So, who are the noise traders, after all

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So, who are the noise traders, after all?

• Economics 437

2
Picnic, anyone?

• Saturday, April 21st
• Noon until 2PM
• Tenative (depending upon response)

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News Background

• Higher Volatility in the Stock Market (s)
• Big Rally in the Treasury Market
• Chaos in the subprime market
• Scary inflation numbers
• PPI up 1.3 for the month of February
• Core PPI up 0.4
• Continued buyouts of public firms

4
Should shareholders rule?A question from HBS
forum
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So, who, after all, are the noise traders?

• Increase in bubbles in recent years
• Growing bailouts, systemic risk
• Whats new and different?

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Michael Lewis provides a clue

• Moneyball
• What is the clue?

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The rise of the institutional investor

• Distinguish
• Mutual funds chosen by individual investors
• Professionally invested institutions
• Endowments
• Foundations
• Professionally directed pension funds
• Public funds
• Corporate funds

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Principle/Agent Problem

• Economic Theory is a principle theory
• Reality is an agent world
• Do they maximize the same objective function
• Probably not if
• Monitoring is difficult
• Incentives to depart from interests of principle
  are high

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The major institutions

• Foundations
• Ford, Rockefeller
• More recently, the Bill Gates foundation
• Endowments
• Harvard, UVA, etc.
• Pension funds
• Corporate and Public

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Endowments and Foundations

• Who is the principle?
• Board of rich folks
• Many with conflicting interests
• These are the most innovative
• Follow the leader investing
• How do they do?
• Clues
• Very little public reporting
• Stepping stone pattern
• Very little indexing
• For endowments, understatement of investment costs

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The publics

• Usually, a political board
• Rife with potential conflicts
• Other agendas
• Clues
• Class action lawsuits against public companies
• Support for punitive measures against public
  companies
• Incentives?
• Misstatements of liability
• Constant turnover of key employees
• Assignment of relevant costs
• Growing liability
• For the pensioner
• For the taxpayer

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End