On the Revival of the “Quarterly Capitalism” Discussion

Ok, I’m a little late with this, but, um, he might kind of have a point…

That said, he’s gonna be so mad when he finds out who took up the cause first…

In any case, let’s discuss…

Currently, publicly traded companies (“public companies,” though importantly distinct from being a government entity) are required to report their business performance once a quarter. This seems helpful from a transparency perspective, but it also has the unintended consequence of companies being obsessed with “hitting their numbers” every 90 days or so. This doesn’t *have* to be a problem, but it’s entirely likely that focusing on short-term profits comes at the expense of maximizing long-run profitability.

This phenomenon, sometimes referred to as “quarterly capitalism,” isn’t simply the result of companies trying to show off every time they have to release earnings numbers. Instead, they’re mainly responding to market incentives- stock prices tend to respond strongly to quarterly earnings, and the perceived performance of company managers is closely tied to stock performance. This basically creates the corporate equivalent of being judged on your weight-loss progress on a weekly basis, and, just like such reporting can lead to unsustainable binge dieting, quarterly financial reporting can lead companies to engage in analogous, say, inefficient cost-cutting measures.

Do I really think that moving to six-month reporting requirements would solve the quarterly capitalism problem? No, mainly since most useful long-term projects have timelines of far more than six months. (I also do worry about the decrease in transparency nowadays.) But I like that the conversation is being had, since it forces discussion of what is referred to by behavioral economists as “myopic loss aversion.”

“Myopia,” taken literally, means near sighted, and, in a decision-making context, means short sighted, or overly focused on the short run. Loss aversion is the phenomenon where people hate losses more than they like equivalent gains. Myopic loss aversion is thought to lead to irrational choices, or choices that are out of line with maximizing long-term returns (or, somewhat equivalently, happiness.). In a personal investing sense, one of the best pieces of advice I can give is to not look at your stock portfolio every day, since you’ll probably get obsessed with short-term ups and downs and start buying and selling in unproductive ways. In a similar sense, professional investors would often be well served to take the quarterly reports and put them in the desk drawer rather than poring over them…or at least focusing on the information that pertains to long-term plans rather than short-term results. (I’m of course making the assumption that the professional investors are working on behalf of clients who are taking a long-term view of their returns.)

Hopefully this makes sense as a logical matter, but unfortunately it’s harder to act on than it might seem. First, just knowing that they’re doing something unproductive doesn’t always make people able to stop doing the unproductive thing. (The dieting analogy keeps working here I suppose, albeit for different reasons!) In addition, it’s harder to stop being myopic when others involved in a market are still committed to the myopic behavior, and it’s extra hard to convince a whole bunch of people to change their thought processes at the same time. Nevertheless, well…glad we had this talk at least. Baby steps…

This post originally appeared on Medium.

P.S. In case you find myopic loss aversion interesting, here’s a paper that suggests it could even explain the equity premium puzzle.

Here are the Victims of Insider Trading, Hope I Didn’t Keep You Waiting Too Long…

We’ve officially gotten to the “actually insider trading is kind of fine” stage of the universe…

Opinion | Show me the victims of insider trading. I’ll wait.

Opinion | Show me the victims of insider trading. I’ll wait.

Meanwhile, take an honest look at the ways the institutions you belong to manage to hoard the best benefits for people like you.

Source: www.washingtonpost.com/blogs/post-partisan/wp/2018/08/09/show-me-the-victims-of-insider-trading-ill-wait/?utm_term=.925f3877db7b

Spoiler alert: it’s not fine, and here’s why:

Here are the Victims of Insider Trading, Hope I Didn’t Keep You Waiting Too Long

Here are the Victims of Insider Trading, Hope I Didn’t Keep You Waiting Too Long

The way 2018 is going, it should not shock you too much that we’ve gotten to the “a little insider trading never hurt anyone” phase of the…

Source: medium.com/@jodiecongirl/here-are-the-victims-of-insider-trading-hope-i-didnt-keep-you-waiting-too-long-d793ea8f18d5

Since I’m guessing that I have a more knowledgeable than average audience here, I’ll elaborate on one point from the original article that is basically correct. Technically speaking, the efficient markets hypothesis (EMH) comes in three flavors:

  • weak form: can’t systematically profit using past price information
  • semi-strong form: can’t systematically profit using public information
  • strong form: can’t systematically profit using even material nonpublic information

Not surprisingly, the strong form of the EMH can’t really hold without substantial insider trading in a market, so in a very specific way insider trading can make markets satisfy a stronger form of efficiency. That said, this observation once again highlights the fact that there is generally a tension rather than a correspondence between efficiency and fairness. In addition, these definitions of efficiency don’t take into account the potential inefficiencies generated by asymmetric information, which we generally put under the heading of market failure.

