Firstly a word of advice: this would come off better if it was less needlessly antagonistic. “Here’s a cool idea I had” is a lot less pleasant than “isn’t this guy stupid for not thinking of the cool idea I had”.
Also I don’t think this is obviously a good idea. The S&P 500 swings hugely in a small space of time. Prices meanwhile are meant to be stable, indeed this is the chief purpose of prices, as a stable means of comparing costs of different goods. If each unit of currency denotes a fixed percentage of all publicly traded firms, then each day prices will need to be reset according to investor confidence. This makes it much harder to know whether a shop is providing you a good price or not.
Even worse you can’t automatically adjust this because there’s no way to measure investor confidence—the value of all ETFs is approximately constant.
You are of course right that most Dath Ilanis would keep most of their savings in ETFs. But they will exchange it for fiat currency when they need to buy things, and with good reason.
I love and respect EY, and the “every part of dath ilan was invented in 15 seconds” quote was written by him, so presumably it can’t be meant to offend him, and I thought “it took me a little more than 15 seconds to think” was obviously self-deprecating, because “a little more” means “orders of magnitude more”, but apologies if that wasn’t clear. I wouldn’t come up with hours of unskilled labor in 15 seconds, and maybe that’s the optimal solution if you need to give your final answer in that time frame.
I think the world market cap (not the S&P 500) is pretty stable, plus you can have fixed prices for simplicity even if your world economy fluctuates? It’s okay to have prices rounded to 0.99 1*12^(whatever) and not update them when the market fluctuates just because it’s convenient, but it’s usually going to hurt buyers because with a constant amount of money and a rising market, prices are usually going to go down, not up. Any further stability comes at the expense of profits.
If most dath ilani consider ETFs stable enough to store their money in, why wouldn’t they also use them as currency? Assuming we’re talking about the same ETF representing a share of the world economy.
Sorry if I misunderstood, thats how it came across to me. I didn’t know that was a self deprecating quote because there’s no link to its origin.
The relevant index is the FTSE global all cap. It doesn’t include privately traded companies, but then again neither would Dath Ilan be able to.
It has far lower growth than the S&P so is worse on that metric. Around 2021 it fell by over a quarter in the space of a year, and over the last week it’s gone down by 3%. Depending on how competitive the market is, these aren’t numbers that can just be rounded away.
The reason why stability is more important for prices than savings is they have different purposes. If my net worth goes down by 3% that has very little impact on my day to day choices. On the other hand if one shop is 3% more expensive than another shop, that will impact which shop I go to, and if one good gets 3% more expensive I will consider substitutes. This is much harder to do if goods fluctuate in price in correspondence to the stock market. You have an intuition for how much a coffee should cost. Eliezer’s proposal is to make that price even more stable to help your intuition out, your proposal makes it much less intuitive.
I also imagine that investment advice in Dath Ilan is to split your savings between Fiat, Bonds, ETFs and other investments depending on appetite for risk, just like on earth. They probably have fewer hedge funds.
I didn’t know that was a self deprecating quote because there’s no link to its origin.
Corrected to “(C) Chief of Exception Handling” which I hope isn’t a spoiler because it adds virtually no information, but it makes it clear that this is a joke from within the dath ilan? And this is easier than hiding the whole thing as a spoiler? My illusion of transparency will kill me.
Around 2021 it fell by over a quarter in the space of a year, and over the last week it’s gone down by 3%.
Wow, okay. I would expect that in an efficient market, a quarter reduction in global capitalization would correspond to something like a mass extinction? Maybe this problem can be solved with a higher level of sanity, but it points to why this is a very utopian model that is far from implementation, at least for Earthlings. I did a little less Googling than was necessary and instead looked at GDP, which seemed like a reasonable guide to global market growth. Of course, you don’t store stocks in GDP, but I would expect stocks to gravitate toward it.
Am I somehow fundamentally wrong here that a quarter drop in global capitalization should NOT look like literally “wiping out a quarter of the world’s assets” including, for example, the corresponding number of people? It’s hard for me to imagine why exactly these fluctuations are so large.
Well GDP is about production, which should be relatively stable.
Stock prices are related to expectations about the future, which are far more variable. They essentially measure the interest adjusted value of future profit, and small changes in revenue/costs can lead to huge changes in profit since profit is a small percentage of revenue.
Understandable, but would you expect that in an efficient dath-ilani-like rational market, expectations would tend more to… match production with minor deviations? This is probably the crux here—if no reasonable amount of average person thinkoomph changes the radical fluctuations in expectations, then this currency is inefficient for regular shopping purposes and I say oops. I still can’t imagine what currency would be better than this, though, because I can’t think of a better way to say “I’m just as smart as the market” than to put my entire stake in the market.
