I don't get it. How is arbitrage supposed to increase liquidity, if it is in practice increasing the cost of transaction? Isn't the middleman increasing the friction in the system?
What value do we create here?
41–50 of 60 posts
Re: What value do we create here?
#42Earlier quoted context omitted.
Yes, but still no. By providing liquidity you can be directly benefiting someone else but you're still not directly creating value. Liquidity, immediacy or anything else in the financial markets don't have any intrinsic value. The only reason the financial system exists at all is to facilitate the efficient allocation of resources towards the production of things that have real value.
Please define "things that have real value".
How about anything that contributes to the continued survival of the human race?
Re: What value do we create here?
#43Earlier quoted context omitted.
Agreed, we've done a pretty amazing job to become so productive. But we've done a terrible job of distributing this among the world's population. It's pretty appalling that with our current levels of productivity there are still so many people whose basic needs are not being met. I guess it depends what you mean by efficiently allocating capital. What's the end goal? Just to produce as much as we can?
> Agreed, we've done a pretty amazing job to become so productive. But we've done a terrible job of distributing this among the world's population. The problem isn't distribution - it's a couple of different things. Forgive me if this seems obvious, but the biggest reason some people are poor is lack of production - by and large, the poorest people aren't producing very many things that their fellow man wants to trad…
> The problem isn't distribution - it's a couple of different things.
I certainly agree that we can't solve this problem by just trying to redistributing existing wealth (i.e. aid). It was never a viable long term solution, and not even as much of a short term one as I would have guessed.
But I stick by the point that we've made amazing strides in productivity, but overall we've not distributed this well. What I really mean by this is, IMO, it would be a better result overall if the world were less productive, but the minimum living standard were higher.
I agree that it's productivity we need to spread, not wealth. The former will bring the latter. But, I think it's fair to say that some parts of the world could afford to spend more of their effort towards facilitating this. Even if that means a drop in overall output, for a while at least.
> Things we produce start out as luxuries and eventually become commodities.
Sure, but the incremental benefits of these items to people tends to get smaller. These could be sacrificed at least until everyone reaches a flatter part of this curve.
This like medicines, sanitation, are not exactly in the same class as, say, an iPod.
> Yes, actually, producing as much as we can is a pretty good plan for improving the world.
In practice a decent plan, and perhaps even the only practical one given human nature and our political systems. But still not a goal in itself.
Re: What value do we create here?
#44Earlier quoted context omitted.
Considering how many people in the world are starving, ill, undereducated, and unemployed, I'd say we're doing a piss-poor job of 'efficiently allocating the world's capital'.
> Considering how many people in the world are starving, ill, undereducated, and unemployed, I'd say we're doing a piss-poor job of 'efficiently allocating the world's capital'. Considering how many in the world aren't starving, ill, undereducated, and unemployed, I'd say we're doing an utterly frigging amazing job of 'efficiently allocating the world's capital'. Seriously - the question isn't, "Why are some people p…
> The fact that there's any literacy, lifespan over 30 years, immunization from disease, infrastructure, and knowledge is marvelous in and of itself. The rate that those things are growing lately is astounding. Humanity is doing a pretty amazing job lately.
And yet there's still so much more to do.
Re: What value do we create here?
#45Wow, I'm quite surprised and honored to come home and see that my post got so many votes.
Having read through most comments below, I want to make a few points:
1. I am not implying a moral obligation to do some jobs over others. Nor am I suggesting a framework to judge the value of some jobs over others. If I had known this was going to be read by so many people, I would have spent more time making sure my message was communicated more clearly. I'm sorry for giving some people the wrong idea.
2. My point is actually very simple and I expect the vast majority of Hacker News readers already get it: for people considering what jobs to do, especially young college students, be wary of focusing on the value of fun and money. Fun and money can be very distracting when you are young and haven't experienced so much freedom before. However, the decisions you make when you are young can have consequences for the trajectory of your whole life. Always think about what will give you long-term and enduring happiness and satisfaction. Often, I think long-term happiness is connected with a cause greater than your own immediate satisfaction. Hence the consideration of value creation.
It's obvious advice, but I hoped my story would make it more digestible for college students.
Re: What value do we create here?
#46Earlier quoted context omitted.
