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Comment by asfgionio2346 | Hacker News Reader

I find myself confused about the purpose of stock markets. How can we arrange our society around a system that is so massively irrational? A few years ago Tesla was worth as much as the rest of the car industry put together. Even if you believed Tesla was going to become a perfect monopoly, its valuation still would not have been justified. Now people are acting like the sky is falling when this pipsqueak manufacturer is still (supposedly) worth twice as much as Toyota.

The most spectacular failure I know of is the case of Twitter. We knew the value of the stock to the penny starting in April of last year, but for months it traded at over a 25% discount. Why do we pretend this system of price discovery works when it can't even discover a price that has been printed in newspapers?

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The rationality of the stock market reminds me of the Winston Churchhill quote: "Democracy is the worst form of government, except for all the others." The market is irrational, but it's based on the best information we have. Admittedly, that information is limited and sucks. Heck, it sucks even if you actually work at a company in question! Even the people there can't be sure what the stock price will do.

> We knew the value of the stock to the penny starting in April of last year, but for months it traded at over a 25% discount. Why do we pretend this system of price discovery works when it can't even discover a price that has been printed in newspapers?

The answer is clear: the market wasn't confident the sale would go through, for good reason. Musk even tried to back out until he was forced to go through with it. If I recall correctly, things started getting much closer to the sale price once it became clear it was more likely to go through.

Tesla isn't only a car company. They also have a lot of technology related to clean energy, along with the self driving technology they are creating.

The bull case isn't "Tesla becomes a monopoly in automobiles." The bull case is "Tesla becomes a car monopoly, monopolizes self driving, creates a great semi truck, has solar panels on half of the buildings in the US, and supplies battery technology to every clean energy producer globally."

Now, does that justify the valuation? Probably not. But it certainly raises the ceiling on Tesla's valuation. I don't think it's an apples to apples comparison between Tesla and other auto manufacturers.

The discount on Twitter stock is related to the likelihood of a deal closing, compared to the market's perceived value of Twitter stock were the deal to fall through. If you think there is a less than 100% chance of the deal closing, the only sensible thing to do would be to price that in.

Yeah the bull case would be something close to considering TSLA to be AMZN in 2006 or so launching AWS and taking advantage of first-mover advantage in the cloud space--only with clean energy and FSD.

If you believed that was a likely outcome then the insane valuations would seem not so insane, which is why it got bet up to those levels.

Because there was the specter of a protracted legal battle to close the Twitter acquisition and that risk (of both time and result) was priced into a 25% discount on the acquisition price. That’s why the stock bumped to 50 on the acquisition news and fell off as the deal became imperiled.

> The most spectacular failure I know of is the case of Twitter. We knew the value of the stock to the penny starting in April of last year, but for months it traded at over a 25% discount. Why do we pretend this system of price discovery works when it can't even discover a price that has been printed in newspapers?

The only point of buying Twitter stock is to sell it again later. If you know it'll sell months later at a specific price, then buying months earlier means tying up capital for a limited upside. Other investments have unlimited upsides, or at least pay dividends.

> > I find myself confused about the purpose of stock markets. How can we arrange our society around a system that is so massively irrational?

Is there any rationality in giving one man (POTUS) more power than all the other 320M citizens combined? Arguably more power than ALL the other humans combined.

What about Hollywood and the acting business? If you picked a random theatre actor would it really underperform Daniel Day Lewis so bad to warrant Lewis paycheck?

Power's Law governs each and every system, on top of that you have stuff such as virality and survivorship bias which are unique to human systems and further amplify Power's Law effects.

That's how you end up with people like POTUS and the Forbes 400, that's also how you end up with stuff like the valuation of Tesla

>Is there any rationality in giving one man (POTUS) more power than all the other 320M citizens combined? Arguably more power than ALL the other humans combined.

The argument here would be that running a country requires fast decisions. Putting that in the hands of millions wouldn't allow us to respond fast enough. The rational decision here is to choose a representative of the people, allowing that person to make decisions quickly and more efficiently than the entire population.

Its berfectly rational to trade speed for accuracy depending on the situation.

>What about Hollywood and the acting business? If you picked a random theatre actor would it really underperform Daniel Day Lewis so bad to warrant Lewis paycheck?

People have limited time. They don't choose movies based on a close analysis of the quality of a given movie; that would be an irrational use of effort on something that you'll only spend 2 hours watching. Instead, the rational thing to do is to use other proxies for "quality" or "enjoyment value."

One of those is to see which actors are in the movie. If you like a particular actor and know that there is a baseline level of quality, you are much more likely to choose that movie. This is a large part of the value that Daniel Day Lewis provides, justifying his paycheck.

> > Its berfectly rational to trade speed for accuracy depending on the situation.

Sure but at that point isn't it better to have a lottery to establish who gets to be POTUS instead of going through the motions of campaign expenses and constant media coverage just to shove down people's throats the idea that POTUS is much better and more qualified of a person than all the other citizens combined?

