Merton Miller

Two Contrasting Views of Stock Markets

Merton Miller

“The casino view sees the stock market as largely a place where investors place bets on the near future prices of stocks rather than on the numbers on a roulette wheel or the spots on a pack of cards. The casino interpretation seems even more apt for futures and options exchanges where the very structure of contracts traded emphasizes the “zero-sum” nature of the market. Casinos, of course, as suppliers of artificial risks to those with a taste for them, may well have their place in society, though presumably only a small place in a world already amply supplied with naturally occurring hazards. The danger some economists see is that as socially acceptable casinos, stock markets may actually be too attractive. They may mislead the unsophisticated into believing that stock market speculation offers a better, and certainly a quicker, way to wealth than working or saving.

That short-term trading of stocks (or futures or options) is a risky activity can hardly be denied. Indeed, much of the research thrust of the academic discipline of finance has been precisely to specify the probability distributions of returns from investments in different assets and over various horizons. But those distributions arise in a way fundamentally different from those of a casino. The distributions of returns on risky stock market investments are driven not by the random fall of dice or the spin of a wheel (although it is sometimes convenient in exposition to pretend that such is the case), but by the revelation or disclosure of new information about the underlying value of a security.

The information needed to value securities is not, however, just a mass of computer printout stored in a vault somewhere. Rather than a single objective entity, information, as Hayek (1945) has stressed, consists of millions of subjective bits and pieces scattered over the whole set of economic actors. One key function of secondary trading in the stock market is to aggregate these separate fragments of information. The prospect of speculative profits is the “bribe,” so to speak, society offers investors to speed the incorporation of the dispersed bits of information into prices. Once the information is incorporated, of course, everyone, including the uninformed, and not just the successful speculators, benefits from having more accurate prices on which to base decisions.”

—Merton H. Miller and Charles W. Upton “Strategies for Capital Market Structure and Regulation.” In Grundy, Bruce D., ed., Selected Works of Merton H. Miller, Vol. II: Economics. (Chicago: University of Chicago Press, 2002): 578-79.