Asymmetrical Information

They put them in there because some Osteopath in Dallas actually believes that if Merrill Lynch is telling him to buy something, that means that, well, they think he should buy it. He forthwith does.

Why is the descriptive metahphor for a gullible person bilked by The Man always "some (moderately disreputable career) in (any metropolitan area other than New York, Los Angeles, Boston, Washington, or San Francisco)"?

Why can't it ever be "some cardiologist at Lenox Hill" or "some doper baby in publishing from the Upper West Side"?

Y'all cityfolk are just too durned clever to get taken?

Osteopath was the first medical specialty I thought of. Of course, I now realize that I was trying to write "Orthopedist", but there you are.

Doctors in New York aren't any smarter or less gullible . . . but they are a lot more likely to be friends with research analysts who clue them into the code, since that's where the bulk of the equity research departments are located. Don't worry -- their auto mechanics and plumbers more than make up for the gullibility quotient.

their auto mechanics and plumbers more than make up for the gullibility quotient.

Jane, I'd say give up on humor because you can't top that one, but you have a habit of proving me wrong on those calls.

That said, the first rule of research reports is don't look at research from a bank that is doing business with the company. The second rule is don't buy an equity during a corporate action. You can get some predictive value in banks' estimates of others' deals. After all, their skill in this area has to carry the dogs they are acting as agent for.

"there was a coded significance to the reports that allowed insiders to benefit at the expense of outsiders"

It wasn't all that difficult a code to crack for anyone who can read one syllable words and count up to, say, a dozen. A simple count of the reports with the word 'buy' rather than 'sell' on the cover should be enough to decipher the mysterious code.

Anyone who is investing in the stock market should do his own homework. If he's not willing to read the entire report and make his own decision, then he should invest in a mutual fund.

Instead, during what was obviously a bubble (OK, it wasn't obvious to my MBA students, but they're excessive trend-followers), those osteopaths in Dallas were sending threatening e-mails to any analyst that dared to be anything other than wildly enthusiastic about internet stocks. If an analyst went on MSNBC during the bubble and said even mildly luke-warm things about a stock, she'd have cab drivers yelling at her for days afterwards for not understanding 'the new economy'.

Analysts got carried away like almost everyone else. There's no reason to scapegoat them while patronizing those poor, helpless little idiots who weren't smart enough to live in an overpriced, crowded, heavily polluted coastal city. If people want to play the market, they need to do their homework, and that includes more than reading one three-or-four letter word on the front cover of one report.

I think that there are two good points here: the first is the one Jane made, and the second is the one left unsaid by multiple commenters. The point that was left unsaid is the folly of trusting organizations - that is to say, the investment bank/research firm or the magazine/paper that writes reviews.

It isn't so much that consumers should know better thna to be fooled, it's that the mass media and corporations (and I know I sound a bit nutty and left wing here,) have no responsability to the public. Corporations I understand, since there exists no purpose for them other than their own profit. Mass media, even though they too are corporations, should have their reputations to consider. Which means that the people who care about reading book reviews either comprise such a small percentage of the readership that it's irrelevant - in which case why are they even written - or the average readership knows how to read between the line.

I guess the point is that lawyers in Soho can read between the lines, and carpenters in Fayetteville are uninterested.

(OK, it wasn't obvious to my MBA students, but they're excessive trend-followers

Do you teach at Eastern Tennessee State?

Why is the descriptive metahphor for a gullible person bilked by The Man always "some (moderately disreputable career) in (any metropolitan area other than New York, Los Angeles, Boston, Washington, or San Francisco)"?

Moderately disreputable say what?

The D.O. is 50-state certified to practice medicine -- with good reason. A D.O. is essentially a full-fledged M.D. student, who has opted (of personal interest) to engage additional studies focusing on the interconnection of the body through the musco-skeletal system.

While one might well question the sanity of an M.D. student who wants to take additional coursework, one cannot fault their dedication to the discipline, nor is their education lacking with respect to the rest of the medical profession.

" (OK, it wasn't obvious to my MBA students, but they're excessive trend-followers

Do you teach at Eastern Tennessee State?"

No. Should I?

The behavior and beliefs that I saw from my American MBA students during the tech bubble in the late 1990s were very similar to the attitudes of my Hong Kong Chinese MBA students during the Southeast Asian boom a few years earlier (before the Flu hit). Take recent trends and project them off to infinity, and if things are going well, don't ask questions!

Let me add a belated word about the reviewer's principal obligation to the readers, not to the one author and his or her friends and associates.

We should be thankful that most reviewers (eg. of restaurants, movies, ...) don't work in the industries whose products they review.

When they do - as in the financial markets and the book section - well, it's not like the conflict of interest is kept secret. Grownups know what to think of such advice.

Ken

It should also be pointed out that some commissioning editors of book reviews at newspapers or magazines don't want hostile reviews, and are less likely to print them, preferring to "accentuate the positive". This might not be unconnected with the cosy relationship many of them enjoy with publishers.

"Third, always understand that in this symbiosis, you are the parasite." So the advice is to be a nice parasite???

I once had the job that included writing personnel performance reports in an organizational culture where the worst reports were written in code (otherwise known as "damning with faint praise"). It made it very difficult to write accurate reports on the better people without having my words misconstrued as code. Book reviewers might well write themselves into irrelevancy if they stick to a "don't directly say anything bad about any book" principle.

OTOH, I have seen scathing reviews where I had to think the reviewer was exaggerating (to say the least) when they ran out of accurate nastiness...

One book review editor told me that he preferred positive reviews because it was better to push up the sales of the deserving books. It helped the book industry and the authors, and that was more important to him than slamming a bad book. Given the large numbers of books that come out each week, why not take that approach?

Certainly, the film reviewers at the same paper have no problem with writing scathing reviews of films they find wanting. Given the small number of films that come out each week, that is a reasonable approach.

So, in a market with a flood of product, push the good. In a market with few choices, push the good, castigate the bad.

The very powerful Revelation Principle in economics says that, when two or more agents are communicating, having each one tell the truth is at least as good as any possible lie at achieving any possible outcome.

Or, put slightly differently, "If achieving an outcome is possible at all, it's possible with the truth."

That's not to say that fibbing isn't individually profitable; it's just that it can NEVER make the entire system better off.

All that fibbing in the equity markets (and the book review markets) is a complicated way of destroying value. It's hardly surprising that the chickens occasionally come home to roost in such an inefficient system.

Lying and cheating can get you ahead one time - but being known as a liar or a cheater is a permanent disadvantage in all future dealings.

The same could be said of teachers discussing students with parents. It's pretty much accepted practice that teachers will speak in similar codes when discussing student progress. Here's a favorite of mine: Christine is a good student who cares about her work. Code for: I know you think Christine is the most wonderful and talented person on the planet, but she really just acts like the 15-year-old that she is, which means that I see nothing wrong with her behavior and, in the long run, I think she'll do just fine in life even though she's not setting the world on fire right now. However, I also know that if I tell you she's an average student, you will either A) needlessly harrangue your daughter to work harder or B) needlessly harrangue administrators and teachers to motivate your well-adjusted child to work harder.

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