information asymmetry

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Empirical Market Microstructure: The Institutions, Economics and Econometrics of Securities Trading by Joel Hasbrouck

Alvin Roth, barriers to entry, business cycle, conceptual framework, correlation coefficient, discrete time, disintermediation, distributed generation, experimental economics, financial intermediation, index arbitrage, information asymmetry, interest rate swap, inventory management, market clearing, market design, market friction, market microstructure, martingale, payment for order flow, power law, price discovery process, price discrimination, quantitative trading / quantitative finance, random walk, Richard Thaler, second-price auction, selection bias, short selling, statistical model, stochastic process, stochastic volatility, transaction costs, two-sided market, ultimatum game, zero-sum game

In the model (and in real markets), a trade can trigger a wave of elections. 5.5 Empirical Implications This book’s presentation of information asymmetry focuses on its role in trading situations. More broadly, though, asymmetric information figures SEQUENTIAL TRADE MODELS prominently in many models of corporate finance and asset pricing. The sequential trade models (and others to follow) establish a connection between information asymmetries and observable market phenomena. The construction of proxies for the former via empirical analysis of the latter ranks as one of the most important goals of empirical microstructure research. In the model of section 5.2, the structural asymmetric information parameter is µ (the proportion of informed traders in the population). µ is positively related to both the bid-ask spread and the revision in beliefs (compare Eqs. (5.7) and (5.1)).

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This is an important point because although information asymmetries related to value are quite plausible in some markets, they are more dubious in others. In equity markets, for example, advance knowledge of an earnings surprise, takeover announcement, or similar event confers an obvious advantage. Similar events do not, however, characterize the government bond and foreign exchange markets. Models of these markets, therefore, must rely on a broader concept of private information. This important point has been stressed by Lyons (2001). 5.4.2 Fixed Transaction Costs Suppose that in addition to asymmetric information considerations, the dealer must pay a transaction cost c on each trade (as in the Roll model).

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Subrahmanyam considers the case of a multiple security market that includes a basket security, for example, a stock index futures contract or an index exchange traded fund. The diversification in an index greatly mitigates firm-specific information asymmetries, making index securities generally cheaper to trade. Holden and Subrahmanyam (1992, 1994), Foster and Viswanathan (1996), and Back, Cao, and Willard (2000) consider multiperiod models with multiple informed traders. 8 A Generalized Roll Model 8.1 Overview Following the economic analysis, we now turn to empirical examination of asymmetric information by developing a generalization of the Roll model. One sensible first step is to allow the efficient price to be partially driven by the trade direction indicator variable.

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

Alan Greenspan, Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, behavioural economics, Berlin Wall, Big bang: deregulation of the City of London, Bletchley Park, business cycle, California gold rush, Charles Babbage, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Dr. Strangelove, Dutch auction, Edward Lloyd's coffeehouse, electricity market, equity premium, equity risk premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, Fairchild Semiconductor, financial innovation, flying shuttle, Ford Model T, Francis Fukuyama: the end of history, George Akerlof, George Gilder, Goodhart's law, Great Leap Forward, greed is good, Gunnar Myrdal, haute couture, Helicobacter pylori, illegal immigration, income inequality, industrial cluster, information asymmetry, intangible asset, invention of the telephone, invention of the wheel, invisible hand, John Meriwether, John Nash: game theory, John von Neumann, junk bonds, Kenneth Arrow, Kevin Kelly, knowledge economy, Larry Ellison, light touch regulation, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Michael Milken, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, Pareto efficiency, Paul Samuelson, pets.com, Phillips curve, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, proprietary trading, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, Right to Buy, risk tolerance, road to serfdom, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, Stuart Kauffman, telemarketer, The Chicago School, The Market for Lemons, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Vilfredo Pareto, Washington Consensus, women in the workforce, work culture , yield curve, yield management

Odysseus would not have been impressed by the argument that the behavior he fears, being irrational, will not happen. And nor are we. Information (Chapter 19) ••••••••••••••••••••••••••••••••••••• Asymmetric information is endemic in modern market economies. It is easy to conclude that the remedy for asymmetric information is to tell consumers more, either by regulation or by recognizing disclosure of risks as a legal defense. Yet, as these examples illustrate, such measures are almost use- Culture and Prosperity { 349} less. The normal market mechanism for dealing with asymmetric information is reputation. When we place a deposit with a bank or visit a doctor, we rely on the reputation of the bank and the doctor to assure the security of our deposit and the wisdom of the advice.

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Simon USA 1978 Decision making Vernon Smith USA 2003 Behavioral economics Robert M. Solow USA 1987 Theory of economic growth A. Michael Spence USA 2001 Asymmetric information George J. Stigler USA 1982 Industrial structures, functioning of markets, and causes and effects of public regulation Joseph E. Stiglitz USA 2001 Asymmetric information Richard Stone UK 1984 National income accounting Jan Tin bergen Netherlands 1969 Economic dynamics James Tobin USA 1981 Finance theory and macroeconomics William Vickrey USA 1996 Asymmetric information {glossary} ••••••••••••••••••••••• absolute advantage balance of payments bounded rationality See COMPETITIVE ADVANTAGE.

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Yet a business partner in Antonio's venture would sensibly be nervous of information asymmetry and moral hazard. Even if Antonio is completely honest and truthfully reveals all he knows, he may be more inclined to offer participations when he is nervous about the prospects for his trade than when he is optimistic. 20 And Antonio will certainly take more risks if he does not bear the whole consequences of failure. This is not entirely a bad thing. Optimism and risk sharing enable many more new businesses to be started and contribute to the pluralism of a market economy. Information asymmetries extend more widely. Those who invest with Antonio will not be a random sample of the population.

Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

active measures, Andrei Shleifer, AOL-Time Warner, asset allocation, automated trading system, barriers to entry, Bernie Madoff, Bob Litterman, book value, business cycle, buttonwood tree, buy and hold, compound rate of return, computerized trading, corporate governance, correlation coefficient, data acquisition, diversified portfolio, equity risk premium, fault tolerance, financial engineering, financial innovation, financial intermediation, fixed income, floating exchange rates, High speed trading, index arbitrage, index fund, information asymmetry, information retrieval, information security, interest rate swap, invention of the telegraph, job automation, junk bonds, law of one price, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market clearing, market design, market fragmentation, market friction, market microstructure, money market fund, Myron Scholes, National best bid and offer, Nick Leeson, open economy, passive investing, pattern recognition, payment for order flow, Ponzi scheme, post-materialism, price discovery process, price discrimination, principal–agent problem, profit motive, proprietary trading, race to the bottom, random walk, Reminiscences of a Stock Operator, rent-seeking, risk free rate, risk tolerance, risk-adjusted returns, search costs, selection bias, shareholder value, short selling, short squeeze, Small Order Execution System, speech recognition, statistical arbitrage, statistical model, survivorship bias, the market place, transaction costs, two-sided market, vertical integration, winner-take-all economy, yield curve, zero-coupon bond, zero-sum game

When we compare spreads, we will implicitly refer to relative spreads. 14.6.1 The Three Primary Spread Determinants The three primary spread determinants are asymmetric information, volatility, and utilitarian trading interest. Their effects on spreads are not independent of each other. For example, if information asymmetries are high, spreads will be wide. Wide spreads, however, discourage uninformed investors, decrease trading volumes (a secondary spread determinant), and thereby make spreads even wider. Asymmetric Information The adverse selection spread model suggests that markets with asymmetrically informed traders will have wide spreads. Spreads will be widest when well-informed traders know material information about instrument values that would have an immediate and significant effect on values if it were common knowledge.

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For example, we argue below that firms in emerging industries should have wider spreads than firms in established industries because of asymmetric information problems. However, firms in emerging industries tend to have substantial investment interest, which creates substantial volumes and therefore narrower spreads. Firms in emerging industries therefore may have narrower spreads than firms in established industries, although we predict otherwise. When factors are correlated, it is often necessary to use statistical methods to disentangle their conflicting effects. 14.6.2.1 Asymmetric Information Proxies Information Disclosure Rules Rules that require information disclosure decrease information asymmetries. Stock markets that require their listed firms to disclose reliable, comprehensive financial information on a regular and timely basis will have narrower spreads than those which do not require extensive disclosure.

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See International Councils of Securities Associations immediacy, 70, 279, 294, 297, 398, 399 immediate-or-cancel orders, 83, 84 implementation risk, 363, 364, 366–67 implementation shortfalls, 424, 426 implicit transaction costs, 421, 422–23 inappropriate order exposure, 165 in-balance inventories, 283, 284 index arbitrage, 563, 577, 580 index components, 484 index creators, 485 index divisors, 485 indexed limit orders, 309 index enhancement funds, 354 index funds, 40, 484, 486–87 index futures market, 562–63 indexing, 197, 457–60 index managers, 486 index markets, 484, 487–93 index participations, 67 index portfolios, 468, 469, 489–91 index products, 484, 491–92 index replicators, 442 index trading mechanisms, 489 indication of interest, 107, 387 indirect compensation, 593 inefficient traders, 197 inelastic demand, 412 inferior prices, 70 infinitely lived contracts, 41 information asymmetries, 7, 312, 314–15, 323, 326–27, 332, 531–32 collection systems, 97 disclosure rules, 314 distribution systems, 98–99 and floor-based trading, 548–49 inside, 228, 584–88 public, 223, 241–43 of specialists, 501–2 technologies, 8, 524–26 unequal access to, 532 See also informed traders informationless trading strategy, 468 information-oriented technical traders, 194, 195, 196, 226, 230–32, 235, 243 informative prices, 4, 206–14, 218, 222, 224, 235, 237, 238–39, 241, 243 informed traders, 223–24, 252, 384–85 asymmetric information, 299, 310, 531 and block trading, 330 competition among, 239–40, 243 in crossing networks, 135 and dealers, 287–92, 295, 519 definition of, 177, 194, 197, 222 and informative prices, 224, 238–39, 243 liquidity and predictability, 236, 237, 239–40 market paradox, 238–39 profits, 237, 238 trading strategies, 196, 225–26 trading styles, 226–35 and transaction costs, 430 initial margin, 156 initial public offering (IPO), 39, 253 innovative market, 527–28 inside information, 228, 584–88 insider trading, 315, 584–99 bounty hunting for, 590 corporate control issue, 594 debate over, 591–97 definition of, 584 and inside information, 584–88 practical judicial issues, 588–91 proving, 590 inside spread, 280, 281 See also bid/ask spread inside the market, 70 Instinet, 35, 132, 543 institutional traders, 281, 283, 290 instrument(s) correlation of, 44 debt, 40–41 definition of, 4 and informed traders, 223 similar, 539 spread orders, 84 straddle, 37 U.S. markets by class, 45 See also trading instruments insurance companies, 65 insurance contracts, 43 interconnect access fees, 536 interdealer brokers, 58, 93 interest, 155–56, 315 interest rate swap, 42, 187 Intermarket Trading System, 105 Intermedia Communications, 363, 373 intermediate commodities, 188 internalization of orders, 161, 514, 520, 522 internal order crossing, 514, 520–21, 522, 537 internal rate of return, 446, 447 International Councils of Securities Associations (ICSA), 66 international equity derivatives markets, 50, 53 international futures markets, 54 International Organization of Securities Commissions (IOSCO), 66 International Securities Exchange, 50, 543 international stock markets, 50–52 Internet, 99, 267, 343, 545, 558 intertemporal cash flow timing problems, 178, 180 in the doghouse, 325 in the market, 74 in the price, 229 intrinsic values.

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

accounting loophole / creative accounting, affirmative action, Alan Greenspan, An Inconvenient Truth, bank run, banking crisis, behavioural economics, Berlin Wall, bonus culture, Branko Milanovic, BRICs, business cycle, call centre, carbon tax, Cass Sunstein, central bank independence, classic study, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, different worldview, disintermediation, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, general purpose technology, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, hedonic treadmill, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, income inequality, income per capita, industrial cluster, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, Paradox of Choice, Pareto efficiency, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Robert Solow, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, social contagion, South Sea Bubble, Steven Pinker, tacit knowledge, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, the strength of weak ties, Tragedy of the Commons, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, vertical integration, web application, web of trust, winner-take-all economy, World Values Survey, zero-sum game

But note that—referring back to the previous chapter—a number of increasingly important sectors of the economy such as music and software also have these characteristics of nonrivalry and nonexcludability. Moreover, many goods and services are characterized by a lack of information about their quality. This can be either because of an information asymmetry between buyer and seller (the seller of a used car knows much more about it than the customer), or because it is an experience good which must be consumed to know what it’s like, for example watching a movie. Information asymmetries and shortfalls are an important reason why markets might not work efficiently. It will be apparent that there are many ways in which markets can “fail,” more so than was the conventional wisdom in the 1980s and 1990s, and covering many more activities than those normally provided by the government.

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They will involve a more productive and thoughtful interplay between markets and governments than we’ve typically had in the past, one taking account of the dramatic technological and structural change in the economy. Markets and governments need each other to function well, and indeed often “fail” in the same contexts. The existence of transactions costs and information asymmetries present a challenge to any institutional framework. The work of the 2009 Nobel laureates Elinor Ostrom and Oliver Williamson focuses precisely on the way these aspects of reality shape different kinds of institutional response. The utterly transformed world of information, due to ICTs, is revolutionizing the governance of every economy, and we’re only partway through the revolution.

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This “states versus markets” perspective is bogus, however. Debates about the scope of government intervention on close inspection turn out to be about the nature of government intervention.6 Markets and governments are likely to fail in similar ways because the “failures” stem from inherent problems such as information asymmetries and spillovers between individual decisions. These make it hard for any institution, whether market or state or some other structure, to bring about an ideal outcome. The deep changes in the structure of the economy have made current institutional and governance failures—in both markets and government—acute.

Big Data and the Welfare State: How the Information Revolution Threatens Social Solidarity by Torben Iversen, Philipp Rehm

23andMe, Affordable Care Act / Obamacare, algorithmic bias, barriers to entry, Big Tech, business cycle, centre right, collective bargaining, COVID-19, crony capitalism, data science, DeepMind, deindustrialization, full employment, George Akerlof, income inequality, information asymmetry, invisible hand, knowledge economy, land reform, lockdown, loss aversion, low interest rates, low skilled workers, microbiome, moral hazard, mortgage debt, Network effects, new economy, obamacare, personalized medicine, Ponzi scheme, price discrimination, principal–agent problem, profit maximization, Robert Gordon, speech recognition, subprime mortgage crisis, tail risk, The Market for Lemons, The Rise and Fall of American Growth, union organizing, vertical integration, working-age population

Measurement of information is a wide-open field, and we hope that our efforts will stimulate interest, foster debate, and spark innovation. Second, our theoretical framework assumes that the information asymmetries are such that individuals know more than (insurance) companies or the state. This is a standard assumption, and it strikes us as very reasonable in many instances. However, as (Big Tech) companies guzzle up more and more information about more and more individuals, linking them across many domains and mining them for patterns, the information asymmetries may not just grow smaller and disappear – as we assume – but eventually reverse. Our intuition is that this would increase the https://doi.org/10.1017/9781009151405.007 Published online by Cambridge University Press 202 Conclusion “cream skimming” of insurance companies: Their risk classification would be excellent; they could identify bad risks with high accuracy; and they would not need to worry as much about adverse selection.

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We begin with the classic case of asymmetric information, where the buyer of insurance is informed, but the insurer is not. This is covered by the standard model of insurance. We then ask what happens when information is shared with insurers, and lastly, we consider the case where neither buyer nor insurer is informed. This latter scenario is rarely considered, but the second case of both the insurer and the insured being informed increasingly applies to today’s Big Data world. The case where neither is informed was important in the early formation of the welfare state. The Asymmetric Information Case Insurance markets would not be problematic if insurers were aware of individual risks.

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We begin with the classic case of asymmetric information, where the buyer of insurance is informed, but the insurer is not. This is covered by the standard model of insurance. We then ask what happens when information is shared with insurers, and lastly, we consider the case where neither buyer nor insurer is informed. This latter scenario is rarely considered, but the second case of both the insurer and the insured being informed increasingly applies to today’s Big Data world. The case where neither is informed was important in the early formation of the welfare state. The Asymmetric Information Case Insurance markets would not be problematic if insurers were aware of individual risks.

To Sell Is Human: The Surprising Truth About Moving Others by Daniel H. Pink

always be closing, Atul Gawande, barriers to entry, behavioural economics, business cycle, call centre, Cass Sunstein, Checklist Manifesto, choice architecture, complexity theory, Credit Default Swap, Daniel Kahneman / Amos Tversky, disintermediation, Elisha Otis, future of work, George Akerlof, independent contractor, information asymmetry, Jeff Bezos, Kickstarter, longitudinal study, Marc Andreessen, Menlo Park, out of africa, Richard Thaler, rolodex, Ronald Reagan, Steve Jobs, The Market for Lemons, Upton Sinclair, Wall-E, zero-sum game

When sellers know more than buyers, buyers must beware. It’s no accident that people in the Americas, Europe, and Asia today often know only two words of Latin. In a world of information asymmetry, the guiding principle is caveat emptor—buyer beware. Akerlof’s provocative thought piece recast how economists and others reckoned with individual transactions and entire markets. So with this example as a model, let’s try another intellectual finger exercise. Imagine a world not of information asymmetry, but of something closer to information parity, where buyers and sellers have roughly equal access to relevant information. What would happen then?

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But the only way to truly influence others is to adopt “a frame of mind and heart that constantly seeks mutual benefit in all human interactions.”10 Because of Fisher’s and Covey’s influence, “win-win” has become a fixture in organizations around the world, though often more in parlance than in practice. One explanation for the disconnect between word and deed goes back to the upheaval I described in Chapter 3. Under conditions of information asymmetry, results frequently are win-lose. After all, when I know more than you, I can get what I want by beating you. And since information asymmetry was the defining condition of sales for so long, our muscle memory often takes us in that direction. But with the emergence of information parity (or at least something close to it), those instincts, developed for a different environment, can send us down the wrong path.

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Kowalski’s name, along with a reminder in his calendar to call him, and moves to the next name on this list. “After the easy ones,” Girard writes, “there are many Kowalskis, if you keep searching.”8 That Girard found enough clueless Kowalskis to become the world’s greatest salesman—and that he remains out and about teaching sales skills—might seem to validate that information asymmetry and the ignoble tactics it allows are alive and well. But there’s one more thing you should know about Joe Girard. He hasn’t actually sold a car since 1977. He quit the business more than three decades ago to teach others how to sell. (The Deloitte & Touche audit his office sent me verifying his record is dated 1991 and covers a fifteen-year period beginning in 1963.)

When Free Markets Fail: Saving the Market When It Can't Save Itself (Wiley Corporate F&A) by Scott McCleskey

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, barriers to entry, Bear Stearns, Bernie Madoff, break the buck, call centre, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, financial engineering, financial innovation, fixed income, Glass-Steagall Act, information asymmetry, invisible hand, Isaac Newton, iterative process, junk bonds, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, place-making, Ponzi scheme, prediction markets, proprietary trading, risk tolerance, Savings and loan crisis, shareholder value, statistical model, The Wealth of Nations by Adam Smith, time value of money, too big to fail, web of trust

E1BAPP01 06/16/2010 172 16:33:47 & Page 172 Appendix 1 INFORMATION ASYMMETRIES ‘‘Information asymmetry’’ is simply an impressive way to say that one party to a deal knows more about the thing being bought or sold than the other (so impressive that it won three economists the Nobel Prize in 2001). If you have ever bought anything on eBay, you have been on the receiving end of an information asymmetry (hopefully without an unhappy ending). The clearest embodiment of asymmetric information is insider trading. Someone knows that ABC Corporation is going to acquire XYZ, Inc. for a share price nicely above the current price, so he goes in with both feet and rakes it in with both hands (hands that, we would hope, will end up in cuffs). There are some wonks who would assert that this should not be illegal, since it is simply a manifestation of an efficient market reflecting all known information in the market price, even if that information is not known by the whole market.

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Informational disadvantages do not appear solely in the process of drafting regulation. They are also a part of the market—a common one if not a natural one. These so-called information asymmetries present regulatory challenges of their own, from a fairness and an efficiency point of view. 1 Rachel Beck, ‘‘Lobbyists Influence Financial Reform,’’ Associated Press, October 17, 2009. E1BAPP01 06/16/2010 172 16:33:47 & Page 172 Appendix 1 INFORMATION ASYMMETRIES ‘‘Information asymmetry’’ is simply an impressive way to say that one party to a deal knows more about the thing being bought or sold than the other (so impressive that it won three economists the Nobel Prize in 2001).

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If a firm’s research department concludes that ABC shares will go down based on its own analysis but then recommends purchasing the shares to its customers, the practice is better termed a conflict of interest (also onerous) rather than an information asymmetry. It should be stressed that an act is not always illegal or unethical simply because it is based on information asymmetry. Financial markets are the same as the markets for puppies or houses or life insurance: One side has a better understanding of the quality of the products or the risk to the insurer than the other. But since it is harder to return a toxic asset than a refrigerator whose light will not turn on, regulators seek to identify those that cross the line into unfair transactions, and to level the field.

Spies, Lies, and Algorithms by Amy B. Zegart

2021 United States Capitol attack, 4chan, active measures, air gap, airport security, Apollo 13, Bellingcat, Bernie Sanders, Bletchley Park, Chelsea Manning, classic study, cloud computing, cognitive bias, commoditize, coronavirus, correlation does not imply causation, COVID-19, crowdsourcing, cryptocurrency, cuban missile crisis, Daniel Kahneman / Amos Tversky, deep learning, deepfake, DeepMind, disinformation, Donald Trump, drone strike, dual-use technology, Edward Snowden, Elon Musk, en.wikipedia.org, end-to-end encryption, failed state, feminist movement, framing effect, fundamental attribution error, Gene Kranz, global pandemic, global supply chain, Google Earth, index card, information asymmetry, information security, Internet of things, job automation, John Markoff, lockdown, Lyft, Mark Zuckerberg, Nate Silver, Network effects, off-the-grid, openstreetmap, operational security, Parler "social media", post-truth, power law, principal–agent problem, QAnon, RAND corporation, Richard Feynman, risk tolerance, Robert Hanssen: Double agent, Ronald Reagan, Rubik’s Cube, Russian election interference, Saturday Night Live, selection bias, seminal paper, Seymour Hersh, Silicon Valley, Steve Jobs, Stuxnet, synthetic biology, uber lyft, unit 8200, uranium enrichment, WikiLeaks, zero day, zero-sum game

The root causes lie deeper, in the informational environment, incentive structure, and institutional dynamics that are unique to intelligence. Information Asymmetry If you’ve ever taken your car to a mechanic, you’ve experienced one of the biggest oversight challenges: information asymmetry. Whenever one party relies on another to get something done, there’s a risk that things go awry. The mechanic overcharges. The car still isn’t fixed properly. Maybe the mechanic is dishonest, or careless, or overworked, or well intended but badly trained. Whatever the reason, you’re disappointed. Information asymmetry is a big part of the problem. One side knows much more than the other and can take advantage of the situation.69 The mechanic knows you have no idea how to fix the car or what it should cost.

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North Korea has been such a hard intelligence target, as late as 2009, the CIA was building its dossier on Kim through the second-hand reports of a sushi chef.18 South Africa is the only country that has ever developed a nuclear arsenal and then voluntarily dismantled it.19 But that’s not a generalizable case, either; at the time, apartheid was crumbling and the outgoing White regime feared putting the bomb in the hands of a Black government. While sports analysts can estimate this year’s outcomes by leveraging literally thousands of data points, nuclear analysts trying to mine history for insights about Iran have a grand total of ten unique cases over seventy-five years. ASYMMETRIC INFORMATION The second factor making some things easier to estimate than others is asymmetric information. In sports, the same information is generally available to everyone. Coaches may have inside knowledge about the mood of their team or how good they looked in practice, but critical information is in the open; nobody is hiding this year’s rankings or a season-ending injury.

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The only real limiting factor to obtaining data is time—how much of it you want to spend watching ESPN or digging through statistics. In geopolitics, the same information is not available to everyone, regardless of how much time they have. Intelligence is in the business of unlocking other people’s secrets and protecting our own. Asymmetric information is the name of the game. And in a world of asymmetric information, prediction is much more difficult and miscalculation much more likely. Douglas MacArthur had some intelligence about China’s troop movements and willingness to intervene in the war. But he found out too late that it wasn’t the full picture. On October 15, 1950, just as MacArthur was reassuring President Truman that China “would have the greatest difficulty of getting more than 50 thousand across the river,” tens of thousands of Chinese forces were secretly doing just that.20 By October 19, 260,000 Chinese fighters were hiding in the Korean mountains.

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems by Irene Aldridge

algorithmic trading, asset allocation, asset-backed security, automated trading system, backtesting, Black Swan, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, computerized trading, diversification, equity premium, fault tolerance, financial engineering, financial intermediation, fixed income, global macro, high net worth, implied volatility, index arbitrage, information asymmetry, interest rate swap, inventory management, Jim Simons, law of one price, Long Term Capital Management, Louis Bachelier, machine readable, margin call, market friction, market microstructure, martingale, Myron Scholes, New Journalism, p-value, paper trading, performance metric, Performance of Mutual Funds in the Period, pneumatic tube, profit motive, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic trading, tail risk, trade route, transaction costs, value at risk, yield curve, zero-sum game

When the quoting dealer receives order flow that he suspects may come from an informed trader and may leave the dealer at a disadvantage relative to the market movements, the dealer increases the spread he quotes in order to compensate himself against potentially adverse uncertainty in price movements. As a result, the wider the quoted bid-ask spread, the higher the dealer’s estimate of information asymmetry between his clients and the dealer himself. Given that the dealer has the same access to public information as do most of the dealer’s clients, the quoted bid-ask spread may serve as a measure of asymmetric information available in the market at large at any given point in time. Effective Bid-Ask Spread The effective bid-ask spread is computed as twice the difference between the latest trade price and the midpoint between the quoted bid and ask 147 Trading on Market Microstructure prices, divided by the midpoint between the quoted bid and ask prices.

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As the order flow from informed traders to the market maker conveys information from traders to the market maker, the subsequent I 145 146 HIGH-FREQUENCY TRADING changes in the bid-ask spread may also convey information from the market maker to other market participants. This chapter describes information-based microstructure trading strategies. MEASURES OF ASYMMETRIC INFORMATION Asymmetric information present in the markets leads to adverse selection, or the ability of informed traders to “pick off” uninformed market participants. According to Dennis and Weston (2001) and Odders-White and Ready (2006), the following measures of asymmetric information have been proposed over the years: r r r r r Quoted bid-ask spread Effective bid-ask spread Information-based impact Adverse-selection components of the bid-ask spread Probability of informed trading Quoted Bid-Ask Spread The quoted bid-ask spread is the crudest, yet most readily observable measure of asymmetric information.

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According to Dennis and Weston (2001) and Odders-White and Ready (2006), the following measures of asymmetric information have been proposed over the years: r r r r r Quoted bid-ask spread Effective bid-ask spread Information-based impact Adverse-selection components of the bid-ask spread Probability of informed trading Quoted Bid-Ask Spread The quoted bid-ask spread is the crudest, yet most readily observable measure of asymmetric information. First suggested by Bagehot (1971) and later developed by numerous researchers, the bid-ask spread reflects the expectations of market movements by the market maker using asymmetric information. When the quoting dealer receives order flow that he suspects may come from an informed trader and may leave the dealer at a disadvantage relative to the market movements, the dealer increases the spread he quotes in order to compensate himself against potentially adverse uncertainty in price movements.

Networks, Crowds, and Markets: Reasoning About a Highly Connected World by David Easley, Jon Kleinberg

Albert Einstein, AltaVista, AOL-Time Warner, Apollo 13, classic study, clean water, conceptual framework, Daniel Kahneman / Amos Tversky, Douglas Hofstadter, Dutch auction, Erdős number, experimental subject, first-price auction, fudge factor, Garrett Hardin, George Akerlof, Gerard Salton, Gerard Salton, Gödel, Escher, Bach, incomplete markets, information asymmetry, information retrieval, John Nash: game theory, Kenneth Arrow, longitudinal study, market clearing, market microstructure, moral hazard, Nash equilibrium, Network effects, Pareto efficiency, Paul Erdős, planetary scale, power law, prediction markets, price anchoring, price mechanism, prisoner's dilemma, random walk, recommendation engine, Richard Thaler, Ronald Coase, sealed-bid auction, search engine result page, second-price auction, second-price sealed-bid, seminal paper, Simon Singh, slashdot, social contagion, social web, Steve Jobs, Steve Jurvetson, stochastic process, Ted Nelson, the long tail, The Market for Lemons, the strength of weak ties, The Wisdom of Crowds, trade route, Tragedy of the Commons, transaction costs, two and twenty, ultimatum game, Vannevar Bush, Vickrey auction, Vilfredo Pareto, Yogi Berra, zero-sum game

In the case of the used-car market, however, each seller of a used car knows something about his or her own car — its quality — that potential buyers do not know. This is an inherent feature of how the market works: there is asymmetric information. In Chapter 17 we studied self-fulfilling expectations equilibria in settings without asymmetric information. In the rest of this chapter, we add asymmetric information to the picture; this turns out to be a basic ingredient in the way that beliefs about endogenous events can manifest themselves in markets. There is a fundamental reason for this: in many settings where buyers and sellers interact, one side of the market has better information about the goods or services being traded than the other side does.

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But just as in our earlier examples, we see how socially undesirable outcomes can occur in the market when there are imbalances in information. The information asymmetry we have focused on in the market for health insurance leads, just as in case of used cars or employment, to a type of adverse selection. Insurance companies cannot select for a population consisting only of healthy individuals; rather, if anyone buys insurance at all, the only thing one can be sure of is that it will be bought by those who are less healthy. There is another type of information asymmetry that occurs in the market for health insurance that we have so far ignored in our discussion.

