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Edwige Cheynel: Public Disclosures and Information Asymmetry: A Theory of the Mosaic - YouTube
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so it's my pleasure to present actually
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parts of my research today and so
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actually to some extent this paper is
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like a nice follow-up I hope I've also
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previous works from Larry so anyway well
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so let me say that before getting to the
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paper itself let's actually which is the
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Moseley this notion of the mosaic let's
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try to understand what's going on when
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we think about the mosaic in the first
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place and so well at its origin the
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mosaic what is it
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well it just an odd form which uses more
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pieces of materials such as stones
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marbles and little pieces of glass and
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at the end once they are placed together
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it creates a unified whole
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okay that if we look at it like in
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isolation those different pieces of
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marble stones the done ethically seem
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well connected at least at her side
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because actually there are it's the
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mosaic okay so of course then this
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notion of the mosaic this method role
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has been used over and over again and
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not only obviously with art but beyond
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that as when we look at back at history
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well we had sometimes to reconstitute a
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lot of different pieces of information
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to create a game the puzzle the mosaic
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okay so we go back into time okay we are
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right after the fall of the Berlin wall
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and right now here is what we have the
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German agency is confronted with a big
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puzzle to assemble back
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the Stasi the formal secret police of
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each Germany has destroyed all the
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evidence out there and now Germany's
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left with around 16,000 bags of pieces
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of information over 40 years they spent
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that time interrogating the
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citizens and they were very thorough to
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basically explain what was going on with
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their citizens and they were documenting
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every single piece of information and of
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course they didn't want to leave any
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evidence after the fall of the Berlin
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Wall
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so at the end German thief was left with
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six hundred millions of pieces of
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information to reconstitute okay so that
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was obviously a big puzzle a big mosaic
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that we had to recreate and well they
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had to unsampled those different pieces
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by hand first and later on
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well they had also them to hire a lot of
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people and fortunately technology was
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becoming super handy so basically a lot
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of scans were developed to try to piece
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together those different bits and pieces
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negative information that don't mean
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much in isolation but in aggregate
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of course we can reconstitute you know
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one of the documents of the Stasi which
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we have right there okay so this
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metaphor the mosaic of course them has
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developed over time and we see a lot
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especially in criminal investigations it
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has been overly publicized
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in Hollywood series such as wellthey a
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thigh bone Law & Order and I don't know
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what well that well of course also in
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the news we got like and around big
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financial scandals and they're basically
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shredders tons of confetti to which
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constitute again same spirit and
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regional traditions so going back to the
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criminal investigation but like more
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concrete like with like the police that
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are working on those criminal cases do
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they use this notion of the mosaic
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theory they do actually what is it it's
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about gathering information so
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especially when we have like terrorist
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attacks piecing together different
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nuggets of information can become super
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handy think about it well for instance
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the other video GPS tracking you're like
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yeah well maybe it's not
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falling like investigation but it can be
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well we have an individual a suspect and
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the police is like noticing that this
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guy is living home and goes a lot to the
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gun store Wow in itself it's pressuring
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us not a big deal okay well right now
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now at the same time is like good back
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and forth like basically between home
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and the airport and the police are
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noticing that he doesn't have like a new
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reason to go there except maybe to
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collect some information it doesn't have
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to travel doesn't have to pick up anyone
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so why is he like going to Cubs organ
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store than the airport and then going
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back and forth
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well those pieces of information in
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isolation don't mean much agree but in
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aggregate you can create a nice mood day
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and it can incriminate basically big
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suspects okay so actually the theory of
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the mosaic except the words will stop
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seeing them in the context of law and in
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the low cases suddenly we see the
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convincing mosaic of circumstantial
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evidence so what is it well basically
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again this is what we were speaking
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about that we have bits and pieces of
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data that in isolation don't mean
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anything but in aggregate it tells you
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like a nice story so especially in
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discrimination cases this theory of the
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mosaic was extremely used and he's
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currently used nowadays well for
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instance you're a pregnant woman well
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you want to fight like a lawsuit against
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your employer well you can use the
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version of the convincing mosaic to
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advocate your case so what can you show
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well maybe some exchange of emails
