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> They can't both be right about which is more valuable Actually, they can. As a simple example, they can agree on both price and volatility projections, but

> They can't both be right about which is more valuable Actually, they can. As a simple example, they can agree on both price and volatility projections, but simply have different utility functions in terms of how much volatility they are willing to accept. Most simply, one of them might be 64 and about to retire while the other is 22 and just starting to invest in their retirement fund. I expect that a majority of stock purchases/sales are in fact driven by such considerations and not fundamentals analysis...

jameshart 10y ago
You're right, of course, they don't just disagree about the value of the stock, they disagree about the value of money, and the meaning of 'value'. But my point is that when you see that a stock is trading at a particular price, all that tells you is that one person has a utility function that values that amount of money higher than a unit of the stock, and one person has a utility function that is opposite it. There's no guarantee either of them have a utility function anywhere near your own. Which leads me to conclude that the net information content of a stock trade is, fundamentally, zero. And yet prediction markets work - go figure.
- bzbarsky 10y ago
  > There's no guarantee either of them have a utility function anywhere near your own. Yep. > Which leads me to conclude that the net information content of a stock trade is, fundamentally, zero. It might not be if you have a bunch of trades, averaging over lots of people with different utility functions. Maybe. Depending on how average your utility function is. In practice people end up with heuristics like "100 - age" and diversification out of stocks or hedging of their stocks to deal with the imperfect matchup between their utility function and the averaged one. It's hard not to think of the whole thing as a house of cards sometimes. > And yet prediction markets work Sometimes they do. As long as everyone involved has broadly the same utility function: that of maximizing their money above all else. If enough people, or more properly enough monetary units, come in with a weird utility function (e.g. valuing a particular prediction more than their money), you get prediction market failures.

jameshart 10y ago

You're right, of course, they don't just disagree about the value of the stock, they disagree about the value of money, and the meaning of 'value'. But my point is that when you see that a stock is trading at a particular price, all that tells you is that one person has a utility function that values that amount of money higher than a unit of the stock, and one person has a utility function that is opposite it. There's no guarantee either of them have a utility function anywhere near your own. Which leads me to conclude that the net information content of a stock trade is, fundamentally, zero. And yet prediction markets work - go figure.

bzbarsky 10y ago
> There's no guarantee either of them have a utility function anywhere near your own. Yep. > Which leads me to conclude that the net information content of a stock trade is, fundamentally, zero. It might not be if you have a bunch of trades, averaging over lots of people with different utility functions. Maybe. Depending on how average your utility function is. In practice people end up with heuristics like "100 - age" and diversification out of stocks or hedging of their stocks to deal with the imperfect matchup between their utility function and the averaged one. It's hard not to think of the whole thing as a house of cards sometimes. > And yet prediction markets work Sometimes they do. As long as everyone involved has broadly the same utility function: that of maximizing their money above all else. If enough people, or more properly enough monetary units, come in with a weird utility function (e.g. valuing a particular prediction more than their money), you get prediction market failures.