ON THE MONEY
STUART THEOBALD: Capital markets are the best mechanisms for price discovery and fraud detection
Public capital markets are the most successful prediction machines humankind has developed. The basic model of a stock exchange has been adapted for many other purposes. Sports markets and political markets trade the outcomes of games and elections. The "prices" at which different possibilities trade in highly liquid markets are much better predictors than any poll or pundit’s opinion. In 2001, the CIA even experimented with creating terror markets in order to develop better predictions of future terror attacks than its analysts. That idea was abandoned when politicians got a whiff of it. This works because agents in a market know, on average, more than any one person. Our bond markets are better predictors of future interest-rate decisions than any particular economist, over time. And our share markets, for which read the JSE, are better predictors of future company profitability than any one investor or analyst. Sure, individuals get it right sometimes, but they don’t get it right...
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