Wednesday, October 31, 2012

What is speculation?

Don Boudreaux, in a smart alecy way tries to equate oil speculators with families stocking up in anticipation of Hurricane Sandy. David Henderson adds his own two cents on the matter but to his credit asks a question about what is real speculation. The defense of speculation is classic example of misdirection. Both are notoriously guilty of this in quite a few of their posts. Though I attribute it lack of understanding of personal method rather than actual mala fide intent as Don also leans against anti-dumping duties.

Argument by misdirection
To understand the misdirection, imagine where speculation as a scale. To its leftmost end, it was a response to an event that does not affect the event itself while to its right the speculation is so large that it was an event in itself. 

People who decry speculation aim towards right and attack there. People who defend speculation aim toward left and voice traditional arguments applicable to that side. And when I say both are right, people get confused with my stance.

Understanding Speculation
Now all households stocking up en masse for calamity (such as Hurricane Sandy) will be an event in itself so this type of speculation comes somewhere closer to the middle but slightly to the left of middle.

On the extreme right, speculators intend to create the shortage and price push because of scarcity. Now the question is can we say that group of investors following technical trading strategies piling on a rising price trend are "intending to cause shortage"? The answer in most cases is no. This phenomenon falls in middle-right but not extreme right.

In rare cases speculation moves to extreme right by group-think and intellectual capture and results in harm to general public.

Regulating Speculation
Purist view is that speculation on extreme right must be banned while those at extreme left can be allowed. Now preventive regulation will start at extreme right and stop long before it reaches right of middle. However, relatively, the speculation in second part can be more justifiable than speculation in first part.