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The market's horizon depends on the world's population time preference and risk aversion as a whole, not on the whims of venture capitalist. Why? Because arbit

The market's horizon depends on the world's population time preference and risk aversion as a whole, not on the whims of venture capitalist. Why? Because arbitrage. If the world as a whole has a low rate of time preference and risk aversion, investments will flow towards high potential long term projects rather than short term ones. But what if you're a greedy, myopic VC with high time preference who wants to make money now? That doesn't affect too much how you will value deals. What you care about is how much money you will make at the exit, which will depend on the equity valuation at that point. And that valuation, depends on the global investment's community risk aversion and risk preference. Facebook trades at a P/E ratio of 71, meaning the equity is worth 71 years of current earnings. Netflix has a P/E of 116. Think that's shorts-sighted? Ultimately, investments come from two sources, money saved and invested by individuals, and banks. If it were only the first, you could say that the type of investments you see reflect the society you have. As a whole, society picks taxi cabs now rather than maybe some pharmaceutical product later. It's not capitalism, it's human nature. Banks complicate the picture, since they turn their deposits into loans of various maturity. The rates on these loans are ultimately tied to central bank policies. However, these policies generally attempt to keep rates low, so as to stimulate "productive" investments. In addition, various bail-out guarantees tend to artificially increase the amount of risk taking. So there you have it. Capitalism by itself merely represents the time preference and risk preference of the population as a whole, and central banks tend to make it more risk taking and longer terms than investors would actually prefer.

username223 12y ago
> And that valuation, depends on the global investment's community risk aversion and risk preference. > > Facebook trades at a P/E ratio of 71, meaning the equity is worth 71 years of current earnings. Netflix has a P/E of 116. Think that's shorts-sighted? Most humans aren't trading on earnings, but on market psychology, believing they can sell to a greater fool in the future. And most trades aren't even made by humans, but by HFT algorithms trying to win massively-leveraged short-term bets for a fraction of a percent. The Facebook and Netflix P/E ratios have very little to do with long-term earnings.
- murbard2 12y ago
  The only place you can criticize the (weak) efficient market hypothesis from is atop a pile of money. Where is it?
jjoonathan 12y ago
> It's not capitalism, it's human nature. I disagree. Capitalism makes investments much more fungible than they would otherwise be, changing the incentive landscape. It can set up a prisoner's dilemma (i.e. a failure of global optimization due to induced local optimization) which preferentially allocates capital away from investments which are intrinsically difficult to value in a timely fashion or intrinsically difficult to capture value from (i.e. science). Correct tulip speculation gets you $$$, making a correct incremental step towards curing cancer gets you nothing on the market. Nobody will be able to tell if your contribution was valuable for the next 30 years, and by then you won't have any mechanism by which you could retroactively hold back your contribution in order to obtain a fair market price for it. According to capitalism, this unfortunate (but completely incidental!) state of affairs is a good reason why investors should speculate in tulips rather than fund biotech. Yuck! Can we do better? In the narrow sense of solving this particular problem, the answer is yes: a prestige-based economy (see: academia) is able to reward investments whose value can't be captured by a market economy, such as the "incremental progress towards cancer cure" example above. Of course, a prestige-based economy would fall flat on its face if one tried to generalize it to more mundane facets of everyday life, so it's not a satisfying solution for the general problem. But it IS a good way to get free-market drum-beaters to acknowledge their very constrictive assumptions about timely valuation and value capture :-)
- murbard2 12y ago
  That's a fair criticism. You point out that capital will not flow towards investments who are difficult to value, or investments which are hard to extract value from. I don't think the first point has merit. Any new venture is intrinsically hard to value, and even a global optimizer would be reluctant to invest in those. This is no different from risk aversion, which I've already cover. The second point on the other hand has merit. If it is difficult to extract value from an endeavor, you have an externality problem. However, this is a distinct concern than an alleged short-term bias in capitalism, an idea which I was attempting to refute. The problem you describe exists just as much in the short run as in the long run. As for what it is to be done, I think several things can help: - Relax antritrust legislation: large companies who aren't threatened by competitors can capture a lot of externalities and tend to develop new science and technology. General Electric Research Laboratory, Bell Labs, Google X... - Develop technology which lower the cost of coordination. Prisoners dilemma arise when there can be no coordination. In fact, if players can enter into arbitrary self-enforcing contracts, every game admits a strong Nash-Equilibrium, and the equilibrium is Pareto optimal! In practice, this means crowdfunding, and mechanisms like dominant insurance contracts[1]. Smart-contracts on blockchains are also interesting in that they are pretty close to the ideal "arbitrary self-enforcing contracts". [1] mason.gmu.edu/~atabarro/PrivateProvision.pdf

