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These predictions can also be self-reenforcing. If enough money believes the model is accurate, it will create it's own market conditions. In a distopian AI sto

These predictions can also be self-reenforcing. If enough money believes the model is accurate, it will create it's own market conditions. In a distopian AI stock prediction world the best model will be the one with the widest publicity and adoption, not the best data points.

aggronn 8y ago
The problem I see with that hypothesis is that the asset pricing must eventually be tied to actual performance--while it may be self-reinforcing to some extend, if it _is_ fundamentally wrong, there will be a reckoning and an adjustment after a high value stock goes bankrupt, for example.
- derefr 8y ago
  But the stock market isn’t just a bunch of people placing speculative bets about company performance; it’s a bunch of people placing speculative bets about company performance by buying shares of the companies. If the market is irrational, it can actually prop up companies that would otherwise go bankrupt.
  - aggronn 8y ago
    I suppose they company could continuously issue stock in this case. But in this world, it actually makes sense for those companies to stop doing their normal business and just go into the business of selling their shares. This reality sounds absurd, but you could argue that BTC market is there. Enough of the market thinks that "always buy" is a good investment, regardless of the real-life value of the asset. Or maybe, less controversially, gold is that market. Any asset that is always increasing in value and not related to the real value of that asset is just a store of value.
    - candiodari 8y ago
      Both of those things have valid services that I pay for. BTC provides a number of services. From money changing and international money transfers to actual investment brokerage. Granted, the number of securities available in BTC is less than spectacular, but it's not zero. I pay for both those services. Now you may argue that those are unregulated services and therefore have trust issues, but one might argue that all markets have trust issues, and the only difference is the level. BTC, so far, seems to be more trustworthy than, for instance, the ECB (e.g. the Greek payment limits and the Cypriot bail in, one of which affected me, and both of them used MY money to achieve political aims, without my approval). Gold provides a store of value, with a good story behind it. I pay my bank, I believe, around $40 per year for that same service. With frankly, not as good a story behind it (as I trust my bank less than I'd trust a bar of gold under my pillow when it comes to still having value tomorrow. Not that I have the kind of spare change to make that a pressing issue, but ...) So given that both BTC and Gold provide services that clearly people are willing to pay for, who's to say they shouldn't have a valuation based on that income like every other financial service provider in the world ?
  - nradov 8y ago
    That effect doesn't go very far. It can slightly reduce a company's cost of capital but won't enable them to be profitable over the long term.
Symmetry 8y ago
Generally when talking about price movements the opposite is true. That is a prediction that the market will move at some point in the future will cause that move to happen right now instead, but only if that prediction is believed. And if you have a model that people believe which predicts the movement of stocks but doesn't have any good reason for those predictions then it may very well move the price of those stocks in the ways that it predicts. But in doing so the money of the people who believe its predictions will be transferred to the people who don't until it stops having an effect.
joe_the_user 8y ago
If enough people believe a given model and use it, it would actually tend to make the model over and under-predict. If a lot of people think the market will go up, it's race to buy before the others and eventually a race to sell before the others when either expectation shift or all the buyers run out. Which is say, belief in a direction can make the direction happen but belief in a particularly shaped curve won't make the market resemble that curve.

aggronn 8y ago

The problem I see with that hypothesis is that the asset pricing must eventually be tied to actual performance--while it may be self-reinforcing to some extend, if it _is_ fundamentally wrong, there will be a reckoning and an adjustment after a high value stock goes bankrupt, for example.

derefr 8y ago
But the stock market isn’t just a bunch of people placing speculative bets about company performance; it’s a bunch of people placing speculative bets about company performance by buying shares of the companies. If the market is irrational, it can actually prop up companies that would otherwise go bankrupt.
- aggronn 8y ago
  I suppose they company could continuously issue stock in this case. But in this world, it actually makes sense for those companies to stop doing their normal business and just go into the business of selling their shares. This reality sounds absurd, but you could argue that BTC market is there. Enough of the market thinks that "always buy" is a good investment, regardless of the real-life value of the asset. Or maybe, less controversially, gold is that market. Any asset that is always increasing in value and not related to the real value of that asset is just a store of value.
  - candiodari 8y ago
    Both of those things have valid services that I pay for. BTC provides a number of services. From money changing and international money transfers to actual investment brokerage. Granted, the number of securities available in BTC is less than spectacular, but it's not zero. I pay for both those services. Now you may argue that those are unregulated services and therefore have trust issues, but one might argue that all markets have trust issues, and the only difference is the level. BTC, so far, seems to be more trustworthy than, for instance, the ECB (e.g. the Greek payment limits and the Cypriot bail in, one of which affected me, and both of them used MY money to achieve political aims, without my approval). Gold provides a store of value, with a good story behind it. I pay my bank, I believe, around $40 per year for that same service. With frankly, not as good a story behind it (as I trust my bank less than I'd trust a bar of gold under my pillow when it comes to still having value tomorrow. Not that I have the kind of spare change to make that a pressing issue, but ...) So given that both BTC and Gold provide services that clearly people are willing to pay for, who's to say they shouldn't have a valuation based on that income like every other financial service provider in the world ?
- nradov 8y ago
  That effect doesn't go very far. It can slightly reduce a company's cost of capital but won't enable them to be profitable over the long term.

Symmetry 8y ago

Generally when talking about price movements the opposite is true. That is a prediction that the market will move at some point in the future will cause that move to happen right now instead, but only if that prediction is believed. And if you have a model that people believe which predicts the movement of stocks but doesn't have any good reason for those predictions then it may very well move the price of those stocks in the ways that it predicts. But in doing so the money of the people who believe its predictions will be transferred to the people who don't until it stops having an effect.

joe_the_user 8y ago

If enough people believe a given model and use it, it would actually tend to make the model over and under-predict. If a lot of people think the market will go up, it's race to buy before the others and eventually a race to sell before the others when either expectation shift or all the buyers run out. Which is say, belief in a direction can make the direction happen but belief in a particularly shaped curve won't make the market resemble that curve.