Efficient Community Hypothesis

Description

Umair Haque:

"Even when markets are efficient, they can still be of little social use, because they can result in dramatic mispricing. The result? Bubble, crash, and collapse: welcome back to 2009, 1989, or 1929.

And that's where communities come in.

I'd like to advance a hypothesis. Call it the Efficient Community Hypothesis. It says: where efficient markets incorporate "all known information," efficient communities incorporate "the best known information." An efficient market is a tool for sorting the largest quantity of info. But an efficient community is a tool for sorting the highest quality info.

On its own, the EMH is simply about informational efficiency: that prices incorporate "all known information." Where it falls down is in terms of informational productivity: whether prices incorporate accurate, valid, and reliable information — high quality knowledge, instead of low-quality noise. Incorporating all known information doesn't mean incorporating good information.

The point of communities is, when you think about it, to ensure that people and organizations don't just get any old information — but the right, the best information. They should filter out bad, inaccurate information from unreliable sources and replace it with its opposite. They are, in short, the economic mirror image of markets: where efficient markets ensure information efficiency, efficient communities ensure information productivity.

I live in a part of a big city that's like a small town. My favorite local butcher, baker, and café — and I — are meshed together into a web of social ties and shared knowledge: a community. I know them, and they know me. I know their virtues, saving graces, idiosyncrasies, and their faults. I suspect that they know mine as well ("Umair? He'll buy one cappuccino and sit by the window writing furiously for hours — the miser!").

That's an efficient community. First, it creates high-quality shared knowledge. Second, that shared knowledge is a public good. Third, That public good is the basis of trust. And it is trust that supports and nurtures the many product, service, and financial markets that exist within my neighborhood, because it sets unshakably strong incentives for good behavior." (http://blogs.hbr.org/haque/2010/04/the_efficient_community_hypoth.html)