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If these actions are not observable to the insurance company then we have a new source of information asymmetry, since each individual knows more about his future behavior than the insurance company does. Once an individual purchases health insurance, his incentive to undertake costly actions to maintain his health is reduced, since he no longer bears the full cost of poor health. This introduces an effect known as moral hazard: when you’re shielded from the full cost of your potential bad behavior, you have less incentive to avoid engaging in it. Information Asymmetry in Trading and the Stock Market. It is useful to reflect further on these examples in light of one of the basic lessons of this chapter: that in any trade, each trader should ask why whoever is on the other side of the trade wants to make the trade.

The Plundered Planet: Why We Must--And How We Can--Manage Nature for Global Prosperity by Paul Collier

agricultural Revolution, Berlin Wall, business climate, carbon tax, Doha Development Round, energy security, food miles, G4S, Global Witness, information asymmetry, Kenneth Arrow, megacity, new economy, offshore financial centre, oil shock, price elasticity of demand, profit maximization, rent-seeking, Ronald Coase, Scramble for Africa, search costs, sovereign wealth fund, stem cell, Stewart Brand, Tragedy of the Commons

Somehow, the copper companies kept failing to make any net profits: large revenues were always offset by large expenses. Information asymmetries and corruption may have found their apogee in the Democratic Republic of the Congo. In October 2009 the Financial Times reported that out of gold exports estimated to be around a billion dollars, the government was capturing revenues of only $37,000. When I raised the issue with the Minister of Finance he doubted the accuracy of the numbers but agreed that there was a massive problem of smuggling. The information asymmetry between tax authorities and a company can be narrowed if the authorities hire specialist accountancy firms to audit the company’s books.

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Leveling the Playing Field That seemingly simple example of a corrupt official being bribed by a foreign company contained a second and more subtle type of problem. The corrupt minister was probably himself being ripped off by the company because he was on the wrong end of the asymmetric information problem that I introduced in the previous chapter. He simply did not know as much as the company offering the bribes about the true value of the contracts he was awarding. There is an institutional technology for overcoming the asymmetric information problem: selling the extraction rights through auction. Auctions can be complicated, but they can level the playing field between a savvy company and an ignorant government.

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The Chinese deals, negotiated in secrecy, had the potential to create all the problems we have encountered: corruption, asymmetric information, and time-inconsistency. However, finger-wagging at China has met with the predictable response. By 2008 the EITI executive was sufficiently concerned to ask me to suggest an alternative approach, one I will outline in the next chapter. Why Not Nationalize Resource Extraction? If resource-extraction companies have ripped off governments through a cocktail of corruption, asymmetric information, and discounts that reflect the time-consistency problem, and if prospecting is in any case best financed by government, why not let government handle the exploitation of natural assets?

Corporate Finance: Theory and Practice by Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann le Fur, Antonio Salvi

"Friedman doctrine" OR "shareholder theory", accelerated depreciation, accounting loophole / creative accounting, active measures, activist fund / activist shareholder / activist investor, AOL-Time Warner, ASML, asset light, bank run, barriers to entry, Basel III, Bear Stearns, Benoit Mandelbrot, bitcoin, Black Swan, Black-Scholes formula, blockchain, book value, business climate, business cycle, buy and hold, buy low sell high, capital asset pricing model, carried interest, collective bargaining, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, currency risk, delta neutral, dematerialisation, discounted cash flows, discrete time, disintermediation, diversification, diversified portfolio, Dutch auction, electricity market, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, fixed income, Flash crash, foreign exchange controls, German hyperinflation, Glass-Steagall Act, high net worth, impact investing, implied volatility, information asymmetry, intangible asset, interest rate swap, Internet of things, inventory management, invisible hand, joint-stock company, joint-stock limited liability company, junk bonds, Kickstarter, lateral thinking, London Interbank Offered Rate, low interest rates, mandelbrot fractal, margin call, means of production, money market fund, moral hazard, Myron Scholes, new economy, New Journalism, Northern Rock, performance metric, Potemkin village, quantitative trading / quantitative finance, random walk, Right to Buy, risk free rate, risk/return, shareholder value, short selling, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, stocks for the long run, supply-chain management, survivorship bias, The Myth of the Rational Market, time value of money, too big to fail, transaction costs, value at risk, vertical integration, volatility arbitrage, volatility smile, yield curve, zero-coupon bond, zero-sum game

It examines the incentives that encourage good managers to issue the right signals and discourage managers of ailing companies from using these same signals to give a misleading picture of their company’s financial health. In sum, information asymmetry may lead to a share being priced at less than its objective value, with two consequences: investments are not maximised because the cost of financing is too high; the choice of financing is skewed in favour of sources (such as debt) where there is less information asymmetry. Stephen Ross initiated the main studies in this field in 1977. 3. Agency theory Agency theory says that a company is not a single, unified entity.

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Signal and agency theory were developed to make up for the shortcomings of the theory of markets in equilibrium. Signal theory is based on the assumption that information is not equally available to all parties at the same time, and that information asymmetry is the rule. This can have disastrous consequences and result in very low valuations or a suboptimal investment policy. Accordingly, certain financial decisions, known as signals, are taken to shake up this information asymmetry. These signals can, however, have a negative financial impact on the party who initiates them if they turn out to be unfounded. Agency theory calls into question the claim that all of the stakeholders in the company (shareholders, managers, creditors) have a single goal — to create value.

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It is also the reason why every year in the US, the UK, France and many other countries, top managers and all directors must disclose the number of shares they hold or control in the companies they work for or of which they are board members. Section 33.4 Information asymmetries and the pecking order theory Having established that information asymmetry carries a cost, our next task is to determine what type of financing carries the lowest cost in this respect. The uncontested champion is, of course, internal financing, which requires no special procedures. Its advantage is simplicity. Debt comes next, but only low-risk debt with plenty of guarantees (pledges) and covenants restricting the risk to creditors and thus making it more palatable to them.

Humans as a Service: The Promise and Perils of Work in the Gig Economy by Jeremias Prassl

3D printing, Affordable Care Act / Obamacare, Airbnb, algorithmic management, Amazon Mechanical Turk, Andrei Shleifer, asset light, autonomous vehicles, barriers to entry, call centre, cashless society, Clayton Christensen, collaborative consumption, collaborative economy, collective bargaining, creative destruction, crowdsourcing, death from overwork, Didi Chuxing, disruptive innovation, Donald Trump, driverless car, Erik Brynjolfsson, full employment, future of work, George Akerlof, gig economy, global supply chain, Greyball, hiring and firing, income inequality, independent contractor, information asymmetry, invisible hand, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Kevin Roose, Kickstarter, low skilled workers, Lyft, machine readable, Mahatma Gandhi, Mark Zuckerberg, market friction, means of production, moral hazard, Network effects, new economy, obamacare, pattern recognition, platform as a service, Productivity paradox, race to the bottom, regulatory arbitrage, remote working, ride hailing / ride sharing, Robert Gordon, Ronald Coase, Rosa Parks, scientific management, Second Machine Age, secular stagnation, self-driving car, shareholder value, sharing economy, Silicon Valley, Silicon Valley billionaire, Silicon Valley ideology, Simon Singh, software as a service, Steve Jobs, TaskRabbit, TechCrunch disrupt, The Future of Employment, The Market for Lemons, The Nature of the Firm, The Rise and Fall of American Growth, transaction costs, transportation-network company, Travis Kalanick, two tier labour market, two-sided market, Uber and Lyft, Uber for X, uber lyft, union organizing, warehouse automation, work culture , working-age population

Algorithmic control is exercised in myriad ways, often eschewing direct orders or explicit instructions.14 Alex Rosenblat and Luke Stark’s study of Uber’s control mechanisms demonstrates how crowdwork conditions can easily be ‘shaped by the company’s deployment of a variety of design deci- sions and information asymmetries via the application to effect a “soft control” over workers’ routines’.15 Even though instructions are ‘carefully designed to be indirect, presumably to avoid the appearance of a company policy’,16 they are incredibly powerful: Individualized metrics . . . foster a ‘highly individualized sense of responsibility for one’s own job stability’, even though drivers have limited control over how passengers interact with the rating system or how Uber assesses it.

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There are two closely related challenges to the on-demand economy’s claim to have fostered a revolutionary culture of innovation: first, that many of its supposedly innovative elements are, in fact, simply aimed at entrench- ing existing operators against future competitors; and second, that platforms’ business models might in fact disincentivize the investment in research, development, and working conditions that spurs innovation. Pernicious Innovation Take rating algorithms as an example. The dramatic increase in information available about workers and consumers alike has gone a long way towards alleviating the information asymmetries that traditionally plague two-sided markets. The case for productivity-enhancing innovation looks straightfor- ward: extensive information allows for easy matching of supply and demand, increasing service provision for platform users, and income for workers. Upon closer inspection, however, not all is quite as it seems.

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The authors graciously concede that ‘because the inter- ests of digital, third-party platforms are not always perfectly aligned with the broader interests of society, some governmental involvement or oversight is likely to remain useful’: ibid. 21. Ibid., 130–1. In their worked example of airbnb (a property rental business), they suggest: [delegating] regulatory responsibility relating to information asymmetry to plat- forms like Airbnb (whose interests are naturally aligned with the global aggregation of information and the mitigation of adverse selection and moral hazard), and let [local housing associations] play a key role in the regulation of local externalities, as the guest-noise and strangers-in-the-building externalities are typically local and primarily affect [the association’s] membership

Machine, Platform, Crowd: Harnessing Our Digital Future by Andrew McAfee, Erik Brynjolfsson

"World Economic Forum" Davos, 3D printing, additive manufacturing, AI winter, Airbnb, airline deregulation, airport security, Albert Einstein, algorithmic bias, AlphaGo, Amazon Mechanical Turk, Amazon Web Services, Andy Rubin, AOL-Time Warner, artificial general intelligence, asset light, augmented reality, autism spectrum disorder, autonomous vehicles, backpropagation, backtesting, barriers to entry, behavioural economics, bitcoin, blockchain, blood diamond, British Empire, business cycle, business process, carbon footprint, Cass Sunstein, centralized clearinghouse, Chris Urmson, cloud computing, cognitive bias, commoditize, complexity theory, computer age, creative destruction, CRISPR, crony capitalism, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, Dean Kamen, deep learning, DeepMind, Demis Hassabis, discovery of DNA, disintermediation, disruptive innovation, distributed ledger, double helix, driverless car, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Ethereum, ethereum blockchain, everywhere but in the productivity statistics, Evgeny Morozov, fake news, family office, fiat currency, financial innovation, general purpose technology, Geoffrey Hinton, George Akerlof, global supply chain, Great Leap Forward, Gregor Mendel, Hernando de Soto, hive mind, independent contractor, information asymmetry, Internet of things, inventory management, iterative process, Jean Tirole, Jeff Bezos, Jim Simons, jimmy wales, John Markoff, joint-stock company, Joseph Schumpeter, Kickstarter, Kiva Systems, law of one price, longitudinal study, low interest rates, Lyft, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, Marc Andreessen, Marc Benioff, Mark Zuckerberg, meta-analysis, Mitch Kapor, moral hazard, multi-sided market, Mustafa Suleyman, Myron Scholes, natural language processing, Network effects, new economy, Norbert Wiener, Oculus Rift, PageRank, pattern recognition, peer-to-peer lending, performance metric, plutocrats, precision agriculture, prediction markets, pre–internet, price stability, principal–agent problem, Project Xanadu, radical decentralization, Ray Kurzweil, Renaissance Technologies, Richard Stallman, ride hailing / ride sharing, risk tolerance, Robert Solow, Ronald Coase, Salesforce, Satoshi Nakamoto, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Skype, slashdot, smart contracts, Snapchat, speech recognition, statistical model, Steve Ballmer, Steve Jobs, Steven Pinker, supply-chain management, synthetic biology, tacit knowledge, TaskRabbit, Ted Nelson, TED Talk, the Cathedral and the Bazaar, The Market for Lemons, The Nature of the Firm, the strength of weak ties, Thomas Davenport, Thomas L Friedman, too big to fail, transaction costs, transportation-network company, traveling salesman, Travis Kalanick, Two Sigma, two-sided market, Tyler Cowen, Uber and Lyft, Uber for X, uber lyft, ubercab, Vitalik Buterin, warehouse robotics, Watson beat the top human players on Jeopardy!, winner-take-all economy, yield management, zero day

Knowledge differentials, unfortunately, kept these transactions from happening. The idea that such “information asymmetries” are harmful not just for the less informed party but also for markets overall was formalized by economist George Akerlof in his classic 1970 paper “The Market for ‘Lemons.’ ” Akerlof showed that the used-car market could suffer greatly because of the existence of “lemons”‡—apparently fine cars that, in fact, had bad mechanical problems. Sellers know which cars are lemons but most buyers don’t, and this information asymmetry will keep the used-car market small and inefficient unless it’s addressed by, for example, having dealers offer money-back guarantees to customers who feel that they’ve been cheated.

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Akerlof showed that in extreme cases, information asymmetry could lead to complete market breakdown and the end of trade. This insight was so counterintuitive and radical at the time that his paper was repeatedly rejected from the top journals in economics, with one referee explaining that the journal “did not publish papers on subjects of such triviality” while another took the opposite tack, writing “if this paper were correct, economics would be different,” so it couldn’t be correct. But Akerlof was right about the critical importance of information asymmetries—economics was different—and ultimately he was recognized with a Nobel prize for this work.

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But Akerlof was right about the critical importance of information asymmetries—economics was different—and ultimately he was recognized with a Nobel prize for this work. Few information asymmetries are deeper or more important than the one that exists between someone who wants a ride across town and a stranger offering to provide that ride in a private car. Even if most drivers are completely honest and safe, the financial and personal risk of getting a bad one appears unacceptably high. Unless this inherent information asymmetry was overcome, the market for person-to-person rides would never take off. But by March of 2016, Uber was handling 50 million rides per month in the United States. The great majority of Uber’s ride suppliers were not professional chauffeurs; they were simply people who wanted to make money with their labor and their cars.

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt, Stephen J. Dubner

airport security, Alan Greenspan, behavioural economics, Broken windows theory, crack epidemic, desegregation, Exxon Valdez, feminist movement, George Akerlof, information asymmetry, Joseph Schumpeter, Kenneth Arrow, longitudinal study, mental accounting, moral hazard, More Guns, Less Crime, oil shale / tar sands, Paul Samuelson, peak oil, pets.com, profit maximization, Richard Thaler, school choice, sensible shoes, Steven Pinker, Ted Kaczynski, The Chicago School, The Market for Lemons, Thorstein Veblen, Tragedy of the Commons, twin studies, War on Poverty

By then, the suspicion of lemonness will have faded; by then, some people will be selling their perfectly good year-old cars, and the lemon can blend in with them, likely selling for more than it is truly worth. It is common for one party to a transaction to have better information than another party. In the parlance of economists, such a case is known as an information asymmetry. We accept as a verity of capitalism that someone (usually an expert) knows more than someone else (usually a consumer). But information asymmetries everywhere have in fact been gravely wounded by the Internet. Information is the currency of the Internet. As a medium, the Internet is brilliantly efficient at shifting information from the hands of those who have it into the hands of those who do not.

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January 8, 2006 Our book Freakonomics includes a chapter titled “How Is the Ku Klux Klan Like a Group of Real-Estate Agents?” This chapter was our effort to bring to life the economic concept known as information asymmetry, a state wherein one party to a transaction has better information than another party. It is probably obvious that real-estate agents typically have better information than their clients. The Klan story was perhaps less obvious. We argued that the Klan’s secrecy—its rituals, made-up language, passwords and so on—formed an information asymmetry that furthered its aim of terrorizing blacks and others. But the Klan was not the hero of our story. The hero was a man named Stetson Kennedy, a white Floridian from an old-line family who from an early age sought to assail racial and social injustices.

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Unless you decide to spend $2,300 for “The Last Hole” (a casket with golf scenes) or “Memories of the Hunt” (featuring big-racked bucks and other prey) or one of the much cheaper models that the funeral director somehow failed even to mention. The Internet, powerful as it is, has hardly slain the beast that is information asymmetry. Consider the so-called corporate scandals of the early 2000s. The crimes committed by Enron included hidden partnerships, disguised debt, and the manipulation of energy markets. Henry Blodget of Merrill Lynch and Jack Grubman of Salomon Smith Barney wrote glowing research reports of companies they knew to be junk.

Virtual Competition by Ariel Ezrachi, Maurice E. Stucke

"World Economic Forum" Davos, Airbnb, Alan Greenspan, Albert Einstein, algorithmic management, algorithmic trading, Arthur D. Levinson, barriers to entry, behavioural economics, cloud computing, collaborative economy, commoditize, confounding variable, corporate governance, crony capitalism, crowdsourcing, Daniel Kahneman / Amos Tversky, David Graeber, deep learning, demand response, Didi Chuxing, digital capitalism, disintermediation, disruptive innovation, double helix, Downton Abbey, driverless car, electricity market, Erik Brynjolfsson, Evgeny Morozov, experimental economics, Firefox, framing effect, Google Chrome, independent contractor, index arbitrage, information asymmetry, interest rate derivative, Internet of things, invisible hand, Jean Tirole, John Markoff, Joseph Schumpeter, Kenneth Arrow, light touch regulation, linked data, loss aversion, Lyft, Mark Zuckerberg, market clearing, market friction, Milgram experiment, multi-sided market, natural language processing, Network effects, new economy, nowcasting, offshore financial centre, pattern recognition, power law, prediction markets, price discrimination, price elasticity of demand, price stability, profit maximization, profit motive, race to the bottom, rent-seeking, Richard Thaler, ride hailing / ride sharing, road to serfdom, Robert Bork, Ronald Reagan, search costs, self-driving car, sharing economy, Silicon Valley, Skype, smart cities, smart meter, Snapchat, social graph, Steve Jobs, sunk-cost fallacy, supply-chain management, telemarketer, The Chicago School, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, Travis Kalanick, turn-by-turn navigation, two-sided market, Uber and Lyft, Uber for X, uber lyft, vertical integration, Watson beat the top human players on Jeopardy!, women in the workforce, yield management

Economists have long recognized that information is a key component in promoting a competitive market, which in turn promotes consumer welfare.3 Indeed, the undistorted flow of information is one of the conditions of the theoretical economic model of “perfect competition,” under which consumers benefit from lower prices, wider choice, and better quality.4 Market transparency, the OECD noted, “increases efficiency by reducing customers’ search costs and allowing suppliers to benchmark their performance with that of their competitors.”5 Market transparency, besides helping buyers, helps sellers “to save costs by reducing their inventories, enabling quicker delivery of perishable products to consumers, or dealing with unstable demand etc.”6 In general, increased transparency ameliorates the problems of “information asymmetries.”7 This is when one party knows more key information than the other party (such as the seller of a used car who knows more about the car’s problems than the buyer).8 As the flow of information increases and becomes more balanced, sellers and buyers are more likely to make educated decisions, and markets become more efficient.9 We often see the benefits of increased transparency when we shop online.

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Rarely will you and others simultaneously search on the The Rise of “Almost Perfect” Behavioral Discrimination 113 same website for the same room and communicate your findings. Thus, consumers may not know when pricing is dynamic, discriminatory, or both. Where Does the Power Reside? The power in our scenario favors those who hold and sell our personal data. These informational asymmetries support near-perfect behavioral discrimination. The first asymmetry is between the discriminating firm and its customers. The firm collects data on its customers and designs the algorithm. The firm may not know exactly how its pricing algorithm derived a particular price for a particular customer (see Chapters 7 and 8), but the firm does know the algorithm’s ultimate strategy (namely to increase profits by better discrimination).

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Nor, in most countries, do individuals as of this book’s publication date have the right to view the data, and to verify or contest the data’s accuracy. Nor can we challenge the accuracy of categories in which we are placed. We may know that we are getting a lot of ads—such as substance abuse, lowerquality credit cards, or checking our prison records—but not know why these ads are directed at us.56 The second level of informational asymmetry is between the firm and its competitors. Because perfect price discrimination will remain elusive, firms will seek to refine their categorizations of consumers. Not all the 114 Behavioral Discrimination firms will have the same data. Firms with a data advantage will likely have better algorithms that can better segment customers, and for each group they will likely be better at identifying the group’s average reservation price (and a narrower distribution of individual reservation prices).

The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality by Brink Lindsey

Airbnb, Asian financial crisis, bank run, barriers to entry, Bernie Sanders, Build a better mousetrap, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, Cass Sunstein, collective bargaining, creative destruction, Credit Default Swap, crony capitalism, Daniel Kahneman / Amos Tversky, David Brooks, diversified portfolio, Donald Trump, Edward Glaeser, endogenous growth, experimental economics, experimental subject, facts on the ground, financial engineering, financial innovation, financial intermediation, financial repression, hiring and firing, Home mortgage interest deduction, housing crisis, income inequality, informal economy, information asymmetry, intangible asset, inventory management, invisible hand, Jones Act, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, knowledge worker, labor-force participation, Long Term Capital Management, low skilled workers, Lyft, Mark Zuckerberg, market fundamentalism, mass immigration, mass incarceration, medical malpractice, Menlo Park, moral hazard, mortgage debt, Network effects, patent troll, plutocrats, principal–agent problem, regulatory arbitrage, rent control, rent-seeking, ride hailing / ride sharing, Robert Metcalfe, Robert Solow, Ronald Reagan, Savings and loan crisis, Silicon Valley, Silicon Valley ideology, smart cities, software patent, subscription business, tail risk, tech bro, too big to fail, total factor productivity, trade liberalization, tragedy of the anticommons, Tragedy of the Commons, transaction costs, tulip mania, Tyler Cowen, Uber and Lyft, uber lyft, Washington Consensus, white picket fence, winner-take-all economy, women in the workforce

Some more quality-conscious (and presumably higher-income) consumers are better off, but some more price-conscious (and presumably lower-income) consumers are worse off.5 Even if it works as well as it can, occupational licensing is thus regressive in its distributional consequences. Meanwhile, licensing regimes and the requirements they impose are all too often highly arbitrary. If the existence of occupational licensing were really a response to underlying market failures (e.g., information asymmetries) that made consumers especially vulnerable to abuse, the same types of occupations would be regulated in state after state. In reality, the scope of occupational licensing is all over the place. Although more than 1,100 different occupations are licensed at the state level, the highest number of occupations licensed in any one state is 177 (California takes this dubious prize).6 This fact strongly suggests that factors other than industry characteristics determine who gets regulated.

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The problem of narrow interests’ advantages in organizing and wielding influence is always with us, but it is especially severe in the cases at hand where the interests are so flush with resources. Furthermore, we identify four additional sources of bias that stack the deck even more in favor of the rent-seekers. The first source of bias is information asymmetries, in which the government’s dependence on regulated interests for policy-relevant information makes it especially open to capture. The second involves the exploitation by rent-seekers of a favorable “policy image” that short-circuits appropriate scrutiny of their self-serving claims. The third source of bias concerns the venue of decision making: when policies are crafted in obscure or insular settings that discourage monitoring and participation by outsiders, it becomes all the more likely that policymaking will be captured by insiders.

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The judges gave virtually identical scores to the Texas and Louisiana arrangements; moreover, the licensed Louisiana florists and unlicensed Texas florists differed little in their ratings.12 Another study found that Florida’s relaxation of licensing restrictions on roofers following Hurricanes Frances and Katrina did not reduce the quality of roofing services despite the fact that asymmetric information problems, frequently cited to justify licensing, could be expected to be especially severe in a post-crisis environment.13 II THE PRICE OF INCUMBENT PROTECTION Occupational licensing may not offer much in the way of consumer protection, but it succeeds admirably as protectionism, shielding incumbent firms from competition and thereby boosting their incomes at consumers’ expense.

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, behavioural economics, Bernie Madoff, Black Swan, Bob Litterman, bond market vigilante , book value, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, carbon credits, Carmen Reinhart, central bank independence, classic study, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global macro, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, inverted yield curve, invisible hand, John Bogle, junk bonds, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, pension time bomb, performance metric, Phillips curve, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, savings glut, search costs, selection bias, seminal paper, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stock buybacks, stocks for the long run, survivorship bias, systematic trading, tail risk, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

Liquidity differences can often be explained by varying degrees of information asymmetry—a key determinant of illiquidity that can in extreme situations cause market breakdowns. At such times, the credibility of information about market prices—which comes from markets being continuously traded with transparent pricing—can influence asset valuations as much as information about economic fundamentals. General confidence in the financial system and in the health of counterparties supports the liquidity of all assets but especially that of more complex and opaque assets; the loss of such confidence raises concerns about information asymmetry and can result in virtual closing of more fragile markets.

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These illiquidity-related premia appear to raise the expected returns of certain alternative asset classes as well as less liquid pockets of traditional asset classes, such as corporate bonds and small-cap equities. Illiquidity premia are hardly constant over time; they apparently were bid down to near zero by early 2007 and then rose sky high during the 2008 liquidity drought. Disagreement and information asymmetries Another CAPM assumption—homogeneous expectations—is obviously unrealistic, but this was a very convenient modeling device. In the past decade, disagreement models showed how differences in investor beliefs can influence financial markets through several channels: gradual information flow, limited attention, and heterogeneous views.

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On supply–demand factors I cite Scholes (1972) and Lamont–Thaler (2003), on index inclusion effects Shleifer (1986) and Wurgler–Zhuravskaya (2002), on inflation-linked bonds D’Amico et al. (2010), on market frictions Garleanu–Pedersen (2009a), on liquidity Acharya–Pedersen (2005), on disagreement Hong–Stein (2007), and on information asymmetries Vayanos–Woolley (2008). On the efficient markets hypothesis, I recommend Fama’s surveys (1970, 1991, 1998), on extensions Grossman–Stiglitz (1980) and Lo (2004), on the many criticisms Soros (2008), Akerlof–Shiller (2009), and Fox (2009), and on defense Rubinstein (2001), Cochrane (2007), and Ball (2009). 6 Behavioral finance • Behavioral finance states that investor irrationality causes systematic mispricings that rational arbitrageurs cannot fully offset due to scarce capital and riskiness of “arbitrage”

The Middleman Economy: How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit by Marina Krakovsky

Affordable Care Act / Obamacare, Airbnb, Al Roth, Ben Horowitz, Benchmark Capital, Black Swan, buy low sell high, Chuck Templeton: OpenTable:, Credit Default Swap, cross-subsidies, crowdsourcing, deal flow, disintermediation, diversified portfolio, experimental economics, George Akerlof, Goldman Sachs: Vampire Squid, income inequality, index fund, information asymmetry, Jean Tirole, Joan Didion, John Zimmer (Lyft cofounder), Kenneth Arrow, Lean Startup, Lyft, Marc Andreessen, Mark Zuckerberg, market microstructure, Martin Wolf, McMansion, Menlo Park, Metcalfe’s law, moral hazard, multi-sided market, Network effects, patent troll, Paul Graham, Peter Thiel, pez dispenser, power law, real-name policy, ride hailing / ride sharing, Robert Metcalfe, Sand Hill Road, search costs, seminal paper, sharing economy, Silicon Valley, social graph, supply-chain management, TaskRabbit, the long tail, The Market for Lemons, the strength of weak ties, too big to fail, trade route, transaction costs, two-sided market, Uber for X, uber lyft, ultimatum game, Y Combinator

Yet there’s plenty of material for such an education because lots of social scientists have studied, from one angle or another, the questions of how middlemen provide value and profit from their roles between buyers and sellers. For example, economic theory has much to say about transaction-cost economics, two-sided markets, and intermediaries’ ability to reduce information asymmetries between buyers and sellers. In particular, game theory informs our understanding of repeated interactions, reputations, shirking and cheating, and third-party enforcement. Social psychology and experimental economics show how acting on behalf of others affects people’s behavior and impressions.

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The chapter on Risk Bearers showed that we have always relied on middlemen to even out ups and downs of uncertain demand and supply; today’s “Uber of” this or that is just the latest technological application of this basic role. The chapters on Certifiers and Enforcers showed how effective middlemen reduce informational asymmetries between buyers and sellers. The Insulator chapter showed how a middleman can act as an equalizer, righting the balance of power between the less experienced players on one side and the experts on the other or enabling the novices to tout their merits and ask for more of what they want than they could comfortably do on their own.

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Therefore, to profit from risk, middlemen, like successful insurers, must be astute at teasing apart these two types of risk: •Internal risk. This is my term for what finance scholars call counterparty risk, or risk due to the characteristics or actions of a trading partner. In other words, internal risks are risks caused by asymmetric information (adverse selection and moral hazard). Risk-bearing middlemen should avoid internal risk because it can only harm them and their partners on the other side. That’s why, for example, a lender should be wary of lending money to someone with no job and no assets. •External risk. This is what economists call exogenous risk and what lawyers call acts of God or force majeure: risks that trading partners cannot control.

Cogs and Monsters: What Economics Is, and What It Should Be by Diane Coyle

3D printing, additive manufacturing, Airbnb, Al Roth, Alan Greenspan, algorithmic management, Amazon Web Services, autonomous vehicles, banking crisis, barriers to entry, behavioural economics, Big bang: deregulation of the City of London, biodiversity loss, bitcoin, Black Lives Matter, Boston Dynamics, Bretton Woods, Brexit referendum, business cycle, call centre, Carmen Reinhart, central bank independence, choice architecture, Chuck Templeton: OpenTable:, cloud computing, complexity theory, computer age, conceptual framework, congestion charging, constrained optimization, coronavirus, COVID-19, creative destruction, credit crunch, data science, DeepMind, deglobalization, deindustrialization, Diane Coyle, discounted cash flows, disintermediation, Donald Trump, Edward Glaeser, en.wikipedia.org, endogenous growth, endowment effect, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, Evgeny Morozov, experimental subject, financial deregulation, financial innovation, financial intermediation, Flash crash, framing effect, general purpose technology, George Akerlof, global supply chain, Goodhart's law, Google bus, haute cuisine, High speed trading, hockey-stick growth, Ida Tarbell, information asymmetry, intangible asset, Internet of things, invisible hand, Jaron Lanier, Jean Tirole, job automation, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, knowledge worker, Les Trente Glorieuses, libertarian paternalism, linear programming, lockdown, Long Term Capital Management, loss aversion, low earth orbit, lump of labour, machine readable, market bubble, market design, Menlo Park, millennium bug, Modern Monetary Theory, Mont Pelerin Society, multi-sided market, Myron Scholes, Nash equilibrium, Nate Silver, Network effects, Occupy movement, Pareto efficiency, payday loans, payment for order flow, Phillips curve, post-industrial society, price mechanism, Productivity paradox, quantitative easing, randomized controlled trial, rent control, rent-seeking, ride hailing / ride sharing, road to serfdom, Robert Gordon, Robert Shiller, Robert Solow, Robinhood: mobile stock trading app, Ronald Coase, Ronald Reagan, San Francisco homelessness, savings glut, school vouchers, sharing economy, Silicon Valley, software is eating the world, spectrum auction, statistical model, Steven Pinker, tacit knowledge, The Chicago School, The Future of Employment, The Great Moderation, the map is not the territory, The Rise and Fall of American Growth, the scientific method, The Signal and the Noise by Nate Silver, the strength of weak ties, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, Uber for X, urban planning, winner-take-all economy, Winter of Discontent, women in the workforce, Y2K

The 1980s privatisation of formerly nationalised industries is just one example. Even though these industries are still regulated by the government, the intellectual framework for this regulation is, as Turner described, the correction of a well-defined ‘market failure’, a specified reason such as an externality or information asymmetry for a breach in the general principle of the desirability of markets. The boundaries of the economic activities that take place in the public rather than the private sector clearly vary from country to country, suggesting there is room for debate about whether the market can and should organise, say, the supply of water and electricity, or rail and air services, or health care, in part or as a whole.

