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Jayson_Virissimo comments on Idle speculation about anchoring and the Facebook IPO - Less Wrong Discussion
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Comments (15)
RolfAndreassen, if you have a theory that allows you to predict particular inefficiencies in very liquid markets like stocks, then you could easily make huge amounts of money (PM me if you need help doing so). The fact that you haven't done so (if, in fact, you haven't) puts your particular hypothesis in a reference class of hypothesis that aren't even worth considering seriously.
Serious question: how would you take putative knowledge that IPO prices are sometimes set too high for the reasons Rolf gives (or even that stock prices in general are subject to anchoring bias or exhibit hysteresis) and use it to make huge amounts of money, particularly given a limited initial bankroll? I am clearly not an economist, so even a rough sketch would help me understand.
Presumably, if you know a stock is too highly priced at its IPO (or any time, really), you short it. Unfortunately the hypothesis "some IPO prices may be subject to manipulation by insiders who know about the anchoring bias" doesn't tell you which ones. I suppose you could try systematically shorting every IPO that comes along, but presumably if that were a viable strategy someone would already be exploiting it; it's too simple not to have been spotted. Besides, I think the transaction costs are too large for a small player to make any money with this sort of strategy.
Seems to me that prices on stocks subject to this sort of manipulation aren't going to be distributed similarly to those that aren't. I have no idea of what either distribution would look like in practice, but it seems like you ought to be able to make some money by preferentially picking your shorts based on the points at which you'd expect them to differ -- the OP's price-to-earnings ratio being one candidate.
How much money depends on how distinguishable this is from a normal shorting strategy, how common this kind of insider manipulation is, and how much noise there is in the system, though. I wouldn't expect it to be a spectacular win in most cases, just a minor advantage.
While I agree with your sentiment, I think this is just begging the question - you are rejecting this speculation by assuming homo economicus.
How seriously would you take a non-wealthy person's claim to know a reliable way to win the lottery? I'm not so much assuming homo economicus as just taking the outside view.
He's trying to figure it out. He hasn't got a theory to predict this in advance. He's just observed, 'dang, that looks like it was inefficient'.
How would you exploit that for your monetary gain?
You need more than an accurate prediction- you need a prediction which is more accurate than the competition's. The stock market is a small-sum game played against other agents, not a zero-sum game against chance.