The stock market is a machine for creating cults

17.43, Wednesday 21 Jul 2021

I’ve been naive about stock ownership. That is, stocks traded on the public markets like NASDAQ and FTSE.

My old mental model was that holders of stocks were partial owners by virtue of them owning, well, shares. Owners can vote, in theory, on company decisions. It’s a bit abstract because mostly the mechanism is that you vote for directors, who are shareholder representatives, a bit like elected political representatives, and they take company decisions on your behalf. And then there are passive owners who are simply there for the ride, waiting for the value of the company to go up and therefore the value of their stock.

Furthermore, the natural value of a share is tied to the future anticipated value of the corporation.

But my old model ignored the dynamic and social nature of the situation. My eyes were opened by this line in Economic Science Fictions (book homepage):

shareholders in corporations are expected to agree or sell their shares (p44).


A diverse shareholder base does not moderate decisions, in itself. Those who disagree will simply sell their shares. Voting doesn’t matter.

ALSO: The price of a share will increase (in line with demand) when there is growth in the number of people in the shareholding population AT LARGE (not just current owners) who agree with company decisions.

BUT individual shareholders are strongly incentivised to increase their own wealth.

Which means that, for shareholders to profit via increasing share price, there is an incentive for those shareholders to encourage others to agree with company actions.

There is also the reverse incentive: if a shareholder disagrees with company actions, they would be wise to keep silent until they have sold their shares (and once they have sold, they have no incentive to say anything at all).

Shareholders turn into evangelists. That’s the function of the market. Profit-seeking stock holders will spread the word and squash dissent, purely from self interest.

There is a cult aspect to the publicly traded corporation. That’s my new mental model.

It’s intrinsic to the way the market works. So the big question about meme stocks (being stocks where the value is determined by online communities piling on) is not: why did they take off in 2021. But instead: how did it take so long for the underlying truth to come to the surface? All stocks are meme stocks.

Let me caveat that. I’m not saying that the pricing mechanism for any given share is exclusively cult-like behaviour.

But another of my long-standing mental models is perturbation theory. Quick summary: you find a way to crudely describe the coarse shape of a dynamic system first, then you add on finer and finer “perturbations” to make your model more accurate. But to a first approximation you only need the first bit.

Perturbation theory doesn’t always hold – it breaks down in chaotic dynamical systems (that’s the definition of chaos). But it’s often good enough.

So what I’m saying is that, yes, there are many factors. But, in my new mental model, it’s the meme stock dynamic that dominates.

The question is: what is to be done about it? I get super uncomfortable about equities being traded where the value is divorced from the underlying intrinsic value of the equity, and instead comes from marketplace activity. I can’t put my finger on why I find it uncomfortable, it just smells of bullshit and society spinning valuable capacity on churning air.

So my response has two parts:

  1. Find alternatives. Is it possible to imagine a stock market which is genuinely tied to the intrinsic value of a corporation? One which somehow discourages pure profit-seeking speculation and pricing based on supply/demand? I have no idea. I don’t know enough about finance.
  2. Lean into it. If all stocks are meme stocks, then a share purchase is a push on the “more like this” button for the corporate world. When you buy a stock, you’re training the engine. So it may not be as profitable, but it should be possible to move the world, just a fraction, by buying stock strictly in keeping with your personal values.


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