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We might now reclassify communications as hard-to-measure given the scale of technological advance, while manufacturing has declined further as a share of output. The ‘measurable’ share of the US economy was down to 30 percent by 1990 (from 49 percent in 1947), Griliches reckoned; it is 23 percent now (Coyle 2021). How should we define price, quantity, and quality in these contexts of ever more intangible output, variety explosion, information asymmetry? Is a smartphone app a low-price camera combined with photo processing? Should we be trying to measure the price of cameras or the price of capturing and storing an image? How should we account for the fact that it is the content of 1MB of data that has value, not the number of bits or the energy use?

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As Chapter Five concluded, elements of the necessary new analytical framework are available in the economic literature—much of it provided by a crop of Nobel laureates such as Krugman (1991), Romer (1994), Stiglitz (2014, with B Greenwald), and Tirole (1988, 2016). Their work has shown different limitations of the fundamental assumptions underpinning the bias toward market solutions. I do not know what the next paradigm in economics will look like, but it will have as default assumptions increasing returns to scale, information asymmetries, pervasive network effects and externalities, principal-agent relations, interaction between decision-makers—all the many characteristics of the digital economy that do feature in many economic models and areas of specialism, but have not been integrated, or mainstreamed to the extent they shape the current climate of ideas.

The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism by Arun Sundararajan

"World Economic Forum" Davos, additive manufacturing, Airbnb, AltaVista, Amazon Mechanical Turk, asset light, autonomous vehicles, barriers to entry, basic income, benefit corporation, bike sharing, bitcoin, blockchain, book value, Burning Man, call centre, Carl Icahn, collaborative consumption, collaborative economy, collective bargaining, commoditize, commons-based peer production, corporate social responsibility, cryptocurrency, data science, David Graeber, distributed ledger, driverless car, Eben Moglen, employer provided health coverage, Erik Brynjolfsson, Ethereum, ethereum blockchain, Frank Levy and Richard Murnane: The New Division of Labor, future of work, general purpose technology, George Akerlof, gig economy, housing crisis, Howard Rheingold, independent contractor, information asymmetry, Internet of things, inventory management, invisible hand, job automation, job-hopping, John Zimmer (Lyft cofounder), Kickstarter, knowledge worker, Kula ring, Lyft, Marc Andreessen, Mary Meeker, megacity, minimum wage unemployment, moral hazard, moral panic, Network effects, new economy, Oculus Rift, off-the-grid, pattern recognition, peer-to-peer, peer-to-peer lending, peer-to-peer model, peer-to-peer rental, profit motive, public intellectual, purchasing power parity, race to the bottom, recommendation engine, regulatory arbitrage, rent control, Richard Florida, ride hailing / ride sharing, Robert Gordon, Ronald Coase, Ross Ulbricht, Second Machine Age, self-driving car, sharing economy, Silicon Valley, smart contracts, Snapchat, social software, supply-chain management, TaskRabbit, TED Talk, the long tail, The Nature of the Firm, total factor productivity, transaction costs, transportation-network company, two-sided market, Uber and Lyft, Uber for X, uber lyft, universal basic income, Vitalik Buterin, WeWork, Yochai Benkler, Zipcar

As platforms like Airbnb, Lyft, Getaround, and Etsy disrupt old economic systems rooted in firm-to-consumer interactions and individual ownership, we are witnessing myriad regulatory issues. These issues, discussed in my 2015 University of Chicago Law Review paper that I coauthored with Molly Cohen, include new solutions to old forms of information asymmetry, new and old “externalities,” and an increasingly blurred boundary between professional and personal modes of exchange.10 Information Asymmetry: When One Party Knows More than the Other Most forms of peer-to-peer exchange are characterized by asymmetric information—knowledge relevant to the intended exchange that is possessed by one trading party but not by the other: for example, a passenger who enters a taxicab may not know the qualifications or intentions of its driver, or a hotelier knows more about the quality of her short-term accommodation than a potential guest does.

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Well, the assertion that new marketplaces will result in perfect competition and depress earning levels focuses on one older aspect of economic theory while ignoring a different aspect that has gained a great deal of attention in the last 40 years: that of “information asymmetry.” As I defined and discussed in chapter 6, sharing economy platforms can reduce many forms of information asymmetry. The predictions of economic theory are that such reductions will increase, rather than reduce, wages over time. Let me explain the consequences of information asymmetry, and in particular, the effect of “adverse selection” further by appealing to the example of used car markets that George Akerlof famously used in his Nobel Prize–winning work.

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These issues, discussed in my 2015 University of Chicago Law Review paper that I coauthored with Molly Cohen, include new solutions to old forms of information asymmetry, new and old “externalities,” and an increasingly blurred boundary between professional and personal modes of exchange.10 Information Asymmetry: When One Party Knows More than the Other Most forms of peer-to-peer exchange are characterized by asymmetric information—knowledge relevant to the intended exchange that is possessed by one trading party but not by the other: for example, a passenger who enters a taxicab may not know the qualifications or intentions of its driver, or a hotelier knows more about the quality of her short-term accommodation than a potential guest does. Similarly, a borrower knows more about her creditworthiness than a lender does. These and other forms of information asymmetry can lead to a lower level of economic activity than society might find desirable. Part of this could be due to uncertainty about quality—I’m not going to get into a taxi unless I’m sure the driver is reliable and won’t rip me off. Or information asymmetry can lead to the situation of “adverse selection”: if there’s no good way of distinguishing between lower and higher quality providers, then a customer is likely to be willing to pay, on average, a price commensurate with the value they’d get from an average quality provider.

Super Thinking: The Big Book of Mental Models by Gabriel Weinberg, Lauren McCann

Abraham Maslow, Abraham Wald, affirmative action, Affordable Care Act / Obamacare, Airbnb, Albert Einstein, anti-pattern, Anton Chekhov, Apollo 13, Apple Newton, autonomous vehicles, bank run, barriers to entry, Bayesian statistics, Bernie Madoff, Bernie Sanders, Black Swan, Broken windows theory, business process, butterfly effect, Cal Newport, Clayton Christensen, cognitive dissonance, commoditize, correlation does not imply causation, crowdsourcing, Daniel Kahneman / Amos Tversky, dark pattern, David Attenborough, delayed gratification, deliberate practice, discounted cash flows, disruptive innovation, Donald Trump, Douglas Hofstadter, Dunning–Kruger effect, Edward Lorenz: Chaos theory, Edward Snowden, effective altruism, Elon Musk, en.wikipedia.org, experimental subject, fake news, fear of failure, feminist movement, Filter Bubble, framing effect, friendly fire, fundamental attribution error, Goodhart's law, Gödel, Escher, Bach, heat death of the universe, hindsight bias, housing crisis, if you see hoof prints, think horses—not zebras, Ignaz Semmelweis: hand washing, illegal immigration, imposter syndrome, incognito mode, income inequality, information asymmetry, Isaac Newton, Jeff Bezos, John Nash: game theory, karōshi / gwarosa / guolaosi, lateral thinking, loss aversion, Louis Pasteur, LuLaRoe, Lyft, mail merge, Mark Zuckerberg, meta-analysis, Metcalfe’s law, Milgram experiment, minimum viable product, moral hazard, mutually assured destruction, Nash equilibrium, Network effects, nocebo, nuclear winter, offshore financial centre, p-value, Paradox of Choice, Parkinson's law, Paul Graham, peak oil, Peter Thiel, phenotype, Pierre-Simon Laplace, placebo effect, Potemkin village, power law, precautionary principle, prediction markets, premature optimization, price anchoring, principal–agent problem, publication bias, recommendation engine, remote working, replication crisis, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, ride hailing / ride sharing, Robert Metcalfe, Ronald Coase, Ronald Reagan, Salesforce, school choice, Schrödinger's Cat, selection bias, Shai Danziger, side project, Silicon Valley, Silicon Valley startup, speech recognition, statistical model, Steve Jobs, Steve Wozniak, Steven Pinker, Streisand effect, sunk-cost fallacy, survivorship bias, systems thinking, The future is already here, The last Blockbuster video rental store is in Bend, Oregon, The Present Situation in Quantum Mechanics, the scientific method, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Tragedy of the Commons, transaction costs, uber lyft, ultimatum game, uranium enrichment, urban planning, vertical integration, Vilfredo Pareto, warehouse robotics, WarGames: Global Thermonuclear War, When a measure becomes a target, wikimedia commons

It is also not always completely transparent to principals how agents are compensated, which might cause principals to make different decisions than they would if they had the full picture. If you knew that your financial adviser was getting paid to recommend a financial product to you, you might be less likely to invest in it. Disclosure laws and the increase in open information via the internet can reduce the effects of asymmetric information. Sometimes, though, the consumer has the upper hand when it comes to asymmetric information. This is often the case with insurance products, where the person or company applying for insurance usually knows more about their own risk profile than the insurance company does. When parties select transactions that they think will benefit them, based at least partially on their own private information, that’s called adverse selection.

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This helps keep premiums from rising too high, making care more affordable for everyone. That’s why the ACA mandate was so important to the viability of the overall system. The mental models from the last section (tragedy of the commons, externalities, etc.) and those from this section (moral hazard, information asymmetry, etc.) are signs of market failure, where open markets without intervention can create suboptimal results, or fail. To correct a market failure, an outside party must intervene in some way. Unfortunately, these interventions themselves can also fail, a result called government failure or political failure.

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., 192 Hyman, Ray, 62 hydra effect, 51, 52 hyperbolic discounting, 87 hypothesis, 136, 161 alternative, 163, 164, 166, 167 null, 163, 164 see also experiments hysteresis, 194 IBM, 241 iCloud, 97 idea maze, 301 ignorance, veil of, 21 “I Know an Old Lady” (Bonne and Mills), 58 immigration, 15–16 immune system, 194 imposter syndrome, 268–72 incentives, 55 perverse, 50–51, 54 income, U.S. household, 148–49, 191 independence, 205 India, 50–51, 235 individualist versus collectivist, in organizational culture, 274 inertia, 102–3, 105–8, 110, 112, 113, 119, 120, 129, 290, 296 infantry, in organizations and projects, 253 inflation, 179–80, 182–83 inflection point, 115 Influence: The Psychology of Persuasion (Cialdini), 215 influence models, 215, 220, 221, 226, 229, 230, 289 authority, 219–20, 226 commitment, 216, 220 liking, 216–17, 220 reciprocity, 215–16, 220, 222, 229, 289 scarcity, 219, 220 social proof, 217–20, 229 information asymmetry, 45–47 information overload, 60, 146 Ingham, Harrington, 196 in-group favoritism, 127, 217 Inkster, James A., 91 innovations, 302 disruptive, 308, 310–11 innovators, in technology adoption life cycle, 116–17, 289, 311 Innovator’s Dilemma, The (Christensen), 310 insincerity, manipulative, 264 Instagram, 220, 247, 291, 310 instant gratification, 87 institutional knowledge, 257 insurance, 43, 46, 191 health, 42, 46, 47, 190 key person, 305 Intel, 308, 310 intelligence quotient (IQ), 138, 250–52 interest, compound, 69, 85 interest rates, 85, 182–83 internalizing, 41–42 internet, 290 messaging services, 119 introverts, 249–50 intuition, 30–31, 33, 132 invention, simultaneous, 291–92 inverse fallacy, 156–57 inverse thinking, 1–2, 291 investments, investors, 180–84, 192, 272, 288 cargo cult, 316 Invisible Armies (Boot), 239 iPad, 290 iPod, 296–97 IQ (intelligence quotient), 138, 250–52 Iraq, 196, 234, 243, 276 irreversible decisions, 61–62, 223–24 Iverson, Allen, 246 Jacobi, Carl, 1 James, LeBron, 246 Janz, Christoph, 298–99 Japan, 241 jelly beans, 169–71 Jobs, Steve, 64, 296–97 jobs to be done, 296, 299–300 John, Tommy, 83 Johnson, Magic, 246 jokes, 35–36 Jordan, Michael, 246 Journal of Experimental Psychology, 13, 17 Joy, Bill, 247 Joy’s law, 247, 248 judicial rulings, 63, 144 Jurassic Park, 121 justice, distributive versus procedural, 224–25 Justice, U.S.

Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

airline deregulation, Alan Greenspan, Albert Einstein, bank run, barriers to entry, behavioural economics, Bretton Woods, business cycle, butterfly effect, capital controls, carbon tax, Carmen Reinhart, central bank independence, collective bargaining, congestion pricing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Donald Davies, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, information asymmetry, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, Pareto efficiency, Paul Samuelson, price elasticity of demand, price stability, prisoner's dilemma, profit maximization, public intellectual, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Vilfredo Pareto, Washington Consensus, white flight

Work by Michael Spence, Joseph Stiglitz, and George Akerlof showed that these types of markets could exhibit a variety of distinctive features, including signaling (costly investment in behavior that has no immediate apparent benefit), rationing (refusal to provide a good or service, even at a higher price), and market collapse. This work earned these three economists a joint Nobel Prize in 2001 and spawned a huge literature that hums along to this day. As a result, we understand much better the workings of credit and insurance markets, where information asymmetries are rife.†† Today, economists are increasingly turning their attention to markets in which consumers do not behave fully rationally. This reorientation has produced a new field called behavioral economics, which attempts to integrate the insights of psychology with the formal modeling approaches of economics.

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Depending on what we assume along these and many other dimensions, we have learned from decades of modeling that imperfect competition can produce a bewildering array of possibilities. More important, thanks to the transparency of the assumptions, we have also learned what each one of these outcomes is predicated on. In the 1970s, economists began to model another aspect of markets: asymmetric information. This is an important feature of real-world markets. Workers have a better sense of their ability than do employers. Creditors know whether they are likely to default or not, while lenders do not. Buyers of used cars do not know whether they’re buying a lemon, but sellers do. Work by Michael Spence, Joseph Stiglitz, and George Akerlof showed that these types of markets could exhibit a variety of distinctive features, including signaling (costly investment in behavior that has no immediate apparent benefit), rationing (refusal to provide a good or service, even at a higher price), and market collapse.

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The irrelevance of sunk costs (payments already made that cannot be recouped) and the equivalence between financial costs and opportunity costs (the value of choices not exercised) do not hold under less than full rationality, to cite but two examples. Although grossly simplified, this telescopic account should give a sense of the expanding diversity of the profession’s explanatory models. We have moved beyond competitive models to imperfect competition, asymmetric information, and behavioral economics. Idealized, flawless markets have given way to markets that can fail in all sorts of ways. Rational behavior is being overlaid with findings from psychology. Typically, the expansion has its roots in empirical observations that seem to contradict existing models.

The Inner Lives of Markets: How People Shape Them—And They Shape Us by Tim Sullivan

Abraham Wald, Airbnb, airport security, Al Roth, Alvin Roth, Andrei Shleifer, attribution theory, autonomous vehicles, barriers to entry, behavioural economics, Brownian motion, business cycle, buy and hold, centralized clearinghouse, Chuck Templeton: OpenTable:, classic study, clean water, conceptual framework, congestion pricing, constrained optimization, continuous double auction, creative destruction, data science, deferred acceptance, Donald Trump, Dutch auction, Edward Glaeser, experimental subject, first-price auction, framing effect, frictionless, fundamental attribution error, George Akerlof, Goldman Sachs: Vampire Squid, Gunnar Myrdal, helicopter parent, information asymmetry, Internet of things, invisible hand, Isaac Newton, iterative process, Jean Tirole, Jeff Bezos, Johann Wolfgang von Goethe, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, late fees, linear programming, Lyft, market clearing, market design, market friction, medical residency, multi-sided market, mutually assured destruction, Nash equilibrium, Occupy movement, opioid epidemic / opioid crisis, Pareto efficiency, Paul Samuelson, Peter Thiel, pets.com, pez dispenser, power law, pre–internet, price mechanism, price stability, prisoner's dilemma, profit motive, proxy bid, RAND corporation, ride hailing / ride sharing, Robert Shiller, Robert Solow, Ronald Coase, school choice, school vouchers, scientific management, sealed-bid auction, second-price auction, second-price sealed-bid, sharing economy, Silicon Valley, spectrum auction, Steve Jobs, Tacoma Narrows Bridge, techno-determinism, technoutopianism, telemarketer, The Market for Lemons, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, two-sided market, uber lyft, uranium enrichment, Vickrey auction, Vilfredo Pareto, WarGames: Global Thermonuclear War, winner-take-all economy

Their imperfections notwithstanding, the advent of babysitter platforms is bad news for brick-and-mortar nanny placement services, whose businesses are surely suffering. But we’re still skeptical that any intermediary, however diligent, will overcome the anxieties of the modern helicopter parent. We doubt that day will ever arrive. Asymmetric information is dead? Long live asymmetric information. The Network Externalities of Ladies’ Night The calculation of how to set prices is a lot more complicated on platforms than in one-sided markets because they are defined by what economists call network externalities, where one person’s purchase makes the item more valuable for other would-be consumers.15 Obviously, this isn’t the case for groceries: the happiness I get from a box of Oreos isn’t affected by whether you prefer to spend your money on Oreos or chocolate-chip cookies or kale.

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It’s why, despite their best efforts, no amount of antifraud efforts by Amazon or eBay or anyone else will rid the world of conmen. As long as there’s money to be made off easy marks, there will be operators able to separate fools from their money. And if somehow tomorrow morning we were to figure out a technology to end information asymmetry, someone else would figure out by tomorrow afternoon some way of making more of it. 4 THE POWER OF SIGNALS IN A WORLD OF CHEAP TALK FACE TATTOOS AND OTHER SIGNS OF HIDDEN QUALITIES When fifteen-year-old Robert Torres came home in 1977 with the letters “SF” tattooed on his left hand, his horror-struck mother, Frances Hernandez, asked him why on earth he’d gone and “marked [himself] for life.”

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In fact, the story of eBay’s early days is partly about the perils of market transactions and how they undermine the fundamentalist vision of markets as the answer to all the world’s problems. They’re insights that are worth keeping in mind today, for internet commerce participants and entrepreneurs alike. But whatever problems eBay and others encountered initially, the tinkerers and innovators of Silicon Valley did prevail. While asymmetric information—when the seller knows more than the buyer—complicates the job of turning the economy into an internet bazaar, eBay and its e-commerce brethren have found many ways to get the market to work reasonably well. And as we’ll see, their successes have provided economists with yet more fodder for their model building and experiments—often from within the companies themselves.

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

affirmative action, Affordable Care Act / Obamacare, airline deregulation, Alan Greenspan, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, behavioural economics, Berlin Wall, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, electricity market, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, Glass-Steagall Act, Great Leap Forward, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Bogle, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, London Interbank Offered Rate, lone genius, low interest rates, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, Paul Volcker talking about ATMs, payday loans, Phillips curve, price stability, profit maximization, profit motive, public intellectual, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, search costs, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, stock buybacks, subprime mortgage crisis, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, Tragedy of the Commons, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game

It was the eighth-largest corporate bankruptcy in U.S. history and the biggest failure by a securities firm since Lehman Brothers Holdings Inc. filed for Chapter 11 in September 2008. 10. While there may be some debate about when taking advantage of information asymmetries is unethical (reflected in the maxim “caveat emptor,” putting the obligation on the buyer to beware of the possibility of information asymmetries), there is no doubt that the banks stepped over the line. See the discussion in later chapters over the large fines paid by the banks for practices that were fraudulent and deceptive. 11. This predatory behavior took a number of forms.

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Hoff, “Market Failures and the Distribution of Wealth: A Perspective from the Economics of Information,” Politics and Society 24, no. 4 (1996): 411–32; and Hoff, “The Second Theorem of the Second Best,” Journal of Public Economics 25 (1994): 223–42. 55. The exciting story is told in the bestseller by Dava Sobel, Longitude: The True Story of a Lone Genius Who Solved the Greatest Scientific Problem of His Time (New York: Walker, 1995). 56. Technically, the problems with incentive pay arise when there are information asymmetries. The employer doesn’t fully know the quality of the products produced by the worker (otherwise, he would specify that). In a trial, the judge and jury worry that the strength of an expert’s opinion might be affected if his compensation depended on the outcome of the trial. 57. Given this, one might ask, why are those in finance, supposedly experts in economics, so wedded to these distortionary incentive schemes.

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Propublica maintained an active media oversight of the aftermath of the BP spill, including corruption in the clean-up process. See http://www.propublica.org/topic/gulf-oil-spill/. 5. R. H. Coase, “The Problem of Social Cost,” Journal of Law and Economics 3 (1960): 1–44. 6. This is especially the case when there are information asymmetries—where one party has easier access to information. If one group has less information about the harm than another (a common situation), then the more informed is in a better position to avoid the harm. Other market imperfections can also affect the efficiency of alternative assignments of property rights.

Willful: How We Choose What We Do by Richard Robb

activist fund / activist shareholder / activist investor, Alvin Roth, Asian financial crisis, asset-backed security, Bear Stearns, behavioural economics, Bernie Madoff, Brexit referendum, capital asset pricing model, cognitive bias, collapse of Lehman Brothers, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, delayed gratification, diversification, diversified portfolio, effective altruism, endowment effect, Eratosthenes, experimental subject, family office, George Akerlof, index fund, information asymmetry, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, lake wobegon effect, loss aversion, market bubble, market clearing, money market fund, Paradox of Choice, Pareto efficiency, Paul Samuelson, Peter Singer: altruism, Philippa Foot, principal–agent problem, profit maximization, profit motive, Richard Thaler, search costs, Silicon Valley, sovereign wealth fund, survivorship bias, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, trolley problem, ultimatum game

I believed that values in credit markets were extraordinary. (Of course, some deals that appear lucrative from a distance are not; at the time I believed I knew which were which.) Yet I simply couldn’t beam my beliefs into investors’ heads. Gradually, I saw that investors’ reluctance had little to do with the usual factors: aversion to risk, information asymmetries, aversion to blame, aversion to ambiguity, herd mentality, or irrational fear. Investors could not fully adopt my conviction about any given opportunity before it disappeared. They could not act on a hunch that I (and others) might just be right. To do so, an investor would have to suspend her belief in reasonably efficient markets—usually, low asset prices signify risk, but not in the collapsing markets of 2008.

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TWO Two Realms of Human Behavior 1. Kierkegaard, Either/Or, 163–164. 2. Becker, Economic Approach, 5. Neoclassical economics could be challenged on the assumption of perfect exchange, i.e., markets in equilibrium, and many have done so. Trading may break down due to heterogeneous goods and information asymmetries, imperfect performance on contracts, prices set via strategic bargaining rather than a Walrasian auctioneer, sheer deceit—you name it. In this case, observed behavior will fail to conform to neoclassical models and economists’ policy prescriptions will not fit the real world. See, e.g., Kohn, “Value and Exchange.”

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See also mercy ambiguity effect, 24 American Work-Sports (Zarnowski), 191 Anaximander, 190 anchoring, 168 angel investors, 212–213n1 “animal spirits,” 169 Antipater of Tarsus, 134–135, 137 “anxious vigilance,” 73, 82 arbitrage, 70, 78 Aristotle, 200, 220n24 Asian financial crisis (1997–1998), 13 asset-backed securities, 93–95 asset classes, 75 astrology, 67 asymmetric information, 96, 210n2 authenticity, 32–37, 114 of challenges, 176–179 autism, 58, 59 auto safety, 139 Bank of New York Mellon, 61 Battle of Waterloo, 71, 205 Bear Stearns, 85 Becker, Gary, 33, 108–109 behavioral economics, 4, 10, 198–199 assumptions underlying, 24 insights of, 24–25 rational choice complemented by, 6 Belgium, 191 beliefs: attachment to, 51 defined, 50 evidence inconsistent with, 54, 57–58 formation of, 53, 92 persistence of, 26–28, 54 transmissibility of, 92–93, 95–96 Bentham, Jeremy, 127, 197–198 “black swans,” 62–64 blame aversion, 57, 72 brain hemispheres, 161 Brexit, 181–185 “bull markets,” 78 capital asset pricing model, 64 care altruism, 38, 104, 108–114, 115, 120, 135, 201 Casablanca (film), 120, 125 The Cask of Amontillado (Poe), 126–127 challenges, 202–203 authenticity of, 176–179 staying in the game linked to, 179–181 changes of mind, 147–164 charity, 40, 45–46, 119, 128 choice: abundance of, 172–174 intertemporal, 149–158, 166 purposeful vs. rational, 22–23 Christofferson, Johan, 83, 86, 87, 88 Cicero, 133–134 Clark, John Bates, 167 cognitive bias, 6, 23, 51, 147–148, 167, 198–199 confirmation bias, 200 experimental evidence of, 10–11, 24 for-itself behavior disguised as, 200–201 gain-loss asymmetry, 10–11 hostile attribution bias, 59 hyperbolic discounting as, 158 lawn-mowing paradox and, 33–34 obstinacy linked to, 57 omission bias, 200 rational choice disguised as, 10–11, 33–34, 199–200 salience and, 29, 147 survivor bias, 180 zero risk bias, 24 Colbert, Claudette, 7 Columbia University, 17 commitment devices, 149–151 commodities, 80, 86, 89 commuting, 26, 38–39 competitiveness, 11, 31, 41, 149, 189 complementary skills, 71–72 compound interest, 79 confirmation bias, 57, 200 conspicuous consumption, 31 consumption planning, 151–159 contrarian strategy, 78 cooperation, 104, 105 coordination, 216n15 corner solutions, 214n8 cost-benefit analysis: disregard of, in military campaigns, 117 of human life, 138–143 credit risk, 11 crime, 208 Dai-Ichi Kangyo Bank (DKB), 12–14, 15, 17, 87, 192–193 Darwin, Charles, 62–63 depression, psychological, 62 de Waal, Frans, 118 Diogenes of Seleucia, 134–135, 137 discounting of the future, 10, 162–164 hyperbolic, 158, 201 disjunction effect, 174–176 diversification, 64–65 divestment, 65–66 Dostoevsky, Fyodor, 18 drowning husband problem, 6–7, 110, 116, 123–125 effective altruism, 110–112, 126, 130, 135–136 efficient market hypothesis, 69–74, 81–82, 96 Empire State Building, 211–212n12 endowment effect, 4 endowments, of universities, 74 entrepreneurism, 27, 90, 91–92 Eratosthenes, 190 ethics, 6, 104, 106–108, 116, 125 European Union, 181–182 experiential knowledge, 59–61 expert opinion, 27–28, 53, 54, 56–57 extreme unexpected events, 61–64 fairness, 108, 179 family offices, 94 Fear and Trembling (Kierkegaard), 53–54 “felicific calculus,” 197–198 financial crisis of 2007–2009, 61, 76, 85, 93–94, 95 firemen’s muster, 191 flow, and well-being, 201–202 Foot, Philippa, 133–134, 135 for-itself behavior, 6–7, 19, 21, 27, 36, 116, 133–134, 204–205, 207–208 acting in character as, 51–53, 55–56, 94–95, 203 acting out of character as, 69, 72 analyzing, 20 authenticity and, 33–35 charity as, 39–40, 45–46 comparison and ranking lacking from, 19, 24, 181 consequences of, 55–64 constituents of, 26–31 defined, 23–24 difficulty of modeling, 204 expert opinion and, 57 extreme unexpected events and, 63–64 flow of time and, 30 free choice linked to, 169–172 in groups, 91–100 incommensurability of, 140–143 in individual investing, 77–78 in institutional investing, 76 intertemporal choice and, 168, 175, 176 job satisfaction as, 189 mercy as, 114 misclassification of, 42, 44, 200–201 out-of-character trading as, 68–69 purposeful choice commingled with, 40–43, 129, 171 rationalizations for, 194–195 in trolley problem, 137 unemployment and, 186 France, 191 Fuji Bank, 14 futures, 80–81 gain-loss asymmetry, 10–11 Galperti, Simone, 217n1 gambler’s fallacy, 199 gamifying, 177 Garber, Peter, 212n1 Germany, 191 global equity, 75 Good Samaritan (biblical figure), 103, 129–130, 206 governance, of institutional investors, 74 Great Britain, 191 Great Depression, 94 Greek antiquity, 190 guilt, 127 habituation, 201 happiness research (positive psychology), 25–26, 201–202 Hayek, Friedrich, 61, 70 hedge funds, 15–17, 65, 75, 78–79, 93, 95 herd mentality, 96 heroism, 6–7, 19–20 hindsight effect, 199 holding, of investments, 79–80 home country bias, 64–65 Homer, 149 Homo ludens, 167–168 hostile attribution bias, 59 housing market, 94 Huizinga, Johan, 167–168 human life, valuation of, 138–143 Hume, David, 62, 209n5 hyperbolic discounting, 158, 201 illiquid markets, 74, 94 index funds, 75 individual investing, 76–82 Industrial Bank of Japan, 14 information asymmetry, 96, 210n2 innovation, 190 institutional investing, 74–76, 82, 93–95, 205 intergenerational transfers, 217n1, 218n4 interlocking utility, 108 intertemporal choice, 149–159, 166 investing: personal beliefs and, 52–53 in start-ups, 27 Joseph (biblical figure), 97–99 Kahneman, Daniel, 168 Kantianism, 135–136 Keynes, John Maynard, 12, 58, 167, 169, 188–189 Kierkegaard, Søren, 30, 53, 65, 88 Knight, Frank, 145, 187 Kranton, Rachel E., 210–211n2 labor supply, 185–189 Lake Wobegon effect, 4 lawn-mowing paradox, 33–34, 206 Lehman Brothers, 61, 86, 89, 184 leisure, 14, 17, 41, 154, 187 Libet, Benjamin, 161 life, valuation of, 138–143 Life of Alexander (Plutarch), 180–181 Locher, Roger, 117, 124 long-term vs. short-term planning, 148–149 loss aversion, 70, 199 lottery: as rational choice, 199–200 Winner’s Curse, 34–36 love altruism, 104, 116, 123–125, 126, 203 lying, vs. omitting, 134 Macbeth (Shakespeare), 63 MacFarquhar, Larissa, 214n6 Madoff, Bernard, 170 malevolence, 125–127 Malthus, Thomas, 212n2 manners, in social interactions, 104, 106, 107, 116, 125 market equilibrium, 33 Markowitz, Harry, 65 Marshall, Alfred, 41, 167 Mass Flourishing (Phelps), 189–191 materialism, 5 merchant’s choice, 133–134, 137–138 mercy, 104, 114–116, 203 examples of, 116–120 inexplicable, 45–46, 120–122 uniqueness of, 119, 129 mergers and acquisitions, 192 “money pump,” 159 monks’ parable, 114, 124 Montaigne, Michel de, 114, 118 mortgage-backed securities, 93 Nagel, Thomas, 161 Napoleon I, emperor of the French, 71 neoclassical economics, 8, 10, 11, 22, 33 Nietzsche, Friedrich, 21, 43, 209n5 norms, 104, 106–108, 123 Norway, 66 Nozick, Robert, 162 observed care altruism, 108–112 Odyssey (Homer), 149–150 omission bias, 200 On the Fourfold Root of the Principle of Sufficient Reason (Schopenhauer), 209n5 “on the spot” knowledge, 61, 70, 80, 94, 205 Orico, 13 overconfidence, 57, 200 “overearning,” 44–45 The Palm Beach Story (film), 7 The Paradox of Choice (Schwartz), 172 parenting, 108, 141, 170–171 Pareto efficiency, 132–133, 136, 139–140 Peirce, Charles Sanders, 53–54, 67, 94 pension funds, 66, 74–75, 93, 95 permanent income hypothesis, 179 Pharaoh (biblical figure), 97–99 Phelps, Edmund, 17, 189–191 Philip II, king of Macedonia, 181 planning, 149–151 for consumption, 154–157 long-term vs. short-term, 148–149 rational choice applied to, 152–158, 162 play, 44–45, 167, 202 pleasure-pain principle, 18 Plutarch, 180–181 Poe, Edgar Allan, 126 pollution, 132–133 Popeye the Sailor Man, 19 portfolio theory, 64–65 positive psychology (happiness research), 25–26, 201–202 preferences, 18–19, 198 aggregating, 38–39, 132, 164 altruism and, 28, 38, 45, 104, 110, 111, 116 in behavioral economics, 24, 168 beliefs’ feedback into, 51, 55 defined, 23 intransitive, 158–159 in purposeful behavior, 25, 36 risk aversion and, 51 stability of, 33, 115, 147, 207, 208 “time-inconsistent,” 158, 159, 166, 203 present value, 7, 139 principal-agent problem, 72 Principles of Economics (Marshall), 41 prisoner’s dilemma, 105 private equity, 75 procrastination, 3, 4, 19, 177–178 prospect theory, 168 protectionism, 185–187 Prussia, 191 public equities, 75 punishment, 109 purposeful choice, 22–26, 27, 34, 36, 56, 133–134, 204–205 altruism compatible with, 104, 113–114, 115–116 commensurability and, 153–154 as default rule, 43–46 expert opinion and, 57 extreme unexpected events and, 62–63 flow of time and, 30 for-itself behavior commingled with, 40–43, 129, 171 mechanistic quality of, 68 in merchant’s choice, 135, 137–138 Pareto efficiency linked to, 132 rational choice distinguished from, 22–23 regret linked to, 128 social relations linked to, 28 stable preferences linked to, 33 in trolley problem, 135–136 vaccination and, 58–59 wage increases and, 187.

