Einde inhoudsopgave
The Decoupling of Voting and Economic Ownership (IVOR nr. 88) 2012/3.3.3.1
3.3.3.1 Correlated Biases
mr. M.C. Schouten, datum 01-06-2012
- Datum
01-06-2012
- Auteur
mr. M.C. Schouten
- JCDI
JCDI:ADS597118:1
- Vakgebied(en)
Ondernemingsrecht / Rechtspersonenrecht
Voetnoten
Voetnoten
Jack L. Treynor, Market Efficiency and the Bean Jar Experiment, 43 Fin. Analysts J. 50, 50 (1987); see also Gilson & Kraakman, supra note 6, at 581 (noting that '[a]lthough each &ader 's own forecasts are skewed by the unique constraints on his or her judgment, other traders will have offsetting constraints. As trading proceeds, the random biases of individual forecasts will cancel one another out, leaving price to reflect a single, best-informed aggregate forecast.').
Treynor, supra note 77, at 50.
Shiller, supra note 35, at 156-57 (noting that '[i]f the millions of people who invest were all truly independent of each other, any faulty thinking would tend to average out, and such thinking would have no effect on prices. But if less-than-mechanic or irrational thinking is in fact similar over large numbers of people, then such thinking can indeed be the source of stock market booms and busts.').
Gilson & Kraakman, supra note 6, at 582 (noting, with respect to the problem that shared prejudice among traders would render individual forecasting errors mutually reinforcing, that '[c]omplete independence, of course, is unlikely in real markets, but so is widespread mutual dependence where it contradicts the independent judgments of many traders').
Andrei Shleifer & Lawrence H. Summers, The Noise Trader Approach to Finance, 4 J. Econ. Persp. 19, 23 (1990). Careful observers have pointed out that even if investors suffer from the same cognitive biases, this doesn't necessarily mean they make the same mistakes. Michael Mauboussin notes that even if investors are overconfident in their own trading skins and start trading when it would be rational to refrain from doing so, as long as degrees of overconfidence are spread randomly across the buyers and sellers of a security, the effects offset each other. Michael J. Mauboussin, Capital Ideas Revisited: the Prime Directive, Sharks, and the FVisdom of the Crowds, Mauboussin on Strategy 10 (Mar. 30, 2005), http:// www.lmcm.com/pdf/CIR.pdf. But notice that the biases identified earlier as potentially affecting individual voting behavior are unlikely to be spread randomly across shareholders who vote for the proposed acquisition and shareholders who vote against. Rather, each bias is likely to steer voting behavior in a particular direction
Bryan Caplan, The Myth of the Rational Voter: Why Democracies Choose Bad Policies 36 (2007).
Id. at 11.
In his classic paper, Market Efficiency and the B ean Jar Experiment, Jack Treynor reports on an experiment conducted in his class. Students were asked to guess the number of beans filling a jar. The purpose of the experiment was to determine how accurate the mean of the guesses was, and how much more accurate it was than the average guess. The jar held 810 beans; the mean estimate turned out to be 841, remarkably close to the true value. Moreover, only two of forty-six guesses were closer to the true value. Treynor uses this as an example to suggest that the accuracy of market prices "comes from the faulty opinions of a large number of investors who err independently" and whose errors therefore cancel out.1
While this is an interesting insight in and of itself, Treynor's experiment is cited here because it forms the introduction to a second experiment that yields important insights for the analysis of independent voting. In that experiment, Treynor cautioned students to take into account, among other things, the fact that the jar was made of thin plastic rather than of thick glass, increasing storage capacity. This time, the mean guess was 952.6, far less accurate than the mean guess of 841 in the first experiment. This suggests that the warnings had caused a systematic error. The conclusion that emerges is that whereas independent errors don't matter because they cancel out, systematic errors can affect the accuracy of group estimates.2
In behavioral finance parlance, by issuing warnings, Treynor "framed" the question, thereby creating a psychological anchor. His experiment illustrates that psychological anchors "can have significance for the market as a whole only if the same thoughts enter the minds of many."3 For this reason, Gilson and Kraakman, who wrote their original piece on market efficiency in the 1980s, didn't seem overly concemed.4 But subsequent research has revealed that in real life we do see the same thoughts enter the minds of many, because "judgment biases afflicting investors in processing information tend to be the same."5 As a result, when shareholders vote they may well make systematic errors, just like the students in Treynor's experiment. Bryan Caplan, in his book The Myth of the Rational Voter: Why Democracies Choose Bad Politics, reaches the same conclusion with respect to citizens voting on political matters. He identifies several biases that voters suffer from including an "anti-foreign" bias, which causes voters to irrationally prefer protectionism over free trade.6 Caplan's main point is that these biases cause voters to make systematic errors. Figure 1 illustrates how this results in an outcome that deviates from the outcome that would be socially optimal.
Figure 1: The Median Voter Model: Systematic Error
Source: Caplan7
To summarize, when biases are positively correlated, diversity breaks down and shareholders will tend to make the same predictions. This may cause them to collectively vote for the incorrect option.