If a company's project/product were failing and/or losing money, then investors would have priced the loss into the stock price long ago.
If a company announces that it is ending a money-losing effort, then investors will value the company more highly.
In theory, therefore, this announcement should raise the stock price. In practice, who knows.
That's a misconception. The investors had done expectations. They were either met or unmet. But unless there is insider info, a project going bad won't get priced before the news is known.
Stuck prices isn't some magical thing that knows all. It's simply an average of what everyone believes. Beliefs are sometimes wrong.
If the price were an average of beliefs, we would have people that believe it's worth more and people that think it's worth less. Those that think it is worth more would, logically, buy Google stock, and then the price would increase until we reached the price where people are somewhat on agreement that it isn't worth more. So, either there is a lack of funds to make the purchases, or the given price reflects the highest price someone is willing to pay for it, right?
Sure. But how far can you infer backwards from that?
I suppose there is a bias in the fact that not all long positions have corresponding shorts, but that seems like it would be pretty minor.
Actually, they can. As a simple example, they can agree on both price and volatility projections, but simply have different utility functions in terms of how much volatility they are willing to accept. Most simply, one of them might be 64 and about to retire while the other is 22 and just starting to invest in their retirement fund.
I expect that a majority of stock purchases/sales are in fact driven by such considerations and not fundamentals analysis...
But my point is that when you see that a stock is trading at a particular price, all that tells you is that one person has a utility function that values that amount of money higher than a unit of the stock, and one person has a utility function that is opposite it. There's no guarantee either of them have a utility function anywhere near your own. Which leads me to conclude that the net information content of a stock trade is, fundamentally, zero. And yet prediction markets work - go figure.
Yep.
> Which leads me to conclude that the net information content of a stock trade is, fundamentally, zero.
It might not be if you have a bunch of trades, averaging over lots of people with different utility functions. Maybe. Depending on how average your utility function is.
In practice people end up with heuristics like "100 - age" and diversification out of stocks or hedging of their stocks to deal with the imperfect matchup between their utility function and the averaged one.
It's hard not to think of the whole thing as a house of cards sometimes.
> And yet prediction markets work
Sometimes they do. As long as everyone involved has broadly the same utility function: that of maximizing their money above all else. If enough people, or more properly enough monetary units, come in with a weird utility function (e.g. valuing a particular prediction more than their money), you get prediction market failures.
Not necessarily--often, money-losing operations are valued by investors because of their potential to be profitable in the future.
Also, the market is likely more efficient with large companies like Google, Apple et al., but short-term price movements still aren't always rational.