Sunday, May 24, 2015

Divestment doesn't work

I noticed The Tech, MIT's student newspaper has a front page article on a call for MIT to divest from fossil fuel companies and various faculty members weighing in.  There was some back and forth in it but the thing that I think is most important about divestment wasn't mentioned by any of the participants.  To put it baldly: divestment doesn't accomplish anything.

Now, US universities have about $415 billion dollars in investments between them.  The ten biggest oil companies have a market capitalization of 1,800 billion between them.  So you might think that all universities divesting could lower the stocks of the gas companies by 20% or so.  Except the denominator you want is actually all the money everyone is investing in all stocks, or about $65 trillion.  So without the investments of the universities you'd only expect their stocks to go down by half a percent.

In economics there's something called the efficient market hypothesis which is sort of badly named and also a bit confusing since it comes in three forms.  None of the three forms is perfectly true but some are more true than others.  But the idea here is that if you manage to lower the price of a firm's stock in a way that doesn't lower the stream of dividends that the stock will produce then if people notice they'll swoop in and bid the price of the stock back up.

That process is far from perfect.  For decades the general level of the stock market went down on Friday and up on Monday before someone noticed and made a huge amount of money in the process of causing the effect to disappear.  If you managed to get all the US universities to divest from oil companies without Wallstreet hearing about it you would be able to get your half a percent share price reduction until they heard about it.  But of course this whole divestment movement is intrinsically public so keeping it secret isn't going to happen.

Normally when someone is going about doing something good in an inefficient way I won't complain.  Yes, I care about efficient charity but apathy is worse problem than inefficiency.  In this case, though, activists are going to accomplish literally nothing even if they succeed so I feel justified in saying "Don't do that, do this instead."

What can you do?  The collective action problems that it's so hard to solve by yourself are easy for a government to solve so call your representatives and tell them you'd like to see them act on climate change.  Have a smaller home or apartment than you might otherwise live in and don't run the heat and AC so hard.  Live closer to where you work and drive a smaller car.  There's lots of things to be done that will actually be effective in proportion to how many people do them.  So do those.


  1. Hmm. I'd assumed that stock prices were in part due to supply-and-demand, such that reducing the demand for a stock would reduce its price. I guess you'd say that selectively investing in companies you find laudable is also an ineffective type of activism?

  2. It is supply and demand but the total supply and demand for stocks doesn't change.

    Investing in laudable companies actually works just fine. They need N dollars so you only have to push N dollars of capitalization their way to get them operating. It's when you have to make sure there isn't N dollars left for a company in the entire stock market that it starts getting more or less impossible.


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