Marketing evil

76 people were killed in the attacks in Oslo and Utøya in Norway last friday. As atrocious as the act was, the perpetrator, Anders Behring Breivik has described it as a "marketing operation". To him, it in fact was that, which is yet another example of how cold and calculative he was and - still being alive unlike most of other similar killers - still probably is. As a real act of terrorism with dozens of victims it's of course belittling to call this marketing. However, there are many inviduals, groups, companies and other organizations that don't do direct harm to anyone but that in some way do promote things that are at least malevolent, but often also downright illegal and cruel. Even murdering gets promoted.

Before handling the violence, let's first consider something else. Tobacco products are a prime example of something that is bad for you but has been promoted a lot in the past. They however have been put at a real tight spot nowadays. You simply cannot advertise them in many countries. In fact, it has lately become the opposite: instead of showing brand logos, cigarette packages have to underline there unhealthiness through capital-sized letters that tell you eg. that "smoking kills". This is all good, but it's still interesting to note how people have gone through all these measures, even though nowadays smokers are any way pretty aware of the dangers of smoking and that smoking is always a choice.

So do people show the same commitment to prevent violence? When tragedies like the one in Norway have happened, there has often been a tendency to blame the violence in entertainment such as computer games, movies and television series. Due to the perpetrator still being alive and having political motives, there might be less of that this time, but in general these questions do come up. Especially in the internet communities there has usually been a very strong disagreement with this view of entertainment being the cause of the tragedy. Common, rather naive arguments include "no sane person would do this no matter how much he plays a game" or "I've been playing this for hours almost every day, and I never feel like killing anyone".

It's of course very difficult to say how these things affect people, but I think it's clear that everything we see in entertainment affect us in some way. In case of computer games, the player also has an active role in the violence so I don't find it far-fetched that their influence is towards making people more violent. So in case a person is enraged by something to begin with, this violent entertainment might make it worse and push the person to violent actions in real life. Even so, this doesn't mean that fiction involving violence should be banned, even if it glorifies the violence. For some that may even be a good way of channeling negative feelings. Still, one should never deny that violent entertainment may promote real violence.

Then we have the news media. Especially in cases like this, its role becomes quite controversial. How to treat those involved with proper respect is of course a serious question, but it might still be relatively trivial compared to how to handle the perpetrator. On the other hand it's important to recognize the motive and to get an image of the character in order to be gain knowledge on how one could possibly prevent similar events from happening. On the other hand that's exactly what the criminal often (and at least in this case) wants, and thus all the media attention brings the message to all potential killers that by killing many people, one will certainly be heard. In addition, big headlines with the killer's face may also be a tempting fantasy for other potential murderers. So, by trying to get high sales a newspaper may in fact promote violence, and even trying to prevent further violence may also simultaneously promote violence. It's a real dilemma.

Tobacco can be justified with free will and being mostly harmful just to its consumer. Violent entertainment, even with the possible bad consequences it might cause, can also be justified by giving people enjoyment and basically being just a way of sharing information and experience. Still, not only the marketing but also the consumption of both of them are regulated at least in terms of limits concerning age and place.

News media is not only justified but also needed for spreading knowledge and awareness. However, it also has to be bound to certain rules as well. More generally, outside the mass media, freedom of speech is an even more important part of an open society that wants to improve the quality of life of all its members. It isn't limited in the same way as the media is, but still bound to some rules around the world. For example, hate speeches or incitement against ethnic or racial hatred are illegal in most countries.

Spree killing, sponsored by Google?

(the site as seen on 25.7.2011)

Entertainment, media and general freedom of speech are all basically just sharing information with certain rules. But how does eg. the site spreekillers.ch stand in this? It calls itself the "International Committee of Competitive Spree Killing", and lists all the worst killing sprees as a highscore list, as if killing was a game. The absolute majority of people will find this kind of site tasteless to say the least, but should it be allowed to exist in the name of freedom of speech? Doesn't this kind of a list persuade to kill as many as possible to get the "ultimate highscore"? Even though that can never be the only reason for the cruelties, it's a goal that can probably boost the ego of a serial killer and in the worst case be the last straw to push him over the limit. Thus, the site is basically promoting evil.

So if incitement against ethnic groups can be illegal, why not incitement against humanity in general? Doesn't SWITCH have the legal possibility to shut down such questionable content? It's of course hard to permanently close certain content on the net, but at least showcasing it can be made harder. In some cases one possibility for this is cutting the possibility for their funding. As a matter of fact the most startling about this is related to exactly that. If you look at the screenshot above, you'll see that the site has been running Google ads. The terms that Google have for running their ads include the following:

"You shall not, and shall not authorize or encourage any third party to engage in any action or practice that reflects poorly on Google or otherwise disparages or devalues Google’s reputation or goodwill."

