An email exchange from today....
TP: Dear Dr. Munger, I enjoyed your video, "What Do Prices “Know” That You Don’t?" The title reminds me of something that Bill Gates said to me. I created the prediction markets project within Microsoft in 2003 and I was asked to brief Bill on them. He immediately understood how prediction market prices work and then said that the reason they might help him was because [paraphrased], "If the market prices differ from my own beliefs, then either they know something that I don't know or I know something they don't know, and either of those may need remedy." Cheers, TP
MM: That's very cool, and an interesting difference between economists and entrepreneurs. I assume you know the joke about the economist and the entrepreneur.
Economist and entrepreneur are walking down a street in San Francisco. The entrepreneur sees a $100 bill, and generously offers to split the “found” value with the economist.
The economist refuses, saying that it’s not possible. “After all,” the economist announces, if there had been a $100 bill in the street, someone would have picked it up. In equilibrium, there are no arbitrage profit opportunities!”
The entrepreneur shakes his head in scorn and pockets the full $100.
So, the economist sticks to the first part of your formulation. For the economist, "they" always know everything, and that's embodied in price. But entrepreneurs
know that prices are wrong, often, sometimes by a lot.
That means the entrep's pick up the $100, and the economist turns out to be right after all. But only because smart people go around looking for wrong prices.
UPDATE: Scott Ainsworth writes.... A story from Georgia - When walking with economists in front of the econ/business buildings on the Georgia campus, I noted that there was a lot of money lying around the ground - pennies and dimes mostly. The obligatory equilibrium jokes followed. One of the economists said that picking up pennies was not worth his opportunity costs. I admitted that I still picked pennies up. More than one person looked askance at me - until I stated that I was the shortest person in the group. Opportunity costs survived and equilibrium was restored. For the economists, it was a very big day - and I was 23 cents wealthier.
TP: Dear Dr. Munger, I enjoyed your video, "What Do Prices “Know” That You Don’t?" The title reminds me of something that Bill Gates said to me. I created the prediction markets project within Microsoft in 2003 and I was asked to brief Bill on them. He immediately understood how prediction market prices work and then said that the reason they might help him was because [paraphrased], "If the market prices differ from my own beliefs, then either they know something that I don't know or I know something they don't know, and either of those may need remedy." Cheers, TP
MM: That's very cool, and an interesting difference between economists and entrepreneurs. I assume you know the joke about the economist and the entrepreneur.
Economist and entrepreneur are walking down a street in San Francisco. The entrepreneur sees a $100 bill, and generously offers to split the “found” value with the economist.
The economist refuses, saying that it’s not possible. “After all,” the economist announces, if there had been a $100 bill in the street, someone would have picked it up. In equilibrium, there are no arbitrage profit opportunities!”
The entrepreneur shakes his head in scorn and pockets the full $100.
So, the economist sticks to the first part of your formulation. For the economist, "they" always know everything, and that's embodied in price. But entrepreneurs
know that prices are wrong, often, sometimes by a lot.
That means the entrep's pick up the $100, and the economist turns out to be right after all. But only because smart people go around looking for wrong prices.
UPDATE: Scott Ainsworth writes.... A story from Georgia - When walking with economists in front of the econ/business buildings on the Georgia campus, I noted that there was a lot of money lying around the ground - pennies and dimes mostly. The obligatory equilibrium jokes followed. One of the economists said that picking up pennies was not worth his opportunity costs. I admitted that I still picked pennies up. More than one person looked askance at me - until I stated that I was the shortest person in the group. Opportunity costs survived and equilibrium was restored. For the economists, it was a very big day - and I was 23 cents wealthier.
4 comments:
What I appreciate about the joke is that the economist is always skeptical of something that looks too good to be true. He won't always be right, but he'll almost always be right, for the simple reason that on a global average one's overall consumption will have to approximate one's overall production.
I once found a twenty dollar bill on the side of the road, and the first thing I thought after I picked it up was the referenced joke.
JLW: I absolutely agree. The fact is that there are (practically) never free dollars lying around. When a get a call from a telemarketer, saying, "Have I got a deal for YOU!" I say, "No, you don't." I don't need to know the details. However, it is ALSO true that entrepreneurs really do find free money lying around. But it's hard work, or takes luck. I'll just sit back and say, "Nope. No free money."
http://what-if.xkcd.com/22/
warning: this will cost you 83 pennies! ;)
Post a Comment