Clipping Groupon

Robert Shiller once proposed that well-meaning economists should point out instances of irrational exuberance.

I could go one step more.  When you see a Ponzi-IPO, not in the criminal sense, but in the Minsky one, it’s time to point it out.  Or, if you have the guts, go short soon after the IPO.

Where is this headed?  One word: Groupon.  And a descriptor: Flawed business model.

The IPO has a tell-tale tell:”The company has used 85 percent of the $1.11 billion it has raised from venture capitalists and other investors to buy equity from early investors eager for a return, instead of funding growth…”

Amazing!  The early birds have cashed out more than $943M gross (not sure how much they had put in, but presumably they came out more than whole).  An unwitting IPO buyer is being asked to come in as a “middle bird.”

The saying goes:  Better to be safe than sorry.  Another: Caveat emptor.

Efficiency and rationality of stock markets

Can an efficient market exhibit irrational pricing?

The answer is Yes. The answer given here is based on a re-reading of Robert Shiller’s 2005 book, Irrational Exuberance

Let us first define terms.  An efficient market is one where all profitable trades have been exploited; in the textbook sense, it is one where the price observed is the market-clearing price, or where the demand and supply curves intersect.  Irrationality is a defect in the perceptions of market participants; they may be subject to excesses of optimism or pessimism, which may cause them to buy more or less than they would if they had been rational.

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