In the Ponzi
scheme known as the stock exchange, this expectation is proportional to
liquidity - new suckers - and volatility. Thus, the price of any given
stock reflects merely the consensus as to how easy it would be to
offload one's holdings and at what price.
Another myth has to do with the role of managers. They are supposed to
generate higher returns to shareholders by increasing the value of the
firm's assets and, therefore, of the firm. If they fail to do so, goes
the moral tale, they are booted out mercilessly. This is one
manifestation of the "Principal-Agent Problem". It is defined thus by
the Oxford Dictionary of Economics:
"The problem of how a person A can motivate person B to act for A's
benefit rather than following (his) self-interest."
The obvious answer is that A can never motivate B not to follow B's
self-interest - never mind what the incentives are. That economists
pretend otherwise - in "optimal contracting theory" - just serves to
demonstrate how divorced economics is from human psychology and, thus,
from reality.
Managers will always rob blind the companies they run. They will always
manipulate boards to collude in their shenanigans.
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