The free flow and public availability of information is the crucial element of a functioning capital market. Anyone who works in the stock market like I do, knows that the processing of information (to maintain an up-to-date mental picture of the reality of the world around us) is an essential element of success in the marketplace. Without quality information, investment simply becomes speculation.
Animals Spirits and Efficient Markets
Historically, profiting in the stock market was the product of information asymmetry. Insiders were generally free to trade on non-public information and in the absence of public disclosure, up-to-the-second pricing and news updates gave professional analysts an advantage over less informed investors. The last few decades, however, have seen an astonishing increase in the levels of information readily available to investors of all stripes. The result has been a more efficient market, one in which it is far more difficult to find anomalies that can be profitably traded on.
That’s not to say that the market cannot overreact or behave irrationally. For example: the massive drop in stock futures on election night this year (when it became evident that Donald Trump would win) was followed by a powerful rally the very next day. Markets can still have temper tantrums in response to macro events; they just re-adjust faster than they used to.
The same can be said for individual securities, which tend to react more violently than the broader market.
Take Dynavax Technologies (Nasdaq: DVAX), a stock I’ve been following in my professional investments.
Dynavax is a pharmaceutical company that recently had a pioneering Hepatitis drug delayed by the FDA.
Retail investors decided the news of the delay meant the world was ending and dumped the stock.
It’s now trading below five dollars per share – down from more than double that amount only a month ago – even though Dynavax Technologies has cash on hand, many impressive drugs in their pipeline, and the Hepatitis drug in question is still likely to get approval.
Markets overreact, despite the abundance of information available, information that should be enough to keep investors from going nuts.
Thankfully, despite the occasional madness, markets behave far more rationally, and in greater concord with the facts of reality, than ever before.
The Political Marketplace
This is why it is such a strange thing to see the exact opposite happening in the world of politics and political discourse.
The recent presidential election has exposed profound limitations in our ability to predict outcomes in the political marketplace.
Everything, from scientific polling to betting markets, had strong indicators of a Clinton victory and they were all wrong… how can that be?
It may be that the information feeding such predictions has been completely corrupted. The term “post-truth” has recently come into vogue to describe the politics of people like Trump, who seem to ignore basic facts from science, to economics. These politicians rely on feelings to evoke visceral reactions from their supporters, rather than engaging in anything so mundane as the minutiae of actual policy.
The problem with such politics is that, in convincing people that the facts are not facts at all, the people cease to act in concord with reality.
It was previously the case that one could reasonably predict election outcomes on the basis of how people perceived their ‘real’ material welfare, and that perception was usually informed by actual policy prescriptions.
Now, people are using a very different, wildly subjective, calculus for determining that welfare, and they are often doing so with tainted facts.
This is because facts are not really what seems to matter to many people anymore. News has become balkanized; as people seek out their ideological echo chambers, never bothering to ask whether what echoes back actually corroborates with reality in any meaningful way.
Breaking Out of the Echo Chamber
Yes, I know this gripe may seem ironic coming from someone writing for an obviously ideological website; but I would never come exclusively to Being Libertarian to understand what is happening in the world. That would be ridiculous!
I recognize the ideological coloring of this community and I can look beyond it.
It is vital that we all work individually to break ourselves free of our own cognitive biases.
We need to see the world as others see it, not just as we wish to perceive it.
Only by knowing what reality truly is, can we hope to meaningfully change it for the better.
This post was written by John Engle.
The views expressed here belong to the author and do not necessarily reflect our views and opinions.