Why are you holding the contract? You're an airline hedging against rising oil prices? You're a multinational corporation locking in a reasonable exchange rate when dealing with overseas manufacturers? You're a speculator who thinks the market isn't properly anticipating the impact of a weather pattern? All these seem fairly reasonable to me. I define a "flipper" as someone whose sole purpose in owning a security is…
What you call "flipper" is normally called a "speculator". Also, speculators add value to the market because they push prices toward the true values. If an asset is expected to be more valuable in the future, speculators will buy it now, raise the prices, thereby encouraging consumers of that asset to use less of it. This ensures that more is available for future use. Also, speculators also add liquidity for consumer…
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Re: What value do we create here?
#47In a similar spirit to the article's question I've recently switched the emphasis of my economic thinking from, "How can I make money?" to "Are there any real-world problems I encounter frequently, or know that others are experiencing, that I think I can solve, and make money while doing it?"
Re: What value do we create here?
#48Earlier quoted context omitted.
> Agreed, we've done a pretty amazing job to become so productive. But we've done a terrible job of distributing this among the world's population. The problem isn't distribution - it's a couple of different things. Forgive me if this seems obvious, but the biggest reason some people are poor is lack of production - by and large, the poorest people aren't producing very many things that their fellow man wants to trad…
> The problem isn't distribution - it's a couple of different things. I certainly agree that we can't solve this problem by just trying to redistributing existing wealth (i.e. aid). It was never a viable long term solution, and not even as much of a short term one as I would have guessed. But I stick by the point that we've made amazing strides in productivity, but overall we've not distributed this well. What I real…
> What I really mean by this is, IMO, it would be a better result overall if the world were less productive, but the minimum living standard were higher.
Maybe, but I think it's a bit of a non-sequitor. There's no either/or choice there. Consistently, a place producing a lot equates with a high quality of life. The only places that do better for quality of life are relatively small, extremely homogeneous societies (Okinawa, Switzerland, etc). As a general, large scale strategy, produce more is pretty good. Attempts to produce less and streamline it to where the governor thinks it should go have all ended poorly thus far.
> Sure, but the incremental benefits of these items to people tends to get smaller. These could be sacrificed at least until everyone reaches a flatter part of this curve. This like medicines, sanitation, are not exactly in the same class as, say, an iPod.
Definitely - and this is a choice we already get to make as individuals. You can choose how much you want to consume, invest, and give charitably. It's an individual ethical judgment, and one we must all make and live with.
> In practice a decent plan, and perhaps even the only practical one given human nature and our political systems. But still not a goal in itself.
Well, I think "produce as much good stuff as we can" is a good goal in itself, but improving the baseline of the whole world is good too. Actually, I think they're complimentary goals, and not really in opposition with each other at all. Working to build as much good stuff as possible in the world makes it easier to make more good stuff cheaper - I don't think there's any natural antagonism or choice between producing more and improving the baseline for the rest of the world. In fact, I'm pretty sure they're complimentary goals.
Re: What value do we create here?
#49Reminds me of Richard Hamming's saying: "What important problems are you working on?"
Very good read - "You and your research" http://www.cs.virginia.edu/~robins/YouAndYourResearch.html
Re: What value do we create here?
#50I don't get it. How is arbitrage supposed to increase liquidity, if it is in practice increasing the cost of transaction? Isn't the middleman increasing the friction in the system?
When something is illiquid due to insufficient buyers and sellers, the bid and ask spread is large. A big discount is needed to motivate people to buy it. E.g. you ask for $100 to sell your lawn mower because that's what every seller asking for. People only bid $60 to buy a lawn mower because they know it's difficult to resell it. The spread is $40. Now from time to time, a few buyers would get desperate and buy at $100; likewise a few sellers would sell at $60.
Someone then comes in and says the spread is crazy. He offers to bid to buy at $70 and to ask to sell at $90. The few desperate sellers of course would sell to him at $70 instead of $60. And the few desperate buyers would buy from him at $90. He narrows the spread from $40 to $20, and makes $20 in between. He basically increases the buyer and seller pools by adding himself to them, thus increased the liquidity of the lawn mower secondary market.
The risk to the arbitrager is that he guesses the amount of potential buyers or sellers wrong and set the wrong narrower bid and ask prices. E.g. he could buy a lot of lawn mowers at $70, but there are much fewer buyers willing to buy at $90. He would have to reduce his offer price to $85, $80, $75, $65, or $60 to really get the buyers going. As you can see his profit margin erodes and eventually turns into a loss.