Why Trading Stocks Is for Suckers

Derek Thompson of The Atlantic’s video series, Economics in Plain English features Thompson answering questions from readers in an accessible way. In this video Thompson answers the question “Is trading stocks a good investment?”

Thompson starts the video out by asking a question of the viewer. He asks “Do you like games of chance?” Games like betting $10 on whether a penny is a persons right or left hand or $50 on a game of rock paper scissors. He notes that for the most part we tend not to like these types of games because they’re random. We like games of skill, which is why we like sports and poker. He says it’s also why we trade stocks.

stocks are like a game

But according to Thompson, in the short term stock prices are random. He says that trying to guess the way a stock will act day to day is very much like a game of chance. He goes on to cite the work of Nobel Prize winning economists Eugene Fama and Robert Shiller. Fama argued that markets are perfectly efficient. Thompson explains that to mean “Each price reflects the universe of knowledge of each stock. In the short term this means you can’t beat the market, because no single investor knows more than the universe.” Shiller argued the opposite. He said that markets are inefficient and are by investor’s emotions. Thompson explains “Mass hysteria, mass gloom and so called animal spirits move the market in the short term away from fundamental like earnings.” Fama and Shiller fundamentally disagreed about how the market work but they did agree that in the short term, “no investor should expect to win.”

Bonus info: I’m fascinated by the idea of Eugene Fama and Robert Shiller having completely different takes on the market but then sharing the 2013 Nobel Prize. You can read more about them in this The New York Times profile.