username223 12y ago

> And that valuation, depends on the global investment's community risk aversion and risk preference. > > Facebook trades at a P/E ratio of 71, meaning the equity is worth 71 years of current earnings. Netflix has a P/E of 116. Think that's shorts-sighted? Most humans aren't trading on earnings, but on market psychology, believing they can sell to a greater fool in the future. And most trades aren't even made by humans, but by HFT algorithms trying to win massively-leveraged short-term bets for a fraction of a percent. The Facebook and Netflix P/E ratios have very little to do with long-term earnings.

murbard2 12y ago
The only place you can criticize the (weak) efficient market hypothesis from is atop a pile of money. Where is it?

jjoonathan 12y ago

> It's not capitalism, it's human nature. I disagree. Capitalism makes investments much more fungible than they would otherwise be, changing the incentive landscape. It can set up a prisoner's dilemma (i.e. a failure of global optimization due to induced local optimization) which preferentially allocates capital away from investments which are intrinsically difficult to value in a timely fashion or intrinsically difficult to capture value from (i.e. science). Correct tulip speculation gets you $$$, making a correct incremental step towards curing cancer gets you nothing on the market. Nobody will be able to tell if your contribution was valuable for the next 30 years, and by then you won't have any mechanism by which you could retroactively hold back your contribution in order to obtain a fair market price for it. According to capitalism, this unfortunate (but completely incidental!) state of affairs is a good reason why investors should speculate in tulips rather than fund biotech. Yuck! Can we do better? In the narrow sense of solving this particular problem, the answer is yes: a prestige-based economy (see: academia) is able to reward investments whose value can't be captured by a market economy, such as the "incremental progress towards cancer cure" example above. Of course, a prestige-based economy would fall flat on its face if one tried to generalize it to more mundane facets of everyday life, so it's not a satisfying solution for the general problem. But it IS a good way to get free-market drum-beaters to acknowledge their very constrictive assumptions about timely valuation and value capture :-)

murbard2 12y ago
That's a fair criticism. You point out that capital will not flow towards investments who are difficult to value, or investments which are hard to extract value from. I don't think the first point has merit. Any new venture is intrinsically hard to value, and even a global optimizer would be reluctant to invest in those. This is no different from risk aversion, which I've already cover. The second point on the other hand has merit. If it is difficult to extract value from an endeavor, you have an externality problem. However, this is a distinct concern than an alleged short-term bias in capitalism, an idea which I was attempting to refute. The problem you describe exists just as much in the short run as in the long run. As for what it is to be done, I think several things can help: - Relax antritrust legislation: large companies who aren't threatened by competitors can capture a lot of externalities and tend to develop new science and technology. General Electric Research Laboratory, Bell Labs, Google X... - Develop technology which lower the cost of coordination. Prisoners dilemma arise when there can be no coordination. In fact, if players can enter into arbitrary self-enforcing contracts, every game admits a strong Nash-Equilibrium, and the equilibrium is Pareto optimal! In practice, this means crowdfunding, and mechanisms like dominant insurance contracts[1]. Smart-contracts on blockchains are also interesting in that they are pretty close to the ideal "arbitrary self-enforcing contracts". [1] mason.gmu.edu/~atabarro/PrivateProvision.pdf