Today a health economist makes a complicated topic in financial economics clearer. Uwe Reinhardt discusses "naked" sales of financial instruments: what they are, why or when they might be good, and why they might be bad.
A naked short sale occurs when a participant sells an asset he or she does not actually own or even yet possess; a traditional short sale requires the participant to actually obtain it "on loan" from another party, in return for a fee and the promise to give it back at a future date, before actually selling it.
Reinhardt points out that short sales, whether naked or not, can be good insofar as they may more rapidly transmit knowledge or perceptions about the quality of investments.
But if enough short-selling occurs, it is also plausible that such bets could simply become self-fulfilling prophecies, unrelated to any particular market fundamental.
