A most wonderful example of cause and effect

I have to admit that I just love this story. For it speaks to that terrible problem that we face so often, trying to understand the difference between correlation and cause.

A number of studies have been done over the years trying to work out whether people are insider trading given the specialist knowledge that they have. For example, one such showed that Senators were getting a 12% annual return on their stock portfolios. The conclusion was that yes, they were indeed using their inside information about what laws were likely to be written and how. No prosecutions of course because this wasn't actually illegal but it was pretty clear that the activity was going on.

Using very much the same techniques researchers have had a look at the stock investments of the policemen of that world, the folks at the SEC. And the results do seem to indicate the same sort of conclusion:

In the report titled "The Stock Picking Skills of SEC Employees," researchers found that SEC employees' stock purchases look like your average person's. But when these employees sell their stocks, they appear to systematically beat the market by making sales within weeks of costly enforcement actions by the agency.

The smoking gun evidence is strong with this one. However, it's not actually the correct answer:

The SEC says it has an explanation. "Each of the transactions was individually reviewed and approved in advance by the Ethics office," said John Nester, spokesperson for the SEC. "Most of the sales were required by SEC policy. Staff had no choice. They were required to sell." Nester explained that before staff can work on an issue that involves a company, they have to sell any holdings of stock in that firm. As a result, he said, there shouldn't be any surprise that a sale would precede the announcement of an enforcement action.

I, for one, think this is a magnificent answer. The SEC decides in secret as to whether it will launch an investigation into a particluar stock. An SEC investigation is never, ever, about awarding a company a gold star for being the good guys. So an announcement of an SEC investigation is always, but always, negative for the price of the stock in question. Which means that the staff are forced, no forced!, to sell out of those stocks that might be affected by an announcement of an investigation. Forced simply by being brought onto the team that decides whether there should be an investigation or not.

What other jobs insist as a condition of employment that you do things that would be illegal outside the context of that employment? The SEC forces people to insider trade, the Army forces people to kill people....any other candidates?

Previous
Previous

Bonuses: RBS vs. John Lewis

Next
Next

I find that I've been a Coasean all along