On short-selling and control theory

[shamebear]

Short-selling of stocks got a lot of bad press from the current financial crisis, but I found a comment from a control engineer interesting. In ordinary buying and selling, everyone hopes that the value of the stock will keep on rising and he likended this to a positive feedback loop, which cannot be stable. The short-selling was then to be the

Comments

[shamebear]

Good point. A sale options (*) for instance, can be both an insurance and a short-selling gamble.

Another signal that a stock is overpriced is of course that people don't want to buy it, but far as I know you can't count "won't-byers" or even how many wanted to buy a given stock from available market data, so short-selling would seem to make the state of the market more visible.
Though perhaps a working futures market does much the same thing?

*) if that's the right translation. The right to sell a stock you have, in the future at a fixed price.