Bank of Japan Deputy Governor Kiyohiko Nishimura discusses "informational advantage" this week at the Lujiazui Forum on economics and finance in Shanghai:
"In my understanding, the Volcker Rule [proposed legislation restricting banks from making certain speculative investments] is designed to deter banks from taking excessive risk in capital markets, where volatility is inherently high and in which bankers do not necessarily have informational advantage in predicting market developments.
Rather, the Volcker Rule urges banks to return to their traditional stronghold of commercial banking business, in which they can utilize their informational advantage based on long-term relationships with their customers."
Informational advantage is a key investment concept. What do you know that other people don't?
If everyone knew everything, investment wouldn't exist. The market would price all investments (stocks, bonds, commodities) perfectly. There would be no room to buy something under-priced and then sell it at a profit after it goes up.
But (fortunately or not) we live in an imperfect world. Some people know more than others. Investment opportunities arise when people who know less dominate a market. The lack of knowledge causes an under-pricing, which more knowledgeable buyers spot. Eventually the wider market sees the unrecognized value and the price rises, making money for the early buyers.
(Investment opportunities also arise when people with good knowledge fail to act rationally on what they know. This happens during panics and manias. Buyers and sellers know better, but their emotions drive them to set the wrong price.)
The key is recognizing where you hold the informational advantage.
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