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Hi! This is the Market Economics Fairy! If you think that not investing in evil stocks can predictably lower the price of their cash flows, that violates the

by Eliezer 11y ago

Hi! This is the Market Economics Fairy! If you think that not investing in evil stocks can predictably lower the price of their cash flows, that violates the weak form of the efficient markets hypothesis! There's nothing else to say! The end!

laughinghan 11y ago
I'll bite. Hi! This is the Real World Fairy! If you think the real world perfectly conforms to the efficient market hypothesis, that violates obvious facts! There's a lot more to say because economics is complicated! The end!
- p4wnc6 11y ago
  But to believe your choice to divest could predictably cause a sustained downward price movement means you believe that to whatever extent the market is inefficient, you can predict the effect of the inefficiency. If you can really do this, you wield enough power to go about eliminating evil in some way more effective way than slow divesting. The bigger issue for me is not that the long-term price impact of divesting is unpredictable (though that's true too). The issue for me is that divesting is a selfish action designed for the divesting party to benefit from the current price of the asset's stream of future cash flows. By divesting in an oil company, say, you are realizing a cash gain roughly equal to the market's appraisal of the discounted stream of future cash flows of the company, per share. Instead of owning a piece of that oil company value in the form of a stock share, you've just converted it to dollar format. You still benefited (if you experienced capital gain on the asset) via the operation of that oil company, and if that company obtained value by inducing a negative externality on the world (say, pollution), some tiny slice of your cash from divesting is equal to the gain from that unpunished externality. If you actually cared about rectifying the problem of the externality, you could instead give your shares away for free to the parties who are damaged by the externality. If you think the oil company pollution will cause oceans to rise and will displace Gulf Coast families, you could give away your shares of Exxon to those at-risk coasters, paying the cost of your lost shares to subsidize their hedge against suffering the costs of some Exxon externality. By divesting, all you would do is to fashion signal that you don't like Exxon. Apart from some remarkable ability to forecast exactly when your divestment will cause a sustained price drop (which you don't have), divesting is sort of like holding up a sign that says "Honk if you don't like _____!" -- it's a fine thing to do conditioned on various goals or preferences, but is not near the highly optimal end of the spectrum of activist actions you could take.
  - nefitty 11y ago
    I would be inspired if I ever saw an investor act directly in that fashion. I'm inspired by rational philanthropy, basically. If it was shown/feasible that certain externality subsidization programs could effect a positive change it doesn't seem like the act is higher risk than other forms of charitable giving.
  - TheOtherHobbes 11y ago
    Actually the rational thing to do would be to start a class action suit forcing the entire fossil fuel industry to pay compensation for the environmental damage it's causing, and to compensate various national economies for the opportunity cost of getting in the way of a move to a clean energy economy. Which is pretty much what's been happening to Big Tobacco. And it's compensation not prevention. In tobacco's case, it isn't going to bring any dead people back to life. I think most people, if asked, would say they'd prefer it if someone they loved hadn't died. Compensation can only go so far to fix that - just as getting the carbon industry to pay compensation won't un-flood any homes that are now underwater. But this is only necessary because the so-called efficient, so-called market, so-called hypothesis is rhetorical bullshit - precisely because so-called market pricing is calculated in ways that exclude the true long-term costs of the external consequences of short term profit. A genuinely efficient market would have to factor in the reality-based pricing consequences so that very bad effects became so financially unattractive they were prevented before they could happen. Without that, you have a wealth extraction playground relying on political privilege to pretend to be something it very much isn't.
