Information, Knowledge and Speculators Presentation copyright © 1999 by Barry Brownstein

The Importance Of Knowledge “ Our ignorance is sobering and boundless. Indeed, it is precisely the staggering progress of the natural sciences which constantly opens our eyes anew to our ignorance…With each step forward, with each new problem which we solve, we not only discover new and unsolved problems, but we also discover that where we believed that we were standing on firm and safe ground, all things are insecure and in a state of flux.”- Karl Popper

Knowledge, Information and Middlemen l Information is simply facts, knowledge involves conceptual understanding l Middlemen are information and knowledge specialists l Technology continually reduces the cost of information, thus reducing the effectiveness of middlemen l The new middlemen are automated smart agents on the Internet

Knowledge Is Dispersed l “...the knowledge of the circumstances of which we must make use never exists in concentrated or integrated forms but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”

Not All Knowledge is “Scientific” l ‘the unorganized knowledge… of the particular circumstances of time and place.” l “tacit” knowledge is inarticulable- “we know a great deal that we cannot tell.” –examples-riding a bicycle, grammatical rules l again the challenge is how to utilize this decentralized knowledge

Central Planning Vs. Markets l “Which system “ is likely to be more efficient depends mainly on the question under which of them we can expect the fuller use be made of the existing knowledge.” l “If... the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances…”

Knowledge in the Firm l Decisions made at the top l Communication goes through ‘proper channels’ l resistance to new ideas l Decisions made by those with ‘best’ local knowledge l new ideas welcomed and filtered l responsibilities and incentives to generate new knowledge l new knowledge may invalidate current beliefs and practices

The Case of Bruegger’s Bagels l Vermont based Bruegger’s had the nations’ largest market share of bagels –special recipe and baking process l Purchased by Quality Dining, an operator of Burger Kings, in 1996 for $142 million l In less than year lost $203 million or 35cents a bagel and sold the company back for $50 million –Quality had transferred Bruegger’s execs to Indiana providing no phones and little office space

What do Speculators Do? l Simply, they buy low and sell high l To do so they seek out new information l By buying low and selling high they provide the important service of smoothing out price fluctuations

Forecasting In Futures Markets l “..the knowledge of the circumstances of which we must make use never exists in the concentrated or integrated form…” l Q. In a ‘average’ year of interest volatility, if you invested a $1000 in treasury bill futures and were correct about the direction of interest rates for 52 straight weeks how much money would you have?

New Era or Mania? l Mania- excessive or unreasonable enthusiasm- stocks?, beanie babies and tulipsbeanie babies tulips l ‘in normal market behavior the long-term direction is up but it is interrupted by setbacks’ l ‘a mania produces powerful persistent rises with fewer setbacks, broad public participation and historic overvaluations by all traditional measures ‘

Forecasting in the Stock Market l Markets are a spontaneous order and are perhaps inherently unpredictable, but not random l Do events drive markets? –If you had tomorrow’s newspaper could you predict the market? l Most predictions are based upon past experience and thus miss turning points

Knowledge On The Internet- Let Every Voice Be Heard l Mass culture and gatekeepers cater to the center of the normal curve l The internet regains the tails of the normal distribution. The uncommon becomes as accessible as the common. l Allows us to pool rare talents and voices, create new communities and thus grow new knowledge