To the extent they don’t have epidemics or handle them better, and don’t elect Trump, it’s probably more stable.
I still can’t imagine what currency would be better than this, though, because I can’t think of a better way to say “I’m just as smart as the market” than to put my entire stake in the market.
Why are you assuming that the unit in which you denominate prices, and the way in which you store your savings are the same thing? Even on earth, most wealthy people only keep a small percentage of their net worth in cash.
These have two different purposes, so are done in two different ways.
Because only the most wealthy people on earth keep their money in stocks, but they need to somehow communicate with all the other people who don’t, so they only exchange “money for the worse money everyone else uses” when they trade. If everyone kept their money in stocks, I would expect people to exchange them directly without exchanging money for money, because you actually have to analyze MORE if you have two different currencies that you use for different purposes.
To the extent they don’t have epidemics or handle them better, and don’t elect Trump, it’s probably more stable.
Not enough. In my understanding, GDP is REALITY and shares as a representation of your expectations somehow do not correspond to reality by tens of percent, which is worse than even our earthly prediction markets. If you, say, build a power plant with a payback in 10 years, in an efficient market the expected repair costs, service life, the chance of displacement by other technologies, and so on are already included in the price of this asset, so the increase in GDP (the cost of the plant as an asset) and the capitalization of shares (expectations) should correspond?
It is perfectly possible that they directly exchange stocks but denominate prices (and wages, contracts etc.) in a much more stable unit. The bank takes care of working out how much stock to transfer to make a given fiat denominated payment.
Market cap is a marginal measure of desirability of shares in the entity represented. It mostly measures the expectations of the most flighty investors over short timescales. If a company issues a billion shares but only one of those is traded in any given day, the price of that single share agreed between the single seller and the single buyer entirely determines the market capitalization of that company.
In practice there is usually a lot more volume, but the principle remains. Almost all shares of any given entity are not traded over the timescales that determine share (or index) prices and hence market capitalization. In addition, market price has very little to do with the value of an entity’s assets. Such assets may be instrumental in generating profits, but the relation is weak and very far from linear.
GDP, too, does not measure what you appear to think it measures.
I admit my mistake in intuitively assuming that GDP and stock market valuations should be closely linked. But it still seems strange to me why they aren’t, and I want to understand that better. Shouldn’t they at least be highly correlated in an idealized model?
Think of stocks as a kind of prediction market for a company’s value. The stock price should reflect expectations about its future earnings, but those expectations are built on something—maybe a new technology they’ve developed, or an undervalued specialist. If that’s the case, then why isn’t the market naturally structured in a way that adjusts salaries dynamically based on predicted contributions? Why don’t we have, say, ‘patent usage shares’ that investors can buy to increase expected royalties on a promising technology?
In an efficient system, I’d expect the market to fragment into these kinds of sub-sectors—where you can bet not just on the company as a whole, but on specific assets or individuals within it. And you love all these equal-surplus deals, so you’re interested in getting that kind of accurate valuation. If you believe a specialist is undervalued, you don’t just buy the company’s stock, you invest in their salary in exchange for a share of the revenue they generate. If you believe a company’s R&D is its most valuable asset, you invest in the future licensing income of its patents rather than the entire stock.
If this kind of structure existed, wouldn’t stock prices and the actual underlying value of companies align more closely? And if they don’t, does that mean GDP is failing to capture certain kinds of value—like knowledge, which isn’t easily tradeable? Or should stock prices themselves be less volatile than they currently are?
I also don’t see how the fact that share prices are set by the latest trade changes this dynamic. If I’m missing something fundamental here, I’d love to hear your perspective. I understand that simply saying ‘the market is irrational’ is not a good correction—it’s probably smarter than I am—but maybe it isn’t structured in the most optimal way, for example, it doesn’t pay people for their expected value, or there’s something key I’m overlooking?
Going into all the ways in which civilization—and its markets—fails to be rational seems way beyond the scope of a few comments. I will just say that GDP does absolutely fail to capture a huge range of value.
However, to address “share prices are set by the latest trade” you need to consider why a trade is made. In principle, prices are based on the value to the participants, somewhere between the value to the buyer and value to the seller. A seller who needs cash soon (to meet some other obligation or opportunity) may accept a lower price to attract a buyer more quickly. In our hypothetical and simplified one-trade-per-day scenario, that seller may accept up to 20% less than the previous day’s trade price, though they find a buyer at only 5% less. So the company’s market cap drops 5% even though 99.9999% of the investors and potential investors still value it exactly the same as yesterday.
This scales up since there are many highly correlated and often very short-term factors that influence desirability of shares vs cash vs bonds vs commodities vs …etc. It’s not just “what do I think this is worth to me”, but also “what do I think that other people think that the market price will be tomorrow” and so on, and this can result in self-fulfilling predictions over surprisingly long time spans.
