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Robert Teitelman

Robert Teitelman

Posted: November 12, 2010 03:04 PM

Transactions: Nov. 15, 2010

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There are markets and electorates; there is price discovery and voting. Different? The same? Both practices are techniques for revealing sentiment. Hammering the keyboard to buy or sell shares, jamming a paper ballot into a scanner, are both methods for transmitting information like an electrode taped to the skull of the demos. Both work most effectively when participants can enter and exit the process as autonomous actors. In markets, of course, big players scattering dollars are more equal than small players worth squat. Indeed, anyone with cash is more important than anyone without. While the rules of voting decree one-man-one-vote, the secondary reality of big donors, big organizations, big shots clearly undermines that. It's always a quaint photo op when a candidate arrives at the polling booth to vote. He doffs his overcoat, handing it off camera like Ina Garten handing off dirty dishes. Smooths the hair; kisses the wife. Weird, there's never a line. Ah, there he is, just a lone palooka undertaking his civic duty. The fact that he (or she) commands millions of dollars, is backed by a vast organization and has an entourage to hold his coat, well, that's not discussed. It's as if those pensioners queueing up at the buffet line at the annual meeting of Gizmo Inc. actually mattered as much as, say, Carl Icahn.

Both practices rest on the belief that they produce optimal, meaning rational, results. In markets, there is the efficient-market hypothesis, which even in its diluted form traces itself back to Adam Smith's invisible hand. Even if the price isn't perfectly efficient, even if the market hasn't absorbed all possible information in a rational fashion, even if it circles around equilibrium (whatever that may be) like a drunken economist around a street lamp, it's better than nothing. The machine works by itself; it takes, in theory, no orders. And what of elections? Candidates have been bought and sold (no pun intended), winners culled from losers. If the election is aboveboard, then the result -- genuflect! -- is The Result. Of course, one big difference between markets and elections is that markets reprice in real time. A moment's reality can change in a snap. Even with real-time polling, which always threatens to collapse the distinction between markets and elections, citizens get to pull on their top coat and select candidates only every few years or so. As a result, the reality established by election persists. This gives pols a chance to act, as opposed to simply getting re-valued daily. Here's another difference: The goal of markets is to set a price; the goal of elections is to improve the lot of voters. Big difference, if perhaps shrinking.

Now it's true the ends of politics and trading are not the same, though our candidate's vicuña topcoat suggests that politics has been pretty profitable for a small-town pharmacist with seven children. But the theories behind them are as close as two siblings, which explains the occasional fighting in the back seat. The electorate is supposedly wise about its own self-interest; and, like now, it may question the wisdom of its doppelgänger, the markets. Alas, this is like peering in the mirror. The dismantling of the strong form of rational markets that followed the financial crisis raises questions about the rationality of electorates, which has implications that extend beyond finance and politics. After all, much of what occurs in a democratic culture is some hybrid of election and price discovery. Most cultural objects, from punditry to footwear to lifestyles to what museums hang on their walls, are shaped by a crowd. Much of what goes for commercial activity, from careerism to car sales, involves scaring up a decent mob. Network effects and tipping points are forms of crowd behavior. Counting crowds is big business. Inane references to Life as High School do have a point: Popularity matters. Social reality bends to its will.

Of course, there are many problems with the common, high-school definition of popularity, which usually comes down, like elections and markets, to who is hot now. But life is long, the future stretches out like the endless highway of song and speech, and there's a tendency to believe that this moment's prom queen will be flaunting her fake tiara for years: eternal fame today. Who knows what the reality will be two decades from now? But, of course, to ponder such questions leads to madness, introspection or value investing, which for the great mass of citizens doesn't help much in either markets, politics or life. Seize the day, my friends. After all, the crowd has every natural right, according to our Founding Fathers, to determine its own fate. Buy, sell, pursue happiness. Where that leaves the rest of us self-reliant individuals is a question for another day.

Robert Teitelman is editor in chief of The Deal.