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

"World Economic Forum" Davos, accounting loophole / creative accounting, Ada Lovelace, Adam Curtis, Airbnb, Alan Greenspan, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, behavioural economics, Ben Bernanke: helicopter money, bitcoin, Bletchley Park, blockchain, Bretton Woods, Brexit referendum, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Charles Babbage, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, crowdsourcing, cryptocurrency, data science, David Graeber, deep learning, deskilling, Diane Coyle, discrete time, disruptive innovation, distributed ledger, diversification, double entry bookkeeping, Ethereum, ethereum blockchain, fiat currency, financial engineering, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, Glass-Steagall Act, Higgs boson, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, large denomination, Large Hadron Collider, Lewis Mumford, liquidity trap, London Whale, low interest rates, low skilled workers, M-Pesa, machine readable, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, Michael Milken, MITM: man-in-the-middle, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, power law, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, robo advisor, Satoshi Nakamoto, Satyajit Das, Savings and loan crisis, savings glut, seigniorage, seminal paper, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, Stuart Kauffman, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Vitalik Buterin, Von Neumann architecture, Washington Consensus

Banks realize that in a situation of distress, they are underwritten and likely to be supported by the United States government and the governments of Europe (Freeman, 2011 ). As a result, they tend to structure themselves along similar lines and this causes a herd mentality that reduces the diversity of behavior, notably when dealing with risk. Second, there is information asymmetry within the banking networks as banks do not share their information with each other. Thus the tools, such as the aforementioned stress tests and Living Wills, being developed to reconstruct the network and estimate systemic risk, are done using partial amounts of publicly available information.

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This involves analyzing a multitude of data sources, which is time-consuming and prone to errors. As the underwriting process is often not integrative of the due diligence process and often involves depending on third-party providers, it leads to duplication of efforts, additional costs to the investors, and information asymmetries owing to the siloed structure of the entire operation. However, companies like Kabbage are showing us that via the use of Big Data analyses, these steps can be automated. Based on the digital footprint of the company, the lending institution can use advanced analytics to perform its due diligence with a better understanding of the risk involved, with a higher level of transparency, and with less manual intervention at higher speeds.

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Big data also allows the analysis of other attributes of financial information, which allows investors to gain a more holistic understanding of the company’s character. Using smart contracts, this automated due diligence can then be leveraged to automate the underwriting process, which reduces execution time and reduces the number of supplementary intermediaries that are currently employed, thus reducing operational risks and information asymmetries . The P2P lending sector is already making strides in this direction to connect savers and lenders. Companies like MoneyCircles connect savers with borrowers who are part of their social circles. Lenders can create or join circles based on their Gmail, Facebook, Twitter, or LinkedIn networks and loan money based on their criteria.

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

Alan Greenspan, balance sheet recession, banking crisis, basic income, Bear Stearns, Bernie Sanders, Bretton Woods, business climate, business cycle, carbon tax, Carmen Reinhart, central bank independence, circular economy, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, degrowth, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, Ford Model T, forward guidance, full employment, G4S, general purpose technology, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, low interest rates, low skilled workers, Martin Wolf, mass incarceration, military-industrial complex, Modern Monetary Theory, Money creation, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, ocean acidification, paradox of thrift, Paul Samuelson, planned obsolescence, Post-Keynesian economics, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Solyndra, Steve Jobs, stock buybacks, systems thinking, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, Tragedy of the Commons, transaction costs, trickle-down economics, universal basic income, vertical integration, very high income

Senior’s 1836 An Outline of the Science of Political Economy, London, Richard Griffin & Co. 21 For a recent application of this argument in defence of inequality, see N. G. Mankiw, ‘Defending the one percent’, Journal of Economic Perspectives, vol. 27, no. 3, Summer 2013, pp. 21–34. 22 I recognised this early in my own work on information asymmetries, in a major controversy with Steven N. S. Cheung over whether the institution of sharecropping (which I argued could be explained by information asymmetries) mattered (see J. E. Stiglitz, ‘Incentives and risk sharing in sharecropping’, The Review of Economic Studies, vol. 41, no. 2, 1974, pp. 219–55 and S. Cheung, ‘Transaction costs, risk aversion and the choice of contractual arrangements’, Journal of Law and Economics, vol. 19, no. 1, 1969).

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The orthodox model understands that markets do not always work well. It therefore uses the concept of ‘market failure’ to explain why suboptimal outcomes occur and how they can be improved. Markets fail under various circumstances: when firms have monopolistic power which restricts competition; when there are information asymmetries between producers and consumers; when there are ‘externalities’ or impacts on third parties which are not properly reflected in market prices; and where public and common goods exist whose benefits cannot be captured by individual producers or consumers.36 The propensity of real-world markets to fail in these various ways means that ‘free’ markets do not maximise welfare.

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Chief among these is that markets generally produce positive outcomes which increase welfare, and should therefore be allowed to operate without much interference wherever possible. A basic regulatory framework of employment, consumer and environmental protection is required to correct for clear externalities and information asymmetries; but governments should not seek to direct markets or shape the businesses which operate in them. The ‘invisible hand’ of the market knows best, generating the highest welfare-producing activities where firms seek to maximise value for their shareholders. Even where the market might seem to get it wrong, governments cannot presume to know better.

The Economics Anti-Textbook: A Critical Thinker's Guide to Microeconomics by Rod Hill, Anthony Myatt

American ideology, Andrei Shleifer, Asian financial crisis, bank run, barriers to entry, behavioural economics, Bernie Madoff, biodiversity loss, business cycle, cognitive dissonance, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, different worldview, electricity market, endogenous growth, equal pay for equal work, Eugene Fama: efficient market hypothesis, experimental economics, failed state, financial innovation, full employment, gender pay gap, Gini coefficient, Glass-Steagall Act, Gunnar Myrdal, happiness index / gross national happiness, Home mortgage interest deduction, Howard Zinn, income inequality, indoor plumbing, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, liberal capitalism, low interest rates, low skilled workers, market bubble, market clearing, market fundamentalism, Martin Wolf, medical malpractice, military-industrial complex, minimum wage unemployment, moral hazard, Paradox of Choice, Pareto efficiency, Paul Samuelson, Peter Singer: altruism, positional goods, prediction markets, price discrimination, price elasticity of demand, principal–agent problem, profit maximization, profit motive, publication bias, purchasing power parity, race to the bottom, Ralph Nader, random walk, rent control, rent-seeking, Richard Thaler, Ronald Reagan, search costs, shareholder value, sugar pill, The Myth of the Rational Market, the payments system, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, ultimatum game, union organizing, working-age population, World Values Survey, Yogi Berra

We emphasized these points in Chapter 3 when explaining why minimum wage legislation may not cause unemployment because it may elicit more work effort from minimum wage workers, or may prevent a low-level equilibrium in the context of multiple possible equilibria. Credit markets are a particularly important type of market dealing in ‘relational contracts’, both because of their central role in a capitalist economy and because asymmetric information is intrinsic to these markets. (We will have more to say about credit markets, and how asymmetric information and limited rationality played major roles in the global financial meltdown of 2008/09, in the Postscript.) Asymmetric information gives rise to a cluster of well-known problems. First, it allows some people to benefit at the expense of those they are supposed to serve – the so-called ‘principal agent’ problem.

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The editors of the International Breastfeeding Journal write that ‘the lack of a breastfeeding 82 Questions for your professor: How do we measure consumer surplus if advertising and marketing change people’s preferences? Does it matter if they buy things they would not want with perfect information? 2.2 Incomplete and asymmetric information The textbook economics story of consumer choice with its assumptions of informative advertising and perfect information leading to optimal choices is particularly misleading in situations where incomplete and asymmetric information is a central feature. This provides an opportunity for manipulative marketing by producers. Let’s consider a couple of examples. Example: marketing prescription drugs No one should have been too surprised when a recent study finally revealed that Prozac, the popular antidepressant taken by 40 million people, and three other drugs in its class are no more effec­tive for most people than a placebo (a sugar pill that the patient believes is a drug).

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The misallocation of resources parallels what we saw in the earlier example, where preferences were altered by advertising. The real default case: incomplete and asymmetric information Despite the pervasiveness of informational problems and the inefficiencies they give rise to, textbook economics focuses on the improbable assumptions of given tastes 85 4  |  People as consumers (which we look at in the next chapter), the drug makers are regularly among the most profitable corporations in the world. and perfect information that helps make Adam Smith’s good-news story of the invisible hand work for consumers. But incomplete and asymmetric information ­– that is, buyers and sellers knowing different things – is a better description of reality for almost all goods.

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, buy and hold, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, Cornelius Vanderbilt, corporate governance, Credit Default Swap, cross-subsidies, currency risk, dematerialisation, disinformation, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Greenspan put, Growth in a Time of Debt, Ida Tarbell, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jim Simons, John Meriwether, junk bonds, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, M-Pesa, market design, Mary Meeker, megaproject, Michael Milken, millennium bug, mittelstand, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, Paul Volcker talking about ATMs, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, reality distortion field, regulatory arbitrage, Renaissance Technologies, rent control, risk free rate, risk tolerance, road to serfdom, Robert Shiller, Ronald Reagan, Schrödinger's Cat, seminal paper, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, vertical integration, Washington Consensus, We are the 99%, Yom Kippur War

Moral hazard in its application to the banking system is the well-founded concern that, if there is an expectation of government assistance for troubled financial businesses, the people who run and trade with these businesses will behave in ways that make the need for such assistance more likely. In Michel Albert’s Swiss village, community pressures handled the problems of information asymmetry, adverse selection and moral hazard. Information asymmetry was reduced, though not necessarily eliminated, by geographical proximity and personal ties. The obligation to participate was informed by the link between economic and social life, and for most it was no obligation at all. Some people were better guardians of their herds than others, some shirked their responsibilities, and others discharged them more than conscientiously, but these differences were ignored in the interests of maintaining a harmonious community.

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The ‘Greenspan doctrine’ regards the exchange of risk as similar to the exchange of milk and coffee: the effect of the trade is to ‘allocate (risk) to those investors most able and willing to take it’.11 But three centuries after Colbert, a different strand of thought in modern economics revives the notion that trade is tricky by stressing ‘information asymmetry’ – people trade because they have different knowledge, or different perceptions of the same knowledge. These two approaches to thinking about trade in risk have a long history. Michel Albert, a French economist turned insurance company boss, offered an entertaining account of the development of the global insurance market in the eighteenth century.

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Some people were better guardians of their herds than others, some shirked their responsibilities, and others discharged them more than conscientiously, but these differences were ignored in the interests of maintaining a harmonious community. Insurance markets exist for risks that involve a substantial degree of randomness – which reduces the problem of information asymmetry, and where the insured has limited influence over the incidence of risk – which reduces the effect of moral hazard. We can insure against car accidents, against our house burning down, against dying prematurely or against living too long. But these perils represent only a fraction of the risks that we face every day – and our ability to insure against even these is jeopardised by the everincreasing capacity to assemble and analyse large data sets which may enable us to predict illness and death from genetic and environmental information.

Don't Be Evil: How Big Tech Betrayed Its Founding Principles--And All of US by Rana Foroohar

"Susan Fowler" uber, "World Economic Forum" Davos, accounting loophole / creative accounting, Airbnb, Alan Greenspan, algorithmic bias, algorithmic management, AltaVista, Andy Rubin, autonomous vehicles, banking crisis, barriers to entry, behavioural economics, Bernie Madoff, Bernie Sanders, Big Tech, bitcoin, Black Lives Matter, book scanning, Brewster Kahle, Burning Man, call centre, Cambridge Analytica, cashless society, clean tech, cloud computing, cognitive dissonance, Colonization of Mars, computer age, corporate governance, creative destruction, Credit Default Swap, cryptocurrency, data is the new oil, data science, deal flow, death of newspapers, decentralized internet, Deng Xiaoping, digital divide, digital rights, disinformation, disintermediation, don't be evil, Donald Trump, drone strike, Edward Snowden, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Etonian, Evgeny Morozov, fake news, Filter Bubble, financial engineering, future of work, Future Shock, game design, gig economy, global supply chain, Gordon Gekko, Great Leap Forward, greed is good, income inequality, independent contractor, informal economy, information asymmetry, intangible asset, Internet Archive, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, job satisfaction, junk bonds, Kenneth Rogoff, life extension, light touch regulation, low interest rates, Lyft, Mark Zuckerberg, Marshall McLuhan, Martin Wolf, Menlo Park, military-industrial complex, move fast and break things, Network effects, new economy, offshore financial centre, PageRank, patent troll, Paul Volcker talking about ATMs, paypal mafia, Peter Thiel, pets.com, price discrimination, profit maximization, race to the bottom, recommendation engine, ride hailing / ride sharing, Robert Bork, Sand Hill Road, search engine result page, self-driving car, shareholder value, sharing economy, Sheryl Sandberg, Shoshana Zuboff, side hustle, Sidewalk Labs, Silicon Valley, Silicon Valley startup, smart cities, Snapchat, SoftBank, South China Sea, sovereign wealth fund, Steve Bannon, Steve Jobs, Steven Levy, stock buybacks, subscription business, supply-chain management, surveillance capitalism, TaskRabbit, tech billionaire, tech worker, TED Talk, Telecommunications Act of 1996, The Chicago School, the long tail, the new new thing, Tim Cook: Apple, too big to fail, Travis Kalanick, trickle-down economics, Uber and Lyft, Uber for X, uber lyft, Upton Sinclair, warehouse robotics, WeWork, WikiLeaks, zero-sum game

Even Lawrence Lessig, the digital law expert who favors many of the policies that the platforms support, said that Google’s deal was the equivalent of a “digital bookstore, not a digital library.”23 What he means is that even as Google was presenting the entire project as being done for the benefit of users, Google itself would ultimately benefit the most. More content meant more opportunities to sell advertising. Why did the authors and publishers ever agree to this initial settlement? Because they didn’t know any better. As with the people who took subprime mortgages from big banks, there was a huge information asymmetry in the dealings of the publishers with Big Tech, which was holding pretty much all the important inside information about just how valuable the digital monetization of searching such content could be. Google understood the new digital world that it was, in fact, creating and dominating. The publishers did not, and were desperate in the short term to stop the Big Tech behemoth from eating their lunch.

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If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.” Translation: Your privacy isn’t our problem. According to Nobel Prize–winning economist Paul Romer, much of our willingness to trade our right to privacy for the sleekest new iPhone model has to do with the fact that “there are tremendous information asymmetries in these markets. Do both parties understand enough to know whether the transaction taking place is in their mutual interest?” he asked, rhetorically. Romer (like me) would argue that they do not; he believes that the complexity of today’s data markets “means that notions like ‘consent’ [to long and complex disclosures about how your data might be used by platform companies] have become meaningless.”

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Turner’s conclusion, which mirrors that of a growing number of economists, is that the gig economy reduces friction in labor markets, meaning it solves a real need and creates convenience, but it also creates fragmentation that tends to work better for employers, who can leverage superior technology and information, than for workers. The fact that all the data is owned by Uber, and not the driver, and that drivers can’t see any of it, also creates a huge information asymmetry between workers and the company, as a study done by another nonprofit group, the Data & Society Research Institute, found. Drivers risk “deactivation” for canceling unprofitable fares and absorb the risk of unknown fares, “even though Uber promotes the idea that they are entrepreneurs who are knowingly investing in such risk.”

Wall Street: How It Works And for Whom by Doug Henwood

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, bond market vigilante , book value, borderless world, Bretton Woods, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, capital controls, Carl Icahn, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, disinformation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, Glass-Steagall Act, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, junk bonds, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, long and variable lags, Louis Bachelier, low interest rates, market bubble, Mexican peso crisis / tequila crisis, Michael Milken, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, planned obsolescence, plutocrats, Post-Keynesian economics, price mechanism, price stability, prisoner's dilemma, profit maximization, proprietary trading, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Savings and loan crisis, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, stock buybacks, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

This greatly complicates the mainstream notion of prices as a signaling mechanism for balancing supply and demand; there may be lots of noise mixed in with the signals. As they say on Wall Street, when something looks too good to be true, it probably is. Or as one of the major figures in the development of information asymmetry theory, Joseph Stiglitz, put it, "If it's such a good idea, why are you telling me, instead of investing your own money?" (quoted in Kane 1993). This is a remarkably blunt statement for Stiglitz, whose normal mode is the symbols of pure mathematized theory. Interest in "information asymmetry" is usually traced to George Akerlof s 1969 paper on the "lemons" problem — not the fruit, but bum autos. Would-be buyers of used cars have no way of knowing whether the vehicle they're contemplating is any good.

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In contrast, Japanese executives ranked share price increases as the least important of the nine objectives." This is no mere cultural difference, but a reflection of the contrasting systems under which the two nations' managers operate. Stein's analysis is related to a branch of economics that sprouted during the 1980s from seeds planted in the 1970s — the study of information asymmetry. Since a party to a transaction can never know if the other is telling the truth, each has to be at least a little suspicious of the other. But protective actions resulting from such suspicions may leave both parties worse off than they would have been had both parties been honest and trusting.

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While it's not clear whether that U.S. outperformance is a permanent thing or just a shorter-term cyclical affair, it can't be denied that the old Axis powers experienced extraordinary growth in investment and income during the first 45 years after Wodd War II's end. It may be that as capitalist economies mature, and liquid balances swell, they may tend toward a more fluid style of finance and ownership. irrational expectations Information asymmetry theorists generally assume that market participants are the rational self-maximizers of mainstream theory; they can just never be certain of the knowledge and motives of their counterparts. As Robert Gordon said of the closely related New Keynesian school, "any attempt to build a model based on irrational behavior or submaximizing behavior is viewed as cheating" (quoted in Dymski 1994).

Alpha Trader by Brent Donnelly

Abraham Wald, algorithmic trading, Asian financial crisis, Atul Gawande, autonomous vehicles, backtesting, barriers to entry, beat the dealer, behavioural economics, bitcoin, Boeing 747, buy low sell high, Checklist Manifesto, commodity trading advisor, coronavirus, correlation does not imply causation, COVID-19, crowdsourcing, cryptocurrency, currency manipulation / currency intervention, currency risk, deep learning, diversification, Edward Thorp, Elliott wave, Elon Musk, endowment effect, eurozone crisis, fail fast, financial engineering, fixed income, Flash crash, full employment, global macro, global pandemic, Gordon Gekko, hedonic treadmill, helicopter parent, high net worth, hindsight bias, implied volatility, impulse control, Inbox Zero, index fund, inflation targeting, information asymmetry, invisible hand, iterative process, junk bonds, Kaizen: continuous improvement, law of one price, loss aversion, low interest rates, margin call, market bubble, market microstructure, Market Wizards by Jack D. Schwager, McMansion, Monty Hall problem, Network effects, nowcasting, PalmPilot, paper trading, pattern recognition, Peter Thiel, prediction markets, price anchoring, price discovery process, price stability, quantitative easing, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, reserve currency, risk tolerance, Robert Shiller, secular stagnation, Sharpe ratio, short selling, side project, Stanford marshmallow experiment, Stanford prison experiment, survivorship bias, tail risk, TED Talk, the scientific method, The Wisdom of Crowds, theory of mind, time dilation, too big to fail, transaction costs, value at risk, very high income, yield curve, you are the product, zero-sum game

See reassessment triggers activity bias, 241 adaptability, trader attribute of, 35, 75, 104, 106-107 See also adaptation, trader adaptation, trader, 439—451 to fast/crisis markets, 440—445 growth mindset and, 451 to major structural market changes, 450—451 to new trading methods, 449 to rangebound markets, 447—448 to trending markets, 448, 449 to volatile markets, 445—447 algorithms, 163, 164, 173 All-Weather portfolio, 87 alpha, definitions of, 21 alpha trader feeling uncomfortable and, 112 formula for success, 72, 75 grit and, 92 having plan, 126 as healthy skeptic, 104 intellectual humility, 184 numeracy, 248 as rational thinker, 34, 76 as risk-seeker, 32 See also trader attributes, positive cognitive; trader attributes, positive miscellaneous; trader attributes, positive non-cognitive “AM/FX” newsletter, 84, 96, 202, 220 Amazon (AMZN) stock, 231, 347, 412 analogs, idea generation and, 402—405 analytical skill, 69 anchoring bias, 67, 225—229, 480, 484 See also disposition effect; loss aversion Anderson, Irina, 69 apophenia, 64, 216—225 See also pattern recognition; Turnaround Tuesday Apple (AAPL) stock, 219, 241, 276, 277, 278, 289, 290, 291, 291, 442 Arcsine Law, 251—254 Art of Currency Trading, The (B. Donnelly), 172 Asch, Solomon, 82 Asch Conformity Experiment, 82, 82, 83 Asian Financial Crisis (1998), 441 “Aspen Trading” (newsletter), 492 asymmetrical information, 156, 160 Axelrod, Bobby, 102 backtesting, 81, 221 curiosity and, 89—90 Bank of America, 42 Global Fund Manager Survey, 345 Bank of Canada, 308 bank traders annual performance and pay, 354 free capital, 356 information asymmetry and, 156 simple indicators and, 166 success rate, 40 bankrupt company, common stock of idea generation and, 406 rallies, 406 typical path followed by, 238 Batnick, Michael, 67—68 Baumeister, Roy, 56—57, 95, 106, 491 Bayes Theorem, 80, 81 Bayesian thinking, 201 Bayesian updating, 80, 81, 84 Beane, Billy, 451, 460—461 beauty contest analogy (Keynes), 311, 325 behavioral bias, 66, 179—180, 198 See also specific types of bias', biased thinking Bernanke, Ben, 208 Bernstein, Jake, 234, 345 bet size, varying, 107, 379 bet sizing, 256 better-than-average effect, 182—183 bias idea generation and, 396 post-trade, 416 See also specific types of bias', apophenia; biased thinking; gambler’s fallacy; herding; hot hand biased thinking, 155 See also specific types of bias; behavioral bias; bias bid/offer spread, 276 finding data on, 278 Big Five Personality Traits, 46—49 agreeableness, 47, 49, 50 conscientiousness, 47—48, 49, 50, 51, 52, 56-58, 71 effect of IQ and on male earnings, 49, 50 extraversion, 47, 49, 50 financial success and, 49—50, 52 lifetime stability of, 48 neuroticism, 47, 49, 50, 51, 52, 58, 71 openness to experience, 47, 49 versus Myers-Briggs (MBTI), 47 See also grit; personality; self-control birthday paradox, 254—255, 255 bitcoin bubble (2017-2018), 185, 239, 370, 405 bleed, slow, 167—168 blogs, 77 “Cheap Convexity,” 492 “Exante,” 492 “Liberty Street Economics,” 280 “No Mercy, No Malice,” 492 Bloomberg, 65, 97, 162, 194, 218, 259, 290, 321, 371, 393, 399, 482 blowups, 117—118 bonds as safe haven, 262 stocks and, 260—261, 261 Borish, Peter, 87, 163 breakout traders, 106 breakout trading, 173 breakouts, 161, 289 Breath (J.

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Langer & J. Roth), 140 health, trader, 459, 481 See also exercise; meditation; mindfulness; yoga hedge fund traders/PMs, 78, 96, 106, 111, 116, 117, 118, 152, 189, 190, 195, 211 annual stop loss, 356, 357 appropriate capital, 149—150 evaluation and compensation, 354 free capital, 356 information asymmetry and, 156 Kelly Criterion and, 375 liquidity and, 283 as poker players, 192 success or failure of, 360 success rate, 40 hedge funds, 40, 78, 114, 150, 273 currency futures and, 421 macro analysis and, 347 pod-based, 162 hedonic treadmill, 128 Hefti, Andreas, 68 Heinke, Steve, 68 herding, 229-240, 483 belief in good stories and, 231 bubbles and, 236—240 conformity and, 230 fear of missing out and, 231—232 how to detect and combat, 234—236 incentives and, 232—233 reasons for market participant, 230—233 versus creative thinking, 232 See also Asch Conformity Experiment Hermann Grid Illusion, 180 Heuer, Richards J., 85—86, 88, 410 hindsight bias, 242 history, trader personal, 462—465 blue collar upbringing, 462—463 money versus happiness curve, 465 perception of money and, 463—464 thinking about, 462—465 Hollins, Peter, 106, 491 hot hand, 245—247 Hour Between Dog and Wolf, The (J.

