Entries Tagged 'Word of The Day' ↓

Word of the Day – Zero Sum Game

A situation in which one person or group can win something only by causing another person or group to lose it. (Source: Mirriam Webster Dictionary

The definition of this economics term is simple, but spotting the reality of being in such a game is not so easy.

We’ve all seen shell games. If not in person – on TVs or movies. 

In these games, watchers are invited to bet on whether they can see where the con man places a ball under three containers he is shuffling around. 

The financial markets essentially do the same thing. We are invited to bet that we (or someone we pay who we think is smarter than we are) can predict where some kind of investment is going to land by a stipulated amount of time.  

The probability of any random event, e.g. rain on any particular day is actually 50/50 over the long run 

We know this from the law of large numbers used in statistics – where a coin is tossed Ad infinitum, the results ultimately move towards 50/50 heads/tails.

But of course, on some days it is easy for us to see that rain is more likely than not and vice versa. 

So we bet on stocks (or futures contracts or commodities or currencies, etc.) within short periods of time where the law of averages (i.e. large numbers) does not yet make the odds 50/50

After the end of each time period we choose, (a minute, hour, day, week, month, etc.) the result is always a zero sum game. The total payout for bets is zero. The winners cancel out the losers.

There may be differing amounts of winners or losers in each time period (i.e. higher or lower volume of bets) but the total amount of money they all bet will sum up to zero.

Winners win at the expense of the losers. Winners (including the Brokerages who take out their cut first) are not necessarily those who will have better knowledge of factors affecting the bets they make. They may just be lucky. But losers are those who, by definition, make poorer choices. Continue reading →

Word of The Day – Asset-Price-Inflation

Investopedia defines Asset-Price-Inflation this way:

Asset price inflation is an economic phenomenon denoting a rise in price of assets, as opposed to ordinary goods and services. Typical assets are financial instruments such as bonds, shares, and their derivatives, as well as real estate and other capital goods. 

Investopedia adds this caveat:

Ordinary goods and services are excluded and do not count as assets in this sense. Most standard measurements of inflation, such as the consumer price index (CPI), do not account for rising asset prices.”

I don’t know about you, but for years I’ve been feeling that our whole economy is becoming more and more like a house of cards. The financial sector has doubled since 1947 from 10% to 20% of our American Economy. 

Millions of Americans work in this sector or benefit from it, but daily many of us feel poorer than ever before. This is particularly the case in big cities across the United States. 

Living in the most expensive area in this country, I’m saddened by seeing the prices of housing rise while friend after friend leaves this area because of its absolutely surrealistic housing prices.

A long time ago I owned a condo that I sold after a decade for four times the amount I bought it for.

The problem I faced then, was that by the time I paid for renovations inside, legal and other fees, and paid off the mortgage interest and equity on my loan, buying another property was out of reach for me. This is what happens when housing asset-price-inflation sets in. Continue reading →

Rent Seeking – A Note

This week I’m reading a book by Mariana Mazzucato, The Value of Everything: Making And Taking in the Global Economy (2018)

Finally! A book about economics that everyone can understand. I’ll review this book fully when I’m finished with it.

For now, I want to clarify the Word of the Day post I wrote in 2013, “What the Heck is Rent-Seeking?”

“Rent seeking” is a word that libertarian scholars, such as Gordon Tullock, appropriated during the last century, along with words such as “liberty,” “freedom” and heritage” from the ‘founding fathers’ of the United States.

Rent-seeking was a concept put forth by Adam Smith, a Scottish philosopher interested in economics, who wrote his famous book, The Wealth of Nations, a few months before the United States of America even existed. Smith published his book March 9th 1776. Continue reading →