Monday, March 1, 2010

Speculation Can Be A Good Thing

So says Darrell Duffie, a professor of finance at Stanford University's Graduate School of Business. See In Defense of Financial Speculation: It is not the same thing as market manipulation from the WSJ, page 2-24-2010, page A15. The key exerpt is:
"Speculators earn a profit by absorbing risk that others don't want. Without speculators, investors would find it difficult to quickly hedge or sell their positions.

Speculators also provide us with information about the fundamental values of investments. When the fundamentals appear favorable, they buy. Otherwise, they sell. If their forecasts are correct, they profit. This causes prices to more accurately forecast an investment's value, spreading useful information."

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