4 ms·

For a lot of economists price == value, so it doesn't really make sense to say something like a house is overvalued. This is particularly true with liquid, well

For a lot of economists price == value, so it doesn't really make sense to say something like a house is overvalued. This is particularly true with liquid, well traded securities like US equities. That's not to say the current price (value) won't ever change but -- generally -- you can't make consistent, exploitable predictions about them. Prices for equities generally take a "random walk" from where they are at any given moment. For an interesting discussion about when and when this isn't the case the book Inadequate Equilibria by Eliezer Yudkowsky is pretty good. https://equilibriabook.com/ https://equilibriabook.com/

g_delgado14 8y ago
Interesting. What about in the case where something clearly doesn't have the value that the price says - i.e. the dutch tulip bubble?
- bluGill 8y ago
  Their argument is value is a moment to moment price and not a fundamental property.
- peacetreefrog 8y ago
  Well for one, it's not just the price -- I can't slap a million dollar price tag on my house and call it the value -- it's the price in a well functioning, liquid market. I.e. someone has to be willing to pay it. Historically from time to time you do get these anomalies and bubbles where things get out of wack. The tulip bubble is a classic example, and BTC last year looked a lot like that too. I think the way to connect those prices back to value is that the price eventually (and not even that long from a historical perspective) got back in sync -- tulip bulbs eventually crashed and BTC has lost 50+% of it's value in the last year. So I guess it's not to say price always == value for everything at every moment in time, but exceptions don't come around that often. Again, the Yudkowsky book explores when they do. Related is this comment by Warren Buffett: "I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. "Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better."
- decentralised 8y ago
  It's the same answer. The idea is that the free market acts out its own price-discovery mechanism and assets are valued in relation to what speculators / investors are willing to pay for them. This is an interesting segway into auction theory and Dutch vs English auctions in particular, if you are interested: https://mikebrandlyauctioneer.wordpress.com/2012/07/29/english-auction-versus-sealed-bid-and-dutch-auctions/ https://mikebrandlyauctioneer.wordpress.com/2012/07/29/engli...
  - pbhjpbhj 8y ago
    * segue I only realised the pun in the product name when I first saw someone make this homophonic substitution error.
    - decentralised 8y ago
      Thanks!

g_delgado14 8y ago

Interesting. What about in the case where something clearly doesn't have the value that the price says - i.e. the dutch tulip bubble?

bluGill 8y ago
Their argument is value is a moment to moment price and not a fundamental property.
peacetreefrog 8y ago
Well for one, it's not just the price -- I can't slap a million dollar price tag on my house and call it the value -- it's the price in a well functioning, liquid market. I.e. someone has to be willing to pay it. Historically from time to time you do get these anomalies and bubbles where things get out of wack. The tulip bubble is a classic example, and BTC last year looked a lot like that too. I think the way to connect those prices back to value is that the price eventually (and not even that long from a historical perspective) got back in sync -- tulip bulbs eventually crashed and BTC has lost 50+% of it's value in the last year. So I guess it's not to say price always == value for everything at every moment in time, but exceptions don't come around that often. Again, the Yudkowsky book explores when they do. Related is this comment by Warren Buffett: "I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. "Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better."
decentralised 8y ago
It's the same answer. The idea is that the free market acts out its own price-discovery mechanism and assets are valued in relation to what speculators / investors are willing to pay for them. This is an interesting segway into auction theory and Dutch vs English auctions in particular, if you are interested: https://mikebrandlyauctioneer.wordpress.com/2012/07/29/english-auction-versus-sealed-bid-and-dutch-auctions/ https://mikebrandlyauctioneer.wordpress.com/2012/07/29/engli...
- pbhjpbhj 8y ago
  * segue I only realised the pun in the product name when I first saw someone make this homophonic substitution error.
  - decentralised 8y ago
    Thanks!