REMEMBER YOUR STOCKS ARE DUST: GAMESTOP, MARKET VOLATILITY, AND VALUE
Recent stock market volatility, epitomized by the dramatic rise and subsequent fall of the price of stock in GameStop Corp. (GME) in response to discussion of said stock on Reddit, invites theological reflection. Commentators compare the clash of small investors against hedge funds to the Biblical struggle of David against the Philistine champion Goliath, while others take the occasion to inveigh against all stock market speculation as dissolute gambling. The implications of stock price volatility seem like an appropriate place to draw our attention during this season of Lent. Casting down the mighty hedge funds from their thrones and lifting up the lowly small investor may sound appealing, but perhaps the more important lesson of price volatility is to remember to always reassess our values, and when we find them in need of adjustment, repent and return to the Lord.
In the 4th Edition of his Principles of Macroeconomics textbook, economist N. Gregory Mankiw quotes Theodore Roosevelt as saying, “There is no moral difference between gambling at cards or in lotteries or on the race track and gambling in the stock market.” The act of gambling may have the same moral standing regardless of its setting, but its effect on society is quite distinct depending on context.
Gambling at the lottery merely moves money around, but gambling on anything predictable – like the stock market – actually produces something useful by harnessing and focusing the knowledge of the players: all the participants have an incentive to become experts in forecasting in their chosen area, and their bets reveal their forecasts.
If one wants to win money by betting on horse races, one needs to learn to predict which horses will run fastest. If one wishes to win money by betting on sporting events, one needs to learn to forecast which teams will win what games, and by what margins. If one wishes to win money by betting on the stock market, one needs to learn to forecast which companies’ stock prices will go up or down. The bookmaker’s odds and the stock broker's ticker tape represent mathematical summations of the revealed conclusions of this expert research. While the act of gambling is the mere transfer of wealth from one participant to another, the collective result of the gambling is a construction of social knowledge revealing the collective wisdom about the forecasted outcome of the event being gambled on.
It may not matter if we have a meticulously-constructed assessment of which basketball team will cover what spread, or which horse will be fastest, but an incentive for people to focus their research efforts on forecasting stock prices might construct useful social knowledge about the goods and services that society needs and wants.
Buying stock in a company is buying a share of the company’s future profits; the value of a share of stock is the present value of the forecast future profits of a company divided by the shares in circulation. Fundamentally, stock prices change because potential buyers and sellers change their assessment of just what is the predicted present value of a company’s future profits. If someone believes that the price of a share of stock is lower than the present value of the expected future profits of the firm divided by the number of shares of stock in circulation, it would be worthwhile to acquire more shares of that company, whereas if one believes the opposite, they should sell. These actions reveal each market participant’s belief about the future profits they expect a company to earn, and the equilibrium price of a stock will be the median belief of market participants about the present value of a company’s future profitability. If that profitability is itself a forecast of what goods and services are likely to be in demand and what production techniques are likely to be the most efficient, the stock market generates helpful information about what activities we would well do more of, and what we should avoid.
Although it is impossible to know with certainty now, there is an objective right answer about the profits a company will earn in the future. The present value of those future profits does vary subjectively from person to person – the adage might say that a bird in the hand is worth two in the bush, but any individual might well assign a different rate to just how many dollars payable next Friday they value as much as $100 right now.
The value of a collectively determined (“crowdsourced”) assessment is the notion that as individuals we all make errors, but the average of our findings has the power to transcend our individual miscalculations. Stock prices thus help us determine what a company is “worth.” Stock prices are volatile when the collective assessment of value changes rapidly. Rising stock prices reveal a collective determination that a company is likely to earn more profit in the future; falling prices reveal that the collective wisdom puts a lower value on that company's output. The trading of stock gives the public a financial incentive both to research what they believe the true value of a company's future profit to be and to reveal the results of their research by buying and selling (or refraining therefrom) shares of particular companies.
Stock prices change, then, when there is a reassessment of the underlying value of the company being purchased. New information can cause this; so too can new evaluation of existing information. When individuals rethink how they value the activity of a company, its stock price can change. There is a danger here, though, that people could act more cynically: one could hope that the optimism one signals about a company’s future by buying stock in a company, magnified by public communication like Reddit venues, could inspire others to be even more optimistic, driving the price even higher, and giving the first purchaser the opportunity to cash out before the subsequent enthusiasts in the company discover that the first buyer did not, in fact, re-value the company’s profit, but falsely conveyed a revaluation of the company in the hope that it inspired others to go even further.
These differing expressions of valuation naturally create a certain amount of chaos or even absurdity when they collide, as stock prices rise and fall in the tension between hedge fund algorithms, trader's instincts, and even the occasional influence of social media. The differing assessments drive prices to and fro as our valuations dance around the central question of what a thing is actually worth.
The tempest resulting from clashing valuations is an apt metaphor for humanity's moral indecision: seeking the latest moral fad or avoiding the outrage du jour, chasing a series of possessions or ideologies that we falsely hope might fill the infinite longings of the human heart until we realize that this too is vanity, a chasing after the wind.
The season of Lent gives us a joyful freedom from this moral whirlwind. As Christians, we have already been told what is most valuable, and Lent is an opportunity to return to those values: Seek ye first the kingdom of God, and his righteousness, and all these things will be added unto you.
Each year the Church invites us to the observance of a holy Lent, the first two marks of which are self-examination and repentance. The Litany of Penitence with which we begin Lent each year calls us to go through our lives systematically and examine where we have fallen into sin – where our actions are out of line with our values, and where what we think we value does not match what we ultimately value. The prayer concluding the litany is not an absolution in the traditional sense; the bishop or priest declares that God “has given power and commandment to his ministers to declare and pronounce to his people, being penitent, the absolution and remission of their sins”, but does not explicitly pronounce that absolution here. Instead, the bishop or priest leads the people in praying that God “grant us true repentance and his Holy Spirit, that those things may please him which we do on this day, and that the rest of our life hereafter may be pure and holy, so that at the last we may come to his eternal joy.”
A call to repentance is a call to rethink the values we have assigned. The prayer of Ash Wednesday is an invitation to rethink how we value what we do, and to engage in a deep and thorough revaluation of the priorities we assign to the various activities of our life.
Sin is often the result of a mis-valuation in our lives – valuing too much the devices and desires of our own hearts, and valuing God's holy laws too little. Our baptismal commitment to persevere in resisting evil and whenever we fall into sin, repent and return to the Lord is a call to regularly examine the values we hold and assign, to see if we have valued the wrong things – and whenever we misvalue things (fall into sin), to reassign value in our lives in the proper places (repent and return to the Lord).
If a company’s future profitability is an objective measurement that is forecast but not altered by the buying and selling of stock, so too is the right ordering of priorities in our lives chiseled in stone, and not altered by the values our choices profess. But just as in the case of the stock market, our misplaced valuation can lead others astray in life, causing them (and us) to lose far more than money.
Value shows what we hold most important, and volatility in valuation suggests widespread rapid reassessment of priorities. If something as crude as the stock market can remind us that we can reassess value, may we let that remind us daily to examine our lives and conduct by the rule of God’s commandments, that we may perceive where we fail to value the love of God and neighbor above all else, and reassign our values appropriately.
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