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Watch Out, The Nerd Humor Battle Is On…

October 1st, 2009 · 12 Comments
Finance · Just For Fun

I knew I would see my name in lights someday, and now it’s official: I am giving a humor talk at the annual meeting of the American Economics Association. My name’s even in the program and everything. (Do a search for humor and you’ll find it. And for the record, Caroline Postelle Clotfelter is the editor of On the Third Hand: Wit and Humor in the Dismal Science, and thus is kind of my hero.)

There’s only one problem with this- I’m not funny. Snarky, sarcastic, full of bad puns, cheeky perhaps…but funny? Ugh. But it’s not like I am one to pass up an opportunity, so off we go…luckily, I’ve got 3 months and the lovely people at ImprovBoston to help me. Too bad that I’ve already been upstaged by Samantha Bee on the econ front:

The Daily Show With Jon Stewart Mon – Thurs 11p / 10c
Cash Cow – High-Frequency Trading
Daily Show
Full Episodes
Political Humor Ron Paul Interview

You know, I will give credit where credit is due. Yes, I said before that I wouldn’t turn down an offer to be the Daily Show’s Senior Economic Corespondent, but no, I am not sure that I would go so far as to wear a green and white cow suit with dollar signs on it. (Though my mom would be so proud that I was continuing on with the cow theme.) Clearly, Samantha Bee wants the position of “Cash Cow” more than I do, and I salute her for that. Maybe someday they’ll resolve the trademark issues surrounding the “Money Honeybee” and I’ll give it another go. After all, I may not have the appropriate name, but I look decent in black and yellow:

Seriously though, her piece on high-frequency trading was surprisingly educational. Also, her point that this activity doesn’t create any value is a valid one- high-frequency trading is a zero-sum game that results in a transfer of value from one place to another rather than a creation of value..kind of like if Robin Hood stole from the rich in order to give to other rich people. I am mostly agnostic as to whether this activity remains legal, but it’s important to see it as a fairly widespread by-product of market activity.

Lest you think that I am only getting competition on the humor from from people who do comedy for a living, I point you to a recent performance by Austan Goolsbee. Goolsbee is one of Obama’s economic advisers and a professor (on leave) at the University of Chicago. He was awarded with the (damning with faint praise) honor of being named “Washington’s funniest celebrity,” and he gave quite the acceptance speech.

This article points out that Goolsbee borrowed the sketch’s structure from SNL’s old Mr. subliminal character, which is pretty accurate. His schtick is also not so different from what I (inadvertently) do with the captions on the videos…or what Stephen Colbert does very intentionally in “The Word” segments. Maybe people will start paying attention if they learn that economists aren’t so terrible to listen to…though I’m not holding my breath.

Tags: Finance · Just For Fun

12 responses so far ↓

  • 1 econgirl // Oct 2, 2009 at 2:07 pm

    A comment, via my email: I would debate with you that high frequency trading adds no economic value. If you read about market principles, the liquidity premium is part of the cost of a stock (i.e. investors will pay more, all things equal, for a stock with higher liquidity (ability to exit a position) than one without). They are increasing liquidity, which actually makes stocks more valuable and transaction costs lower.

    Now, I admit that I am not specifically a finance person, but I do get the concept of the liquidity premium. That said, to generalize and say “people mucking around in markets is always good because it increases liquidity” seems to be stretching more than a little in this case. Why?

    Let’s assume for sake of simplicity that high-frequency traders are mostly taking long positions, in which case their goal is to buy low and sell high. The very nature of their approach indicates that these two things are going to happen within a short period of time. If the high-frequency traders are just “flipping” a security in this way, they aren’t really adding anything to liquidity, since you could take the high-frequency trader out of the picture and still have a buyer and seller, namely the seller that the high-frequency trader bought from and the buyer that the high-frequency trader sold to. The (immediate, at least) value created in the transaction is the spread between the minimum that the original seller would have sold for (willingness to sell, in economic terms) and the maximum that the final buyer will pay for it (willingness to pay, in economic terms). The high-frequency trader hasn’t added anything to this amount, he’s just taken a cut for himself.

    Like I said before, I’m relatively neutral on this issue, and I’m just trying to make the facts clear. You can read an interesting article that gives a helpful example of what high-frequency trading is here:

  • 2 Carl Peter Klapper // Oct 2, 2009 at 4:43 pm

    I am on my way out the door, but very briefly… If there are actually a high number of trades by different people at prices which are stable in the near term than we have real liquidity and this represents that people can buy or sell a stock easily at a price that is transparent to even a casual observer of the market. The same people, e.g. market makers and institutions, provide a fake liquidity — such as currently — and wild daily price swings achieve the same effect as illiquidity, i.e. selling well below or buying well above moving averages.