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., 248, 349, 492 Tierney, John, 56—57, 106, 491 tight/aggressive trading style, 138, 197 time dilation, 189, 483 time of day/week/month bid/offer spread, 278 FX trades and, 312 as market catalyst, 310, 312 volume, 283—286, 288 Tolle, Eckhart, 128—129, 158, 491 Toronto Stock Exchange, 473 tracking, trade, 392, 423 trade, lifecycle of hypothetical, 392—424 execution, 392, 418—423 filtering, 392, 394, 407—411 grid showing, 392 idea generation, 392, 393—407 performance analysis, 392, 423—424 position sizing, 392, 417 tactics, 392, 412—416 tracking, 392, 423 trade, lifecycle of short EURUSD (Sept 2020), 425—435 EURUSD hourly chart Aug and Sept 2020 and, 429, 430 execution, 433—434 filtering, 431—432 idea generation, 431 overview, 425—431 position sizing, 432—433 as stale narrative trade, 431 tactics, 432 trade quotas, 113 trader attributes, positive cognitive, 75—104 confidence, calibrated, 75, 81 creative, 75, 86—89 curious, 75, 89—90 flexible and open-minded, 75, 83—86 future-oriented, 75 grit/perseverance/mental endurance, 75, 91—94 growth mindset, 75, 90—91 healthy skeptic, 103—104 independent thinker, 75, 82—83 intelligent/knowledgeable/informed, 75, 77—78 organized/meticulous, 75, 95—100 process-oriented, 75, 100—103 quantitative, 75, 78—81 rational, 75, 76 trader attributes, positive miscellaneous, 75, 143—154 appropriate capital, 75, 143, 148—150 experience, 75, 143, 146 healthy and supportive risk-taking environment, 75, 143, 148, 150-154 luck, 75, 143, 146-147 passion for trading, 75, 143, 144—146 raw trading instinct, 75, 143—144 trader attributes, positive non-cognitive, 75, 104—142 ability to manage stress, 75, 104, 131—135 adaptable, 75, 104, 106—107 courageous, 75, 104, 107—119 decisive, 119—121, 484 disciplined/self-control, 75, 104, 105—106 focused, 75, 104, 135—138, 484 locus of control understanding, 75, 104, 139—142 patient, 75, 104, 138—139 self-aware, 75, 104, 121—131 Trader Self-Assessment, 30—37 traders, evaluating, 101 See also specific types of traders traders, traits of excellent, 493 See also trader attributes, positive cognitive; trader attributes, positive miscellaneous; trader attributes, positive non-cognitive traders, traits of losing, 494 trades, evaluating, 101 trading gambling and, 191—192 information asymmetry, 156 as negative sum game, 39, 155, 156, 277 quitting, 145—146 rules, 101, 467 technology asymmetry, 156 See also trading costs; trading methods; strategy, trading; transaction costs trading costs, 155, 156 See also transaction costs trading history, personal, 461—462 trading instinct, raw as trader attribute, 75, 143—144 as x-factor, 143 trading journal, 99—100 building self-awareness with, 121—126 improving trading process with, 424 monthly review, 124 recording trade executions in, 392, 422 sample, 123 takeaway goals, 125 trading self-awareness and, 124 trading methods adapting to new, 449—451 varying, 467 See also strategy, trading transaction costs, 40, 70, 155, 276, 277—279, 418-422 bid/offer, 155 commissions, 155 day trader P&L before and after, 279 FX trader P&L before and after, 279 how to reduce, 418—422 slippage, 155 trend following, 159—160, 173 trend indicators moving averages, 337—338 trend reversal indicator, 312 trending markets, 448 identifying, 448, 449 Turek, Jon, 492 Turnaround Tuesday, 222, 223—225 anatomy of a sell-off, 223 total cumulative performance of Tuesdays in 2008, 225 Tuesday 1-day S&P 500 return, 224 Tversky, Amos, 198 TWAP order, 419, 420 Twitter, 78, 83, 98 bias, 235, 236 confirmation bias on, 198 information and analysis source, 156 finance experts on, 308 monitoring, 35 real-time news from, 230 sentiment, 267 sharing hypotheses on, 84 stock market crash speculation on, 264 USDJPY Hourly, April to July 2020, 221 May 3—7, 2010, 18, 485 vs.

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing by Vijay Singal

3Com Palm IPO, Andrei Shleifer, AOL-Time Warner, asset allocation, book value, buy and hold, capital asset pricing model, correlation coefficient, cross-subsidies, currency risk, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, fixed income, index arbitrage, index fund, information asymmetry, information security, junk bonds, liberal capitalism, locking in a profit, Long Term Capital Management, loss aversion, low interest rates, margin call, market friction, market microstructure, mental accounting, merger arbitrage, Myron Scholes, new economy, prediction markets, price stability, profit motive, random walk, Richard Thaler, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, short squeeze, survivorship bias, Tax Reform Act of 1986, transaction costs, uptick rule, Vanguard fund

The third reason proceeds from investor recognition. An increase in investor awareness, for example, can affect the stock price in several ways. First, the firm’s operating performance may improve because of increased monitoring by investors and by enhanced access to capital markets. Second, the firm’s liquidity may improve due to less information asymmetry as a result of greater production of information by investors and analysts. IMPERFECT SUBSTITUTES The imperfect-substitutes argument relies on the concurrent growth in indexing and the price impact of changes to the S&P 500. There is a permanent price increase for firms added to the S&P 500 index (see Table 8.1).

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Another explanation for the abnormal performance is a reduction in asymmetry of information between the management and investors. When a company operates in a single segment, external earnings and performance estimates are more accurate than when a company operates in multiple segments. A reduction in information asymmetry means that there is less risk and, therefore, the stock price is higher. 313 314 Beyond the Random Walk References for Further Reading Abarbanell, Jeffrey S., Brian J. Bushee, and Jana Smith Raedy. 2003. Institutional Investor Preferences and Price Pressure: The Case of Corporate Spin-offs.

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Capital Structure in Corporate Spinoffs. Journal of Business, forthcoming. Johnson, Shane A., Daniel P. Klein, and Verne L. Thibodeaux. 1996. The Effects of Spin-Offs on Corporate Investment and Performance. Journal of Financial Research 19(2), 293–307. Krishnaswami, Sudha, and Venkat Subramanian. 1999. Information Asymmetry, Valuation, and the Corporate Spin-off Decision. Journal of Financial Economics 53, 73–112. Maxwell, William, and Ramesh P. Rao. 2003. Do Spin-offs Expropriate Wealth from Bondholders? Journal of Finance, forthcoming. McConnell, John, M. Ozbilgin, and Sunil Wahal. 2001. Spin-offs, Ex Ante.

The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance by Eswar S. Prasad

access to a mobile phone, Adam Neumann (WeWork), Airbnb, algorithmic trading, altcoin, bank run, barriers to entry, Bear Stearns, Ben Bernanke: helicopter money, Bernie Madoff, Big Tech, bitcoin, Bitcoin Ponzi scheme, Bletchley Park, blockchain, Bretton Woods, business intelligence, buy and hold, capital controls, carbon footprint, cashless society, central bank independence, cloud computing, coronavirus, COVID-19, Credit Default Swap, cross-border payments, cryptocurrency, deglobalization, democratizing finance, disintermediation, distributed ledger, diversified portfolio, Dogecoin, Donald Trump, Elon Musk, Ethereum, ethereum blockchain, eurozone crisis, fault tolerance, fiat currency, financial engineering, financial independence, financial innovation, financial intermediation, Flash crash, floating exchange rates, full employment, gamification, gig economy, Glass-Steagall Act, global reserve currency, index fund, inflation targeting, informal economy, information asymmetry, initial coin offering, Internet Archive, Jeff Bezos, Kenneth Rogoff, Kickstarter, light touch regulation, liquidity trap, litecoin, lockdown, loose coupling, low interest rates, Lyft, M-Pesa, machine readable, Mark Zuckerberg, Masayoshi Son, mobile money, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, offshore financial centre, open economy, opioid epidemic / opioid crisis, PalmPilot, passive investing, payday loans, peer-to-peer, peer-to-peer lending, Peter Thiel, Ponzi scheme, price anchoring, profit motive, QR code, quantitative easing, quantum cryptography, RAND corporation, random walk, Real Time Gross Settlement, regulatory arbitrage, rent-seeking, reserve currency, ride hailing / ride sharing, risk tolerance, risk/return, Robinhood: mobile stock trading app, robo advisor, Ross Ulbricht, Salesforce, Satoshi Nakamoto, seigniorage, Sheryl Sandberg, Silicon Valley, Silicon Valley startup, smart contracts, SoftBank, special drawing rights, the payments system, too big to fail, transaction costs, uber lyft, unbanked and underbanked, underbanked, Vision Fund, Vitalik Buterin, Wayback Machine, WeWork, wikimedia commons, Y Combinator, zero-sum game

Whether the two key functions of banks, maturity transformation and mitigation of information asymmetries, can be accomplished through technology will determine whether commercial banks may be displaced or simply switch to alternative roles in an economy. The more data there are about individuals and firms, the more often financial transactions are executed through digital platforms, and the cheaper it is to mine these data using algorithms (the writing of which can also be automated), the easier it is for other intermediaries to take on the traditional roles of banks in ameliorating information asymmetries. This undercuts one of the key elements of the business model of banks, especially small and medium banks, that relies on knowledge about their customers obtained through various transactions, in addition to the formal and informal relationships maintained by bankers.

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Unless there is a backstop, such as a government that can credibly commit to returning money to a failed bank’s depositors, such crises of confidence can spread quickly to other banks, bringing both the banking system and the economy to their knees. Another key function of banks is mitigating information asymmetries—the fact that borrowers know more about themselves than potential lenders do. Borrowers, for instance, know their full employment history, the state of their health, and less tangible elements such as their willingness to pay. Community bankers can develop networks of relationships in their towns, yielding valuable information about borrowers that can then be used in making lending decisions.

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When the firm approaches the bank for a loan, either to increase its office space or to meet its payroll during a period of temporarily low sales, the bank has a better sense of the riskiness involved in such a loan. Thus, banks have an advantage over finance companies that would not have such relationships with prospective borrowers. Banks also try to mitigate the information asymmetry problem by requiring borrowers to post collateral, that is, pledge assets owned by the borrower that the bank can take possession of in case of default on the loan. Down payment requirements serve a similar function. Mortgage loans for house purchases in the United States typically cover 80 to 90 percent of the estimated value of the house, with the purchaser expected to put up a down payment for the remainder.

The New Division of Labor: How Computers Are Creating the Next Job Market by Frank Levy, Richard J. Murnane

Atul Gawande, business cycle, call centre, computer age, Computer Numeric Control, correlation does not imply causation, David Ricardo: comparative advantage, deskilling, digital divide, Frank Levy and Richard Murnane: The New Division of Labor, Gunnar Myrdal, hypertext link, index card, information asymmetry, job automation, knowledge economy, knowledge worker, low skilled workers, low-wage service sector, PalmPilot, pattern recognition, profit motive, Robert Shiller, Ronald Reagan, Salesforce, speech recognition, tacit knowledge, talking drums, telemarketer, The Wealth of Nations by Adam Smith, working poor

However, since motivation is another attribute that employers cannot measure with pencil-and-paper tests, IBM and its competitors cannot reliably assess job applicants’ motivation. IBM’s reputation for high-quality management training attracts to the firm highly motivated individuals who welcome the challenge of improving their skills by participating in well-designed, rigorous training programs. Thus, because of information asymmetry and self-selection, IBM’s strong training programs help the firm to attract and retain skilled managers.6 The IBM and Cisco cases illustrate that large, successful companies believe they can teach the skills needed to excel at complex communication and expert thinking tasks. The cases also show that technology is 130 CHAPTER 7 not a substitute for face-to-face classroom interactions in some critical parts of the learning process.

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This, however, can be only part of the answer since the expensive part of Basic Blue is the week in Armonk that focuses on improving participants’ skills in managing complex personal interactions. These skills are valued not only by IBM, but also by its competitors. Economic theorists have shown that the answer to this puzzle rests in part on asymmetric information. In the hiring process, it is difficult to identify people who are skilled at complex communication. Scores on pencil-and-paper tests don’t provide the needed information, which is why neither IBM nor its competitors can identify those job applicants who are skilled at complex communication.

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.: National Academy Press, 2002), 127–57. 5. As discussed later, the community server also keeps track of students’ grades on chapter tests and the semester examination, eliminating the bookkeeping activities that consume a great deal of time for most teachers. 6. For rich discussions of the asymmetric information and self-selection ideas, see Daron Acemoglu and Jorn-Steffan Pischke, “Beyond Becker: Training in Imperfect Labour Markets,” Economic Journal 109, no. 453 (February 1999): F112–42; and David Autor, “Why Do Temporary Help Firms Provide Free General Skills Training?” Quarterly Journal of Economics 116, no. 4 (November 2001): 1409–48.

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

"World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Bear Stearns, Ben Bernanke: helicopter money, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bretton Woods, BRICs, business climate, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Dr. Strangelove, Edward Snowden, eurozone crisis, fiat currency, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global macro, global reserve currency, global supply chain, Goodhart's law, Growth in a Time of Debt, guns versus butter model, Herman Kahn, high-speed rail, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, junk bonds, Kenneth Rogoff, labor-force participation, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, market design, megaproject, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, Nixon triggered the end of the Bretton Woods system, obamacare, offshore financial centre, oil shale / tar sands, open economy, operational security, plutocrats, Ponzi scheme, power law, price stability, public intellectual, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, Solyndra, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, undersea cable, uranium enrichment, Washington Consensus, working-age population, yield curve

In an extreme case, there might be no market at all for used cars because buyers and sellers are too far apart on price, even though there would theoretically be a market-clearing price if both sides to the transaction knew all the facts. Used cars are just one illustration of the asymmetric information problem, which can apply to a vast array of goods and services, including financial transactions. Interestingly, gold does not suffer this problem because it has a uniform grade. Absent fraud, there are no “lemons” when it comes to gold bars. A touchstone for economists since 1970, Akerlof’s work has been applied to numerous problems. The implications of his analysis are profound. If communication can be improved, and information asymmetries reduced, markets become more efficient and perform their price discovery functions more smoothly, reducing costs to consumers.

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This inquiry involves imperfect information or information asymmetry: a situation in which one party has superior information to another that induces suboptimal behavior by both parties. This field took flight with a 1970 paper by George Akerlof, “The Market for ‘Lemons,’” that chose used car sales as an example to make its point. Akerlof was awarded the Nobel Prize in Economics in 2001 in part for this work. The seller of a used car, he states, knows perfectly well whether the car runs smoothly or is of poor quality, a “lemon.” The buyer does not know; hence an information asymmetry arises between buyer and seller.

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But uncertainty caused by the Fed’s policy flip-flops makes the discount rate difficult to ascertain and causes employers to reduce or delay hiring. In effect, the Fed’s efforts to stimulate the economy are actually retarding it. Free markets matter not because of ideology but because of efficiency; they are imperfect, yet they are better than the next best thing. Akerlof illustrates the costs of information asymmetry at one point in time, while Bernanke shows the costs of information uncertainty over time. Both are correct about these theoretical costs, but both ignore the full costs of trying to fix the problem with government intervention. Akerlof was at least humble about these limitations, while Bernanke exhibited a central planner’s hubris throughout his career.

The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction by Richard Bookstaber

asset allocation, bank run, Bear Stearns, behavioural economics, bitcoin, business cycle, butterfly effect, buy and hold, capital asset pricing model, cellular automata, collateralized debt obligation, conceptual framework, constrained optimization, Craig Reynolds: boids flock, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, dark matter, data science, disintermediation, Edward Lorenz: Chaos theory, epigenetics, feminist movement, financial engineering, financial innovation, fixed income, Flash crash, geopolitical risk, Henri Poincaré, impact investing, information asymmetry, invisible hand, Isaac Newton, John Conway, John Meriwether, John von Neumann, Joseph Schumpeter, Long Term Capital Management, margin call, market clearing, market microstructure, money market fund, Paul Samuelson, Pierre-Simon Laplace, Piper Alpha, Ponzi scheme, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, Richard Feynman, risk/return, Robert Solow, Saturday Night Live, self-driving car, seminal paper, sovereign wealth fund, the map is not the territory, The Predators' Ball, the scientific method, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, tulip mania, Turing machine, Turing test, yield curve

If we are going to use the analogy of war in economics and finance, the battlefield where Boyd’s dictum most applies is the realm of information. One tactic in this battlefield is to create informational asymmetries. If the market is becoming efficient, if information is immediately accessible to everyone at the same time, then either create new private information or else speed up your access to the public information. Derivatives play a role in the first approach, with investment banks such as Goldman Sachs creating information asymmetries by constructing financial instruments such as credit default swaps that they understand better than the buyers. For the second approach, consider the news feeds that are pushed to high-frequency traders with millisecond response times.

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See also MGonz Iceland, 11 IKB, 165 imperfect knowledge economics, 175. See also Frydman, Roman; Goldberg, Michael impossibility theorem, 53, 55–57 (see also Gödel, Kurt); implications for limits to knowledge, 51; proof of, 199 induction, 15, 180–184; and crises, 184 Industrial Revolution, 5–6, 188 informational asymmetries, 120 informational irreducibility, 109–111 Institute for New Economic Thinking, 89 insurance companies, 131 International Monetary Fund, 11 Jagger, Mick, 45 Jevons, William Stanley, 3, 91; and cryptography, 7; and the development of marginal utility, 7; The Principles of Science, 7; and the representative agent, 82; studies at University College, 6; and sunspots, 8–11; The Theory of Political Economy, 6–7; and the three-body problem, 28–29; and travels to Australia, 6 Kahneman, Daniel, 45–47 Kay, John, 3 Keynes, John Maynard, 38, 84–85, 173, 183 Knightian uncertainty, 50 Kuhn, Thomas; and crisis science, 91; and differing paradigms argument, 107; and normal science, 58, 91, 178 Kundera, Milan, 12, 116; and eternal recurrence, 41; and planet of inexperience, 60–61; The Unbearable Lightness of Being, 41, 60–61 (see also Unbearable Lightness of Being, The) Lakatos, Imre, 91 Laplace, Pierre-Simon, 56–57 Lee, Bruce, 120–121 Lehman Brothers, 11, 14 Leibniz, Gotfried Wilhelm, 109, 116 leverage, 15, 139–141, 143; and the financial crisis of 2008, 156 (see also financial crisis of 2008); and regulation, 156 Lewis, Michael, 185 Library of Babel, 61–63, 123; as Arrow-Debreu world, 63; and computational irreducibility, 62–64; and the Conway’s Game of Life, 123; and the limits of knowledge, 62–63 (see also limits of knowledge); map versus territory and, 64 (see also map versus territory); and radical uncertainty, 63, 123–125 limits of knowledge, 177; and complexity, 111; and fallibility, 123, 183; and use of heuristics, 86; and limits to modeling, 177; in self-referential systems, 51–56 liquidity, 48, 139–141, 143; and crisis dynamics, 151–154; and demand, 144–147, 151–155, 186; and dynamics, 144; and the financial crisis of 2008, 156 (see also financial crisis of 2008); and heterogenous decision cycles, 152–154; interaction with, 152–154; and leverage, 151–154; and margin calls, 151–153; and the market makers, 152–155; and regulation, 156; and supply, 144–147, 151–155, 186 Long-term Capital Management (LTCM), 112–113 Lucas, Robert, 3, 13, 89, 105; and ergodicity, 42 Lukmanier electric line, 133 Luria, Alexsander, 76–77 Lynch, Merrill, 162–163, 166 Madame Bovary, 116.

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One feature of the agent-based modeling approach is that making such adjustments is integral to the fabric of the model. This stands in contrast to the deductive approach, where changes at a minimum need to rework the intricately balanced mathematical structure, and at worst require resetting the underlying axioms. Even economic models with asymmetric information or with the body English of behavioral assumptions do not accept the limits to knowledge that prevent us from laying out the model until it is run. Yet, people need to know the model, some model, and solve it for an optimization, perhaps constrained in some way, in order to determine how to act.9 Problems emerge for economics from the human characteristic of being the children of our experiences, both experiences in the past and the hazy prospects of future experiences.

Advances in Financial Machine Learning by Marcos Lopez de Prado

algorithmic trading, Amazon Web Services, asset allocation, backtesting, behavioural economics, bioinformatics, Brownian motion, business process, Claude Shannon: information theory, cloud computing, complexity theory, correlation coefficient, correlation does not imply causation, data science, diversification, diversified portfolio, en.wikipedia.org, financial engineering, fixed income, Flash crash, G4S, Higgs boson, implied volatility, information asymmetry, latency arbitrage, margin call, market fragmentation, market microstructure, martingale, NP-complete, P = NP, p-value, paper trading, pattern recognition, performance metric, profit maximization, quantitative trading / quantitative finance, RAND corporation, random walk, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, Silicon Valley, smart cities, smart meter, statistical arbitrage, statistical model, stochastic process, survivorship bias, transaction costs, traveling salesman

CHAPTER 18 Entropy Features 18.1 Motivation Price series convey information about demand and supply forces. In perfect markets, prices are unpredictable, because each observation transmits everything that is known about a product or service. When markets are not perfect, prices are formed with partial information, and as some agents know more than others, they can exploit that informational asymmetry. It would be helpful to estimate the informational content of price series, and form features on which ML algorithms can learn the likely outcomes. For example, the ML algorithm may find that momentum bets are more profitable when prices carry little information, and that mean-reversion bets are more profitable when prices carry a lot of information.

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Team members are data scientists with a deep knowledge of financial markets and the economy. Remember, the theory needs to explain a large collection of important features. In particular, a theory must identify the economic mechanism that causes an agent to lose money to us. Is it a behavioral bias? Asymmetric information? Regulatory constraints? Features may be discovered by a black box, but the strategy is developed in a white box. Gluing together a number of catalogued features does not constitute a theory. Once a strategy is finalized, the strategists will prepare code that utilizes the full algorithm and submit that prototype to the backtesting team described below.

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Third, we define a tick imbalance bar (TIB) as a T*-contiguous subset of ticks such that the following condition is met: where the size of the expected imbalance is implied by |2P[bt = 1] − 1|. When θT is more imbalanced than expected, a low T will satisfy these conditions. Accordingly, TIBs are produced more frequently under the presence of informed trading (asymmetric information that triggers one-side trading). In fact, we can understand TIBs as buckets of trades containing equal amounts of information (regardless of the volumes, prices, or ticks traded). 2.3.2.2 Volume/Dollar Imbalance Bars The idea behind volume imbalance bars (VIBs) and dollar imbalance bars (DIBs) is to extend the concept of tick imbalance bars (TIBs).

State-Building: Governance and World Order in the 21st Century by Francis Fukuyama

Asian financial crisis, behavioural economics, Berlin Wall, Bretton Woods, centre right, corporate governance, demand response, Doha Development Round, European colonialism, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, George Akerlof, Hernando de Soto, information asymmetry, liberal world order, Live Aid, Nick Leeson, Pareto efficiency, Potemkin village, precautionary principle, price stability, principal–agent problem, rent-seeking, road to serfdom, Ronald Coase, structural adjustment programs, Suez crisis 1956, tacit knowledge, technology bubble, The Market for Lemons, The Nature of the Firm, transaction costs, vertical integration, Washington Consensus, Westphalian system

The problem in Russia and other postcommunist countries was somewhat different. The privatization of state-owned enterprises is of course an appropriate goal of economic reform, but it requires a substantial degree of institutional capacity to implement properly. Privatization inevitably creates huge information asymmetries, and it is the job of governments to correct them. Assets and ownership rights have to be properly identified, valued, and transferred transparently; the rights of new minority shareholders have to be protected to prevent asset-stripping, tunneling, and other abuses. Thus, while privatization involves a reduction in the scope of state functions, it requires functioning markets and a high degree of state capacity to implement.

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Open-ended employment contracts and authority relationships permitted more flexible adjustment to unforeseen future states of the world. In addition, market efficiency rests on the existence of a large number of market participants in competition with one another. But large numbers tend to turn into small numbers in many specialized contracting situations, allowing contractors to take advantage of asymmetric information. Again, the solution was to bring these activities within the boundaries of the hierarchy through vertical integration. Economics put its distinctive stamp on organizational theory, however, when it began to import its own individualistic behavioral assumptions inside the boundaries of the firm.

Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accelerated depreciation, accounting loophole / creative accounting, Airbus A320, Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bear Stearns, Bernie Madoff, big-box store, Black Monday: stock market crash in 1987, Black-Scholes formula, Boeing 747, book value, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, capital controls, Carl Icahn, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, cross-subsidies, currency risk, discounted cash flows, disintermediation, diversified portfolio, Dutch auction, equity premium, equity risk premium, eurozone crisis, fear index, financial engineering, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, James Webb Space Telescope, junk bonds, Kenneth Rogoff, Larry Ellison, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, PalmPilot, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk free rate, risk tolerance, risk/return, Robert Shiller, Scaled Composites, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, Skype, SpaceShipOne, Steve Jobs, subprime mortgage crisis, sunk-cost fallacy, systematic bias, Tax Reform Act of 1986, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, vertical integration, yield curve, zero-coupon bond, zero-sum game, Zipcar

New equity issues are a last resort when the company runs out of debt capacity, that is, when the threat of costs of financial distress brings regular insomnia to existing creditors and to the financial manager. We will take a closer look at the pecking order in a moment. First, you must appreciate how asymmetric information can force the financial manager to issue debt rather than common stock. Debt and Equity Issues with Asymmetric Information To the outside world Smith & Company and Jones, Inc., our two example companies, are identical. Each runs a successful business with good growth opportunities. The two businesses are risky, however, and investors have learned from experience that current expectations are frequently bettered or disappointed.

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A debt issue lets bad news come out later through other channels.) The story of Smith and Jones illustrates how asymmetric information favors debt issues over equity issues. If managers are better informed than investors and both groups are rational, then any company that can borrow will do so rather than issuing fresh equity. In other words, debt issues will be higher in the pecking order. Taken literally this reasoning seems to rule out any issue of equity. That’s not right, because asymmetric information is not always important and there are other forces at work. For example, if Smith had already borrowed heavily, and would risk financial distress by borrowing more, then it would have a good reason to issue common stock.

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Other things being equal, A’s stockholders are better off if it is a stock offer rather than a cash offer. With a stock offer, the inevitable bad news about B’s value will fall partly on the shoulders of B’s stockholders. Asymmetric Information There is a second key difference between cash and stock financing for mergers. A’s managers will usually have access to information about A’s prospects that is not available to outsiders. Economists call this asymmetric information. Suppose A’s managers are more optimistic than outside investors. They may think that A’s shares will really be worth $215 after the merger, $7.45 higher than the $207.55 market price we just calculated.

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity by Joseph E. Stiglitz

"World Economic Forum" Davos, accelerated depreciation, Airbnb, Alan Greenspan, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, basic income, behavioural economics, benefit corporation, Berlin Wall, bilateral investment treaty, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, deindustrialization, discovery of DNA, diversified portfolio, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial engineering, financial intermediation, Francis Fukuyama: the end of history, full employment, gender pay gap, George Akerlof, gig economy, Gini coefficient, Glass-Steagall Act, hiring and firing, housing crisis, Hyman Minsky, income inequality, independent contractor, inflation targeting, informal economy, information asymmetry, intangible asset, investor state dispute settlement, invisible hand, Isaac Newton, labor-force participation, liberal capitalism, low interest rates, low skilled workers, market fundamentalism, mini-job, moral hazard, non-tariff barriers, offshore financial centre, open economy, Paris climate accords, patent troll, pension reform, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Ronald Reagan, selection bias, shareholder value, Silicon Valley, sovereign wealth fund, TaskRabbit, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, tulip mania, universal basic income, unorthodox policies, vertical integration, zero-sum game

The intent is to leverage these funds enormously. †† A key malfunction of the financial markets is related to credit rationing: the inability of a borrower to get access to funds at any interest rate, even though similarly situated borrowers do get credit. It is caused in turn by imperfect information and information asymmetries. Such market failures are particularly pervasive in the provision of long-term credit. Another related market failure is the lack of a full set of risk (insurance) markets. By now, there exists an extensive literature explaining how government, even when it faces similar limitations, can improve societal welfare.

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There are policies that can help Europe’s private sector work better, not only for itself in the long run, but for all of society. The chapters in Part II of this book describe some of the key ways in which this can be done. The worst manifestations of dysfunctional markets are those in which some entities make money by taking advantage of others, whether through market power or information asymmetries. Any new rulebook that does not address these instances of market failure will be incomplete, and no sector has failed to perform as it should so much as the financial sector. We devote Chapter 5 entirely to it. The efficiency of all sectors (including finance) and their ability to serve society depends on robust competition.

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The ECB has resisted deep reform of the repo market because it long championed these transactions for improving the transmission of monetary policy in the Eurozone and accelerating financial integration. Similarly, the ECB, the Bank of England, and the European Commission together designed plans for simple, transparent, and standardized securitization. This plan would reduce the opacity, information asymmetries, conflicts of interest, and perverse incentives that made securitization the focal point of the global financial crisis. But these reforms do not adequately address the fundamental flaw of securitization, which is the separation of risk bearing from loan origination. Thus, it is worrying that many in Europe are actively encouraging the revival of securitization markets without adequately taking into account their risks and limitations.

After the Gig: How the Sharing Economy Got Hijacked and How to Win It Back by Juliet Schor, William Attwood-Charles, Mehmet Cansoy

1960s counterculture, Airbnb, algorithmic management, Amazon Mechanical Turk, American Legislative Exchange Council, back-to-the-land, barriers to entry, bike sharing, Californian Ideology, carbon footprint, clean tech, collaborative consumption, collaborative economy, Community Supported Agriculture, COVID-19, creative destruction, crowdsourcing, deskilling, driverless car, en.wikipedia.org, financial independence, future of work, gentrification, George Gilder, gig economy, global supply chain, global village, haute cuisine, income inequality, independent contractor, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Jean Tirole, Jeff Bezos, jitney, job satisfaction, John Perry Barlow, John Zimmer (Lyft cofounder), Kevin Kelly, Lyft, Marshall McLuhan, Mason jar, mass incarceration, Mitch Kapor, Network effects, new economy, New Urbanism, Occupy movement, peer-to-peer rental, Post-Keynesian economics, precariat, profit maximization, profit motive, race to the bottom, regulatory arbitrage, rent gap, rent-seeking, ride hailing / ride sharing, Ruby on Rails, selection bias, sharing economy, Silicon Valley, Silicon Valley ideology, Skype, smart cities, social distancing, Stewart Brand, TaskRabbit, technological determinism, technoutopianism, Telecommunications Act of 1996, The Nature of the Firm, the payments system, Tragedy of the Commons, transaction costs, transportation-network company, Travis Kalanick, two-sided market, Uber and Lyft, Uber for X, uber lyft, urban planning, wage slave, walking around money, Whole Earth Catalog, women in the workforce, working poor, Yochai Benkler, Zipcar

They can also adapt their algorithms to induce behaviors they want. Ride-hail companies use gaming techniques to keep workers at the wheel longer,44 and they have learned that riders are more willing to pay surge prices when their phone batteries are low.45 Legal scholars and others have argued that this information asymmetry gives firms immense power and provides a strong rationale for regulation.46 Data transparency is one way to mitigate the asymmetry. Public availability of data is crucial for other reasons, too. Without it, it’s difficult to assess the extent of person-to-person discrimination. And if we want platforms to be held accountable for the carbon and other environmental impacts of their activities, access to data is imperative.

