Distributed Arbitrage
So why did Fred Wilson create that coolio Yahoo poll yesterday?
His Quibblo poll (which asked what price would Yahoo’s stock price would close at today) - was picked up by 24 blogs (including his own.) It collected almost 2,200 votes within a day.
But did Fred do this out of some interest in Yahoo or because he actually cared about all those poor Yahoo shareholders? No - he did it so he could put in some buy prices at the low price and make some money off of somebody else’s misery.
Ah Wall St. Gotta love it - huh?
And capitalism - what a great system.
This arbitraging behavior has been around for a while.
But what does it have to do with making things?
Or bettering the world?
May 5th, 2008 at 4:02 pm
gordon gekko: “greed is good”
i don’t really subscribe to that theory marc.
and i didn’t do the poll thinking i’d buy the stock on the basis of the poll. i did it because i thought it would be interesting. it was to me.
but i do feel YHOO is undervalued and i figured the stock would test the $20 level early in the morning
it didn’t and so i never bought the stock today
that’s too bad
fred
May 5th, 2008 at 5:34 pm
still amazes me at how dumb the world is when it comes to wall street. Fred is one of the good guys, i’m a short seller, i bet on fraud, corruption and failure, u wanna have a dumb greed is good post, aim it at me!
May 5th, 2008 at 6:02 pm
Marc, this seems really of the mark. If you pay any attention to Fred or know him at all, you know he loves data porn. Anytime he can gather data or measure something, he does. I actually think he is notable for the lengths to which he goes to publish and share his findings with the blogosphere at large.
If you have been reading his blog, he has been very loud and clear in his opposition to the MSFT/YHOO deal and, I believe, was taking into account the best interests of YHOO and its employees.
All told, I am not sure from where this vitriol comes. Maybe you could write a follow-up with more of your thinking. I am interested.
May 5th, 2008 at 11:23 pm
Ahh yes, this is the same kind of intuitive, emotionally appealing and dead wrong sort of thinking that leads to calls to eliminate the gas tax, prohibitions on charging interest, or the idea that we should refuse to buy products produced by foreign laborers who don’t make a certain minimal wage (not the same as sweat shops). What these fallacies all share in common is the fact that it’s easy to point to the person who is ‘hurt’ by the supposedly bad action while it is much harder to point to who is helped.
For instance consider interest. The reason islam and medeival christianity banned it’s collection is that it’s easy to see the small guy who is paying interest to the rich merchant/bank as sympathetic while there is no obvious person you can point to as being hurt by barring the charging of interest. However, if you ban interest people stop offering loans which inhibits innovation, but this consideration just doesn’t have the emotional pull since you can’t point to particular innovations and enterprises that failed to happen. Similarly, workers who are paid low wages by factories are easy to point to but it’s hard to identify the particular poor farmers who would be slightly better off if increased demand let them work in a factory. Making money off of predicting a companies failure is a similar sort of situation where the people who are hurt are easy to see and trigger our sympathy while the people who are helped are diffuse and hard to concretely identify.
Ultimately the value of the financial markets is in directing societal resources toward useful, cost-effective projects. When money is wastefully invested in companies like e-useless-widgets.com as it was during the dot.com boom people lose money and we are all made worse off. Not only do the VCs or shareholders lose money in such circumstances but the entire society suffers because we lose out on the useful products the employees of e-useless-widgets.com could have created with their time. The dot com bust was a dramatic example of this, because of the massive waste of resources on useless projects the whole economy suffered.
Thus it’s to society’s benefit for the market to accurately reflect expectations of a company’s future success. If companies are undervalued they don’t get access to sufficient capital to create useful products, if they are overvalued we end up wasting resources that could have been used better elsewhere Selling shares short or buying puts helps adjust down the price of overvalued companies so the money can be used somewhere else more efficiently. Without this mechanism there is no effective way for the market to integrate the expertise of people who realize that a company/business method is undervalued.
Ultimately I find that the best way to avoid most of these economic confusions is not to think too much about money. Money is merely a gloss that confuses the issue. Once you think about the market as a way of deciding which projects we want to spend time and resources on it becomes obvious that it’s just as important to avoid wasting resources on less efficient companies as it is to recognize undervalued ones.
May 6th, 2008 at 6:07 am
Funny comparison, but so of the mark. If you read just a little a bit of what he writes you´d know. I think this is just you trying to grab a little of his audience, you probably will get some attention, for a day or two.
May 6th, 2008 at 10:55 am
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May 15th, 2008 at 9:15 am
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