Oh, wait, one other thing…while McArdle is correct in that random people probably shouldn’t try to pick individual stocks, she leaves out that many people absolutely *should* hold a diversified portfolio that includes stocks (generally via index funds or other low-fee products). Unfortunately, the insider/outsider divide isn’t between individual and professional investors, and there’s no reason to think that asset managers and the like wouldn’t also find themselves on the losing end of insider trading, so “don’t hold individual stocks” isn’t really relevant to the discussion at hand or a solution to the insider trader problem.

My Interest In The New Goldman Sachs CEO Goes Pretty Much Exactly As You Would Expect…

In learning about the music industry, I often think about how what behavioral experiments I would want to run if I had the proper resources/infrastructure/etc. Along these lines, one thing I’m curious about is how people’s willingness to pay for music is affected by the financial situation of the people creating the music- in other words, are people more willing to pay for music (as opposed to download illegally, stream, whatever) when they know the money matters to the musicians? I’ve actually brainstormed with people about how to implement such a thing, and…it’s harder than you might think. See, one feature of economic experiments is that we’re not supposed to use deception- in this case, it means I would actually have to find musicians with differing levels of income rather than just tell hypothetical background stories. Obviously such people exist, but I’m going to go out on a limb and hypothesize that the music created by the high-income musicians is different from the music created by the low-income musicians in a way that is related to willingness to pay.

In a perfect world, I guess I would find a band where the members have day jobs that differ widely in income, since then I could present the same music with different backstories without having to make anything up. (If you know any such unicorn bands please do drop me a line!) I guess something like this would be a decent backup plan:

Goldman Sachs’ president has gigs as a DJ around the world

Goldman Sachs’ president has gigs as a DJ around the world

His Fleetwood Mac remix was recently featured on SiriusXM.

Source: www.cnbc.com/2018/03/14/goldman-sachs-david-solomon-has-gigs-as-a-dj-around-the-world.html

I like this on principle, since I feel pretty strongly that people should have hobbies and interests and whatnot, but I also can’t help but think “hmmm, now if I find an equivalently popular DJ who isn’t a CEO as my control group”…

Turns out the story gets more interesting…apparently the Sirius exposure that D-Sol (yep, that’s David Solomon’s stage name) get ended up getting him a spot on the Billboard charts:

I mean come on, this is #goals…in case you can’t see the chart itself, here’s the description:

Dance/Mix Show Airplay

This week’s most popular current songs ranked by total weekly plays on full-time dance-formatted stations as well as mix show plays on mainstream top 40 and select rhythmic and adult top 40 stations that have submitted their hours of mix show programming, as monitored by Nielsen Music, to Billboard. Songs are defined as current if they are newly-released titles, or songs receiving widespread airplay and/or sales activity for the first time.

Obviously I’m curious as to the effect that such airplay has on streaming and sales behavior…unfortunately, I don’t have data on streaming, but here’s the sales trajectory:

Let’s unpack this, since the chart timing is a little complicated…the Billboard chart date is July 28, 2018, which means it was published on July 24 and covers the period July 16-22. The song didn’t remain on the chart the next week (boo), so we can think of this as the period over which the song got the bulk of its airplay attention. That’s a little weird but interesting, since it suggests a couple of things: one, that the sales interest preceded the airplay interest rather than the other way around, and two, that the airplay and chart recognition didn’t lead to a huge spike in sales. (Granted, we don’t know that we wouldn’t have seen more of a decline if the airplay hadn’t happened, but the magnitude of the effect is still limited by the fact that sales couldn’t have been less than zero in the “counterfactual” situation.)

As a related matter, I have an idea…so I’m going to make a song, and enough of you are going to buy it so that I can get on the Billboard charts, since from what I can tell the bar is a lot lower than it used to be. (The chart above is an airplay chart, so the sales data I showed here doesn’t speak to this point directly, but this is the pattern that I see more generally.) Wait, now I’m wondering if David Solomon just had 1,000 of his closest friends do him a solid… 🙂

In case you’re curious, here’s the song in question (there’s also an extended version if you’re super into it):

Since you’ve read this far, I figured I’d pass along another relevant item I came across in my research:

Yes, I’m trying to not be annoyed by the misspelling because it’s just too funny. I’m also trying to not take issue with the following headline:

Calvin Harris Tops the ‘Forbes’ Highest-Paid DJ List For Sixth Straight Year

Calvin Harris Tops the ‘Forbes’ Highest-Paid DJ List For Sixth Straight Year

Calvin Harris has been named Forbes’ highest-paid DJ in the world for a sixth year in a row. Check the full list of Forbes’ top 15 paid DJs here.

Source: www.billboard.com/articles/news/dance/8467942/calvin-harris-top-paid-dj-forbes

I mean, technically…though looking at the numbers, I think the article might actually be correct as stated, at least for the top spot for the time being.