It is perfectly possible that in Dath Ilan all bank accounts are by default denominated in a global ETF, and you only exchange that for fiat currency at the point of use. It still makes sense to denominated prices of fiat currency.
Firstly a word of advice: this would come off better if it was less needlessly antagonistic. “Here’s a cool idea I had” is a lot less pleasant than “isn’t this guy stupid for not thinking of the cool idea I had”.
Also I don’t think this is obviously a good idea. The S&P 500 swings hugely in a small space of time. Prices meanwhile are meant to be stable, indeed this is the chief purpose of prices, as a stable means of comparing costs of different goods. If each unit of currency denotes a fixed percentage of all publicly traded firms, then each day prices will need to be reset according to investor confidence. This makes it much harder to know whether a shop is providing you a good price or not.
Even worse you can’t automatically adjust this because there’s no way to measure investor confidence—the value of all ETFs is approximately constant.
You are of course right that most Dath Ilanis would keep most of their savings in ETFs. But they will exchange it for fiat currency when they need to buy things, and with good reason.
I love and respect EY, and the “every part of dath ilan was invented in 15 seconds” quote was written by him, so presumably it can’t be meant to offend him, and I thought “it took me a little more than 15 seconds to think” was obviously self-deprecating, because “a little more” means “orders of magnitude more”, but apologies if that wasn’t clear. I wouldn’t come up with hours of unskilled labor in 15 seconds, and maybe that’s the optimal solution if you need to give your final answer in that time frame.
I think the world market cap (not the S&P 500) is pretty stable, plus you can have fixed prices for simplicity even if your world economy fluctuates? It’s okay to have prices rounded to
0.991*12^(whatever) and not update them when the market fluctuates just because it’s convenient, but it’s usually going to hurt buyers because with a constant amount of money and a rising market, prices are usually going to go down, not up. Any further stability comes at the expense of profits.If most dath ilani consider ETFs stable enough to store their money in, why wouldn’t they also use them as currency? Assuming we’re talking about the same ETF representing a share of the world economy.
Sorry if I misunderstood, thats how it came across to me. I didn’t know that was a self deprecating quote because there’s no link to its origin.
The relevant index is the FTSE global all cap. It doesn’t include privately traded companies, but then again neither would Dath Ilan be able to.
It has far lower growth than the S&P so is worse on that metric. Around 2021 it fell by over a quarter in the space of a year, and over the last week it’s gone down by 3%. Depending on how competitive the market is, these aren’t numbers that can just be rounded away.
The reason why stability is more important for prices than savings is they have different purposes. If my net worth goes down by 3% that has very little impact on my day to day choices. On the other hand if one shop is 3% more expensive than another shop, that will impact which shop I go to, and if one good gets 3% more expensive I will consider substitutes. This is much harder to do if goods fluctuate in price in correspondence to the stock market. You have an intuition for how much a coffee should cost. Eliezer’s proposal is to make that price even more stable to help your intuition out, your proposal makes it much less intuitive.
I also imagine that investment advice in Dath Ilan is to split your savings between Fiat, Bonds, ETFs and other investments depending on appetite for risk, just like on earth. They probably have fewer hedge funds.
Corrected to “(C) Chief of Exception Handling” which I hope isn’t a spoiler because it adds virtually no information, but it makes it clear that this is a joke from within the dath ilan? And this is easier than hiding the whole thing as a spoiler? My illusion of transparency will kill me.
Wow, okay. I would expect that in an efficient market, a quarter reduction in global capitalization would correspond to something like a mass extinction? Maybe this problem can be solved with a higher level of sanity, but it points to why this is a very utopian model that is far from implementation, at least for Earthlings. I did a little less Googling than was necessary and instead looked at GDP, which seemed like a reasonable guide to global market growth. Of course, you don’t store stocks in GDP, but I would expect stocks to gravitate toward it.
Am I somehow fundamentally wrong here that a quarter drop in global capitalization should NOT look like literally “wiping out a quarter of the world’s assets” including, for example, the corresponding number of people? It’s hard for me to imagine why exactly these fluctuations are so large.
Well GDP is about production, which should be relatively stable.
Stock prices are related to expectations about the future, which are far more variable. They essentially measure the interest adjusted value of future profit, and small changes in revenue/costs can lead to huge changes in profit since profit is a small percentage of revenue.
Understandable, but would you expect that in an efficient dath-ilani-like rational market, expectations would tend more to… match production with minor deviations? This is probably the crux here—if no reasonable amount of average person thinkoomph changes the radical fluctuations in expectations, then this currency is inefficient for regular shopping purposes and I say oops. I still can’t imagine what currency would be better than this, though, because I can’t think of a better way to say “I’m just as smart as the market” than to put my entire stake in the market.
