iRationality
posted by Michael Abramowicz
David Pennock is Time’s Person of the Year. This is quickly getting to be an old joke, but Pennock is one of the people who should be entitled to the award based on this year’s theme of crowd wisdom and production. He has done great research on subjects such as collaborative filtering and prediction markets. (I also do research on prediction markets, and that is how I initially encountered his work.)
On his new Oddhead blog, Pennock has a clever post with which I nevertheless disagree. The post, entitled “Irrefutable evidence of inefficient markets,” tracks the stock market’s reaction to Apple Computer’s announcement of the iPhone. It notes that the stock price increased more than $2 just as the iPhone was announced, but then gradually increased about another $3 over the remaining twenty minutes of the keynote address, even though there were no new product announcements.
After the jump, I’ll explain the two reasons Pennock indicates this might be irrational, and why I disagree.
First, the stock price graph comments seem to suggest (though Pennock doesn’t explicitly make this argument) that it doesn’t make sense for the price to keep rising after the initial announcement. This raises the question of why markets sometimes take a while to absorb information. I think the reason is that each observer, in hearing a piece of good news, might realize the chance that he or she is missing something. The iPhone might look great to me when Steve Jobs is showing it, but perhaps others can point out some flaws. So, I initially discount my own opinion. When the expected negative analysis doesn’t come in the expected volume, I gain more confidence in my initial reaction. Markets take time (though surprisingly little!) to process news because the information to be processed includes not just the initial announcement, but also the analysis or lack thereof that follows.
Second, and more emphatically, Pennock believes that Steve “Jobs’s speech could not possibly have revealed over $8 billion in previously undisclosed information.” Yes, there were many rumors of the Apple iPhone, but many observers thought that Apple would not develop one. (The Top Ten Apple Rumours of All Time site continues to list the iPhone at #6, with the conclusion that that rumor is “totally misguided.”) And it does not seem implausible to me that a product like this could have well more than a 10% impact on a reasonable valuation of the company, not only because of projected revenues from the phone itself, but also because the product may help other products (notably, iTunes), and because the product may position Apple for future unknown projects in the telecommunications area. Granted, this is very loose reasoning — one would hope that a market would reflect much more careful projections, though maybe it doesn’t. But at least it suggests that the market’s reaction was not entirely absurd.
Disclosure: I am a former employee of Apple Computer. But today, I use Windows. And I don’t have an iPod, although I’d be delighted to serve as an iPhone beta tester.
January 18, 2007 at 8:59 am
Posted in: Uncategorized
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Responses (1)
Michael Risch - January 18, 2007 at 11:41 am
Consider as well that as time goes on, there is more disclosure of features, carriers, etc. and the more such features, the more likely people will buy it.
Also, tied to the rumors, the more that was shown and demonstrated, the more likely that this is not vaporware.
Finally consider that not every investor watched live – perhaps it took 20 minutes for the news to disseminate. I think this is subtly different than abosorption, but obviously related.
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