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between supervisors speaking about your
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condition which is completely illegal
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but in isolation that would not be
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sufficient well then you have like a
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series of although emails about joking
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jobs like people joking about you
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condition again and then at the end
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people blaming you to be late because
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you went a lot basically to the restroom
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so anyway at the end all those pieces of
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information well together
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in aggregate we can help you to recipe
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determine that there is indeed a
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discrimination going on
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so of course well this the notion of the
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mosaic theory has been then using - okay
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and the biggest of it's a scandal ever
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infinitely more recently I would say
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this is the Bernie Madoff Ponzi scheme
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where the financial analyst Ari
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Marco Polo's basically was able to
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expose this big scandal by using this
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mosaic theory he was conducting
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interviews with hedge fund managers and
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then he was like collecting information
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from his own understanding about the
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business then he was also doing word
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well looking at the disclosures their
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accounting information trying to compare
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it with what their competitors were
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doing out there and all those bits and
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pieces of data well suddenly when you
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put them together it didn't make any
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sense and their right to the conclusion
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that the performance of Bernie Madoff
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firms were just implausible was that of
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course we know the follow-up okay bad
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accounting we'll catch up with you so at
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the end we had basically the document
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that we having we should be sent to the
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SEC where before you know the scandal
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would expose and it's literally stating
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well I am using I use the music theory
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for sample my set of observations and so
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on okay
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so it's like I think incredible what you
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can find on the internet by the way so
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anyway so at the end well of course our
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paper with my closer Carolyn Levin is
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about this notion of the mosaic in the
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context of financial markets okay
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exactly the same idea so here more
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specifically we think about the skilled
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investor this killed investor well of
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course this job is about collect
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information piecing together
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disinformation so that you can create
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maybe a mosaic in the sense that we can
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make profit out of it because of course
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he's in the business of making money
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okay so some of those pieces of
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information may be public we know
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nothing he may go so far some other
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pieces of information might be private
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and that is maybe the problem that we
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are facing what is the source of this
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private information of course is this
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financial analyst it indeed extremely
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skilled well maybe from is all
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interviews with like some employees
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going to the stores you will be able to
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collect information about the business
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of Walmart constants and deduce whether
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the business is doing well - this is
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private information that is perfectly
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legal the question becomes more
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interesting when we have some private
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information that are coming from private
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conversations with the management so
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what's going on then there does it imply
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insider trading this is Holly and here
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is what we have right now with the
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current legislation well it depends as
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usual it depends on the world
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well basically exactly the context where
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this private information was coming from
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okay so in itself there is nothing
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illegal to have private conversations
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between an analyst and manager okay so
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well same thing on the management side
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the manager is also allowed to talk
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privately to financial Alan if there is
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nothing illegal in itself
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okay the promise is about the content of
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the information it becomes illegal it
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basically there is an exchange about
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material information and what does it
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mean matter your information so let's
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look at the definition okay material is
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defined as a substantial likelihood that
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a reasonable shoulder would consider it
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importance as you can tell it's pretty
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vague and of course when we have such a
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vagueness
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in the definition well companies and
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financial analysts will try to find a
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way to get around this basically
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legislation which is actually the
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regulations fair disclosure in short
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regulative okay so way gift II the
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notion of materiality of information as
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you can see that's not pretty clear so
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let's try to illustrate what's going on
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so in our paper here is the way we are
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thinking about it okay
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so how exactly do public and private
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information combine to produce
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information that is then valuable to
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this skilled investor okay doesn't
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necessarily imply insider trading I
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would say legally or not at the end we
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will have like a dilemma to face well so
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let's actually think about two pieces of
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information so the public piece of
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information is the weather forecast so
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far so good it can be either rain or
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sunshine now second piece of information
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this is the so-called private
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information the current inventory you
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know in the company well let's say that
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they have either sunscreen or umbrella