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Uberland: How Algorithms Are Re-writing the Rules of Work. Berkeley: University of California Press. Rosenblat, Alex, Solon Barocas, Karen Levy, and Tim Hwang. 2016. “Discriminating Tastes: Customer Ratings as Vehicles for Bias.” Intelligence and Autonomy (October): 1–21. Rosenblat, Alex, and Luke Stark. 2016. “Algorithmic Labor and Information Asymmetries: A Case Study of Uber’s Drivers.” International Journal of Communication 10:3758–84. Rosenthal, Brian M. 2019. “ ‘They Were Conned’: How Reckless Loans Devastated a Generation of Taxi Drivers.” New York Times, May 19, 2019. Rowe, Pia C. M. 2017. “Beyond Uber and Airbnb: The Social Economy of Collaborative Consumption.”

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Platform companies are using AI, or artificial intelligence, to do many functions that were previously done by management, such as performance evaluation, employment support, and even the initial sign-up. Algorithms are frequently a source of frustration for workers, owing to lack of transparency and asymmetric information.43 In ride-hail and delivery, platforms switched to “blinding” job destinations,44 which eliminated a key component of worker choice, supposedly one of the hallmarks of this kind of work. Couriers report not being sure how turning down jobs affects their position in the queue for new ones,45 and more generally, we found that they were confused about how jobs were allocated.

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", "there is no alternative" (TINA), "World Economic Forum" Davos, affirmative action, Alan Greenspan, Albert Einstein, algorithmic trading, Andy Kessler, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, BRICs, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, carbon credits, Carl Icahn, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, deal flow, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Dr. Strangelove, Dutch auction, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial engineering, financial independence, financial innovation, financial thriller, fixed income, foreign exchange controls, full employment, Glass-Steagall Act, global reserve currency, Goldman Sachs: Vampire Squid, Goodhart's law, Gordon Gekko, greed is good, Greenspan put, happiness index / gross national happiness, haute cuisine, Herman Kahn, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", job automation, Johann Wolfgang von Goethe, John Bogle, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Michael Milken, Mikhail Gorbachev, Milgram experiment, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Phillips curve, planned obsolescence, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, Reminiscences of a Stock Operator, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk free rate, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, stock buybacks, survivorship bias, tail risk, Teledyne, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, two and twenty, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Everybody now relied on someone else to do their risk analysis. William Heyman, former head of market regulation at the US SEC, observed: “In manufacturing, the market price is set by the smartest guy with the best, cheapest production process. In securities markets, the price is set by the dumbest guy with the most money to lose.”16 Figure 17.4. Information asymmetries in securitization Source: Adapted from BIS Committee on the Global Financial System. Paper Chains These risk chains relied on voluminous documents, which only lawyers read but without necessarily understanding what was going on. As became apparent later, the legal basis for some transactions was also flawed.

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See also investment banks Iania, Leonardo, 126 IBM, 244 Icahn, Carl, 137, 146 Iceland, 279, 345 collapse of banking system, 275 stock market, 84 Ideal Husband, The, 53 IFIL Investments, 222 Ikebe, Yukiko, 40 illiquid markets, 287 Immelt, Jeffrey, 63, 344 imports from China, 85 income, annuities, 70 increase in borrowing levels, 265-268 incubators, 247, 254 independent contracting, 181 indexed gold put options (IGPOs), 216 India, 22 gold in, 27 rupees, 21-22 individual retirement accounts (IRAs), 48 industrialization, 38 inflation, 49, 145 after fall of the Berlin Wall, 101 effect on conglomerates, 60 hyperinflation, 22 in Zimbabwe, 22 information asymmetries in securitization, 271 determining from noise, 125-127 transparency, 283 infrastructure, 124 innovation, 77 innovative debt structures. See debt Inside Job, The, 316, 353 insolvency, 280 Institute of Theoretical Physics (Copenhagen, Denmark), 101 insurance bonds, 176 life, securitization of, 178 prices, 209.

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., Fred, 243 Science Museum (London), 351 Scion Funds, 256 Scissors, Derek, 350 Seabright, Paul, 35 Seagram, 79 Second World War, 84, 102 Secret of FX, The, 40 Secret, The, 45 Secrets of Wealth, 96 Securities, exotic products, 73-74 Securities and Exchange Commission (SEC), 131 Securities Exchange Company, 34 Securities Industry and Financial Markets Association (Sifma), 213 securitization, 68, 169, 188, 207 adjusted rate mortgages (ARMs), 183-184 bonds, 173 central banks, 281-282 chain reaction in markets, 202-204 of debt, 188-192 failure of bonds, 204-205 housing market, 179-182 information asymmetries in, 271 of intellectual property rights, 168 of life insurance policies, 178 models, 177 rating agencies, 282 regulators understanding of, 282 risks, 170, 172 security, trading, 66 self-employment, 181 self-regulating markets, 102 selling, 311 senior debt, 148 senior management, knowledge of business operations, 292-293 senior tranches, 171 Sentamu, John, 346 seppuku, ritualized suicide, 200 September 11, 2001, 44 September, 2008 market crash, 341-343 sequential tranching, 178 Serin, Casey, 187 setsuyaku no tatsujin (master penny-pincher), 39 sewer bonds, 214.

Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane

agricultural Revolution, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, basic income, book value, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, debt deflation, deindustrialization, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, foreign exchange controls, full employment, garden city movement, George Akerlof, ghettoisation, Gini coefficient, Hernando de Soto, housing crisis, Hyman Minsky, income inequality, information asymmetry, knowledge worker, labour market flexibility, labour mobility, land bank, land reform, land tenure, land value tax, Landlord’s Game, low interest rates, low skilled workers, market bubble, market clearing, Martin Wolf, means of production, Minsky moment, Money creation, money market fund, mortgage debt, negative equity, Network effects, new economy, New Urbanism, Northern Rock, offshore financial centre, Pareto efficiency, place-making, Post-Keynesian economics, price stability, profit maximization, quantitative easing, rent control, rent-seeking, Richard Florida, Right to Buy, rising living standards, risk tolerance, Robert Solow, Second Machine Age, secular stagnation, shareholder value, subprime mortgage crisis, the built environment, The Great Moderation, The Market for Lemons, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, universal basic income, urban planning, urban sprawl, working poor, working-age population

II). 4 Of course land prices can also fall as economies deteriorate and indeed when an economic shock hits land prices can fall more rapidly than economic growth – further explored in Chapter 5. 5 The classical economists were building on a long tradition: ancient civilisations taxed land and property for thousands of years before consumption, income or corporation taxes were invented (Blöchliger, 2015, p. 6). 6 Rent extraction may also overshoot and capture even more than the true change in land values because of information asymmetries and price stickiness. For example, there is evidence that landlords do not lower rents when economic growth declines or when their costs fall (for example with interest rate cuts that reduce their mortgage payments). However, when their costs increase (e.g. tax changes) they insist they have to pass on the cost to tenants. 7 See Orbanes (2007) for a detailed historical account of the game. 8 See Gaffney (1994, pp. 35–39) for a description of the legacy of Henry George. 9 Lloyd George’s ‘People’s Budget’ of 1909 proposed to introduce a 20% land tax (see Chapter 4, section 4.3). 10 For a detailed account of the development of neoclassical economics’ concept of capital from a pro-Georgist perspective, see Gaffney (1994b).

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We hope that the arguments presented thus far will be enough to convince readers that a libertarian, free-market-orientated approach to the land problem makes little sense. Because legal frameworks are essential for land to become property at all, any analysis of the land problem that starts from the premise of minimising state involvement cannot succeed. There can never be an entirely free market in landed property. The complex drivers, time lags and information asymmetries inherent in the property market strongly suggest that there can be no self-correcting equilibrium in landownership or land values, as envisaged in neoclassical economic theory. This is supported by the historical record, which is one of consistent booms and busts, or financial cycles (Anderson, 2009; Borio, 2014; Kindleberger and Aliber, 2005).

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Proponents of these so-called ‘dynamic stochastic general equilibrium’ models argued that, unlike an older generation of models, they were properly ‘micro-founded’ on optimising behaviour at the level of individual households and firms. To the book’s diagnosis of how this came about, I would add a failure to use correct micro-foundations that took into account the asymmetric information revolution initiated by George Akerlof, Michael Spence and Joseph Stiglitz, and the research of Angus Deaton and Christopher Carroll on how households behave when facing uncertainty and liquidity constraints.2 The global financial crisis has highlighted the mistake made by most of the macroeconomics profession and central banks in not incorporating asset prices, including property prices, credit and household balance sheets more generally in their models and their understanding.

Grave New World: The End of Globalization, the Return of History by Stephen D. King

"World Economic Forum" Davos, 9 dash line, Admiral Zheng, air freight, Alan Greenspan, Albert Einstein, Asian financial crisis, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Sanders, bilateral investment treaty, bitcoin, blockchain, Bonfire of the Vanities, borderless world, Bretton Woods, Brexit referendum, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collateralized debt obligation, colonial rule, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, currency risk, David Ricardo: comparative advantage, debt deflation, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Snowden, eurozone crisis, facts on the ground, failed state, Fall of the Berlin Wall, falling living standards, floating exchange rates, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, global value chain, Global Witness, Great Leap Forward, hydraulic fracturing, Hyman Minsky, imperial preference, income inequality, income per capita, incomplete markets, inflation targeting, information asymmetry, Internet of things, invisible hand, Jeremy Corbyn, joint-stock company, Kickstarter, Long Term Capital Management, low interest rates, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, middle-income trap, moral hazard, Nixon shock, offshore financial centre, oil shock, old age dependency ratio, paradox of thrift, Peace of Westphalia, plutocrats, post-truth, price stability, profit maximization, quantitative easing, race to the bottom, rent-seeking, reserve currency, reshoring, rising living standards, Ronald Reagan, Savings and loan crisis, Scramble for Africa, Second Machine Age, Skype, South China Sea, special drawing rights, technology bubble, The Great Moderation, The Market for Lemons, the market place, The Rise and Fall of American Growth, trade liberalization, trade route, Washington Consensus, WikiLeaks, Yom Kippur War, zero-sum game

By reducing the cost of information – and by creating global online ‘hubs’ like Alibaba and Amazon, where buyers and sellers can ‘virtually’ meet one another – the global marketplace should expand, competition should intensify and pricing should become more transparent. All in all, the allocation of resources should improve, leaving output higher, prices lower and everyone – other than inefficient rent-seeking companies – happier. Yet this argument assumes that technology only works by reducing barriers to entry, limiting information asymmetries and encouraging price discovery. That’s much too narrow a view. Technology also fundamentally alters production techniques and hugely skews the distribution of income and wealth. In both cases, technology can be enormously damaging to globalization. The decision on where to locate production facilities ultimately depends on a trade-off between the forces of dispersion and agglomeration.

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They weren’t outsiders looking in on a Minsky world: they were, collectively, very much part of that world.14 UNDERMINING THE NEW WISDOM The financial crisis was not, however, a story about euphoria alone. It stemmed from a combination of factors, each of which challenged what had become conventional thinking over the previous three decades. Markets themselves were failing, thanks in part to asymmetric information: the ultimate investors in US sub-prime mortgages were often blissfully unaware of the risks they were taking, largely because the underlying nature of their risky investments was typically camouflaged through the copious use of collateralized debt obligations and other innovative financial ‘disguises’.15 Incentives were badly skewed: those who made commission from selling risky products were typically able to pass the risk on to others – often thousands of miles away – using ‘pile ’em high and sell ’em cheap’ tactics.

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King, The End of Alchemy: Money, banking and the future of the global economy, Little, Brown, London, 2016. 13.Sherman McCoy, the protagonist in Wolfe’s Bonfire of the Vanities, is a Wall Street trader whose life goes horribly wrong just when it seemed to be going so well: he was a self-styled Master of the Universe. 14.For a discussion of the effects of dysfunctional belief systems, see R. Hausmann, ‘Through the Venezuelan looking glass’, Project Syndicate, August 2016, available at: https://www.project-syndicate.org/commentary/venezuela-destructive-belief-systems-by-ricardo-hausmann-2016-08 15.The classic article on asymmetric information is George Akerlof, ‘The market for lemons: Quality, uncertainty and the market mechanism’, Quarterly Journal of Economics, 84:3 (1970), pp. 488–500. 16.See, for example, E. Passari and H. Rey, Financial Flows and the International Monetary System, National Bureau of Economic Research Working Paper No. 21172, Cambridge, MA, May 2015. 17.The pre-2000 figures come from M.

The Globalization Paradox: Democracy and the Future of the World Economy by Dani Rodrik

"World Economic Forum" Davos, affirmative action, Alan Greenspan, Asian financial crisis, bank run, banking crisis, Bear Stearns, bilateral investment treaty, borderless world, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, classic study, collective bargaining, colonial rule, Corn Laws, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, Doha Development Round, en.wikipedia.org, endogenous growth, eurozone crisis, export processing zone, financial deregulation, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, George Akerlof, guest worker program, Hernando de Soto, immigration reform, income inequality, income per capita, industrial cluster, information asymmetry, joint-stock company, Kenneth Rogoff, land reform, liberal capitalism, light touch regulation, Long Term Capital Management, low interest rates, low skilled workers, margin call, market bubble, market fundamentalism, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, microcredit, Monroe Doctrine, moral hazard, Multi Fibre Arrangement, night-watchman state, non-tariff barriers, offshore financial centre, oil shock, open borders, open economy, Paul Samuelson, precautionary principle, price stability, profit maximization, race to the bottom, regulatory arbitrage, Savings and loan crisis, savings glut, Silicon Valley, special drawing rights, special economic zone, subprime mortgage crisis, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tobin tax, too big to fail, trade liberalization, trade route, transaction costs, tulip mania, Washington Consensus, World Values Survey

Stiglitz won a Nobel Prize in 2001 (along with George Akerlof and Mike Spence) for theoretical work showing how “asymmetric information” distorts incentives in a wide range of markets. If you know more than I do about the value of what you are selling me—whether it is your used car, your labor, or your debt—then we’re in for a troubled relationship. Prices in such transactions tend to provide the wrong signals. Many trades that should not happen do, while others that should happen don’t. Many of the pathologies of financial markets—boom-and-bust cycles, financial panics, lack of access to credit by otherwise creditworthy borrowers—can be explained by information asymmetries of this type (often interacting with other market distortions).

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If the answer is not an unqualified yes to these and a multitude of other similar questions, financial markets will fail. Unfortunately, such failings are legion, which is why we have become so accustomed to the financial market pathologies they produce. Economists are not unaware of these problems. The economics literature is chockful of analyses of these failings, which go by names such as asymmetric information, limited liability, moral hazard, agency costs, multiple equilibria, systemic risk, implicit guarantees, information cascades, and so on. Each one of these phenomena has been studied to death with intricate mathematical reasoning and empirical illustrations. By now most economists also understand that these problems have not been adequately addressed in the global economy.

Money Free and Unfree by George A. Selgin

Alan Greenspan, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, centralized clearinghouse, Charles Lindbergh, credit crunch, Credit Default Swap, crony capitalism, disintermediation, Dutch auction, fear of failure, fiat currency, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, foreign exchange controls, Fractional reserve banking, German hyperinflation, Glass-Steagall Act, Hyman Minsky, incomplete markets, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, large denomination, liquidity trap, Long Term Capital Management, low interest rates, market microstructure, Money creation, money market fund, moral hazard, Network effects, Northern Rock, oil shock, Paul Samuelson, Phillips curve, plutocrats, price stability, profit maximization, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, Robert Gordon, Robert Solow, Savings and loan crisis, savings glut, seigniorage, special drawing rights, The Great Moderation, the payments system, too big to fail, transaction costs, Tyler Cowen, unorthodox policies, vertical integration, Y2K

In particular, why have national governments almost universally taken over the business of issuing coins and paper currency, and replaced precious metals with fiat money as the base supporting bank-issued money? Why have they not (in developed countries, at least) also nationalized the production of checking accounts, choosing instead to tax and regulate private banks? Standard answers to these questions refer to market failures (natural monopolies, externalities, or information asymmetries) that might render unregulated private production of money inefficient or unstable or infeasible. Market-failure explanations assume that governments shape monetary institutions to serve money holders, by providing a more efficient and stable payments system than would exist under laissez faire.

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Therefore, I think it worthwhile to consider some market-failure arguments that may have played a tacit role in the movement to suppress state bank notes. GRESHAM’S LAW Three possible causes of currency-market failure that might supply a rationale for the 10 percent tax are Gresham’s law, asymmetric information, and network externalities. Gresham’s law asserts that “bad money drives good money out of circulation.” Modern writers consider it applicable only where a single monetary unit is defined in terms of two intrinsically distinct mediums, implying an official “fixed” exchange rate between them.

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State bank notes were, in fact, often accepted at a discount relative to legal tender—this was, indeed, one of the chief complaints lodged against them. The complaint meant that some other medium—gold or greenbacks—was the de facto unit of account. To the extent that nonpar exchange was not costless, Rolnick and Weber’s law should have favored national bank notes over state bank notes. ASYMMETRIC INFORMATION If some agents lack information concerning the intrinsic values of different currencies, something like Gresham’s law can occur even where nonpar exchange is costless. Suppose that there are two note-issuing banks, S and N, and that bank S maintains a riskier loan portfolio and a lower reserve ratio than bank N.

Move Fast and Break Things: How Facebook, Google, and Amazon Cornered Culture and Undermined Democracy by Jonathan Taplin

"Friedman doctrine" OR "shareholder theory", "there is no alternative" (TINA), 1960s counterculture, affirmative action, Affordable Care Act / Obamacare, Airbnb, AlphaGo, Amazon Mechanical Turk, American Legislative Exchange Council, AOL-Time Warner, Apple's 1984 Super Bowl advert, back-to-the-land, barriers to entry, basic income, battle of ideas, big data - Walmart - Pop Tarts, Big Tech, bitcoin, Brewster Kahle, Buckminster Fuller, Burning Man, Clayton Christensen, Cody Wilson, commoditize, content marketing, creative destruction, crony capitalism, crowdsourcing, data is the new oil, data science, David Brooks, David Graeber, decentralized internet, don't be evil, Donald Trump, Douglas Engelbart, Douglas Engelbart, Dynabook, Edward Snowden, Elon Musk, equal pay for equal work, Erik Brynjolfsson, Fairchild Semiconductor, fake news, future of journalism, future of work, George Akerlof, George Gilder, Golden age of television, Google bus, Hacker Ethic, Herbert Marcuse, Howard Rheingold, income inequality, informal economy, information asymmetry, information retrieval, Internet Archive, Internet of things, invisible hand, Jacob Silverman, Jaron Lanier, Jeff Bezos, job automation, John Markoff, John Maynard Keynes: technological unemployment, John Perry Barlow, John von Neumann, Joseph Schumpeter, Kevin Kelly, Kickstarter, labor-force participation, Larry Ellison, life extension, Marc Andreessen, Mark Zuckerberg, Max Levchin, Menlo Park, Metcalfe’s law, military-industrial complex, Mother of all demos, move fast and break things, natural language processing, Network effects, new economy, Norbert Wiener, offshore financial centre, packet switching, PalmPilot, Paul Graham, paypal mafia, Peter Thiel, plutocrats, pre–internet, Ray Kurzweil, reality distortion field, recommendation engine, rent-seeking, revision control, Robert Bork, Robert Gordon, Robert Metcalfe, Ronald Reagan, Ross Ulbricht, Sam Altman, Sand Hill Road, secular stagnation, self-driving car, sharing economy, Silicon Valley, Silicon Valley ideology, Skinner box, smart grid, Snapchat, Social Justice Warrior, software is eating the world, Steve Bannon, Steve Jobs, Stewart Brand, tech billionaire, techno-determinism, technoutopianism, TED Talk, The Chicago School, the long tail, The Market for Lemons, The Rise and Fall of American Growth, Tim Cook: Apple, trade route, Tragedy of the Commons, transfer pricing, Travis Kalanick, trickle-down economics, Tyler Cowen, Tyler Cowen: Great Stagnation, universal basic income, unpaid internship, vertical integration, We are as Gods, We wanted flying cars, instead we got 140 characters, web application, Whole Earth Catalog, winner-take-all economy, women in the workforce, Y Combinator, you are the product

The false democracy that places art and random uploads side by side has, I believe, led too many to believe that art is easy to make and therefore not valuable. As James DeLong said, “Google can continue to do well even if it leaves providers of its [content] gasping like fish on a beach.” Once upon a time a critic such as Pauline Kael or Greil Marcus could help me navigate this information asymmetry, driving interest in work they deemed to be of quality. The hegemony of the blockbuster in music, books, and film allows marketers to bypass critics, rendering them almost irrelevant to the process. Do you think the producer of Michael Bay’s Transformers spends one minute worrying about critics?

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Researcher Sara Kingsley at the University of Massachusetts found real problems with the crowdwork model. A direct and limitless supply of labor and tasks should produce a perfectly competitive market; however, data collected from our yearlong study of crowdwork suggests that the reverse is true. Rife with asymmetric information problems, crowdsourcing labor markets are arguably not just imperfect, but imperfect by design. Kingsley found that Amazon could constantly lower the piecework price it paid on Mechanical Turk and that it was continually opening up new low-labor-cost countries, such as India, to the platform.

Transaction Man: The Rise of the Deal and the Decline of the American Dream by Nicholas Lemann

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, Abraham Maslow, Affordable Care Act / Obamacare, Airbnb, airline deregulation, Alan Greenspan, Albert Einstein, augmented reality, basic income, Bear Stearns, behavioural economics, Bernie Sanders, Black-Scholes formula, Blitzscaling, buy and hold, capital controls, Carl Icahn, computerized trading, Cornelius Vanderbilt, corporate governance, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, deal flow, dematerialisation, diversified portfolio, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, Fairchild Semiconductor, financial deregulation, financial innovation, fixed income, future of work, George Akerlof, gig economy, Glass-Steagall Act, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Ida Tarbell, index fund, information asymmetry, invisible hand, Irwin Jacobs, Joi Ito, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kickstarter, life extension, Long Term Capital Management, Mark Zuckerberg, Mary Meeker, mass immigration, means of production, Metcalfe’s law, Michael Milken, money market fund, Mont Pelerin Society, moral hazard, Myron Scholes, Neal Stephenson, new economy, Norman Mailer, obamacare, PalmPilot, Paul Samuelson, Performance of Mutual Funds in the Period, Peter Thiel, price mechanism, principal–agent problem, profit maximization, proprietary trading, prudent man rule, public intellectual, quantitative trading / quantitative finance, Ralph Nader, Richard Thaler, road to serfdom, Robert Bork, Robert Metcalfe, rolodex, Ronald Coase, Ronald Reagan, Sand Hill Road, Savings and loan crisis, shareholder value, short selling, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Snow Crash, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, TaskRabbit, TED Talk, The Nature of the Firm, the payments system, the strength of weak ties, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, too big to fail, transaction costs, universal basic income, War on Poverty, white flight, working poor

When Jensen left for Harvard, Meckling felt betrayed and broke off their friendship forever. When a challenge to financial economics—in particular to the efficient market hypothesis—began to emerge, roughly speaking from the left, within the profession, it had two major components. One was the idea of information asymmetry: markets could not price everything perfectly if all participants did not have equal access to accurate information. The other was behavioral economics, which focused on the many ways the human mind was naturally prone to misperceive reality and how that would affect people’s interactions with economic markets.

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Ron Hubler, Howie Huffington, Arianna Hyde Park Iacocca, Lee IBM Icahn, Carl identity politics Illinois legislature immigrants, undocumented index funds, invention of India individualism; end of Industrial Revolution; corporate revolution compared to inequality: economic, see wealth, concentration of; racial, see racism inflation; interest rates and; wages and information asymmetry Inner-City Muslim Action Network Instagram institutions: individualism vs.; loss of faith in; as mature groups; as necessary for pluralism; transaction-based order vs.; see also corporations; federal government; Organization Man insurance companies Intel Interest Equalization Tax interest groups; desire to eliminate; successes of; types of interest rates; deregulation and; Greenspan and; inflation and; on mortgages Internal Revenue Service International Nickel International Typographical Union Internet; bubble of 2000; early conceptions of; financial industry on; as predicted in fiction; regulation of; see also networks; Silicon Valley interstate banking Interstate Commerce Commission Investing in US investment banking; academic paradigm shift in; antitrust suit against; changes to in 1970s; commercial banking vs.; computerization of; deregulation of, see deregulation; diversified portfolios in; Glass-Steagall Act and, see Glass-Steagall Act; SEC and, see Securities and Exchange Commission; shifting clients of; see also Morgan Stanley; specific financial instruments Irish Americans Italian Americans Itô, Kiyosi ITT Jackson, Andrew Jackson, Jesse Jackson, Mahalia Jacobs, Irwin Japan; auto industry in Jdate Jefferson, Thomas Jensen, Michael; as advocate for free markets; background of; character of; corporations studied by; at Harvard; on integrity; in Landmark; mind shift of; at Rochester; at University of Chicago Jensen, Stephanie Jews; in finance Jhering, Rudolf von Jobs, Steve Johns Hopkins University Johnson, Earl Johnson, Jonathan Jones, Doug Journal of Applied Corporate Finance Journal of Financial Economics J.P.

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As the Treasury was working on its report about Long-Term Capital Management, Yellen’s deputy, Doug Elmendorf, was working with her to try to figure out where she stood on derivatives regulation. Because it tracks so closely with what actually happened ten years later, one memo from Elmendorf to Yellen, from December 1998, is eerily prescient about the possibility for disaster that the new financial system had created. Elmendorf wrote: One specific effect of asymmetric information [meaning that in over-the-counter derivatives markets, no party to a transaction knew the underlying economic condition of the other parties] is to increase the risk of a general financial panic (“systemic risk”). Because market participants cannot judge the financial health of institutions they deal with, bad news about one institution has a contagion effect on other institutions, reducing their access to capital as well.

Finance and the Good Society by Robert J. Shiller

Alan Greenspan, Alvin Roth, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, benefit corporation, Bernie Madoff, buy and hold, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, democratizing finance, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial engineering, financial innovation, financial thriller, fixed income, full employment, fundamental attribution error, George Akerlof, Great Leap Forward, Ida Tarbell, income inequality, information asymmetry, invisible hand, John Bogle, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, Right to Buy, road to serfdom, Robert Shiller, Ronald Reagan, selection bias, self-driving car, shareholder value, Sharpe ratio, short selling, Simon Kuznets, Skype, social contagion, Steven Pinker, tail risk, telemarketer, Thales and the olive presses, Thales of Miletus, The Market for Lemons, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, zero-sum game, Zipcar

But, lacking the subsidy e ectively given by the U.S. government via Fannie Mae and Freddie Mac, mortgage securitization has not been common anywhere else.6 Before the crisis of 2007 nance theorists saw clear innovation in mortgage securitization. Securitized mortgages are, in the abstract, a way of solving an information asymmetry problem—more particularly the problem of “lemons.” This problem, rst given a theoretical explanation by George Akerlof, refers to the aversion many people have to buying anything on the used market, like a used car. They worry that they can’t judge whether the item has defects, and that they will get stuck with a lemon.

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In much of the rest of the world, although there has been some limited attempt at mortgage securitization, investors have mostly held mortgages indirectly by owning shares in the mortgage originators. 7. Franco Modigliani and Merton Miller (1963) assumed that investors did not have to expend any resources to acquire information about the assets they invest in. George Akerlof shared the 2001 Nobel Prize in economics for a 1970 article that detailed how information asymmetry sometimes prevents markets from existing. 8. Akerlof (1970). 9. Hill (1997). 10. National Commission on the Causes of the Financial and Economic Crisis in the United States (2011): 196. 11. Shiller (2008). 12. Davis (2006) and Caplin et al. (1997). Chapter 6. Traders and Market Makers 1. Montesquieu (1773 [1748]): Volume II, Book XX, Chapter II, p. 2. 2.

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Capital: A Critique of Political Economy. New York: Modern Library. Marx, Karl, and Friedrich Engels. 1906 [1848]. Manifesto of the Communist Party. Chicago: Charles H. Kerr & Co. Mayer, Colin. 1990. “Financial Systems, Corporate Finance, and Economic Development.” In R. Glenn Hubbard, ed., Asymmetric Information, Corporate Finance, and Investment, 307–32. Chicago: University of Chicago Press. Melamed, Leo. 2009. For Crying Out Loud: From Open Outcry to Electronic Screen. Hoboken, NJ: Wiley. Mian, Atif, and Amir Su . 2010. “Household Leverage and the Recession of 2007 to 2009.” IMF Economic Review 58:74–117.

Skin in the Game: Hidden Asymmetries in Daily Life by Nassim Nicholas Taleb

anti-fragile, availability heuristic, behavioural economics, Benoit Mandelbrot, Bernie Madoff, Black Swan, Brownian motion, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, cellular automata, Claude Shannon: information theory, cognitive dissonance, complexity theory, data science, David Graeber, disintermediation, Donald Trump, Edward Thorp, equity premium, fake news, financial independence, information asymmetry, invisible hand, knowledge economy, loss aversion, mandelbrot fractal, Mark Spitznagel, mental accounting, microbiome, mirror neurons, moral hazard, Murray Gell-Mann, offshore financial centre, p-value, Paradox of Choice, Paul Samuelson, Ponzi scheme, power law, precautionary principle, price mechanism, principal–agent problem, public intellectual, Ralph Nader, random walk, rent-seeking, Richard Feynman, Richard Thaler, Ronald Coase, Ronald Reagan, Rory Sutherland, Rupert Read, Silicon Valley, Social Justice Warrior, Steven Pinker, stochastic process, survivorship bias, systematic bias, tail risk, TED Talk, The Nature of the Firm, Tragedy of the Commons, transaction costs, urban planning, Yogi Berra

I hence view Sharia as a museum of the history of ideas on symmetry in transactions. Sharia establishes the interdict of gharar, drastic enough to be totally banned in any form of transaction. It is an extremely sophisticated term in decision theory that does not exist in English; it means both uncertainty and deception—my personal take is that it means something beyond informational asymmetry between agents: inequality of uncertainty. Simply, as the aim is for both parties in a transaction to have the same uncertainty facing random outcomes, an asymmetry becomes equivalent to theft. Or more robustly: No person in a transaction should have certainty about the outcome while the other one has uncertainty.

