A positive economics view of short selling

One of the most hotly contested investment practices during the global financial crisis (GFC) was short selling, with the strategy receiving attention approaching histrionic proportions from corporate executives, investors, media, regulators and politicians alike. This paper examines the practice of short selling through the lens of positive economics, examining the largely normative debate surrounding this unorthodox market behavior and its role in society. In exploring the economics of short selling, the authors examine a number of arguments from both the long and short side of the market and consider whether the central arguments levelled against the strategy are specific to short sellers or whether these issues relate to all market participants. We posit that short sellers assist in making markets less opaque, with these traders fulfilling an important price discovery role.