  • 3 Daniel Reeves // Oct 2, 2009 at 5:01 pm

    I think the claim that High-Frequency Trading (HFT) adds value in terms of liquidity is bogus.
    I like the proposal of using a call-market that clears once per second. Then HFT would go away without doing any practical harm in terms of freshness of market prices. Here’s a blurb with some pointers to people who are thinking about this intelligently:

  • 4 Daniel J. Smith // Oct 8, 2009 at 1:24 pm

    How does high-frequency trading not add value? The only way to that conclusion is in a Walrasian Equilibrium framework, which unrealistically assumes perfect information and ignores the market process of how transient knowledge is transmitted to the relevant economics actors (See Nobel Laureate F.A. Hayek’s “The Use of Knowledge in Society,” AER 1945). The entire efficient market hypothesis is based upon entrepreneurs using their unique knowledge of time and place in order to find profitable opportunities i.e. errors that they can arbitrage away. It is precisely the arbitraging of high-frequency traders that ensures that stock prices reflect almost instantly the newest information and developments. This arbitraging process is no different than an entrepreneur noticing that the cost of putting water in water bottles and marketing them is lower than the price people are willing to pay for them. They realize that they have unique information which allows them to see errors (or unexploited transactions) in the current economic arrangement, and share their knowledge through the pursuit of profit. The people who own or are thinking of purchasing stock, as well as companies making long-term plans using the weighted average cost of capital, which includes the stock price, all benefit from having all that information reflected in the stock price as soon as possible.

  • 5 Daniel Reeves // Oct 8, 2009 at 2:00 pm

    @Daniel J Smith, I disagree, at least practically. There are drastically diminishing benefits for wildly increasing costs as you push the timescales below 1 second.

    It’s just a dumb mechanism.

  • 6 Carter // Oct 8, 2009 at 2:08 pm

    I think Daniel pretty much nailed it on the head. I know how hard it is for people to believe that freedom works to produce the most efficient and just distribution of goods and services, but it’s true. Don’t fear liberty. Embrace it. F.A Hayek, Frederich Bastiat, Lysander Spooner, Murray Rothbard, Adam Smith, etc. all knew what they were talking about.

  • 7 Daniel Reeves // Oct 8, 2009 at 2:21 pm

    @Carter, thanks! Wait, you probably meant the other Daniel. But this is not a debate about Freedom! HFT is patently inefficient, like selling a painting in an auction whose rules are that you have to place your bid in a box in the middle of the pacific ocean. It’s a stupid, inefficient mechanism, no matter how much the buyers who’ve invested heavily in swift sailboats scream bloody murder.

    Check out the Wellman proposal in the link I included above.

    Again, this is *not* an argument about Free Markets vs More Government.

  • 8 Carter // Oct 8, 2009 at 2:35 pm

    My bad. Yeah I was giving kudos to Daniel Smith. And yes it is always an argument about freedom vs. government when you are proposing regulation. To be honest I am not an expert in the specifics of stock market transactions. I am just a real estate, banking and finance expert. Arguing how transactions should take place is secondary to the arguments of principles. If we don’t agree on principles, then we’ll never agree on specifics. If what Daniel Reeves proposes is correct, then why wouldn’t the market already be cutting out those losses voluntarily? (No I’m not a chicago school econ) If it is because current regulation prohibits it, then I would back you up Daniel Reeves. But I would do it by saying let the market work. Let entrepreneurs figure out the best way to conduct transactions. The only reason there is so much activity in the stock markets anyway is because average Americans who know nothing about the stock market are driven into it as a means of savings and investing since they certainly can’t save dollars. Thanks FRB. No worries, things will be changing drastically over the next few months. I hope Bernanke goes down in flames. And I can only pray that Sir Alan is put in jail for his counterfeiting all these years.

  • 9 Brad // Oct 9, 2009 at 2:19 pm

    Also leaving out the door in 5 mins … There are different ways to respond to this. High Frequency Trading (HFT) of a thing would be more valuable if the traders are interested in having progressively shorter liquidity. However (finance in a nutshell here) anything is only worth (in $) its NPV of all future cash flows (future cash ins vs outs adjusted for risk, inflation, and required return).

  • 10 Brad // Oct 9, 2009 at 2:20 pm

    In other words… you’re not crazy. we like you. 🙂

  • 11 Brad // Oct 9, 2009 at 2:25 pm

    Carter: nice dialog. interesting. I think you’d be pleased to hear about HR1207 Federal Reserve Transparency Act, sponsored by Ron Paul.

  • 12 Carter // Oct 19, 2009 at 7:02 pm

    Yeah Brad thanks. I have watched some of the hearings on Youtube. Barney Frank loves himself so much I wanted to vomit my guts out watching him try to take credit for everything. Haha. That’s politicians for you I guess. Tom Woods was great, but I don’t think he’s used to arguing with politicians. I like watching Alan Grayson slam Bernanke.

    Grayson: “Where did the trillions of dollars go?”
    Bernanke: “Uhh…Uhh… I don’t know?”

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