## Thursday, September 23, 2010

### A look at historical bubbles

Interesting

James said...

At around 5 minutes 50 seconds in the video clip, there's a scene where students are asked how much they would buy a particular mug for. The answer averages \$6. Then a few mugs are given to random students. An hour goes by and those students are asked how much they would sell their mug for. The average answer is \$9.

The conclusion of this experiment, that the emotional pleasure of owning something for just an hour pushed the price up 50%, does not necessarily follow from the data. There’s another possible explanation.

Problem: there needs to be a second test to see how much they would sell the mug for immediately after they receive it. In addition, there needs to be a third test to see how much they would sell the mug for before they actually own it.

My hypothesis is that these second and third tests would still result in higher selling prices than buying prices. My answer rests in the idea that prices are determined subjectively. An individual buyer always values something for more than he buys it for. The students had always valued the mug at a higher price than what they would buy it for. This is true before they were given the mug, the instant they took ownership of the mug, and an hour after they took ownership of the mug. It is precisely the difference in the price between what they would buy it for and what they value it that is the impetus for them buying the mug in the first place.

The flip side of this is that sellers always value an object for less than what they sell it for. It is this price differential that is the impetus for selling it. Wal-mart doesn’t buy simple 4 function calculators for 70 cents so that it can sell them for 70 cents. It buys them for 70 cents because they can sell it for \$1. The price it purchases the calculator for is the price it values it. Then, it knows that it can turn around and sell it for more than what they value it.

One last thing: if someone valued a widget for \$10, then that means he values \$10 for the price of 1 widget. Either way, whether he has \$10 dollar or one widget, his utility is the same. There’s no impetus for him to exert the work to exchange one for the other. Unless, of course, working in this particular field of exchanging things makes him happier for its own sake.

James said...

At around 5 minutes 50 seconds in the video clip, there's a scene where students are asked how much they would buy a particular mug for. The answer averages \$6. Then a few mugs are given to random students. An hour goes by and those students are asked how much they would sell their mug for. The average answer is \$9.

The conclusion of this experiment, that the emotional pleasure of owning something for just an hour pushed the price up 50%, does not necessarily follow from the data. There’s another possible explanation.

Problem: there needs to be a second test to see how much they would sell the mug for immediately after they receive it. In addition, there needs to be a third test to see how much they would sell the mug for before they actually own it.

My hypothesis is that these second and third tests would still result in higher selling prices than buying prices. My answer rests in the idea that prices are determined subjectively. An individual buyer always values something for more than he buys it for. The students had always valued the mug at a higher price than what they would buy it for. This is true before they were given the mug, the instant they took ownership of the mug, and an hour after they took ownership of the mug. It is precisely the difference in the price between what they would buy it for and what they value it that is the impetus for them buying the mug in the first place.

The flip side of this is that sellers always value an object for less than what they sell it for. It is this price differential that is the impetus for selling it. Wal-mart doesn’t buy simple 4 function calculators for 70 cents so that it can sell them for 70 cents. It buys them for 70 cents because they can sell it for \$1. The price it purchases the calculator for is the price it values it. Then, it knows that it can turn around and sell it for more than what they value it.

One last thing: if someone valued a widget for \$10, then that means he values \$10 for the price of 1 widget. Either way, whether he has \$10 dollar or one widget, his utility is the same. There’s no impetus for him to exert the work to exchange one for the other. Unless, of course, working in this particular field of exchanging things makes him happier for its own sake.