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The question “Is it ethical to sell something to someone knowing the price will eventually drop?” is an ancient one—but its solution is no less straightforward. The debate goes back to a disagreement between two stoic philosophers, Diogenes of Babylon and his student Antipater of Tarsus, who took the higher moral ground on asymmetric information and seems to match the ethics endorsed by this author. Not a piece from both authors is extant, but we know quite a bit from secondary sources, or, in the case of Cicero, tertiary. The question was presented as follows, retailed by Cicero in De Officiis. Assume a man brought a large shipment of corn from Alexandria to Rhodes, at a time when corn was expensive in Rhodes because of shortage and famine.

The Euro and the Battle of Ideas by Markus K. Brunnermeier, Harold James, Jean-Pierre Landau

"there is no alternative" (TINA), Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, battle of ideas, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, Brexit referendum, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, cross-border payments, currency peg, currency risk, debt deflation, Deng Xiaoping, different worldview, diversification, Donald Trump, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, financial deregulation, financial repression, fixed income, Flash crash, floating exchange rates, full employment, Future Shock, German hyperinflation, global reserve currency, income inequality, inflation targeting, information asymmetry, Irish property bubble, Jean Tirole, Kenneth Rogoff, Les Trente Glorieuses, low interest rates, Martin Wolf, mittelstand, Money creation, money market fund, Mont Pelerin Society, moral hazard, negative equity, Neil Kinnock, new economy, Northern Rock, obamacare, offshore financial centre, open economy, paradox of thrift, pension reform, Phillips curve, Post-Keynesian economics, price stability, principal–agent problem, quantitative easing, race to the bottom, random walk, regulatory arbitrage, rent-seeking, reserve currency, risk free rate, road to serfdom, secular stagnation, short selling, Silicon Valley, South China Sea, special drawing rights, tail risk, the payments system, too big to fail, Tyler Cowen, union organizing, unorthodox policies, Washington Consensus, WikiLeaks, yield curve

The answer is that banks are in general better at lending than individual savers for a number of reasons. First, banks identify more easily projects that are worth funding and pursuing. Underlying these arguments is what economists refer to as asymmetric information: Borrowers know more about their projects than any individual lender, but dedicated lenders, such as banks, can at least mitigate information asymmetries. Second, owing to their expertise, banks can more easily enforce repayment than an individual lender. Third, banks can lend to many different borrowers, making it easier to diversify idiosyncratic risks. Modern Banking and Capital Markets The Initial Blaming of Anglo-American Banking Modern banks have moved beyond this traditional model of banking.

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Another simple form of attracting new capital is to force banks to issue new equity. On their own, individual firms would be reluctant to do so because of the associated stigma, but centrally enforced, coordinated actions are of course free of such considerations. Thorough and publically communicated asset quality reviews could have a similar effect: they would reduce asymmetric information, reduce the stigma, and encourage the issuance of additional equity. The issuance of “contingent convertible bond,” so called CoCos, was pushed as a “cheaper” alternative. Cocos is a hybrid fixed-income security that counts toward capital requirements as it can be converted into equity in case a pre-specified trigger is reached.

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Index Abe, Shinzo, 285 Ackermann, Joseph (“Joe”), 166, 330 Adam, Konrad, 65 Adenauer, Konrad, 40, 47–48 AEG (firm), 49 Agenzia per la Promozione dello Sviluppo ne Mezzogiorno (Italian organization), 240 Agreement on Net Financial Assets (ANFA), 325 AIG (firm), 314 aircraft industry, 71 Allais, Maurice, 68, 71 Alternative für Deutschland (German party), 65 Andrieux, François, 44 Anglo-American economic perspective, 249–51 Anglo-Irish Bank, 303–4, 338 Anglo-Saxon financial capitalism, 162 anti-Semitism, 55, 61 Argentina, 126, 295, 330 Aron, Raymond, 65 Asia Infrastructure Investment Bank, 275 Asian economic crisis, 22, 157, 165; IMF and, 290, 293; US and, 262 Asian Monetary Fund (proposed), 22 Asmussen, Jörg, 199, 264, 337–38, 350, 355 asset-based securities, 360; alternatives to, 367 assets: asset quality reviews, 202; collateral policy on, 192–93; ESBies (European safe bonds), 113–14; government guarantees for, 194–95; held by US banks, 255; mark-to-market assets, 163–64; purchased by China, 280–81; purchased by Russia, 283–84; ring-fencng of, 213–14; safe assets, 182–83, 222–26 asymmetric information, 162 austerity, 380; debate over stimulus versus, 148–54; in Italy, 335 Bagehot, Walter, 131, 193, 332 Balcerowicz, Leszek, 147 Balladur, Edouard, 80–81 Balogh, Thomas, 258 Banca d’Italia, 242, 325 Banco d’España (Spanish central bank), 323 Banco Espirito Sancto (Portuguese bank), 201–2 bank debts, 303–4 Bank Deutscher Länder, 344 Bankia (Spanish bank), 189, 192 banking, 157–59; bail-ins of, 197–203; bank failures, 201–2; capital markets and, 162–66; collateral policy for, 192–93; in currency unions, 90, 211–22; direct recapitalization of, 195–97; ECB’s supervision of, 368–72; Eurosystem, 321–25; exposure limits in, 185; in France and Germany, 46–48; during global financial crisis, 173–74; interaction of banks with states, 182–83; interbank market in, 166–72; as issue for troika, 302; money creation in, 160–61; recapitalization of banks, 357; traditional, 159–62; in UK, following Lehman collapse, 269; zombie and vampire banks, 189 banking unions, 211–12 Bank of Cyprus, 199 Bank of England, 89, 157, 319 bankruptcies, 256–59 Banque de France, 325 Barber, Tony, 272 Barre, Raymond, 72 Barroso, José Manuel, 19, 113, 230, 301 Basel II regulations, 208 Bastiat, Fréderic, 57, 69–70 Bayerische Hypotheken- und Wechsel-Bank (Germany), 171 Bear Stearns (firm), 264 Beck, Ulrich, 27 Belgium: on currency unions, 210; Dexia bank bailed out by, 217; on UK’s threat to leave EU, 277; universal banking in, 159 Belka, Marek, 302 BELLs (Bulgaria, Estonia, Latvia, and Lithuania), 147 Berlusconi, Silvio, 94, 116–17, 243, 247, 335; on euro, 248; meets with Merkel and Sarkozy, 246, 336; Putin and, 285 Bernanke, Ben, 314 Biagi, Marco, 244 Bismarck, Otto von, 58 Blair, Tony, 268–69 Blanchard, Olivier, 143, 301 blue Eurobonds, 112 Böhm, Franz, 62 Bossi, Umberto, 335–36 Bowe, John, 304 Brady Plan, 291 Brazil, 330 Bresciani-Turroni, Costantino, 238 Bretton Woods system, 77–79; alternatives to, 312; gold standard and, 90; IMF created by, 288 Bridge of Spies (film, Spielberg), 45 Britain.

No Slack: The Financial Lives of Low-Income Americans by Michael S. Barr

active measures, asset allocation, Bayesian statistics, behavioural economics, business cycle, Cass Sunstein, cognitive load, conceptual framework, Daniel Kahneman / Amos Tversky, financial exclusion, financial innovation, Home mortgage interest deduction, income inequality, information asymmetry, it's over 9,000, labor-force participation, late fees, London Interbank Offered Rate, loss aversion, low interest rates, machine readable, market friction, mental accounting, Milgram experiment, mobile money, money market fund, mortgage debt, mortgage tax deduction, New Urbanism, p-value, payday loans, race to the bottom, regulatory arbitrage, Richard Thaler, risk tolerance, Robert Shiller, search costs, subprime mortgage crisis, the payments system, transaction costs, unbanked and underbanked, underbanked

Of course, revealing such information would also reduce broker and creditor profit margins. But as the classic market competition model relies on full information and assumes rational behavior based on understanding, this proposal attempts to remove market frictions from information failures and to move market competition more toward its ideal. De-biasing consumers would reduce information asymmetry and lead to better competitive outcomes. Improving Truth in Lending Optimal disclosure will not occur in all markets through competition alone because in some contexts firms have incentives to hide information about products or prices and consumers may not insist on competition based on transparency because they misforecast their own behavior.

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In reality, the government does not regulate as the borrower believes, and the lender does not necessarily behave as the borrower hopes. Instead, information is hidden from the borrower, information that, if available, would improve market competition and the borrower’s outcomes. Given the consumer’s probably false background assumptions and the reality of asymmetric information favoring the lender and broker, we suggest that creditors be required to reveal useful information to the borrower at the time of the mortgage loan offer, including disclosure of the borrower’s credit score and the borrower’s qualifications for the lender’s mortgage products and rates. Creditors could be required to offer information regarding the typical repayment histories for borrowers of this type with this mortgage product.

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Many borrowers may be unable to compare complex loan products and act optimally for themselves based on such an understanding (see, for example, Ausubel 1991). We thus deploy an opt-out strategy to make it easier for borrowers to choose a standard product and harder for borrowers to choose a product that they are less likely to understand. At the same time, lenders may seek to extract surplus from borrowers because of asymmetric information about future income or default probabilities (see Bond, Musto, and Yilmaz 2005), and, in the short term, lenders and brokers may benefit from selling borrowers loans they cannot afford. Thus a pure default would be undermined by firms, and regulation needs to take account of this market pressure by pushing back.

People, Power, and Profits: Progressive Capitalism for an Age of Discontent by Joseph E. Stiglitz

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, AlphaGo, antiwork, barriers to entry, basic income, battle of ideas, behavioural economics, Berlin Wall, Bernie Madoff, Bernie Sanders, Big Tech, business cycle, Cambridge Analytica, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, carried interest, central bank independence, clean water, collective bargaining, company town, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, crony capitalism, DeepMind, deglobalization, deindustrialization, disinformation, disintermediation, diversified portfolio, Donald Trump, driverless car, Edward Snowden, Elon Musk, Erik Brynjolfsson, fake news, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, Firefox, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, gig economy, Glass-Steagall Act, global macro, global supply chain, greed is good, green new deal, income inequality, information asymmetry, invisible hand, Isaac Newton, Jean Tirole, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John von Neumann, Joseph Schumpeter, labor-force participation, late fees, low interest rates, low skilled workers, Mark Zuckerberg, market fundamentalism, mass incarceration, meta-analysis, minimum wage unemployment, moral hazard, new economy, New Urbanism, obamacare, opioid epidemic / opioid crisis, patent troll, Paul Samuelson, pension reform, Peter Thiel, postindustrial economy, price discrimination, principal–agent problem, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, Richard Thaler, Robert Bork, Robert Gordon, Robert Mercer, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, search costs, secular stagnation, self-driving car, shareholder value, Shoshana Zuboff, Silicon Valley, Simon Kuznets, South China Sea, sovereign wealth fund, speech recognition, Steve Bannon, Steve Jobs, surveillance capitalism, TED Talk, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, two-sided market, universal basic income, Unsafe at Any Speed, Upton Sinclair, uranium enrichment, War on Poverty, working-age population, Yochai Benkler

., Stiglitz, “Monopoly, Non-Linear Pricing and Imperfect Information: The Insurance Market,” Review of Economic Studies 44, no. 3 (1977): 407–30. Reprinted in Selected Works of Joseph E. Stiglitz, Volume I: Information and Economic Analysis (Oxford: Oxford University Press, 2009), 168–92. AI also results in information asymmetries. Some firms know more than others, and the Big Tech firms know more than consumers. Markets are only efficient in the absence of distortionary asymmetries in information, whether those were natural or created by the market. Big Data is increasing these asymmetries, and thereby potentially making resource allocations less efficient. 19.Jennifer Valentino-DeVries, Jeremy Singer-Vine, and Ashkan Soltani, “Websites Vary Prices, Deals Based on Users’ Information,” Wall Street Journal, Dec. 24, 2012. 20.To use the colorful language of Nobel Prize winners George Akerlof and Robert Shiller, to “phish for phools.”

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In all economies, large banks and other financial institutions can exert disproportionate power. 87.Vincent Larivière, Stefanie Haustein, and Philippe Mongeon, “The Oligopoly of Academic Publishers in the Digital Era,” PLoS ONE 10, no. 6 (2015): e0127502, https://doi.org/10.1371/journal.pone.0127502. 88.Research over the past half century has identified a large number of “market failures,” circumstances in which markets fail to produce efficient outcomes, including the absence of perfect risk and capital markets and imperfect and asymmetric information. This chapter (and more broadly this book) has focused on one market failure—lack of competition—because I believe it is central to the maladies facing the economy. 89.CEO compensation in the US has increased enormously over the past four decades, and is much larger than in other advanced countries.

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Sampson, Great American City: Chicago and the Enduring Neighborhood Effect (Chicago: University of Chicago Press, 2011). 14.More generally, the spatial allocation of economic activity is not efficient because of strong congestion and other location-specific externalities (externalities, recall, arise whenever the full consequences of an individual’s decisions are not reflected in the costs he has to bear; and whenever there are externalities, markets are not efficient.) 15.The role played was partially inadvertent, a by-product of World War II, as government helped move people from the rural to the urban sector for war production and as it helped ensure that those returning from the war had the skills necessary for success in the new industrial economy, through the GI Bill. For a greater elaboration of this point, see the studies cited in chapter 6, note 7. 16.Modern economic theory (based on asymmetric information) has explained why this is so, and why the problems are inherent. 17.This idea has been elaborated in Joseph E. Stiglitz and Jungyoll Yun, “Integration of Unemployment Insurance with Retirement Insurance,” Journal of Public Economics, 89, no. 11–12 (2005): 2037–67; and “Optimal Provision of Loans and Insurance Against Unemployment From A Lifetime Perspective” (NBER Working Paper No. 19064, 2013). 18.I am indebted to Alan Krueger for discussions on these issues.

How Markets Fail: The Logic of Economic Calamities by John Cassidy

Abraham Wald, Alan Greenspan, Albert Einstein, An Inconvenient Truth, Andrei Shleifer, anti-communist, AOL-Time Warner, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black-Scholes formula, Blythe Masters, book value, Bretton Woods, British Empire, business cycle, capital asset pricing model, carbon tax, Carl Icahn, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, Garrett Hardin, George Akerlof, Glass-Steagall Act, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Nixon triggered the end of the Bretton Woods system, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, Ponzi scheme, precautionary principle, price discrimination, price stability, principal–agent problem, profit maximization, proprietary trading, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, subprime mortgage crisis, tail risk, Tax Reform Act of 1986, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, Tragedy of the Commons, transaction costs, Two Sigma, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

But the modern theory of the invisible hand that Friedman and others promoted explains too much with too little. At its core, it says simply: self-interest plus competition equals nirvana. There is no mention in this equation of the institutions of modern capitalism, such as multinational corporations, derivatives markets, universal banks, and mutual funds. Information asymmetries, uncertainty, copycat behavior, network effects, and disaster myopia—the invisible hand metaphor abstracts from all of these awkward features of reality, too. Don’t worry, its defenders say, the market will take care of things. Just make sure that competition reigns, prevent the emergence of monopolies, and a good outcome is guaranteed.

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He expressed his thoughts in clear English, used equations sparingly, and made little attempt to keep up with intellectual fashion. But what Minsky lacked in modernity, he more than made up for in insight. Although he rarely made explicit reference to concepts such as the prisoner’s dilemma, asymmetric information, or disaster myopia, his analysis displayed an acute awareness of the various sources of market failure. A keen student of Keynes’s Treatise on Probability as well as The General Theory, he had never accepted that financial markets aggregated economic data efficiently, or that decisions involving the future could be represented as a process of taking mathematical expectations of known probabilities.

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American International Group (AIG) America Online (AOL) Ameriquest Mortgage Company Amherst College AMRESCO Amtrak “Anatomy of Market Failure, The” (Bator) Anderson, Martin anti-Semitism antitrust laws Apostles Apple Army, U.S. Air Corps Corps of Engineers ARPANET Arrow, Kenneth Arthur, W. Brian Arthur Andersen Asch, Solomon asset-backed securities (ABSs) Associates First Capital asymmetric information AT&T Atomic Energy Commission, U.S. Attlee, Clement Australia Axelrod, Robert Aylwin, Patricio Bachelier, Louis Bagehot, Walter Baker, James Bank of America Bank of England Monetary Policy Committee Bankers’ Panic (1907) Bankers Trust Bank for International Settlements Baran, Paul Barclays Bank Barings Bank Barone, Enrico Barro, Robert Barron’s Bartlett, Bruce Bator, Francis Baumol, William Bayh-Dole Act (1984) B&C lending Bear Stearns Beatles Beauty Contest theory Bebchuk, Lucian Becker, Gary behavioral economics Bell Laboratories Beneficial Finance Bennett, Alan Bentham, Jeremy Berkshire Hathaway Inc.

Democratizing innovation by Eric von Hippel

additive manufacturing, correlation coefficient, Debian, disruptive innovation, Free Software Foundation, hacker house, informal economy, information asymmetry, inventory management, iterative process, James Watt: steam engine, knowledge economy, longitudinal study, machine readable, meta-analysis, Network effects, placebo effect, principal–agent problem, Richard Stallman, software patent, systematic bias, the Cathedral and the Bazaar, tragedy of the anticommons, transaction costs, vertical integration, Vickrey auction

But what about manufacturers that specialize in custom products? Isn’t it their business to respond to special requests? To understand which way the innovate-or-buy choice will go, one must consider both transaction costs and information asymmetries specific to users and manufacturers. I will talk mainly about transaction costs in this chapter and mainly about information asymmetries in chapter 5. I begin this chapter by discussing four specific and significant transaction costs that affect users’ innovate-or-buy decisions. Next I review a case study that illustrates these. Then, I use a simple quantitative model to further explore when user firms will find it more cost-effective to develop a solution—a new product or service—for themselves rather than hiring a manufacturer to solve the problem for them.

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That is, the color of the circuit boards in the user factory became an item the problem solvers needed to know only when engineers, in the course of their development of the component placer, decided to use a vision system in the component-placing machine they were designing, and the fact that the boards were yellow became relevant only when the engineers chose a video camera and lighting that could not distinguish the metalized patterns on the board against a yellow background. Clearly, it can be costly to transfer the many items of information that a product or service developer might require—even if each individual item has low stickiness—from one site to another. How Information Asymmetries Affect User Innovation vs. Manufacturer Innovation An important consequence of information stickiness is that it results in information asymmetries that cannot be erased easily or cheaply. Different users and manufacturers will have different stocks of information, and may find it costly to acquire information they need but do not have. As a result, each innovator will tend to develop innovations that draw on the sticky information it already has, because that is the cheapest course of action (Arora and Gambardella 1994; von Hippel 1994).

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Conversely he found that increased stickiness of technology-related information was associated in a significant reduction in the amount of technology design done by the user (Kendall correlation coefficients = 0.4789, P < 0.05). In other words, need-intensive tasks within product-development projects will tend to be done by users, while solutionintensive ones will tend to be done by manufacturers. Low-Cost Innovation Niches Just as there are information asymmetries between users and manufacturers as classes, there are also information asymmetries among individual user firms and individuals, and among individual manufacturers as well. A study of mountain biking by Lüthje, Herstatt, and von Hippel (2002) shows that information held locally by individual user-innovators strongly affects the type of innovations they develop.

Money: 5,000 Years of Debt and Power by Michel Aglietta

accelerated depreciation, Alan Greenspan, bank run, banking crisis, Basel III, Berlin Wall, bitcoin, blockchain, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, cashless society, central bank independence, circular economy, collapse of Lehman Brothers, collective bargaining, corporate governance, David Graeber, debt deflation, dematerialisation, Deng Xiaoping, double entry bookkeeping, energy transition, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, forward guidance, Francis Fukuyama: the end of history, full employment, German hyperinflation, income inequality, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, joint-stock company, Kenneth Arrow, Kickstarter, land bank, liquidity trap, low interest rates, margin call, means of production, Money creation, money market fund, moral hazard, Nash equilibrium, Network effects, Northern Rock, oil shock, planetary scale, plutocrats, precautionary principle, price stability, purchasing power parity, quantitative easing, race to the bottom, reserve currency, secular stagnation, seigniorage, shareholder value, special drawing rights, special economic zone, stochastic process, Suez crisis 1956, the payments system, the scientific method, tontine, too big to fail, trade route, transaction costs, transcontinental railway, Washington Consensus

However, doing the job of a financial intermediary involves a lot more than arranging networks to connect different actors, however effective these may be. It also requires specialised information and a specific expertise for selecting assets and distinguishing good projects from bad.2 That is to say, the informational asymmetries that result from the act of credit cannot be eliminated by transfer technologies. This is why the Internet giants will very likely be uninterested in becoming financial intermediaries. If they were to become such, what would define them as banks would be the combination of a capacity for intermediation and a payments network.

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From this we can deduce a certain reticence towards providing liquidity in stress situations, above all in over-the-counter markets without clearing mechanisms and without a central settlements agent. Abundant macroeconomic liquidity can thus coexist with insufficient market liquidity, on account of informational asymmetries and counterparty risks. Banking crises are the most serious crises because they strike at the heart of the monetary system’s functioning. They show how insufficient the law of reflux is in ensuring this system’s stability. Contagion leads to three categories of banking crises. The original crises are panics produced by the conversion of deposits into cash.

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These characteristics mean that the law of reflux is fulfilled in the centralisation of the relations between interbanking correspondents within multilateral clearing systems.47 Banks are institutions that offer non-tradable credits combined with the provision of payment services. They invest in specific information whose quality cannot be evaluated by depositors. This asymmetric information structure, linked to network effects in the payment system, implies that the most effective relationship is for deposits to be valued at par in units of account, and hence convertible at par into the base currency. This relationship expanded greatly in the second half of the nineteenth century, when deposits became transferable via cheques.

High-Frequency Trading by David Easley, Marcos López de Prado, Maureen O'Hara

algorithmic trading, asset allocation, backtesting, Bear Stearns, Brownian motion, capital asset pricing model, computer vision, continuous double auction, dark matter, discrete time, finite state, fixed income, Flash crash, High speed trading, index arbitrage, information asymmetry, interest rate swap, Large Hadron Collider, latency arbitrage, margin call, market design, market fragmentation, market fundamentalism, market microstructure, martingale, National best bid and offer, natural language processing, offshore financial centre, pattern recognition, power law, price discovery process, price discrimination, price stability, proprietary trading, quantitative trading / quantitative finance, random walk, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, Tobin tax, transaction costs, two-sided market, yield curve

Being closer to actual normality and independence of observations (Figure 1.2) allows the application of standard statistical techniques, which means faster calculations, shorter cycles and thus faster reaction. The upshot of this new paradigm is clear: even if connectivity speed ceased to be a significant edge, HFT would still exist. MORE THAN SPEED Easley et al (1996) linked liquidity to informational asymmetry by identifying how market makers adjust their bid–ask spreads to the probability of informed trading (PIN). Because informed traders monetise their superior knowledge of a security’s future price by adversely selecting uninformed traders, market makers must update their quoted levels and sizes in real time in a manner that reflects their estimate of PIN.

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This allows HF traders to place numerous independent bets every day on the same instrument or portfolio, thus 2 i i i i i i “Easley” — 2013/10/8 — 11:31 — page 3 — #23 i i THE VOLUME CLOCK: INSIGHTS INTO THE HIGH-FREQUENCY PARADIGM taking advantage of the multiplicative effect postulated by the “fundamental law of active management”, ie, that a tiny predictive power on a sufficiently large number of independent bets yields a high information ratio and thus a profit (Grinold 1989). The goal is to exploit the inefficiencies derived from the market’s microstructure, such as rigidities in price adjustment within and across markets, agents’ idiosyncratic behaviour and asymmetric information. As a consequence of this higher frequency, the identification of opportunities, risk control, execution and other investment management activities must be automated. Not all algorithmic trading occurs at high frequency, but all high-frequency trading requires algorithms. It is useful to contrast the divergent worlds of the low-frequency (LF) traders and the HF traders.

Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life by Rory Sutherland

"World Economic Forum" Davos, 3D printing, Alfred Russel Wallace, barriers to entry, basic income, behavioural economics, Black Swan, Brexit referendum, butterfly effect, California gold rush, call centre, Captain Sullenberger Hudson, Cass Sunstein, cognitive dissonance, confounding variable, Daniel Kahneman / Amos Tversky, Dava Sobel, delayed gratification, Donald Trump, double helix, Downton Abbey, driverless car, Easter island, Edward Jenner, Elon Musk, Firefox, Ford Model T, General Magic , George Akerlof, gig economy, Google Chrome, Google X / Alphabet X, Grace Hopper, Hyperloop, Ignaz Semmelweis: hand washing, IKEA effect, information asymmetry, it is difficult to get a man to understand something, when his salary depends on his not understanding it, James Dyson, John Harrison: Longitude, loss aversion, low cost airline, Mason jar, Murray Gell-Mann, nudge theory, Peter Thiel, placebo effect, race to the bottom, Richard Feynman, Richard Thaler, Rory Sutherland, shareholder value, Silicon Valley, social intelligence, Steve Jobs, supply-chain management, systems thinking, TED Talk, the map is not the territory, The Market for Lemons, The Wealth of Nations by Adam Smith, ultimatum game, universal basic income, Upton Sinclair, US Airways Flight 1549, Veblen good, work culture

Noticeably, brands such as Juul and Vype are starting to emerge in the similarly haphazard vaping market. In many ways, expensive advertising and brands arise as a solution to a problem identified by George Akerlof in his 1970 paper ‘The Market for Lemons’ in the Quarterly Journal of Economics. The problem is known as ‘information asymmetry’, whereby the seller knows more about what he is selling than the buyer knows about what he is buying. This lesson was learned the hard way in Eastern Bloc countries under communism; brands were considered un-Marxist, so bread was simply labelled ‘bread’. Customers had no idea who had made it or whom to blame if it arrived full of maggots, and couldn’t avoid that make in future if it did, because all bread packaging looked the same.

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We often forget that, without this assurance of quality, there simply isn’t enough trust for markets to function at all, which means that perfectly good ideas can fail. Branding isn’t just something to add to great products – it’s essential to their existence. Evolution solved the problem of asymmetric information and trust for flowers and bees back when our ancestors were still living in trees. Bees have been around for at least 20 million years, floral plants a good deal longer. My analogy between signalling in the biological world and advertising in the commercial world may explain something I have noticed for years: if you talk to economists, they tend to hate advertising and barely understand it at all, while if you talk to biologists they understand it perfectly.

Platform Revolution: How Networked Markets Are Transforming the Economy--And How to Make Them Work for You by Sangeet Paul Choudary, Marshall W. van Alstyne, Geoffrey G. Parker

3D printing, Affordable Care Act / Obamacare, Airbnb, Alvin Roth, Amazon Mechanical Turk, Amazon Web Services, Andrei Shleifer, Apple's 1984 Super Bowl advert, autonomous vehicles, barriers to entry, Benchmark Capital, big data - Walmart - Pop Tarts, bitcoin, blockchain, business cycle, business logic, business process, buy low sell high, chief data officer, Chuck Templeton: OpenTable:, clean water, cloud computing, connected car, corporate governance, crowdsourcing, data acquisition, data is the new oil, data science, digital map, discounted cash flows, disintermediation, driverless car, Edward Glaeser, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, financial innovation, Free Software Foundation, gigafactory, growth hacking, Haber-Bosch Process, High speed trading, independent contractor, information asymmetry, Internet of things, inventory management, invisible hand, Jean Tirole, Jeff Bezos, jimmy wales, John Markoff, Kevin Roose, Khan Academy, Kickstarter, Lean Startup, Lyft, Marc Andreessen, market design, Max Levchin, Metcalfe’s law, multi-sided market, Network effects, new economy, PalmPilot, payday loans, peer-to-peer lending, Peter Thiel, pets.com, pre–internet, price mechanism, recommendation engine, RFID, Richard Stallman, ride hailing / ride sharing, Robert Metcalfe, Ronald Coase, Salesforce, Satoshi Nakamoto, search costs, self-driving car, shareholder value, sharing economy, side project, Silicon Valley, Skype, smart contracts, smart grid, Snapchat, social bookmarking, social contagion, software is eating the world, Steve Jobs, TaskRabbit, The Chicago School, the long tail, the payments system, Tim Cook: Apple, transaction costs, Travis Kalanick, two-sided market, Uber and Lyft, Uber for X, uber lyft, vertical integration, winner-take-all economy, zero-sum game, Zipcar

If you can’t find an item you want on eBay, then a good interaction has failed to occur. If you did find an item you wanted but got cheated, abused, or deceived, then a bad interaction has occurred. In general, there are four main causes of market failures: information asymmetry, externalities, monopoly power, and risk. Information asymmetry arises whenever one party to an interaction knows facts that other parties don’t and uses that knowledge for personal advantage. Consider the problem of counterfeit goods, when the seller knows that the goods are fake but does not inform the buyer. Fakes account for Skullcandy headphones with lousy sound quality, Gucci handbags with broken stitching, Duracell batteries that don’t hold a charge, OtterBox mobile phone cases that are not drop-proof, and Viagra that provides no lift.

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The single most heavily cited article on corporate governance is a literature survey that considers only “the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.”17 The focus here is on the information asymmetry arising from the separation of ownership and control—a critical element of governance design, but far from sufficient.18 Information asymmetry between the community of users and the firm also matters, and their interests too must be aligned. Additionally, platform governance rules must pay special heed to externalities. These are endemic in network markets, since, as we’ve seen when examining network effects, the spillover benefits users generate are a source of platform value.

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Many platform managers choose governance principles that favor themselves over their users. Yet platforms that respect their users more can expect more from their users—with benefits ultimately accruing to all. Governance will always be imperfect. Whatever the rules, partners will find new forms of private advantage. There will always be information asymmetries and externalities. Interactions lead to complications, which lead to interventions, which lead to new complications. Indeed, if good governance allows third parties to innovate, then, as they create new sources of value, they will simultaneously create new struggles to control that value.

