The Price of Insight

Wednesday, 04 November 2015
By Chris Yapp

Shortly after I wrote the “Price of Regulation”, the VW emissions scandal hit the media. Yet another example of problems with regulated markets at one level. First, we have evidence that gaming the regulatory regime was seen, by one company at least, as a valid approach. Second, the reputational risk taken that led to a 30% drop in share price and now a quarterly loss is a high price to pay for cheating.

Yet what actually came into the public domain on that announcement? Evidence of the gap between the test results and the real world have been known since 2009 at least. That covers a wider range of suppliers, not just VW, though no evidence of cheating has been cited against others. Research reports to the EU regulator dating back to 2013 had been in the public domain.

In the US companies have to declare risks to their business. How many diesel vehicle companies noted these risks in their accounts?

Add to this, various reports from environmental groups and think tanks and there was a lot of information in the public domain that pointed to problems, if not potential criminality.

Part of the regulatory apparatus of the markets are the analysts and their company and sector reports. How many of their outputs since 2009 have picked up on these risks in advising investors?

I wonder if any of the analysts put questions on these topics to any of the vehicle manufacturers over the last 6 years. If not, why not?

I am far from alone in suggesting that the “efficient market hypothesis” has its limits. For all known information to be “in the price” requires all the information to be understood and the necessary insight to be drawn from that information.

There are a lot of people paid to create this insight to support efficient and effective markets.

A lot of focus is inevitably on the details of this specific instance. However, are there lessons here or the wider “insight business”?

It seems to me that it would be worthwhile using this as a case study to improve investor support. Does this case suggest that the tools and practises of the analyst community, leave it vulnerable to strategic blind spots? Are the sources of information used too narrow to miss early signals?

It is estimated that 29,000 people in the UK die each year because of air pollution. The VW scandal has the potential to turn nastier for the diesel sector as a whole, as the implications and tougher testing are brought in.

Importantly, in an era of “big data”, we can now process much more information than a few years ago. What is needed is “big insight”, but at what price? Every crisis for one group is an opportunity for another.

This article is part of a series on the Future of Price.
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