Harvard Business Review: Crowdfunding and Day Traders

[OddTrader]

If Crowdfunding is the New Day Trading, Look Out

Walter Frick

September 27, 2013

https://hbr.org/2013/09/if-crowdfunding-is-the-new-day-trading-look-out

Paul Volcker famously said the only financial innovation to improve society in recent memory was the ATM. Not everyone agrees. In an essay earlier this week on the evolution of money and finance, GigaOM founder and venture capitalist Om Malik argued that crowdfunding will be the new day trading, the latest financial innovation to “cut costs and [drive] wider participation in a previously closed and clubby market.” Advocates of crowdfunding had better hope not.

To be clear, Malik isn’t talking about Kickstarter where funders make a donation that acts like a pre-order. He’s talking about the public buying stock in private companies, something that may soon be legal thanks to the JOBS Act, and which took a step forward this week with new rules from the SEC allowing private companies to advertise investment opportunities for accredited (read: rich) investors. Now startups and hedge funds alike can advertise the fact that they’re raising money, and some day soon you or I might join wealthier citizens in investing in them.

There’s no doubt that this will drive broader participation in startup investing, but the comparison to day trading confirms crowdfunding skeptics’ greatest fear: that when the party’s over, the public will be left with substantially lighter wallets.

That’s what happened in the case of day trading.

A 2004 study of day traders in Taiwan concluded that, while a small group of traders made money consistently, “more than eight out of ten day traders lose money.” (Subsequent research determined that fewer than 1% of day traders consistently beat the market.) Two of the same researchers found something similar in a broader paper in 2000 on stock trading by U.S. households (not just day trading), which they provocatively titled “Trading is Hazardous to Your Wealth.” Once commission was taken into account, the researchers determined that households did substantially worse than they would have done investing in index funds. Notably, they found that the more households traded, the worse they did:

Our most dramatic empirical evidence is provided by the 20 percent of households that trade most often. With average monthly turnover of in excess of 20 percent, these households turn their common stock portfolios over more than twice annually. The gross returns earned by these high-turnover households are unremarkable, and their net returns are anemic. The net returns lag a value-weighted market index by 46 basis points per month (or 5.5 percent annually). After a reasonable accounting for the fact that the average high-turnover household tilts its common stock investments toward small value stocks with high market risk, the underperformance averages 86 basis points per month (or 10.3 percent annually).

In other words, it’s far from clear that widening participation in the stock market — at least at the level of active trading by individuals — was a good thing.

Malik nods toward this problem, writing of financial innovations:

People race to try it, hoping to earn higher returns, and that works; for a while, anyway. Inevitably, however, the innovation attracts too many newcomers that those returns collapse, leaving huge losses

In the case of day trading, at least, the data suggests lack of knowledge is a more relevant constraint than timing; nonetheless the questions at hand are whether such “innovation” does us much good, and whether equity crowdfunding will be any different.

There are reasons for skepticism: venture capital as an asset class has underperformed the S&P 500 for the last decade, and pouring more capital into VC has historically led to lower returns. Only the top 20% or so of VC firms have a track record of beating the market, and they have the advantage of seeing the best deals (which may never be available to the average crowdfunding investor, at least at comparable terms).

In the case of startups, at least, the time frames involved are long enough that frequent trading is basically impossible. But the central bias the researchers identified as causing individual stock traders to lose money is just as relevant for crowdfunding: “People are overconfident.”

When it comes to the stock market, the deck is firmly stacked against the little guy, and so the best way for most people to invest in it is through a boring old index fund. If investing in startups is anything like picking stocks in that sense, there’s likely to be a dark side to democratization.

Walter Frick is a senior associate editor at Harvard Business Review.

 

[dealmaker]

"A 2004 study of day traders in Taiwan concluded that, while a small group of traders made money consistently, “more than eight out of ten day traders lose money.” (Subsequent research determined that fewer than 1% of day traders consistently beat the market.) Two of the same researchers found something similar in a broader paper in 2000 on stock trading by U.S. households (not just day trading), which they provocatively titled “Trading is Hazardous to Your Wealth.” Once commission was taken into account, the researchers determined that households did substantially worse than they would have done investing in index funds. Notably, they found that the more households traded, the worse they did:"

These studies generalize and group all traders into the same category. I wonder if they spent any time studying what was the common thread amongst the 1% who were successful. Trading is an art as well as science thus experience matters.

 

[birzos]

I wonder if they spent any time studying what was the common thread amongst the 1% who were successful.

It's called the Market Wizards series of books.

