Abstract
The analysis of the stock market developed in this Article agrees with the view that trading in the stock market by public investors is a zero sum game in which no one investor gains without a corresponding loss to another. It also agrees that in this zero sum game, an inside trader "plays with percentage dice." Since the prohibition against insider trading can only limit and not eliminate insider trading, the obvious question is "why would investors consent to play in a crooked game?" This Article breaks new ground by answering this question. To describe the stock market as a zero sum game is t; describe the stock market in terms of only one of the two dimensions of economic analysis. The stock market is a zero sum game in expected return, but it is a positive sum game in terms of risk reduction. All risk-averse investors can come out ahead by diversifying their investnents in publicly traded stocks, a win-win outcome. Therefore, one answer to the question of why investors consent to play in a crooked game is that what they lose in expected return they more than make up for in risk reduction. Risk-averse investors are like risk-averse homeowners who insure their homes knowing that some insurance fraud will take place and that they are paying for it through higher insurance premiuns.
Recommended Citation
Dyer, Boyd Kimball
(1992)
"Economic Analysis, Insider Trading,
and Game Markets,"
Utah Law Review: Vol. 1992:
No.
1, Article 1.
Available at:
https://dc.law.utah.edu/ulr/vol1992/iss1/1