No, No Trade Theorem

by on November 16, 2010 at 7:24 am in Economics | Permalink

One of my favorite scenes from Michael Lewis's The Big Short is a great illustration of how adverse selection or fear of adverse selection can prevent a market from operating and how noise traders open the market.

Steve Eisman wants to bet against subprime.  Greg Lippmann wants to sell him that bet. But Eisman and his partners hold back. They keep asking what does this guy know that we don't? Why is he selling us this great deal? Could it really be this obvious?  Could it really be this simple? Over and over again they questions Lippmann and themselves. "Greg," says Eisman's partner, "Don't take this the wrong way.  But I'm just trying to figure out how you're going to fuck me."

Everything is telling Eisman that this is the bet of the century but fear that he is missing something, that the other guy is smarter than he is, still holds him back.  Finally, Lippmann hits on an unusual idea, he invites Eisman, who wants to short subprime, to meet with the buyers of subprime.

The teppanyaki room inside the Okada restaurant consisted of four islands, each with a large, cast-iron hibachi and dedicated chef.  Around each island Lippmann seated a single hedge fund manager whom he had persuaded to short subprime bonds, along with investors who were long those same bonds.  The hedge fund people, he hoped, would see just how stupid the investors on the other side of those bets were and cease to worry that the investors knew something they did not. 

Lippmann's plan works.  Eisman meets the buyers and for the first time groks the stupidity that is ruling the market and he makes the trades that will make him and his partners rich.

Chris November 16, 2010 at 3:35 am

Ouch!!

End of posting should read: "…the trades that will make HIM…rich." We call this a direct object.

Robin Hanson November 16, 2010 at 5:26 am

Excellent example. Unfortunately, the more common problem is being the idiot, rather that being the wise guy who can't quite be convinced he's trading with idiots.

Outsider November 16, 2010 at 6:19 am

I think the saying is

"fools are without number"

The corallary is

"The greatest lesson in life is to

know that even fools are right sometimes."

I think that none of us is as smart as we think.

Mostly investing results are the the stars aligning for or against

you.

dirk November 16, 2010 at 6:39 am

gold, gold, gold, gold, gold, gold, gold, gold.

Yancey Ward November 16, 2010 at 8:16 am

Lippman was the bookie, I take it?

Bill November 16, 2010 at 10:11 am

History is always the person sitting on the other side of the table from a person who makes a prediction.

Look at predictions economists make and compare them to what actually transpired. Or politicians.

Oh, we can cut taxes and their won't be a structural deficit because GNP will grow faster and the tax cut will make more revenue than it loses.

Scott November 16, 2010 at 6:46 pm

Hindsight is always 20/20. Eisman is wrong and we never hear from him again. He turns out to be right and everyone else is stupid.

Newsflash: no one can predict the future.

uggfurclearance November 17, 2010 at 5:27 pm

`No, I always go about alone and nothing ever happens to me,' she said, taking her hat. And kissing Kitty once more, without saying what was important, Nike Shox Clearanceshe stepped out courageously with the music under her arm and vanished into the twilight of the summer night, bearing away with her her secret of what was important, and what gave her that calm and dignity so much to be envied.

Kitty made the acquaintance of Madame Stahl too, and this acquaintance, together with her friendship with Varenka, did not merely exercise a great influence on her – it also comforted her in her mental distress. She found Ugg boots clearancethis comfort through a completely new world being opened to her by means of this acquaintance, a world having nothing in common with her past; an exalted, noble world, from the height of which she could contemplate her past calmly. It was revealed to her that besides the instinctive life to which Kitty had given herself up hitherto there was a spiritual life. This life was disclosed in religion, but a religion having nothing in common with that one which Kitty had known from childhood, and which found expression in masses and evening services at the Widow's Home, where one might meet one's friends; and in learning by heart Slavonic texts with the priest.Ugg boots clearance

dual sim January 6, 2011 at 12:30 am

Vai e prendi una superiore qualità di repliche orologi sarebbe meglio.

Comments on this entry are closed.

Previous post:

Next post: