surely the Agency Problem is a classic example of an empirically testable (true?) theory contradicting a false axiom.
why should economics assume people act rationally? why can't it test how people do act? why weren''t Greenspan's policies based on how people really act rather than some idealistic fairly tale?
There's the theoretical Economics and Finance, and the Applied side. The applied side can look at what people actually do, But the theoretical stuff is really based on what people should be doing if acting rationally. Greenspan's theory was largely based on the idea of long term views of projects. The products merely got so complicated that no one truly understood the problem they were creating.
Indon wrote:Smart people can already allocate the world's investment capital into movies - by investing into movies!
No, they can't. You can invest in movie companies, or independent projects, but you can't go invest in Transformers 3.
Also by using futures you can lower the risk of investing in movies, thereby encouraging more investment.
Indon wrote:If not through overestimation of earnings, how else do stocks generate bubbles?
-People drop money into something they think is more valuable than it really is.
-Turns out not to be that valuable.
-People lose a lot of money.
It's more often an over-estimation of growth, market share and revenues as opposed to earnings, and thats really more the issue in the Dot.com problem.
The thing is the companies are losing money, negative earnings, but people say 'oh their revenue is growing though' and then they value the company based on how big they think it will be in the future which will impact very distant earnings. The Movie futures would have earnings in a very near term which are verified and then the contract settles and terminates, that's not the same at all.
The different between a Bubble and Merely overvaluing a contract is that the contract does not 'Hold' value.
Imagine: 1000 contracts and 1000 Shares.
With the contracts, People enter into 900 contracts at $100 and then 100 contracts at $150...No money changes hands as these contracts are entered into. The next day the Spot price is $150...The people who have shorted the 900 at $100 have lost $50 each so far, the ones long have made $50 each, and the others are even....A month goes by and its settlement day and the spot price is only $50.
The People who went long the contracts lost 900*50 and 100*100 , and the people who went short made 900*50 and 100*100.
Zero sum...No wealth is created, nor is it destroyed, it merely transfers from one party to another.
Do it with Stocks. 900 shares are bought at $100, and then 100 shares at $150. $105,000 goes to the sellers from the buyers. The next day the stock price is $150...no money changes hands, but Now the combined value of the shares is $150,000...but only $105,000 was spent...wealth was created. A month later the share price drops to $50. Now the entire issue is only $50,000, wealth has been destroyed.
This is NOT Zero Sum, The difference here is that All of the shares adopt the value of the last sale price, so the combined value of all the shares of a company can rise without any money entering the situation. This creates the appearance that more wealth exists...people can then borrow off that wealth or begin to count it, and when the bubble bursts, it comes crashing down.
That's the case with Dot.com and housing...people created this Wealth position which wasn't really worth it, with those assets they borrowed against it, and when it crashes down it brings everything down with it.
Futures values are direct payments from one party to another, value can't increase or decrease without an actual cashflow in and out, it cannot ever be a bubble.