> > One of those is to see which actors are in the movie. If you like a particular actor and know that there is a baseline level of quality, you are much more likely to choose that movie. This is a large part of the value that Daniel Day Lewis provides, justifying his paycheck.

You just described survivorship bias: Movie with Daniel Day Lewis is better because Daniel Day Lewis is in it.

>Sure but at that point isn't it better to have a lottery to establish who gets to be POTUS instead of going through the motions of campaign expenses and constant media coverage just to shove down people's throats the idea that POTUS is much better and more qualified of a person than all the other citizens combined?

The point is to find a person that is qualified and represents the will of the people. Electing a president is a tradeoff between efficiency and accuracy. A lottery would be much more efficient, but much less accurate in finding the "best" candidate for president. Elections are less efficient, but better than a lottery at choosing a competent and representative candidate.

>You just described survivorship bias: Movie with Daniel Day Lewis is better because Daniel Day Lewis is in it.

That's not survivorship bias. I fully admit that other actors could be better, and I'd imagine that many others do also. The point I'm making is that I have much more data on Daniel Day Lewis than I do on any random actor. As such, a rational individual will take that into account when deciding on a movie.

It's random chance that Daniel is famous. However, now that he's famous, we know much more about what he brings to a movie than most other actors. It would be irrational to ignore that info, regardless of how we got it.

> > The point is to find a person that is qualified and represents the will of the people. Electing a president is a tradeoff between efficiency and accuracy. A lottery would be much more efficient, but much less accurate in finding the "best" candidate for president. Elections are less efficient, but better than a lottery at choosing a competent and representative candidate.

The random winner of the lottery would try just as hard to follow the will of the people in order to be popular and convince the population to postpone the next lottery as much as they possibly can and thus stay in power.

> > It's random chance that Daniel is famous. However, now that he's famous, we know much more about what he brings to a movie than most other actors. It would be irrational to ignore that info, regardless of how we got it.

Or maybe it's not about the acting, but the budget allocated for promotion and shoving the movie down people's throats, see the huge flop of By the Sea (2015) starring Angelina Jolie and Brad Pitt who were also directors and producers. Only 10 million as the budget, which pales compared to the big studios mega-budget movies they ofter star in. And so with zero promotion Brad Pitt and Angelina Jolie are just regular actors and nobody went to see them. Even their fans do not know of this movie.

https://en.wikipedia.org/wiki/By_the_Sea_(2015_film)

Similarly the election circus and the huge media coverage it generates are the promotional service for the would be POTUS, shoving him down people's throats and convincing the population that he's the most qualified.

You say information, for me it's promotion. Promotion is the opposite of information. If I were to give examples

It's always the dollar amount and human-hours spent on the promotion which matters.

Actually a lottery system would be way more representative. The chances of a wealthy politician being chosen by random lottery are pretty small.

A random person as president every term, that sounds like a better system to me, a person more likely in touch with the everyday problems and with far less political motivation. Plenty of reasons it wouldn't work like immediate corruption by companies wanting their own legislation by promising random person money and jobs after their term. Not necessarily worse than the corruption we have now. Interesting idea nonetheless.

Leadership is challenging, and a very small percentage of the population have good leadership skills. A random person almost certainly won’t, and would be unable to do the job, whereas virtually every candidate in an election has already had a long career as an effective leader.

There are certainly merits to a lottery system. There are also merits to an electoral system. The larger point I'm making is that choosing a leader is perfectly rational, unlike the original comment implied.

Markets are irrational in the short term for sure, but very good allocators of capital long term.

re: Twitter Price is just the last transaction to clear and the buyers can make that transaction for a million reasons, some of them betting that intrinsically the price doesn't reflect their value of the company. Seems fine to me. Wrong in the short term now looking back, but a million other things may have happened differently (TikTok could have been banned, Musk could have taken over differently, Macro trends could have reversed...etc)

> A few years ago Tesla was worth as much as the rest of the car industry put together. Even if you believed Tesla was going to become a perfect monopoly, its valuation still would not have been justified.

The bet is on Tesla doing more than regular cars. How much does the calculus change when people think it will eat the taxi/rideshare market, the solar market, the backup battery market, the charger market, and potentially robotics?

Tesla’s valuation is entirely based on investing in that vision. That’s why it’s notable that it’s precipitously collapsing. People are losing faith and it might just become a regular old car company.

> We knew the value of the stock to the penny starting in April of last year, but for months it traded at over a 25% discount

No you didn’t. You knew the closing price of an offer that the buyer was trying to back out of.

To an extent, it’s the worst system except for all the others; most people don’t think it’s a particularly good system, but, well, what’s your alternative?

RE the Twitter thing, you’re benefiting from hindsight a bit there. Musk almost immediately started trying to get out of the deal, and it was far from clear that he’d actually be forced to complete. It was quite reasonable that there’d be some price uncertainty.

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