Insider Trading – the Director’s Cut

Equivocable Insiders

Insider trading – the use of inside information about a corporation – to trade its stock to personal advantage is a major concern of regulators everywhere. Laws against this abound, and the penalties if found out are often significant: jail time awaits the unwary insider.

Of course, the ultimate insiders are company executives and there have been a lot of studies trying to figure out whether directors are any good at exploiting internal information. The evidence, such as it is, is equivocal and the reason seems to be that these privileged insiders don’t know as much as we think they do. Meanwhile insider trader laws are actually damaging the ability of markets to set prices efficiently: as ever, unintended consequences abound.

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Unit Bias: Cooking, Dieting and Investing

Feast and Famine

Cooking is, of all the inventions that have propelled mankind to the top of the food chain, probably the most important. Our dubious ascent to mastery of all we survey, other than investment bankers’ bonuses, is founded not on the skills of the scientist or the warrior but those of the humble cook.

From this it follows that, if cookery is the bedrock of our civilisation, and civilisation is the trigger for the development of the invention of money, then we ought to look for parallels between food related biases and investment biases. Indeed, it rather looks like the latter may be at least partially founded in the former.

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Investing at the Edge of Reality

Relief from the Bizarre

Mostly we expect scientists to make the world a more understandable place – or at least a more comfortable one. After all, science has helped us move from a state in which we prayed to invisible deities for deliverance from natural disasters to one in which we rely on functionally illiterate politicians to direct relief operations. So, perhaps prayer isn’t entirely irrational…

Unfortunately, as we’ve dug deeper into the mysteries of the multiverse, increasingly we’ve been forced to face the fact that reality is more bizarre than we can possibly imagine and that our senses offer us only a limited window on the world. Oddly, though, it also hints as to why we make investing mistakes.

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Religion in EconoLand

Religion is not a single thing. It is a body of behaviour unified by our failure to find a simple rational explanation for it when seen from the perspective of the individual.

(James Dow, A Scientific Definition of Religion)

Priestly Predictions

EconoLand is a peculiar place. Although its people are perfectly normal in all other respects they place their trust and their futures in the hands of a cadre of strange, secretive and almost entirely incomprehensible priests. They name these divine intermediaries “economists”.

It seems that only these “economists” can intercede with the god of the land, who is imbued with superhuman powers of omniscience and perfect foresight, yet is wholly and totally devoid of emotion or any trace of human sympathy. It’s an odd fact that, although this god is believed to be perfectly rational and incapable of error, the predictions of the economists never, ever agree with each other. What’s even more odd, no one ever seems to notice.

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Of Mice and Templeton Moments

An Age of Genius

Sir John Templeton was one of the last century’s greatest investors who, like most people who exhibit unusual skill in the financial markets, had an appropriate view of the balance between investing fundamentals and investor psychology. He died only a few years ago, at the great age of 95, and almost to the end he was still making strikingly accurate predictions, some of which are yet in the process of coming nastily true.

At one level Templeton's approach to investing was simple and familiar: go against the flow and seek out opportunity where no one else dares to look. As usual, the problem with such advice is that it’s very easy to give and very hard to take. But we need the evidence of the mice to tell us why.

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