    - p4wnc6 11y ago
      Whether a class action is the right approach seems debatable to me. If parties possibly damaged by the externality are entitled to shares of any profit derived from that externality, it acts as an incentive for the company to derive profits in others ways. Rather than a class action that, as you correctly point out, merely gives victims compensation for damage done, it could be better to give potential victims some form of corporate governance. This is all very hypothetical. The chances that an organization couldn't find some political maneuvers to dodge really paying for damages they cause are low. It would be like whack-a-mole. If you incentivize the company to steer away from ocean-raising pollution by letting potential coastal victims have some control, well then they'll just find some other group to extract profits from via unnoticed or unpunished victimization. I'm not sure society wins by engaging in this game of whack-a-mole. The company keeps everyone distracted, the barriers for establishing class action results are high, it's inefficient for us to spend that much time and money on legal routes, and in the meantime, many bad actors simply get away with it and continue to extract profits and consumption opportunities at the expense of others. This is one reason why I prefer to think about direct actions I can do that demonstrably help. Giving to Against Malaria definitely helps someone. Getting all wrapped up in long-term political advocacy for changing the entire framework in which publicly traded companies operate, so as to prevent them from extracting profits via unfair victimization ... that seems like a politics-is-the-mindkiller situation, which will probably do nothing but burn me out and prevent me from doing other things that actually could have helped. Don't get me wrong. It's depressing that it's like this and doesn't bode well for moving towards a more egalitarian society (which I think would be better). But nonetheless it's just the world we live in, litany of Gendlin, yada yada yada.
- pjscott 11y ago
  You're arguing against the strong form of the efficient market hypothesis. The weak form merely claims that the market is hard to exploit -- that, for example, there are investors smart enough to notice when evil stocks are being loudly undervalued and seize the obvious opportunity by buying more of them.
  - forgetsusername 11y ago
    Bingo. Another way to think about it is that the market is impossible to exploit on average. On a single bet, in a vacuum, some people will win (had the right information), some will lose (thought they had the right information, were wrong). But proving that you can do the former, consistently, is impossible.
- deleted 11y ago
  [deleted]
gjm11 11y ago
If enough people decline to invest in evil stocks, the companies whose stocks they are will find it harder to raise money by stock offerings, which will make them a bit less likely to succeed and therefore also make it harder for them to raise money by selling bonds. These effects will typically be small, and in the case of a single person declining to invest in evil stocks they will typically be so small that it's obviously correct to ignore them completely. But if the EMH requires them to be zero, I'm not seeing why. Could you explain?
- Eliezer 11y ago
  Because if you withdraw your demand for predictable reasons, other market actors say "Oh a predictably underpriced asset" and bid it back up to almost exactly the same price as before.
  - gjm11 11y ago
    Almost exactly. And, more to the point: the "predictable reasons" involve predicting how many people will be unwilling to hold the assets because of the evil. The more people who are thus unwilling, the higher the predictions will be in future and the lower the price of the asset will go. Your choice whether to hold the assets affects the prediction.
danenania 11y ago
When you find yourself arguing that giving money to a company isn't helpful to that company in some way, you're likely dealing with a very leaky economic abstraction.

