Markets as Information Gathering Tools

The academic literature, Wall Street commentary, and even daily news reporting reflect a belief that markets can anticipate events. The current movements in the stock market are interpreted as reflecting the likelihood that the Federal Reserve System will change interest rates. Futures markets are interpreted as reflecting the best estimates of things to come. Movements in individual stock prices are thought to anticipate earnings reports or the probability of a merger or buyout. If we want to know about future weather in the South, we should study the orange juice futures. The academic journals are filled with the concept of rational expectations in which current prices are supposed to reflect the sum of all knowledge in the system. Prices, according to this theory, are a statistic that indicates the aggregation of information about underlying states of the economy. Those who are "outsiders" to the information in the system become "insiders" by simply observing the economic activity.