To the extent they don’t have epidemics or handle them better, and don’t elect Trump, it’s probably more stable.
Why are you assuming that the unit in which you denominate prices, and the way in which you store your savings are the same thing? Even on earth, most wealthy people only keep a small percentage of their net worth in cash.
These have two different purposes, so are done in two different ways.
Because only the most wealthy people on earth keep their money in stocks, but they need to somehow communicate with all the other people who don’t, so they only exchange “money for the worse money everyone else uses” when they trade. If everyone kept their money in stocks, I would expect people to exchange them directly without exchanging money for money, because you actually have to analyze MORE if you have two different currencies that you use for different purposes.
Not enough. In my understanding, GDP is REALITY and shares as a representation of your expectations somehow do not correspond to reality by tens of percent, which is worse than even our earthly prediction markets. If you, say, build a power plant with a payback in 10 years, in an efficient market the expected repair costs, service life, the chance of displacement by other technologies, and so on are already included in the price of this asset, so the increase in GDP (the cost of the plant as an asset) and the capitalization of shares (expectations) should correspond?
It is perfectly possible that they directly exchange stocks but denominate prices (and wages, contracts etc.) in a much more stable unit. The bank takes care of working out how much stock to transfer to make a given fiat denominated payment.
Market cap is a marginal measure of desirability of shares in the entity represented. It mostly measures the expectations of the most flighty investors over short timescales. If a company issues a billion shares but only one of those is traded in any given day, the price of that single share agreed between the single seller and the single buyer entirely determines the market capitalization of that company.
In practice there is usually a lot more volume, but the principle remains. Almost all shares of any given entity are not traded over the timescales that determine share (or index) prices and hence market capitalization. In addition, market price has very little to do with the value of an entity’s assets. Such assets may be instrumental in generating profits, but the relation is weak and very far from linear.
GDP, too, does not measure what you appear to think it measures.
I admit my mistake in intuitively assuming that GDP and stock market valuations should be closely linked. But it still seems strange to me why they aren’t, and I want to understand that better. Shouldn’t they at least be highly correlated in an idealized model?
Think of stocks as a kind of prediction market for a company’s value. The stock price should reflect expectations about its future earnings, but those expectations are built on something—maybe a new technology they’ve developed, or an undervalued specialist. If that’s the case, then why isn’t the market naturally structured in a way that adjusts salaries dynamically based on predicted contributions? Why don’t we have, say, ‘patent usage shares’ that investors can buy to increase expected royalties on a promising technology?
In an efficient system, I’d expect the market to fragment into these kinds of sub-sectors—where you can bet not just on the company as a whole, but on specific assets or individuals within it. And you love all these equal-surplus deals, so you’re interested in getting that kind of accurate valuation. If you believe a specialist is undervalued, you don’t just buy the company’s stock, you invest in their salary in exchange for a share of the revenue they generate. If you believe a company’s R&D is its most valuable asset, you invest in the future licensing income of its patents rather than the entire stock.
If this kind of structure existed, wouldn’t stock prices and the actual underlying value of companies align more closely? And if they don’t, does that mean GDP is failing to capture certain kinds of value—like knowledge, which isn’t easily tradeable? Or should stock prices themselves be less volatile than they currently are?
I also don’t see how the fact that share prices are set by the latest trade changes this dynamic. If I’m missing something fundamental here, I’d love to hear your perspective. I understand that simply saying ‘the market is irrational’ is not a good correction—it’s probably smarter than I am—but maybe it isn’t structured in the most optimal way, for example, it doesn’t pay people for their expected value, or there’s something key I’m overlooking?
Going into all the ways in which civilization—and its markets—fails to be rational seems way beyond the scope of a few comments. I will just say that GDP does absolutely fail to capture a huge range of value.
However, to address “share prices are set by the latest trade” you need to consider why a trade is made. In principle, prices are based on the value to the participants, somewhere between the value to the buyer and value to the seller. A seller who needs cash soon (to meet some other obligation or opportunity) may accept a lower price to attract a buyer more quickly. In our hypothetical and simplified one-trade-per-day scenario, that seller may accept up to 20% less than the previous day’s trade price, though they find a buyer at only 5% less. So the company’s market cap drops 5% even though 99.9999% of the investors and potential investors still value it exactly the same as yesterday.
This scales up since there are many highly correlated and often very short-term factors that influence desirability of shares vs cash vs bonds vs commodities vs …etc. It’s not just “what do I think this is worth to me”, but also “what do I think that other people think that the market price will be tomorrow” and so on, and this can result in self-fulfilling predictions over surprisingly long time spans.
It is perfectly possible that in Dath Ilan all bank accounts are by default denominated in a global ETF, and you only exchange that for fiat currency at the point of use. It still makes sense to denominated prices of fiat currency.