Reinventing Capitalism in the Age of Big Data by Viktor Mayer-Schönberger, Thomas Ramge

accounting loophole / creative accounting, Air France Flight 447, Airbnb, Alvin Roth, Apollo 11, Atul Gawande, augmented reality, banking crisis, basic income, Bayesian statistics, Bear Stearns, behavioural economics, bitcoin, blockchain, book value, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, Cass Sunstein, centralized clearinghouse, Checklist Manifesto, cloud computing, cognitive bias, cognitive load, conceptual framework, creative destruction, Daniel Kahneman / Amos Tversky, data science, Didi Chuxing, disruptive innovation, Donald Trump, double entry bookkeeping, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Evgeny Morozov, flying shuttle, Ford Model T, Ford paid five dollars a day, Frederick Winslow Taylor, fundamental attribution error, George Akerlof, gig economy, Google Glasses, Higgs boson, information asymmetry, interchangeable parts, invention of the telegraph, inventory management, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, job satisfaction, joint-stock company, Joseph Schumpeter, Kickstarter, knowledge worker, labor-force participation, land reform, Large Hadron Collider, lone genius, low cost airline, low interest rates, Marc Andreessen, market bubble, market design, market fundamentalism, means of production, meta-analysis, Moneyball by Michael Lewis explains big data, multi-sided market, natural language processing, Neil Armstrong, Network effects, Nick Bostrom, Norbert Wiener, offshore financial centre, Parag Khanna, payday loans, peer-to-peer lending, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price mechanism, purchasing power parity, radical decentralization, random walk, recommendation engine, Richard Thaler, ride hailing / ride sharing, Robinhood: mobile stock trading app, Sam Altman, scientific management, Second Machine Age, self-driving car, Silicon Valley, Silicon Valley startup, six sigma, smart grid, smart meter, Snapchat, statistical model, Steve Jobs, subprime mortgage crisis, Suez canal 1869, tacit knowledge, technoutopianism, The Future of Employment, The Market for Lemons, The Nature of the Firm, transaction costs, universal basic income, vertical integration, William Langewiesche, Y Combinator

Moreover, market participants may not want to reveal all their preferences to the market. This and similar behavior leads to the information asymmetries we mentioned earlier. Data-rich markets do not eliminate such asymmetries; but because more preference information on data-rich markets generally leads to better matches, there is less of an incentive to keep information from others: vastly improved matching aims to identify the transaction partner that gets the most value out of a transaction, the partner who is thus willing to pay the highest price, arguably outweighing some of the advantages in negotiations that many information asymmetries may offer. In data-rich markets, each exchange between potential partners reveals more information, even if not leading to a transaction, and thus betters the outcome.

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They’re the first people to identify a new market, patent an invention, launch an efficient means of production, or introduce some other “new combination”—a way to coordinate human activity—before anyone else is aware of it. For Schumpeter and his acolytes, the resulting information asymmetry creates an economic incentive. Even though the market becomes less efficient, that is the price we pay for innovation. Hence, information imbalances aren’t necessarily bad—up to a point. The incentives created by information asymmetries are essential to innovation, but the reward for innovation cannot be permanent without harming the market. Asymmetries must be fleeting and temporal lest market predators exploit their information monopoly forever, creating a vacuum, a black hole in which information is trapped.

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This may sound like a sensible strategy for an individual, but if it is widespread, it hurts everyone by making it difficult for others to process the information being shared. Moreover, if market participants have to assume that others are not transparent, they must factor this into their decision-making. In his classic example of information asymmetry, George Akerlof cites the market for used cars. Because it’s difficult to inspect the condition of every component of a car without disassembling it, buyers cannot really ascertain if a car they are considering purchasing is a “peach” or a “lemon” at the time of the transaction. As every used car in the market could potentially be a lemon, buyers are less inclined to pay extra for a purported peach, while sellers who actually have a car in great condition must absorb the market’s informational inefficiencies, and in most cases they either decide not to sell their cars or to sell them for less than they feel they’re worth.

Secrets of Sand Hill Road: Venture Capital and How to Get It by Scott Kupor

activist fund / activist shareholder / activist investor, Airbnb, Amazon Web Services, asset allocation, barriers to entry, Ben Horowitz, Benchmark Capital, Big Tech, Blue Bottle Coffee, carried interest, cloud computing, compensation consultant, corporate governance, cryptocurrency, discounted cash flows, diversification, diversified portfolio, estate planning, family office, fixed income, Glass-Steagall Act, high net worth, index fund, information asymmetry, initial coin offering, Lean Startup, low cost airline, Lyft, Marc Andreessen, Myron Scholes, Network effects, Paul Graham, pets.com, power law, price stability, prudent man rule, ride hailing / ride sharing, rolodex, Salesforce, Sand Hill Road, seminal paper, shareholder value, Silicon Valley, software as a service, sovereign wealth fund, Startup school, the long tail, Travis Kalanick, uber lyft, VA Linux, Y Combinator, zero-sum game

Because of this imbalance, specifically regarding investment decisions, information asymmetry can come into play (often at the expense of the founder). The VCs are repeat players and thus have the benefit of lots of years of developing their understanding of the various mechanics (especially when negotiating term sheets), whereas founders have been through the process only a handful of times, at most. What I hope to lay out for founders is a better understanding of and appreciation for the interplay between VCs and founders in order to level the playing field. Information asymmetry should not pollute the foundation of a marriage that could last ten years or more.

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CHAPTER 9 The Alphabet Soup of Term Sheets: Part One (Economics) Now, let’s assume your startup story is compelling enough that you receive a term sheet from a VC. This is an exciting moment for many founders . . . and then their eyes start to cross. What do all those terms mean? How do you evaluate them? What’s standard, what’s not; what’s a good deal versus a bad deal? As I mentioned at the beginning of this book, the term sheet is where information asymmetry between VCs and founders comes into play the most, and often at the expense of the founder. This is because VCs have been through this process many times and have negotiated hundreds of term sheets. By contrast, founders only get a few shots on goal in a lifetime and likely can count the number of term sheets they have negotiated on one hand.

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Here’s What I Believe about Good VCs Good VCs help entrepreneurs achieve their business goals by providing guidance, support, a network of relationships, and coaching. Good VCs recognize the limitations of what they can do as board members and outside advisors as a result of the informational asymmetry they have with respect to founders and other executives who live and breathe the company every day. Good VCs give advice in areas in which they have demonstrated expertise, and have the wisdom to avoid opining on topics for which they are not the appropriate experts. Good VCs appropriately balance their duties to the common shareholders with those they owe to their limited partners.

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, blockchain, Boeing 747, Bonfire of the Vanities, Bretton Woods, Brexit referendum, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, currency risk, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, driverless car, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, Glass-Steagall Act, global macro, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, low interest rates, machine readable, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Minsky moment, Money creation, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, operational security, Paul Samuelson, Peace of Westphalia, Phillips curve, Pierre-Simon Laplace, plutocrats, prediction markets, price anchoring, price stability, proprietary trading, public intellectual, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk free rate, risk-adjusted returns, Robert Solow, Ronald Reagan, Savings and loan crisis, Silicon Valley, sovereign wealth fund, special drawing rights, stock buybacks, stocks for the long run, tech billionaire, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, We are all Keynesians now, Westphalian system

Economists have spent decades identifying imperfections in the free market model. Price signals are moved by market manipulation. Monopoly power is used to restrict supply and peg prices. Information asymmetries allow sellers to deprive buyers through hidden defects. This and more are freely admitted without ruffling the general equilibrium. Instead elites propose public policy remedies. Monopolies are addressed by antitrust enforcement. Asymmetric information is addressed by warranties. Such remedies are legion. Remedial costs and benefits are hotly debated. Yet the general equilibrium goes unquestioned. The root of general equilibrium is rational behavior.

Uberland: How Algorithms Are Rewriting the Rules of Work by Alex Rosenblat

"Susan Fowler" uber, Affordable Care Act / Obamacare, Airbnb, algorithmic management, Amazon Mechanical Turk, autonomous vehicles, barriers to entry, basic income, big-box store, bike sharing, Black Lives Matter, business logic, call centre, cashless society, Cass Sunstein, choice architecture, cognitive load, collaborative economy, collective bargaining, creative destruction, crowdsourcing, data science, death from overwork, digital divide, disinformation, disruptive innovation, don't be evil, Donald Trump, driverless car, emotional labour, en.wikipedia.org, fake news, future of work, gender pay gap, gig economy, Google Chrome, Greyball, income inequality, independent contractor, information asymmetry, information security, Jaron Lanier, Jessica Bruder, job automation, job satisfaction, Lyft, marginal employment, Mark Zuckerberg, move fast and break things, Network effects, new economy, obamacare, performance metric, Peter Thiel, price discrimination, proprietary trading, Ralph Waldo Emerson, regulatory arbitrage, ride hailing / ride sharing, Salesforce, self-driving car, sharing economy, side hustle, Silicon Valley, Silicon Valley ideology, Skype, social software, SoftBank, stealth mode startup, Steve Jobs, strikebreaker, TaskRabbit, technological determinism, Tim Cook: Apple, transportation-network company, Travis Kalanick, Uber and Lyft, Uber for X, uber lyft, union organizing, universal basic income, urban planning, Wolfgang Streeck, work culture , workplace surveillance , Yochai Benkler, Zipcar

Chapter 3 then examines the storytelling that Uber relies upon to expand its empire. Entrepreneurship has a noble heritage in the United States, a fact that Uber makes use of when recruiting its drivers. Despite the company’s grandiose promises, however, the experience that Uber delivers to its drivers is a far cry from actual entrepreneurship. Uber’s pay structure, information asymmetries, and management controls are indicators that ridehail work is not the entrepreneurial endeavor the company makes it out to be. A lingering question—can we trust Uber to be a fair and honest broker?—is the subject of chapter 4. When we think about tech-mediated transactions, the technology part sounds pretty neutral—it’s just an engine that works behind the scenes.

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., Min Kyung Lee, Daniel Kusbit, Evan Metsky, and Laura Dabbish, “Working with Machines: The Impact of Algorithmic and Data-Driven Management on Human Workers,” in Proceedings of the 33rd Annual ACM SIGCHI Conference, Seoul, South Korea, April 2015 (New York: ACM, 2015), 1603–1612, https://dl.acm.org/citation.cfm?id=2702548. 7. Uber Help, “Insurance,” February 14, 2018, https://help.uber.com/h/a4afb2ed-75af-4db6–8fdb-dccecfcc3fd7?state=x31lXMTG_n8G9rQNXx_5L3qgzdIE8–7bHzhAoksAf1g%3D&_csid=KofAFMlupm3NY9go3S0D_A#_. 8. Alex Rosenblat and Luke Stark, “Algorithmic Labor and Information Asymmetries: A Case Study of Uber’s Drivers,” International Journal of Communication 10, no. 27 (2016), http://ijoc.org/index.php/ijoc/article/view/4892. 9. Douglas O’Connor, Thomas Colopy, Matthew Manahan, and Elie Gurfinkel v. Uber Technologies, Inc., August 16, 2013, http://uberlawsuit.com/Complaint.pdf. 10.

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Lobel, “The Law of the Platform”; Calo and Rosenblat, “The Taking Economy.” 71. Tressie McMillan Cottom, “Credentials, Jobs and the New Economy,” Inside Higher Ed, March 2, 2017, www.insidehighered.com/views/2017/03/02/impact-new-economy-profit-colleges-and-their-students-essay. 72. Alex Rosenblat and Luke Stark, “Algorithmic Labor and Information Asymmetries: A Case Study of Uber’s Drivers,” International Journal of Communication 10, no. 27 (2016): 3762, http://ijoc.org/index.php/ijoc/article/view/4892. 73. A portion of my fieldwork cited here and at different points throughout this book has also been used in a joint research project and related publications.

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

Affordable Care Act / Obamacare, Alan Greenspan, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, bonus culture, break the buck, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, impact investing, implied volatility, income inequality, index fund, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, low interest rates, margin call, Mark Zuckerberg, McMansion, Minsky moment, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Savings and loan crisis, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, subprime mortgage crisis, tail risk, Thales of Miletus, the long tail, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

You might think you are backing a high-earning computer programmer, but it turns out that your money is funding a low-earning chemistry teacher. The information asymmetry that all markets must grapple with is particularly great when it comes to investing in people: no investor can hope to understand the aspirations, integrity, and self-discipline of a young person like the young person himself. With a traditional loan, the asymmetry still exists, but the obligation to repay at least offers greater protection to the interests of the investor. Information asymmetry goes hand in hand with a problem known as “adverse selection.” Imagine that the year is 2003, and an investor decides to put her money into a promising young Harvard undergraduate named Mark Zuckerberg.

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“Part of what went wrong over the long term was two things: computing power and the Greenspan consensus [named for Alan Greenspan, a former chairman of the Federal Reserve] that markets worked,” says the former employee. “The finance industry could slice, dice, and analyze information in ways they couldn’t before. Information was available, which meant markets could function properly. People thought information asymmetry was the problem, and now that problem was solved. Everyone thought they could price risk. That was an illusion: you have to know what you are looking at.” What the agencies—and the industry as a whole—should have been looking at was the probability of a national downturn in American housing prices.

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A farmer might lock in a price for his crop via the futures market, hedging himself against a sharp fall in market prices. High-frequency trading: A trading strategy that is characterized by extreme speed. High-frequency traders pursue a variety of investment approaches, from following short-term price trends to making markets. Information asymmetry: When one party knows more about a transaction than the other. Companies with very short track records or people seeking health-insurance coverage will, for example, usually be better informed about their circumstances than a potential equity investor or an insurance provider. Leverage: The amount of debt that a borrower carries relative to equity.

Why Stock Markets Crash: Critical Events in Complex Financial Systems by Didier Sornette

Alan Greenspan, Asian financial crisis, asset allocation, behavioural economics, Berlin Wall, Black Monday: stock market crash in 1987, Bretton Woods, Brownian motion, business cycle, buy and hold, buy the rumour, sell the news, capital asset pricing model, capital controls, continuous double auction, currency peg, Deng Xiaoping, discrete time, diversified portfolio, Elliott wave, Erdős number, experimental economics, financial engineering, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, global village, implied volatility, index fund, information asymmetry, intangible asset, invisible hand, John von Neumann, joint-stock company, law of one price, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, market design, market fundamentalism, mental accounting, moral hazard, Network effects, new economy, oil shock, open economy, pattern recognition, Paul Erdős, Paul Samuelson, power law, quantitative trading / quantitative finance, random walk, risk/return, Ronald Reagan, Schrödinger's Cat, selection bias, short selling, Silicon Valley, South Sea Bubble, statistical model, stochastic process, stocks for the long run, Tacoma Narrows Bridge, technological singularity, The Coming Technological Singularity, The Wealth of Nations by Adam Smith, Tobin tax, total factor productivity, transaction costs, tulip mania, VA Linux, Y2K, yield curve

The phenomenon of “herding,” discussed at length in the remainder of this chapter, can also be considered an example of market failure, as it leads to important deviations from “fundamental” or “equilibrium” prices. This research has fertilized many novel approaches that are working out ways in which rational behavior could lead to less-than-optimal market outcomes. Another important step has been the introduction of so-called “information asymmetry,” which describes situations in which different parties to a transaction possess different amounts of information. Such “asymmetric information,” the fact that people are not equal with respect to the quality and quantity of information they use to make decisions, blossomed in the seventies as a way to explain the behavior of financial markets, which are indeed extremely susceptible to information difficulties.

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This leads to a specific power law acceleration of the market price, providing our first predictive precursory pattern anticipating a crash. The imitation between agents leading to an accelerating crash hazard rate may result, for instance, from a progressive shift in the belief of investors about market liquidity, without invoking asymmetric information, and independently of the price behavior and its deviation from its fundamental value [132]. THE PRICE-DRIVEN MODEL The price-driven model inverts the logic of the previous risk-driven model: here, again as a result of the action of rational investors, the price is driving the crash hazard rate rather than the reverse.

Understanding Sponsored Search: Core Elements of Keyword Advertising by Jim Jansen

AltaVista, AOL-Time Warner, barriers to entry, behavioural economics, Black Swan, bounce rate, business intelligence, butterfly effect, call centre, Claude Shannon: information theory, complexity theory, content marketing, correlation does not imply causation, data science, en.wikipedia.org, first-price auction, folksonomy, Future Shock, information asymmetry, information retrieval, intangible asset, inventory management, life extension, linear programming, longitudinal study, machine translation, megacity, Nash equilibrium, Network effects, PageRank, place-making, power law, price mechanism, psychological pricing, random walk, Schrödinger's Cat, sealed-bid auction, search costs, search engine result page, second-price auction, second-price sealed-bid, sentiment analysis, social bookmarking, social web, software as a service, stochastic process, tacit knowledge, telemarketer, the market place, The Present Situation in Quantum Mechanics, the scientific method, The Wisdom of Crowds, Vickrey auction, Vilfredo Pareto, yield management

Our answer lies with the signaling theory and, when focusing specifically on search engine results, a concept known as information foraging theory. Signaling theory Research into consumer searching on the Web characteristically has an inherent assumption of information asymmetry. In other words, we are making the assumption that consumers search to even out an information imbalance. Otherwise, why would someone search (other than for entertainment) if not to correct an information imbalance? Information asymmetry is a characteristic in decision-making situations and transactions where one of the participants has more and/or better information than others engaged in the transaction.

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Note that this was based on data from a particular search engine and set of sponsored-search efforts, so click potential for a given sponsored-search effort may vary. 78 Understanding Sponsored Search Table 4.3.╇ Changes in conversion potential by ad rank Rank 1 2 3 4 5 6 7 8 9 10 Click potential (%) Conversion rate (%) Conversion potential (%) Change in conversion potential (%) 100.0 59.8 47.5 39.0 34.8 31.3 24.0 20.0 15.3 13.9 100.0 91.1 75.1 72.4 69.3 71.9 67.6 64.9 72.3 87.7 100.0 54.5 35.7 28.2 24.1 22.5 16.2 13.0 11.1 12.2 – −46 −34 −21 −15 −7 −28 −20 −15 10 Perception Choice Set Ad Selection –The searcher must attend to the choice sets – Choices must rise above noise level – The number of choices affects the searcher’s selection time – Information scent is used for selection User Motivation and Awareness – Addressing information asymmetry – Reducing uncertainty Ad attributes – Signals are contained within the ad itself – Where the ad appears on the SERP is also a signal Ad – Ad is a guide post to take the potential consumer to the landing page – Searchers selects ads that reduce information asymmetry – Ads must contain relevant signals and placed where searchers notice them Figure 4.5.╇ Interactive process of searcher/potential customer and advertisement.

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The first exposure is to gain consumers’ awareness. The second exposure is to show the relevance of the product. The third exposure is to show the benefits of the product. This is also related to wear-in and wear-out aspects of advertisements. Signaling theory states that in situations where there is information asymmetry, a signal credibly relays information about a product or service to the consumer. The basis of signaling theory comes from biology and economics, but it also can be applied to understand human communication. The more difficult it is for consumers to assess aspects of a product prior to purchase, the more likely they are to rely on more costly signals to form expectations about the suitability of a product [5].

The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance) by Feng Gu

active measures, Affordable Care Act / Obamacare, Alan Greenspan, barriers to entry, book value, business cycle, business process, buy and hold, carbon tax, Claude Shannon: information theory, Clayton Christensen, commoditize, conceptual framework, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, disruptive innovation, diversified portfolio, double entry bookkeeping, Exxon Valdez, financial engineering, financial innovation, fixed income, geopolitical risk, hydraulic fracturing, index fund, information asymmetry, intangible asset, inventory management, Joseph Schumpeter, junk bonds, Kenneth Arrow, knowledge economy, moral hazard, new economy, obamacare, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, race to the bottom, risk/return, Robert Shiller, Salesforce, shareholder value, Steve Jobs, tacit knowledge, The Great Moderation, value at risk

One study (Arthur Kraft, Huai Zhang, and Renhui Fu, 2012, “Financial Reporting Frequency, Information Asymmetry, and the Cost of Equity,” Journal of Accounting and Economics, 54: 132–149) reports that quarterly statements enhance corporate transparency (investors’ information), but the main findings of this study come from comparing quarterly to annual reports. Our suggestion maintains semiannual reports. On the other hand, a research on Singaporean companies found: “ . . . mandatory quarterly reporting does not reduce information asymmetry . . . ” (Peter Kajüter, Florian Klassman, and Martin Nienhaus, Causal Effects of Quarterly Reporting—An Analysis of Benefits and Costs, working paper (University of Muenster, Abstract, 2015).)

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Managers are privy, for example, to recent sales and cost trends, the progress of drugs or software products under development, customer defection rate (churn), new contracts signed, and emerging markets penetration rate, among many other important business developments. No information vendor, Internet chat room, or even a sophisticated analyst can provide investors such “inside” information. No advances in information technology and investors’ processing capacity (Edgar, XBRL) can overcome the fundamental information asymmetry—managers know more than THE BOOK IN A NUTSHELL xv investors—inherent to capital markets. You might not like it, but that’s how it is and will be. In fact, in subsequent chapters we provide empirical evidence suggesting that the quality of the overall information used by investors continuously deteriorates and share prices reveal less of companies’ value and future prospects.

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Data must be organized (not originally collected; any well-run company has all the information we prescribe) and investors’ questions answered. It would be helpful, therefore, if these managerial efforts were rewarded; and, indeed, they are. The reward to managers and companies lies in the removal of the detrimental effects on companies of inadequate disclosure and lack of transparency—information asymmetry, in the economics jargon. Simply put, the fast-diminishing usefulness of financial information we documented isn’t good for companies and their managers, because it increases investors’ uncertainty about companies’ growth prospects, as we have shown in Chapter 6, and increased uncertainty translates directly into lower share prices and higher cost of capital.12 Indeed, extensive evidence links investors’ information uncertainty to share price decline and volatility increase, particularly for medium and small companies (thin institutional holdings, low analysts following), for which investors’ information is generally constrained.13 So, it’s obviously in managers’ best interest to responsibly enhance disclosure to arrest the diminishing usefulness of financial information.

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, false flag, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, general purpose technology, Glass-Steagall Act, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low interest rates, low skilled workers, M-Pesa, market bubble, means of production, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, post-Fordism, Post-Keynesian economics, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Solow, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

The outcome of moral hazard and adverse selection could be the rationing of credit actually provided by lenders, and hence the failure of credit markets to clear.9 In this light, banks and other financial institutions are providers of services that presumably improve the efficiency of the interaction between borrowers and lenders. It is evident that information asymmetry among borrowers and lenders reduces efficiency since it forces the lender to carry the costs of monitoring. Banks are institutions that specialize in collecting information and monitoring borrowers; these tasks can be undertaken cheaply due to the size of banks but also because of the peculiar nature of banks as businesses.

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The second point is even more important as it relates directly to contemporary banking theory. The goldsmiths view lies at the foundations of the conventional fractional reserve approach to banking; it also provides underpinnings for contemporary microeconomics of banking which seeks to explain the emergence of banks in terms of information asymmetries between borrower and lender, as was seen in earlier sections of this chapter. Banks are treated as fundamentally passive financial intermediaries that acquire reserves by collecting loanable funds thus creating a basis on which to engage in lending. In contrast, the bills view is the foundation of the alternative and far more fruitful contemporary approach to banking that is associated with post-Keynesianism.

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Townsend, ‘Optimal Contracts and Competitive Markets with Costly State Verification’, Journal of Economic Theory 22, 1979. 9 See, for instance, Joseph Stiglitz and Andrew Weiss, ‘Credit Rationing in Markets with Imperfect Information’, American Economic Review 71:3, 1981, pp. 393–410; Nobuhiro Kiyotaki and John Moore, ‘Credit Cycles’, Journal of Political Economy 105:2, 1997. 10 Once again, the literature is very broad; see, very selectively, Hayne Leland and David H. Pyle, ‘Informational Asymmetries, Financial Structure and Financial Intermediation’, The Journal of Finance 32, 1977; John Bryant, ‘A Model of Reserves, Bank Runs, and Deposit Insurance’, Journal of Banking and Finance 4, 1980; Douglas Diamond and Philip Dybvig, ‘Bank Runs, Deposit Insurance and Liquidity’, Journal of Political Economy 91, 1983; Douglas Diamond, ‘Financial Intermediation and Delegated Monitoring’, Review of Economic Studies 51, 1984; John H.

The Great Divide: Unequal Societies and What We Can Do About Them by Joseph E. Stiglitz

"World Economic Forum" Davos, accelerated depreciation, accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Alan Greenspan, Asian financial crisis, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Branko Milanovic, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, carried interest, classic study, clean water, collapse of Lehman Brothers, collective bargaining, company town, computer age, corporate governance, credit crunch, Credit Default Swap, deindustrialization, Detroit bankruptcy, discovery of DNA, Doha Development Round, everywhere but in the productivity statistics, Fall of the Berlin Wall, financial deregulation, financial innovation, full employment, gentrification, George Akerlof, ghettoisation, Gini coefficient, glass ceiling, Glass-Steagall Act, global macro, global supply chain, Home mortgage interest deduction, housing crisis, income inequality, income per capita, information asymmetry, job automation, Kenneth Rogoff, Kickstarter, labor-force participation, light touch regulation, Long Term Capital Management, low interest rates, manufacturing employment, market fundamentalism, mass incarceration, moral hazard, mortgage debt, mortgage tax deduction, new economy, obamacare, offshore financial centre, oil shale / tar sands, Paul Samuelson, plutocrats, purchasing power parity, quantitative easing, race to the bottom, rent-seeking, rising living standards, Robert Solow, Ronald Reagan, Savings and loan crisis, school vouchers, secular stagnation, Silicon Valley, Simon Kuznets, subprime mortgage crisis, The Chicago School, the payments system, Tim Cook: Apple, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Turing machine, unpaid internship, upwardly mobile, urban renewal, urban sprawl, very high income, War on Poverty, Washington Consensus, We are the 99%, white flight, winner-take-all economy, working poor, working-age population

The stock options that they used to pay some of their senior executives, moreover, provided incentives for bad accounting, including incentives to engage in extensive off-balance-sheet accounting. The bankers seemingly didn’t understand the risks that were being created by securitization—including those arising from information asymmetries: The originators of the mortgages did not end up holding on to them, so the originators didn’t bear the consequences of any failure at due diligence. The bankers also misestimated the extent of correlation among default rates in different parts of the country—not realizing that a rise in the interest rate or an increase in unemployment might have adverse effects in many parts of the country—and they underestimated the risk of real estate price declines.

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CREDENTIALED ACCOMPLICES There is one other set of accomplices—the economists who provided the arguments that those in the financial markets found so convenient and self-serving. These economists provided models—based on unrealistic assumptions of perfect information, perfect competition, and perfect markets—in which regulation was unnecessary. Modern economic theories, particularly those focusing on imperfect and asymmetric information and on systematic irrationalities, especially with respect to risk judgments, had explained how flawed those earlier “neoclassical” models were. They had shown that those models were not robust—even slight deviations from the extreme assumptions destroyed the conclusions. But these insights were simply ignored.

Augmented: Life in the Smart Lane by Brett King

23andMe, 3D printing, additive manufacturing, Affordable Care Act / Obamacare, agricultural Revolution, Airbnb, Albert Einstein, Amazon Web Services, Any sufficiently advanced technology is indistinguishable from magic, Apollo 11, Apollo Guidance Computer, Apple II, artificial general intelligence, asset allocation, augmented reality, autonomous vehicles, barriers to entry, bitcoin, Bletchley Park, blockchain, Boston Dynamics, business intelligence, business process, call centre, chief data officer, Chris Urmson, Clayton Christensen, clean water, Computing Machinery and Intelligence, congestion charging, CRISPR, crowdsourcing, cryptocurrency, data science, deep learning, DeepMind, deskilling, different worldview, disruptive innovation, distributed generation, distributed ledger, double helix, drone strike, electricity market, Elon Musk, Erik Brynjolfsson, Fellow of the Royal Society, fiat currency, financial exclusion, Flash crash, Flynn Effect, Ford Model T, future of work, gamification, Geoffrey Hinton, gig economy, gigafactory, Google Glasses, Google X / Alphabet X, Hans Lippershey, high-speed rail, Hyperloop, income inequality, industrial robot, information asymmetry, Internet of things, invention of movable type, invention of the printing press, invention of the telephone, invention of the wheel, James Dyson, Jeff Bezos, job automation, job-hopping, John Markoff, John von Neumann, Kevin Kelly, Kickstarter, Kim Stanley Robinson, Kiva Systems, Kodak vs Instagram, Leonard Kleinrock, lifelogging, low earth orbit, low skilled workers, Lyft, M-Pesa, Mark Zuckerberg, Marshall McLuhan, megacity, Metcalfe’s law, Minecraft, mobile money, money market fund, more computing power than Apollo, Neal Stephenson, Neil Armstrong, Network effects, new economy, Nick Bostrom, obamacare, Occupy movement, Oculus Rift, off grid, off-the-grid, packet switching, pattern recognition, peer-to-peer, Ray Kurzweil, retail therapy, RFID, ride hailing / ride sharing, Robert Metcalfe, Salesforce, Satoshi Nakamoto, Second Machine Age, selective serotonin reuptake inhibitor (SSRI), self-driving car, sharing economy, Shoshana Zuboff, Silicon Valley, Silicon Valley startup, Skype, smart cities, smart grid, smart transportation, Snapchat, Snow Crash, social graph, software as a service, speech recognition, statistical model, stem cell, Stephen Hawking, Steve Jobs, Steve Wozniak, strong AI, synthetic biology, systems thinking, TaskRabbit, technological singularity, TED Talk, telemarketer, telepresence, telepresence robot, Tesla Model S, The future is already here, The Future of Employment, Tim Cook: Apple, trade route, Travis Kalanick, TSMC, Turing complete, Turing test, Twitter Arab Spring, uber lyft, undersea cable, urban sprawl, V2 rocket, warehouse automation, warehouse robotics, Watson beat the top human players on Jeopardy!, white picket fence, WikiLeaks, yottabyte