Swarna Srinivasan's Library tagged market →  View Popular

riddle: Why has the Toyota
Prius enjoyed such success, with sales of more than 400,000 in the United
States, when most other hybrid models struggle to find buyers?

One answer may be that buyers of the Prius want everyone to know they are
driving a hybrid.

The best known of these feedback loops is the use of borrowed money to buy
assets. Rising prices make banks more willing to lend, creating more demand for
the assets in question, pushing up prices even further and thereby appearing to
ratify the original lending decisions of the banks. When markets fall this
leverage works the other way, as could be seen when investors offloaded assets
at fire-sale prices last year.

There are many other positive-feedback processes. Take share buy-backs, for
instance. Companies used their cash (or borrowed money) to reduce their share
capital. Markets might have treated this as evidence of a lack of imagination,
or a paucity of profitable projects. Instead, they saw it as evidence that the
managers were focusing on “shareholder value” and boosting earnings per share,
however ephemeral that might have been.

Companies were buying far more of their own shares than anyone else did. But
the buying spree was unsustainable. Smithers calculates that American-owned
companies were paying out some 70% of their profits at the peak, if you include
dividends and buy-backs. They have since slashed dividends and will have to
start issuing shares as well. Instead of borrowing money to pay back
shareholders, companies now need to raise equity to pay back creditors.

The shift in the supply-demand balance is not confined to America. European
companies have already raised a total of €56 billion ($76 billion) in rights
issues this year, according to dealReporter, an information service. Robert
Buckland, a strategist at Citigroup, says that British equity supply was
shrinking at 4% per annum in early 2008, and is now growing by a similar amount.
That is all down to financial companies, which have had to raise capital to
repair their balance-sheets; net issuance from the rest of the market is
basically flat

STOCK markets could forecast the availability of water more accurately than
the best computer models used by environmental scientists. That's the idea
behind the launch of an online market which invites "traders" to gamble on
future water levels in dams in Australia.

The Australian Knowledge Exchange works by giving traders A$100,000
(US$65,000) play money and 1000 stocks in each of five reservoirs in New South
Wales. The stocks pay out each month according to the level of the dam. If the
dam is full, they are worth $100. Traders can profit by buying stocks for less
than their final value, or by selling them for more.

The online market is the brainchild of a team from the government agency
CSIRO Sustainable Ecosystems in Canberra, Australia, and the University of
Karlsruhe, Germany.

If the market proves to be a better predictor of water levels than existing
computer models, says CSIRO's Stuart Whitten, it could help manage other
environmental issues such as animal extinctions and bushfires. Their ultimate
goal is ambitious: for online markets to influence the government's
environmental policy.

"This approach has huge potential in the environmental sector where there is
a lot of uncertainty," says Josh Donlan of Cornell University in Ithaca, New
York, and Advanced Conservation Strategies, a Utah-based NGO.

The incentives are clearly not monetary - the trader who does best wins a
paltry A$50 - but Whitten hopes people will be drawn to take part in what is a
"public good" enterprise, much like Wikipedia. Although anyone can become a
trader, the team's ideal players would be farmers, weather forecasters, people
who live close to reservoirs, and computer modellers. The market currently has
about 50 traders, and the team hope at least 50 more will join.

Donlan says the market's real value will come from the wide-ranging knowledge
of investors. For example, when it comes to biodiversity, rather than rely
solely on the IUCN Red List of Threatened Species, which may not account for all
regional variations, markets that capture local knowledge could give a more
accurate prediction of the size of bird populations, say.

But economist Robin Hanson of George Mason University in Virginia cautions
that while predictive markets can be more precise than other methods:
"Ultimately, it's not about accuracy, it's about public acceptance."

The need to slam the gates on investors highlights a big flaw in the hedge
fund model. If funds make illiquid, long-term bets, it is risky to offer
investors the chance to get out every month, as many funds do. Some funds are
now locking investors in for longer, in exchange for fee reductions. An
alternative is for a fund to limit its investments to truly liquid securities.
That, for example, is Tudor’s new approach.