Experiment in economics

[YankeyMCC]

Just read something that seemed completely incorrect and I would like to use you good lounge denizens to test it out.

Here is the situation:

We have a box of diamonds all of the same weight and quality, there are exactly as many diamonds as there are people in the experiment. But they are commonly owned and we must sell or hold them buy voting.

If we sell the diamonds now we will get $1000 per diamond

If we sell the diamonds tomorrow we will get $2000 per diamond

All profits are distributed equally to the participants.

[Deja Q]

1. Is the $2000-per-diamond guaranteed?

[YankeyMCC]

3. Yes

[Deja Q]

6. If I waited until tomorrow,

would twice as many people show up and therefore we'd get half the profits?

[YankeyMCC]

8. No only those present at the beginning can participate

There's no catches, it's as straightforward as it sounds

If the group votes to sell now you will each get $1000
If the same group votes to wait until tomorrow you will get $2000 just a day later.

That's it, no intended tricks.

[Deja Q]

9. How about unintended tricks?

:evilgrin:

So we sell today and get $1000 each now.

If we wait until tomorrow, we will get $2000 the day after that?

Accountants say to get the money now. (or that's what they taught at the college I went to...) For in the future, the same amount of money may not be worth as much.

This is tricky; the obvious answer is to get the $2000, but the obvious problem is never obvious...

[YankeyMCC]

11. You can twist yourself into paralysis

None of the unintended consequences you're speculating about will be real. I'm looking at how people will choose given straight forward choices.

[Kutjara]

12. The time-value of money.

You're correct that money in the future is worth less than the same amount of money today. How much less is determined by the prevailing interest rate in the economy. For example. If someone's going to give you $1,000 in one year's time and the interest rate is 10% per annum, that would be worth approximately $909 today. That's the same as saying $1,000 at the end of next year is only worth $909 to you now.

The reason for this is fairly straightforward. You could take the $909 now, invest it at 10% for a year, and have the $1,000 at the end.

Of course, this calculation ignores risk and assumes that the 10% is guaranteed. If you add the risk of not being paid, $1,000 in a year could be worth significantly less today. At the extreme, if the person offering the $1,000 is a crack user and gambling addict, the current value of the money might be zero (because you'll never get it).

In this case, since it seems both the $1,000 and $2,000 are guaranteed, and the prevailing interest rate presumably isn't greater than 100% per day, and the participants aren't all expecting to die within 24 hours, the $2,000 option must be the preferred one.

[hickman]

2. Wait a day, twice the profits?

Seems like a no brainer unless someone's got drug dealers on their back.

[YankeyMCC]

5. Yeah it seems like a no brainier doesn't it?

But for some reason the author of a book I'm reading uses this example to demonstrate logic in economics and he assumes the group would vote to sell the items immediately.

For the most part the rest of the book (up to that point) seemed pretty well reasoned, and this just seemed a weird lapse. So I wanted to check it out in some way.

[YankeyMCC]

4. I'd be curious to know the reasoning of the person who voted for selling now

Unless of course you were just being mischievous :)

[JVS]

7. Are you sure that's all there is to it?

[YankeyMCC]

10. Positively

The point is to demonstrate that a free market with strong property rights will make a better decision for the future than a communally owned property.

I think the mistake the author is making is that property rights do not have to be "all or nothing"

That is a traditional European view, at least since the advent of enclosing land. But there are things in between, Native American cultures had property rights but in a very different way. And this scenario is somewhere in between (each person has a right to share the benefits but only at the sufferance of the community) and the author is trying to fit it into the "all or nothing" model.

[hickman]

13. I'm sorry, but I need more.

How does the enclosing of common land(in England) and giving the land to the nobility have anything to do with this. The small freemen farmers were destroyed and their lands were absorbed into whatever bozo was currently holding a title. William the Conquerer started this. He took a land of farmers and turned it into a land of aristocracy and slaves.