User:Zoepapado/sandbox

Truth in Financial Economics

1. Speculation

The ‘true’ value of an asset will eventually be discovered by a market https://en.wikipedia.org/wiki/Price_discovery. Under this assumption, speculation, such as by hedge funds  or individuals (traders), may attempt to predict the future price of an asset (share). This is done using a variety of analytical methods, such as by determining the profitability of a company’s investments. This will influence the speculator’s decision to either trade (buy then sell) assets, if they expect the price to rise, or short assets, if they expect the price to fall. These decisions determine the income or revenue of individuals or businesses involved in speculation.

In this sense, speculation is the search for truth, as the practice  is dependent on finding information which will determine the future price of an asset. There is information asymmetry between investors and insiders.

There is also deception of truth in financial markets. For example, dividends reward shareholders to keep their assets. This makes the price of a share less volatile as would be experienced in a free market.

2. Capital Allocation Problem

speculation - search for truth

dividends - for shareholders, why people hold shares - distorts value - ****

truth is self evident - true price is what the last transaction was sold for

true value - more apparent in financial market - more transparency

- barriers to entry or exit

- ebay - bid - true value

price  view of all shareholders/potential shareholders

info assymetries - result of competition — keep leading market - investments - capital allocation problem - keep shareholders happy -