Information Economics

I sometimes forget that not everyone is familiar with my favorite idioms. For example, in speaking to one of our legal research consultants today, I told her that I would be "out of pocket" for a few days around the holidays. When she queried as to what I meant, I explained to her my use of the term and then, being curious, took two minutes to search the web as to where the expression originated. According to a blog entitled "the hubbub: Language, behavior, technology," this term had once only referred to tax deductible expenses but has morphed into meaning that an individual is unavailable. Indeed, in its October 7, 2006 blog post entitled "Office Talk: 'Out of Pocket'," the authors suggest that something more sinister may be afoot. Not only unavailable, "out of pocket" is a possible diss, a warning not to bother ... "you can use email, phone, IM, SMS, carrier pidgeon -  there's nothing you can do to reach me at that time."

This got me to thinking about the implications overall for investment professionals for whom information is arguably the lifeblood of money flows.

  • Can we be over exposed to individuals or is there always room for more?
  • Is there such a thing as too much information?
  • How should we be sorting "good" information from "bad?"

In 1997, I published a doctoral dissertation about the information economics associated with high frequency trading. Entitled "Are Institutional Investors and Analysts Informed Traders? An Empirical Examination," I investigated trading volume and costs for "visible" exchange-traded stocks on one end of the spectrum in terms of institutional ownership and analyst following and "neglected" equity securities at the other extreme. As expected, I was able to document informational inefficiencies, leading to the conclusion that there might be "gold in them thar hills" if one is to pay close attention to micro data trends.

Expect more from me on the topic of information arbitrage. It is both mysterious and puzzling but certainly worth further investigation.

Information and Pension Investing

Having read more than a few blog posts about a company called Monitor110, I decided to spend some time at their website. While I know nothing about the company other than what I read, their graphic of the "New Information Dissemination Cycle" fascinates. If true that blog content, local news and other types of non-traditional venues offer a competitive edge to investors, capital markets could be turned upside down.

Just in the last ten or so years, rocket speed transmission of data - aided in part by advanced technology developments and cross-border deregulation - has improved efficiencies, thereby reducing costs and shrinking diversification potential. Some posit this is a good thing. Others complain that it makes it difficult to "beat" the market by accessing and analyzing information not widely known by others. This is a topic that is near and dear to my heart, having spent several years writing a doctoral dissertation about market microstructure. (I looked at information economics in the form of bid-ask spreads for NYSE-traded stocks across levels of institutional investor ownership and analyst following. Send an email if you would like a copy.)

According to their website, Monitor110 envisions revolutionizing "financial services by enabling Institutional Investors to turn Internet information into alpha generation." At a time when countless pensions, endowments and foundations are scrambling for returns, potential wins have great appeal. (This is not an endorsement of any particular company or strategy. Readers are responsible for their own analysis.)

The role of information in making investment decisions is a topic of great interest to us all. Debating the economic value of information deserves far more space than can be provided here. However, the notion that blogs - and other "non main stream" sources of information - contain pearls of wisdom not yet assimilated by the market certainly merits discussion. One question that arises. Do blogs lead or lag major news announcements? Journalist Chris Nolan has an interesting take on the power of blogs in an article for, writing that, beyond politics, "their value as forums for collective knowledge is becoming known in other areas as well."

What did people do before the Internet came along?