by Eliezer 11y ago

laughinghan 11y ago

I'll bite. Hi! This is the Real World Fairy! If you think the real world perfectly conforms to the efficient market hypothesis, that violates obvious facts! There's a lot more to say because economics is complicated! The end!

p4wnc6 11y ago
But to believe your choice to divest could predictably cause a sustained downward price movement means you believe that to whatever extent the market is inefficient, you can predict the effect of the inefficiency. If you can really do this, you wield enough power to go about eliminating evil in some way more effective way than slow divesting. The bigger issue for me is not that the long-term price impact of divesting is unpredictable (though that's true too). The issue for me is that divesting is a selfish action designed for the divesting party to benefit from the current price of the asset's stream of future cash flows. By divesting in an oil company, say, you are realizing a cash gain roughly equal to the market's appraisal of the discounted stream of future cash flows of the company, per share. Instead of owning a piece of that oil company value in the form of a stock share, you've just converted it to dollar format. You still benefited (if you experienced capital gain on the asset) via the operation of that oil company, and if that company obtained value by inducing a negative externality on the world (say, pollution), some tiny slice of your cash from divesting is equal to the gain from that unpunished externality. If you actually cared about rectifying the problem of the externality, you could instead give your shares away for free to the parties who are damaged by the externality. If you think the oil company pollution will cause oceans to rise and will displace Gulf Coast families, you could give away your shares of Exxon to those at-risk coasters, paying the cost of your lost shares to subsidize their hedge against suffering the costs of some Exxon externality. By divesting, all you would do is to fashion signal that you don't like Exxon. Apart from some remarkable ability to forecast exactly when your divestment will cause a sustained price drop (which you don't have), divesting is sort of like holding up a sign that says "Honk if you don't like _____!" -- it's a fine thing to do conditioned on various goals or preferences, but is not near the highly optimal end of the spectrum of activist actions you could take.
- nefitty 11y ago
  I would be inspired if I ever saw an investor act directly in that fashion. I'm inspired by rational philanthropy, basically. If it was shown/feasible that certain externality subsidization programs could effect a positive change it doesn't seem like the act is higher risk than other forms of charitable giving.
- TheOtherHobbes 11y ago
  Actually the rational thing to do would be to start a class action suit forcing the entire fossil fuel industry to pay compensation for the environmental damage it's causing, and to compensate various national economies for the opportunity cost of getting in the way of a move to a clean energy economy. Which is pretty much what's been happening to Big Tobacco. And it's compensation not prevention. In tobacco's case, it isn't going to bring any dead people back to life. I think most people, if asked, would say they'd prefer it if someone they loved hadn't died. Compensation can only go so far to fix that - just as getting the carbon industry to pay compensation won't un-flood any homes that are now underwater. But this is only necessary because the so-called efficient, so-called market, so-called hypothesis is rhetorical bullshit - precisely because so-called market pricing is calculated in ways that exclude the true long-term costs of the external consequences of short term profit. A genuinely efficient market would have to factor in the reality-based pricing consequences so that very bad effects became so financially unattractive they were prevented before they could happen. Without that, you have a wealth extraction playground relying on political privilege to pretend to be something it very much isn't.
  - p4wnc6 11y ago
    Whether a class action is the right approach seems debatable to me. If parties possibly damaged by the externality are entitled to shares of any profit derived from that externality, it acts as an incentive for the company to derive profits in others ways. Rather than a class action that, as you correctly point out, merely gives victims compensation for damage done, it could be better to give potential victims some form of corporate governance. This is all very hypothetical. The chances that an organization couldn't find some political maneuvers to dodge really paying for damages they cause are low. It would be like whack-a-mole. If you incentivize the company to steer away from ocean-raising pollution by letting potential coastal victims have some control, well then they'll just find some other group to extract profits from via unnoticed or unpunished victimization. I'm not sure society wins by engaging in this game of whack-a-mole. The company keeps everyone distracted, the barriers for establishing class action results are high, it's inefficient for us to spend that much time and money on legal routes, and in the meantime, many bad actors simply get away with it and continue to extract profits and consumption opportunities at the expense of others. This is one reason why I prefer to think about direct actions I can do that demonstrably help. Giving to Against Malaria definitely helps someone. Getting all wrapped up in long-term political advocacy for changing the entire framework in which publicly traded companies operate, so as to prevent them from extracting profits via unfair victimization ... that seems like a politics-is-the-mindkiller situation, which will probably do nothing but burn me out and prevent me from doing other things that actually could have helped. Don't get me wrong. It's depressing that it's like this and doesn't bode well for moving towards a more egalitarian society (which I think would be better). But nonetheless it's just the world we live in, litany of Gendlin, yada yada yada.
pjscott 11y ago
You're arguing against the strong form of the efficient market hypothesis. The weak form merely claims that the market is hard to exploit -- that, for example, there are investors smart enough to notice when evil stocks are being loudly undervalued and seize the obvious opportunity by buying more of them.
- forgetsusername 11y ago
  Bingo. Another way to think about it is that the market is impossible to exploit on average. On a single bet, in a vacuum, some people will win (had the right information), some will lose (thought they had the right information, were wrong). But proving that you can do the former, consistently, is impossible.
deleted 11y ago
[deleted]

gjm11 11y ago

If enough people decline to invest in evil stocks, the companies whose stocks they are will find it harder to raise money by stock offerings, which will make them a bit less likely to succeed and therefore also make it harder for them to raise money by selling bonds. These effects will typically be small, and in the case of a single person declining to invest in evil stocks they will typically be so small that it's obviously correct to ignore them completely. But if the EMH requires them to be zero, I'm not seeing why. Could you explain?

Eliezer 11y ago
Because if you withdraw your demand for predictable reasons, other market actors say "Oh a predictably underpriced asset" and bid it back up to almost exactly the same price as before.
- gjm11 11y ago
  Almost exactly. And, more to the point: the "predictable reasons" involve predicting how many people will be unwilling to hold the assets because of the evil. The more people who are thus unwilling, the higher the predictions will be in future and the lower the price of the asset will go. Your choice whether to hold the assets affects the prediction.

danenania 11y ago

When you find yourself arguing that giving money to a company isn't helpful to that company in some way, you're likely dealing with a very leaky economic abstraction.