姿态 -- a site by bzy

1012 – Street price v.s. market price

research |

price | adverse selection | information asymmetry | market | cost of carry | private value | common value | winner's curse |

I went across this post: http://www.zerohedge.com/news/2015-06-25/how-much-160-silver-worth-average-american-hint-less-10. In short, the post argues by means of “interviewing” people in the street that average Americans fail to appreciate the value of silver (with the implicit message that the observed price in the frinancial market appears too high—at least that’s my reading).

Two well-known economic principles are at play here (at least two). First, severe information asymmetry can result in market break down (Akerlof, 1973). This is porobably the dominant force at play here. Such information asymmetry is, specifically, a form of adverse selection or winner’s curse. After all, the seller (the existing owner of the silver) must know something I as a candidate buyer does not. Likely, if I buy at the offered price, I am screwed.

Second, there is no natural use of a block of silver to an average American. This is known as “cost of carry”. Commodity goods require proper storage before their use in production (or reselling) to generate consumable goods (or simply money). Such storage can be costly. Just like a barrel of crude oil, a small block of silver can be difficult to keep before turned over to cash: It is probably heavy and can induce robbery. In addition, cost of carry involves the time and effort in converting the commodity good into final products. Even though there is a place where the silver bar can be readily resold and the $160 cash retrieved, the process involves the individual’s costly time and effort.

Taken together, these two components can result in an overall negative valuation of the silver bar. The trade, hence, will not go through. This is exactly the point of having a financial market, where the collaboration of many traders' competitive behavior reduces the force of information asymmetry and the cash settlement (relatedly, margining, default account, collaterals, etc.) minimizes cost of carry. To this extent, the market price of silver ($160) is much more reliable than any sorts of street interviews can deliver.

10:42, Jun 26, 2015
bzy@Rotterdam