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okay so that's what we have right now
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well now of course if we know those two
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pieces of information can we make some
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profits of course well if you know that
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it's going to rain and you pair that
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with the umbrella the current stock of
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course you will buy same thing if you
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see sunshine and then sunscreen you know
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that the business will go well and of
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course well if you are in the opposite
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basically or little cases you will short
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sell the company
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so basically combining those two pieces
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of information you will be able indeed
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to make a lot of money yes but you need
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those two pieces together because in
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isolation can you make some profits do
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you know how to trade whether it's like
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good news or bad news in itself well
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let's look at for instance the public
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information well you know that it's
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going to rain but can you know whether
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you should buy or sell no you don't know
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okay you see that same thing for the
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private information now
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halation is completely useless okay well
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now yourself no idea okay I know that
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they have umbrella but I don't know what
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to do
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okay so what is the trader figures out
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the current inventory on his own which
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is the private information of course
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that not illegal well you know it goes
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to the stores
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he's like observing that for instance
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there are a lot of umbrellas oh he's
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observing that there are a lot of
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sunscreen that's not illegal of course
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is spending a third time that maybe the
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normal investor would not spend and of
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course it will benefit from his own
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deductions his own reasoning okay of
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course it can maybe conduct some
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interviews casually with employees and
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then again that's not illegal okay the
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question becomes more interesting if the
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trader obtains the current inventory
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information from the management directly
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is it illegal and the answer is well
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actually it depends him depends on what
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if you look there if you look at the
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current cases on insider trading so here
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was what's going on if the weather
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forecast was already publicly known then
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in this case if there is an exchange of
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information about the current inventory
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it is indeed illegal okay because
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obviously that was material information
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useful information because it was
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piecing together like the two pieces of
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information so in aggregate it was
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extremely valuable however if the
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weather forecast information was not
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publicly known was not out there then in
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this case it's perfectly okay apparently
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to have like some private information
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about the current inventory so that
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would be primaried because basically the
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public information is not you know out
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there the weather forecasts no one knows
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it yet so basically the manager is
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allowed to speak about the current
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inventory does it make
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innocence do you think that the timing
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of this basically weather forecast
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should be basically so important to be
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able to decide whether it's legal or not
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to share the Inventure information well
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I think in principle it is not clear
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that the timing should make a difference
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and basically at the end the weather
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forecasts we know beforehand that it
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will be out sooner or later
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okay so at the end of course the skilled
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investor will be able to make profits
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and then that should be insider trading
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but is it well as you can see you can
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play a little bit with you know the
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timing okay so what about would I care
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about more because after all I am an
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accountant well if you look at the
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financial reporting setting and the fact
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beam members they have actually their
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own definition right now of materiality
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and what is really funny it is it is
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really different from the the reg FD
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definition so basically in that case the
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weather forecast should report it
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because some investor might benefit from
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it that's the reason why this kind of
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information should be basically material
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because you know it could help an
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investor to make a decision which is
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very basically different from what we
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were speaking about because the Reg a
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the definition is rather suggesting that
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an information becomes valuable becomes
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material well if it affects an average
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investor so in other words well right
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now maybe we have more information in
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the accounting disclosures given the
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notion of materiality in the financial
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reporting setting but of course we try
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maybe to have a common definition
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between the reg FD and FSB members and
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there is this current proposal where
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basically the first beam members are
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trying to converge towards the same the
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same definition as the ACC with the
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Raggedy legislation okay so then the
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average investor is probably not if it
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comes into a practice probably not the
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one you know that knows which is in the
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current inventory of course you know
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usually those are the skill ones so then
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if this proposal is basically going into
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it that maybe we will have less insider
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trading who knows because of the mosaic
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actually theory so anyway thank you so
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much
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