On Google, Stock, and IPOs

This weekend, I had a conversation (actually an IM) with a friend of mine who's in the computer trade press. She'd asked me what I thought of the Google IPO. I responded by talking about how interesting it was to auction off some shares and keep others for long-term planning, and the potential implications for an initial stock price “pop” or for Google's ability to think long-term vs. quarter to quarter. I was beginning to get off into some esoteric stuff about how valuations occur when I realized that she totally wasn't following. After chiding her for saying she's a business reporter who doesn't really know how the stock market works, I realized that there are some things that are so complex not many people really understand it. (I know I don't.)

Then I began to muse about what stock really was (I likened it to issuing currency against the assets of the company, with an exchange rate and so on). At that point, I remembered why I find economics so confusing: it seems like some kind of faith-based system. It works because we believe it should work. I mean, what really backs most of the currencies of the world? And how can China buy American debt (they're financing a good bit of it right now, thank you)? My head began to hurt so I ordered pizza and watched “Whose Line Is It Anyway.”

Economics is for people who are smarter than I.

Comments

• Anonymous
  May 17, 2004
  Its an ouroboros ;)
  
  Wasn't that movie "A beutiful Mind" about a guy who revolutionized economics?
  Wasn't he completely insane?
• Anonymous
  May 17, 2004
  Not insane, but I believe he suffered from paranoid delusions. Go figure.
• Anonymous
  May 17, 2004
  Hence the 3 major stock crashes this century. People stopped believing.
• Anonymous
  May 17, 2004
  economics rocks. hands down.
• Anonymous
  May 27, 2004
  Basically, economics is about decisions made to rationalize scarce goods against relatively unlimited human desires. It also suggests that in the short-run, decisions aren't particular rational (e.g. market bubbles), whereas in the long-run market decisions behave more rationally (though according the Keynes, in the long-run we're all dead anyway).
  
  Currency is very much faith based, a type of non-interest charging credit card issued by Uncle Sam or some other institution. Wrt stocks and IPOs, Google's IPO is based on future expectations, and until you have enough data points to form a regressable time-series to establish a historical (and more predictable) pattern of actual vs. expected returns, the future expected valuation of a stock will remain pretty volatile. With more datapoints, better extrapolations can be made and the stock valuation becomes more accurate (e.g. Microsoft, albeit too predictable :( ).
  
  Many great mathematicians had mental problems. John Nash, before he went into 20 dark years of paranoid schizophrenia, pioneered game theory, based on groundbreaking work of math legends von Neumann and Morgenstern. It provided a highly rigorous mathematical framework to rationalize "non-cooperative" games [with incomplete information and for mutual gain]. Before Nash, von Neumann and Morgenstern's work dealt strictly with the non-cooperative zero-sum variety between two parties.
  
  The main purpose of game theory is to consider situations where instead of agents making decisions as reactions to exogenous prices ("dead variables"), their decisions are strategic reactions to other agents actions ("live variables"). An agent is faced with a set of moves he can play and will form a strategy, a best response to his environment, which he will play by. Strategies can be either "pure" (i.e. play a particular move) or "mixed" (random play). A " Nash Equilibrium" will be reached when each agent's actions begets a reaction by all the other agents which, in turn, begets the same initial action. In other words, the best responses of all players are in accordance with each other.
  
  If you think of Google's IPO Dutch auction as a long series of games played by many non-cooperating agents with mutual gains, digging into game theory will help you understand and perhaps predict a set of optimal strategies for such an auction.
  
  Though all this would be super helpful at assessing Google's valuation over time, the math to do it well in near real-time is beyond most people, including myself, since just remembering your calculus alone wouldn't cut it. It's an fascinating field, nonetheless.
• Anonymous
  July 01, 2004
  What is Google IPO?Who can explain it in detail?Thanks!