I know I'm too writing on a Google platform, but I don't find mentioning this to be in contradiction with the above term. The spree killer site has been around for at least few years, so there has been enough time to notice what it's about. It still probably doesn't mean that Google exactly condones the content, but maybe it should follow its unique slogan "Don't be evil" in a more active fashion in terms of sites like these. As for the other organizations, individuals and media, that same slogan is worth pursuing for them as well. After all, even if questionable content or questionable marketing may sometimes be worthwhile in the short run or from a certain point of view, such a thing as bad publicity still exists.

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The myth of an efficient market, part 3/3: Actual markets

In the previous part I described the preconditions for perfect market efficiency. In principle even with all its shortcomings, a market could get close to perfect efficiency even if none of the preconditions are really met. But has it been like this in the real-life markets? How have the markets acted in every day situations or under special circumstances? How would this manifest itself as a percentage? And will the market of the future be different from the market of today?

Examples from the last decade

Let's have a look at the recent history. Even though it's an extreme example, it's hard not to mention the dot-com bubble. Normally when a company has a 10% possibility of being worth 100 billion in the long run, and 90% possibility of failing miserably and being worth nothing, its value should be about 10 billion. However in the dot-com bubble the value in a case like this was often closer to that best-case scenario. Thus, during the dot-com bubble many companies were overvalued with a percentage of thousands or even tens of thousands. This could be seen not only in the valuations of single stocks but also very strongly on the index level. Less technology-driven indices had much less of a bubble, but for example NASDAQ was overvalued by hundreds of percent.

Then there's the current crisis that started from the U.S. housing market. Before the crisis stock prices rose to ungroundedly high levels, from which they dove to levels so low that they were even less founded on reality. One of the reasons for the gravity of the dip must have partially been in the efficiency factor number 4: external economical factors. Due to these special circumstances also many small investors saw an excellent opportunity buy shares at very low prices.

Moreover, the way this crisis has affected the European economy with all its troubled national economies starting from Greece, is also largely caused by market inefficiency. Had the debt market functioned efficiently, Greece would have had to pay higher interest for its loans many years earlier. But this never happened until it really had to happen. Greece was deceitful when joining the EMU and as a euro country it got cheaper loans than it should have received based on its economy. Since it took much longer to get to the point of rising interest rates, the economical fall is now of course a lot worse.

Everyday situations

In addition to the aforementioned episodic examples there are many more customary situations, where inefficiency is evident. The human restrictions related to time become obvious, when companies announce their quarterly reports. It's not uncommon that the first reaction will be disappointment eg. from too low quarterly earnings, due to which the stock price will plummet, but after the report is analyzed properly, the more essential factors start looking good, and the price will rise. Or the whole thing the other way around. Of course this is extremely short-term deviation, but what makes it interesting is that a quarterly report can set the price course for a significantly longer period of time. The price may slowly change in one direction, even if no new concrete information is brought to attention, and before the next quarterly report is announced, a plummet of 5% may have changed to a rise of 30%. Of course one could argue that the knowledge of absence of news is also knowledge. This is true, but it rarely justifies any significant price changes. All this can be seen as shortcomings in the efficiency preconditions 1-3 and 5.

In addition to these there are other generally recognized phenomena such as the May phenomenon - which can be summarized by the sentence "sell in may and go away", which somewhat applied to this year as well. Stocks with cheap key figures (which are commonly called value stocks) have also usually given better results than "growth stocks". If the markets truly were efficient, this couldn't be true.

Stock prices also more or less constantly vary without any clear reason. Of course given the extremely complex world and web of knowledge around us, this could be justified by new small pieces of knowledge. In practice the situation of the company or the market still shouldn't change significantly by minute.

A special case are stocks that are particularly involatile and may have very large spreads between their sell and buy assignments. Here's a graph of a small cap OMX-H stock that suddenly rocketed 20% on 24.11.2010 from 17 euro to over 21 without any apparent reason. From the perspective of a regular private investor the change was also significant with a worth of over 30 000 euro. After that the spread was also that huge. Next day the price almost plummeted back to its earlier level, which means that the seller did a good deal there. Of course this is just a small stock in a somewhat peripheric market, but still shows an example of how unefficient the market can be.

The percentual efficiency of the market

So what do we get, when we look at all the practical data we have and try to put it into the the formula given in the first part? It's fair to assume that under full efficiency a stock market index should have a quite steady and balanced progress - not a straight line but not that far from it either. Still, also in an efficient market the stocks of individual companies would of course vary more than the entire index. Thinking like this, the efficiency of many stock market indices would have gone down to something like 30-40% during the dot-com bubble. By using some kind of more merciful weighting methods the efficiency could have been a bit more, around 50%, but that's still very inefficient.

The more recent bubble and recession don't seem much more efficient either. Even though the market started to be more aware of all the problems and risks related to the subprime loans, the market still continued its bullish trend for a while. In the end, most major indices, like DAX, NASDAQ and Dow Jones had gone down over 50% percent from their peaks reaching a bottom from which they have afterwards recovered close to 100% in two years reaching almost the level before the crisis! Of course unlike with the dotcom-bubble there are now more real issues instead of just extreme speculation about huge future profits. Still, even as the western economies are still facing severe problems, the course of events is extremely hard to consider as being even close to efficient. From overvaluation the situation progressed to a clear undervaluation, and once again, depending on the weighting method and other factors the efficiency levels might have been just a bit over 50 percent in many markets.

