Wednesday, March 25, 2015

Adversarial Economics

I know some people who are constantly trying to make money in financial markets. They think that I, as an economist, should be a natural ally. I start to talk about "random walk," "efficient market hypothesis," "mutual funds," and "buy and hold," and their eyes glaze over. Borrrr-ing! Why can't I be more like Jim Cramer? That guy doesn't tell people crap like that! (It is interesting, though, to imagine what that would be like. Cramer's show would be 15 seconds, like the winning Lotto numbers. He'd come on and say, "Here's my advice for today: keep holding what you already have. See you tomorrow!")

Beyond the poor economics of trying to beat the market, I have additional qualms. Production is win-win, investment is win-win, but participating in secondary markets is win-lose. If you make money from it, by definition someone else lost money. That's not how you change your mind to a Zion mentality. If I know something about the company that leads me to believe there's money to be made, I have a responsibility to tell the existing owner, not play dumb and wait for the profit.

"But what if it's not secret information? He already knows some people believe this, he just doesn't agree." Have I put any effort into showing him the error of his ways? Or do I just mumble a grateful prayer for the "sucker born every minute" and pounce?

I read an article yesterday that brought all this to mind. Someone found a picture for sale on eBay.

“When I discovered the image and knew who it was, I began to shake,” said Brother Fox. “I called my wife in to look at the image. I realized I had found something very special and very valuable.”
So when you find something on eBay that you realize is very valuable, do you still participate in the auction, which is designed to give the seller the lowest amount of money possible? Yeah, I'm aware that most auctions are subject to what Richard Thaler calls "the winner's curse," but with imperfect information, some auctions end up like this one: the seller and all other potential buyers have too-low a valuation and one potential buyer has an accurate valuation. What do you do if you are the accurate potential buyer? Contact the seller and tell him he's about to lose a fortune, or wait quietly with your poker face on, hoping no one notices your dancing feet under your chair?

I don't know what this guy did. I don't know what I would do. But I know what I should do, and I don't think participating in adversarial economics moves me closer to that goal.

No comments: