  The efficiency of a modern economy depends on what we call the Value-Tracking
Hypothesis: that market prices of key assets broadly track some underlying
value. This can be expected if a sufficient weight of market participants are
valuation-based traders, buying and selling an asset when its price is,
respectively, below and above their well-informed private valuations. Such
tracking will never be perfect, and we propose a natural unit of tracking
error, the 'deciblack'. We then use a simple discrete-time model to show how
large tracking errors can arise if enough market participants are not
valuation-based traders, regardless of how much information the valuation-based
traders have. We find a threshold above which value-tracking breaks down
without any changes in the underlying value of the asset. Because financial
markets are increasingly dominated by non-valuation-based traders, assessing
how much valuation-based investing is required for reasonable value tracking is
of urgent practical interest.
