Why markets do not imply “Greed is Good”

11 Jul

Inspired by a John Kay column in the FT today.*

Naked greed does not maximize corporate profits. Customers do not have full information about product quality, so they must trust their suppliers. When a corporation like GlaxoSmithKline (GSK) gets caught cheating its customers ( by suppressing information about negative side effects of one of its drugs), the gain in extra profits from cheating on this one drug is surely more than offset by the loss in profits on all drugs (from the damage to GSK’s reputation as a trustworthy supplier).

Contrary to popular wisdom, the market doesn’t reward greed, it punishes it.

*I don’t bother linking since it’s gated. Kay has been providing important insights about corporate profit maximizing for a while now (including in his great book Obliquity).