WHY ARE THERE SO MANY FINANCIAL BAZILLIONAIRES?

WHY ARE THERE SO MANY FINANCIAL BAZILLIONAIRES? The caption is an irreverent restatement of a question posed by Brad De Long with a lot of suggested answers by Tyler Cowen and the commenters at Marginal Revolution. (I got the link from 2 Blowhards). One of the underlying questions is that if the rewards to being in finance are so great, why don’t lots more people enter and compete away the excessive rewards? I wanted to highlight Cowen’s point about the “first mover advantage.” Kids, Annalisa made the point some time ago that a lot of the movements on financial markets seem random. I commented that the randomness, according to the random walk theory, is the result of trading activity. I would add that people make a lot of money from that trading activity. A simplified hypothetical example could be that a trader notices a pattern. A particular security tends to be cheaper on Tuesdays and has a higher price on Wednesdays. He can make money by buying on Tuesdays and selling on Wednesdays. He should do so until the pattern disappears and Tuesday and Wednesday prices behave randomly. The result is that the stock price moves randomly and the trader has made money. Cowen’s “first mover advantage” can be simplified to say that the first person to notice the anomaly can make a lot of money.

This entry was posted in Economics. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *