Nobody likes a party pooper

Just watched Michael Lewis on the Daily Show make an excellent point about short selling. Quizzed by Jon on whether shorting was somehow sleazy, Lewis pointed out that shorting is about the only way you can get bad (but true) market news to come to light. Without shorting, everyone’s vested interests are in a company’s doing better and better (at least on paper), so there’s no real incentive to catch companies when they try to pass off fictitious value as the real thing (e.g., outright fraud, making unrealistically positive forecasts, etc.) But if you have short sellers there’s a constituency calling for the exposure of things that are artificially inflating value.

Of course, there’s no reason this concept can’t apply to other environments, as well. It seems obvious to me that this is where groupthink comes from in corporate environments, for instance. The rewards for telling the boss (true) bad news are puny compared to the rewards for telling him/her (true) good news, so there’s basically no room for shorting here. Nobody gets a big promotion for warning that you’re about to hit an iceberg. Instead, everyone tries to bend the news toward being good…even when it isn’t. And you end up with an organization that has an increasingly adversarial relationship with reality.

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