When thinking about efficiency on a more general level, we should of course consider a longer period of time. Between overvaluation and undervaluation there needs to be a moment when the stock market index momentarily "fully reflects all information". When the index is close to this level, the misvaluations of individual stocks take a bigger role in the overall efficiency. The stocks that are most actively bought and sold are usually of course relatively more efficiently priced as well, and when defining overall effectiveness these could actually have a bigger weight in it. Still, even if this would make the stock selection efficiency (in other words the relative price of different stocks, when comparing them with each other) have an efficiency of let's say 90 percent, the overreactions in the turns of economic trends seem so big that this would still make the overall efficiency much lower to about 70 percent.

When you consider Fama's efficiency forms more like layers as I suggested in the definition part, there is the possibility that efficiency on the information layer would in fact be stronger than efficiency on the psychologic-speculative layer. If the market pricing is divided into macro and micro level efficiencies (in other words the efficiency to detect the business cycle correctly and the efficiency to detect the price of a single stock correctly respectively), the psychologic-speculative layer can be considered as taking a bigger role as a cause for inefficiency on the macro level than it does on the micro level. Still, in practice the layers cannot be fully separated: even if the role of psychology and speculation grows, information efficiency always has a significant part in all of it. Nevertheless, if security pricing inefficiency on the macro level is enough to lower the efficiency to a level of 70 percent, one cannot neglect the non-informational causes for inefficiency.

True efficiency or just human efficiency?

It's probably clear by now that I don't find the market particularly efficient. Still, the level of efficiency is largely a matter of how you define "full reflection of all information". For a full reflection just having a large group of people isn't enough: all information will never be fully reflected in all prices. Still, the information could in principle be reflected to the extent that no individual could ever outperform the market. In practice, as long as the investment decisions are done by humans instead of machines, not even this can be possible. The reason for this is that then there would be no motivation to explore investment possibilities, and that in itself would already lower the overall efficiency from this level that would be humanly efficient.

I suppose when people talk about market efficiency, they are in fact talking about this human efficiency, even though in my opinion "the full reflection of all information" would require a lot more. In principle we can distinguish three different levels of efficiency. From the weakest to the strongest they are as follows:

The actual current market efficiency

< Theoretical full human efficiency

< Theoretical real full efficiency

Even the full human efficiency would already require a huge and extremely efficient organization without any personal goals to evaluate the prices of even the smallest of stocks. In addition the efficiency prerequisites 4 and 5 should always apply, since an individual investor can block these factors. If human efficiency would be for example 75% and the actual market efficiency 65% of the theoretical real full efficiency, the actual market efficiency compared to the human efficiency would be 87%. At good times this efficiency could reach even the 95% that was mentioned in the introduction.

Are the markets getting more efficient?

In practice the market is always wrong - it's only a matter of how wrong it is and how easy it is to pinpoint this error. There may be even big efficiency differences between different indices or markets and in somewhat peripheric indices like the Helsinki OMX-H the efficiency is probably lower than in bigger indices. As time passes efficiency might also grow. For example as the awareness of the January and May phenomena has grown, their effect may have become lower - or on the other hand sometimes these can be seen as self-fulfilling prophecies which would actually result in the opposite. What's more important, however, is that internet with all its information, interaction and the ease of trade should create a certain kind of intelligence of the masses. On the other hand as the amount of players on the playground grows, so might the amount of fools and lemming behaviour.

The dynamics of efficiency will probably still experience many changes. Information efficiency will still probably grow at least in terms of information available. However, as the world economy has become more and more connected, there is always a need for even more information and a possibility for more unexpected emotional bursts. Whereas movie critics for example evaluate a static fully finished product, the different parties in the stock market need to evaluate a constantly living, massive and hugely dynamic web of securities. And what's more, these stock market "critics" - investors, analysts and media - all live in interaction with the market, which in turn may cause self-fulfilling speculation and chain reactions.

All "critic parties" influence the market movement not only in the price formation of securities but also in the real economy. Thus, even absurd and originally inefficient psychologic-speculative reactions may through their own influence result in those reactions being partially sound and even expressing efficiency in a way. When you end up in a market that's been hit by a overreaction, even the tiniest straw can then break the back of that psychological camel, and once again the the entire market will turn from bull to bear or vice versa, and all this affects the real economy as well.

In a way, in addition to business cycles, one could define efficiency cycles. When efficiency gets too low, the motivational precondition for efficiency will get higher, and efficiency will grow. And when efficiency gets too high, the motivation gets lost and inefficiency takes over. By evaluating how efficient the market at a given time is, an investor might get clues on how worthwhile it is to investigate various investment possibilities. When efficiency gets low, it's time to strike.

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