[extropy-chat] Noisy future day (was: silent night)

[Robin Hanson]

On 12/22/2004, Harvey Newstrom wrote:
>Robin, do futures markets only work as a form of betting?  I know that in 
>most markets, you actually purchase a product or an option to buy a 
>product at a set price.  If the price goes up or down, you win or lose as 
>its value changes.  That's the basic function of ownership.  But aren't 
>futures markets just betting?  You have no property.  You bet on an 
>outcome and someone else pays in cash if you win.  No ownership or value 
>changes occur.

The fundamental economic distinction is between common values and private 
values.  A common value asset has the same (relative) value for everyone in 
the end, while the value of a private value asset varies from person to 
person.

Most retail markets, from flea markets to grocery stores, trade mostly 
private value assets.  The buyer values the item more than the seller, so 
they trade.  They both full well know this.

Virtually all of the financial markets you know of trade basically common 
value assets.  Sure, there are a few people whose value for the asset 
differs, but the vast majority of traders would get the same value from 
holding the asset for a long time.  Most traders in financial markets are 
speculators, who are essentially betting.  For every winner there is a 
loser.  If I buy IBM and it goes up I win, but only because the person I 
bought it from lost.  To not make a bet you just buy an index fund of all 
the assets - relative to such an index fund every other asset trade is a bet.

The fact that some common value markets trade "real physical things" while 
other markets trade paper whose value depends on what some other people 
will do later is way beside the point.



Robin Hanson  rhanson at gmu.edu  http://hanson.gmu.edu
Assistant Professor of Economics, George Mason University
MSN 1D3, Carow Hall, Fairfax VA 22030-4444
703-993-2326  FAX: 703-993-2323