When Friedrich Hayek published “The Use of Knowledge in Society” in a 1945 edition of American Economic Review, he argued that an often neglected reason why capitalist economies create more wealth than centrally planned regimes is because of an information advantage. If you’re trying to sell coffee in Santa Cruz, California, you are going to know about the flavor demands, peak traffic hours, and seemingly idiosyncratic preferences of your customers better than a committee in Washington, D.C.
With stock market investing, we accept that information can be such an advantage that we attach criminal penalties to executives that purchase stock after receiving material information that is not disclosed to the public. Heck, for advocates of the semi-strong efficient market hypothesis, the underpinning is that the current price reflects all publicly known information about the stock.
If you accept the premise that information is the input that leads to rational decision-making, … Read the rest of this article!