 

[OddTrader]

Look at this:

https://en.wikipedia.org/wiki/List_of_highest_funded_crowdfunding_projects


Rank
Project
Category
Platform
Campaign
end date
Campaign
target
Amount
raised
Notes



25
Augur
Software
Independent, bitcoin, Ethereum
October 1, 2015
none
$5,318,330 [38][third-party source needed]
An open-source, decentralized prediction market built using Blockchain technology. The project seeks to leverage the Wisdom of Crowds (also known as "collective intelligence") — and the open, global, peer-to-peer, distributed ledger functionality that blockchain technology provides — to generate better forecasts about any future event involving any major topic of widespread interest.

https://en.wikipedia.org/wiki/Augur_(software)

History

The development of Augur began in October 2014, with an alpha prototype being released shortly after. In April 2015, Augur's first contract was uploaded to the Ethereum network.[11]
Augur's alpha GUI

In May 2015, Augur released a two-minute animated video titled "How Augur Works" narrated by country music star Shooter Jennings. The video provides a detailed explanation of Augur using simplified language to increase understanding of the technology.[12] It was watched more than 200,000 times on YouTube.

In June 2015, an alpha version was released to the general public for testing.[13]

Shortly afterwards, Augur announced that 8.8 million reputation tokens would be distributed via a 45-day crowdsale beginning on August 17, 2015.[14][15] It was deemed necessary to support future development and distribute voting power for event outcomes. Augur raised over $5.2 million before the crowdsale concluded on October 1, 2015, making it one of the top 25 highest funded crowdfunding projects of all time.[16][17][18][2]

 

[OddTrader]

Collective Intelligence

https://www.elitetrader.com/et/threads/trend-following-podcast-update.289146/page-3#post-4087484

Synopsis: Michael Covel speaks with Christopher Chabris on today’s podcast. Chabris is an American research psychologist, currently Associate Professor of Psychology and co-director of the Neuroscience Program at Union College in Schenectady, New York, Adjunct Assistant Professor of Neurology at Albany Medical College and a Research Affiliate at the MIT Center for Collective Intelligence. He is best known as the co-author (with Daniel Simons) of the popular science book The Invisible Gorilla, which presents the results of research into attention and other cognitive illusions. Chabris offers a wide take on what’s going on in our minds. Covel and Chabris discuss witnesses, memory, and the legal system; expert witness testimony; “the play that changed poker”; mastery in any field; the connection between chess and memory; Chabris’ interaction with Neil deGrasse Tyson, and how memory affects our outlook; the stock market, prediction, and forecasting; the importance of confidence with regard to predictions; simple rules vs. complex rules; Oprah Winfrey, Malcolm Gladwell, and intuition; and memory and the influx of information coming at us.

http://www.michaelcovel.com/2015/02...-with-michael-covel-on-trend-following-radio/

http://traffic.libsyn.com/trendfollowing/318.mp3

https://www.elitetrader.com/et/threads/intuition-amplifiers-2.260064/page-79#post-3818938

Today market participants find themself faced with a range of what we can call systemic problems, i.e. vastly complex challenges like market-moving events that affect every one of us and are affected by every one of our actions. Such problems call for us to be able to engage in effective deliberations on a global scale. The spectacular emergence of the Internet has enabled unprecedented opportunities for such interactions - via email, instant messaging, news groups, chat rooms, blogs, wikis, podcasts, and the like - on a scale that was impossible a few short years ago. To date, however, such large-scale interaction have been incoherent and dispersed, contributions vary widely in quality, and there has been no clear way to converge on well-supported decisions concerning what actions traders should take to solve their most pressing problems. Can we do a better job of harnessing the vast collective intelligence now potentially available to us? If the answer is yes, then wouldn’t it be the most incredible Intuition and general mind Amplifier of them all?

https://www.elitetrader.com/et/threads/romney-and-the-market.251461/page-3#post-3662633

The Delphi method ( /ˈdɛlfaɪ/ DEL-fy) is a structured communication technique, originally developed as a systematic, interactive forecasting method which relies on a panel of experts.[1]

In the standard version, the experts answer questionnaires in two or more rounds. After each round, a facilitator provides an anonymous summary of the experts’ forecasts from the previous round as well as the reasons they provided for their judgments. Thus, experts are encouraged to revise their earlier answers in light of the replies of other members of their panel. It is believed that during this process the range of the answers will decrease and the group will converge towards the "correct" answer. Finally, the process is stopped after a pre-defined stop criterion (e.g. number of rounds, achievement of consensus, stability of results) and the mean or median scores of the final rounds determine the results.[2]

Other versions, such as the Policy Delphi,[3] have been designed for normative and explorative use, particularly in the area of social policy and public health.[4] In Europe, more recent web-based experiments have used the Delphi method as a communication technique for interactive decision-making and e-democracy.[5]

Delphi is based on the principle that forecasts (or decisions) from a structured group of individuals are more accurate than those from unstructured groups.[6] This has been indicated with the term "collective intelligence".[7] The technique can also be adapted for use in face-to-face meetings, and is then called mini-Delphi or Estimate-Talk-Estimate (ETE). Delphi has been widely used for business forecasting and has certain advantages over another structured forecasting approach, prediction markets.[8]

Maybe Govt by 1 person however competent is a thing of the past ?