Information, Middlemen,

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Chapter 7
Information, Middlemen, and Speculators
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Chapter Outline

• Introduction
• Real Estate Agents As Information Producers
• Reducing Search Costs
• Markets Create Information

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Chapter Outline

• Varieties of Speculation
• Consequences of Speculation
• Prophets and Losses
• The Complex Question of Insider Trading

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Chapter Outline

• The Liability Question
• Physicians and Malpractice Suits

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Introduction

• Mistaken decisions are sometimes costly.
• Avoiding mistakes is costly.

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Introduction

• Questions
• How can mistakes be avoided?
• Is information free?

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Real Estate Agents As Information Producers

• How to save about 5,000 and lose 15,000right
  on your own home.
• Question
• Is this possible?

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Real Estate Agents As Information Producers

• Realtors
• Serve as middlemen
• Question
• Who do they serve--buyers or sellers?

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Real Estate Agents As Information Producers

• Information is a scarce good.
• For buyers and sellers to continue to acquire
  information

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Real Estate Agents As Information Producers
Value of costs and benefits
Quantity of information
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Real Estate Agents As Information Producers

• Middlemen
• Increase peoples wealth by acting as low-cost
  producers of information
• Reduce transaction costs

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Reducing Search Costs

• Question
• Would you save money if you sold your G.E. stock
  yourself instead of using a stockbroker?

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Reducing Search Costs

• Question
• Why is getting it wholesale a popular pastime
  for many people.
• Retailers provide valuable information.

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Reducing Search Costs

• Question
• What role do job-placement agencies serve?

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Reducing Search Costs

• Middlemens Negative Reputation
• Comes from our habit of comparing actual
  situations with better but nonexistent ones

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Reducing Search Costs

• Middlemens Negative Reputation
• People perceive that middlemen take advantage of
  our ignorance.
• Middlemen produce real wealth.

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Markets Create Information

• Markets generate high-quality information at low
  cost.
• Middlemen serve a crucial role.

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Markets Create Information

• Well-Organized Markets
• Bids and offers of many prospective buyers and
  sellers have been brought together to create a
  single price for a fairly uniform good over a
  wide geographic area.

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Markets Create Information

• Questions
• Is the stock market well organized?
• The furniture market?
• The grocery market?
• The Beanie Baby market?

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Markets Create Information

• Prices provide information about available
  opportunities.

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Markets Create Information

• Middlemen
• Organize markets
• Create valuable information
• Specialize because they feel they have a
  comparative advantage
• Sometimes called speculators

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Varieties of Speculation

• Speculation (dictionary definition)
• Trading in the hope of profit from changes in the
  market price
• Question
• Is this adequate?

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Varieties of Speculation

• Examples
• Bears on Wall Street
• Commodity speculation
• Your education expenditure
• Consumer expecting price increases

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Consequences of Speculation

• Question
• What would farmers do if they expected a disease
  to wipe out part of this years corn crop?

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Consequences of Speculation
Year 1
Year 2
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Consequences of Speculation

• Question
• How can speculators reduce risk to others?

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Consequences of Speculation

• Speculators purchase risk.
• Hedgers sell risk.

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Prophets and Losses

• Questions
• What if the speculators are incorrect in their
  anticipations?
• What would you do if you had disagreed with the
  speculators anticipations?

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Prophets and Losses

• Speculators provide information.
• They offer express judgments.
• Their generated prices are indexes of value.

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Prophets and Losses

• Farmers decisions are affected by futures
  prices.
• Natural disasters have relatively little affect
  on food prices due to speculators.

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The Complex Questionof Insider Trading

• Question
• What would occur if speculators decisions were
  impacted by information they had no right to know?

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The Complex Questionof Insider Trading

• Questions
• What do buyers have the right to know?
• What do sellers have an obligation to reveal?

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The Complex Questionof Insider Trading

• Questions
• Is full disclosure possible when many people are
  not paying attention?
• When is inside information both desirable and
  ethical?

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The Complex Questionof Insider Trading

• Fiduciary Obligations
• Moral and legal duties taken on by contract or
  other agreement
• It is illegal when insider trading occurs as a
  result of the violation of these obligations.

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The Complex Questionof Insider Trading

• Questions
• Should all insider trading be made illegal?
• What is an unfair advantage?

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The Liability Question

• Questions
• What should be done about transactions that dont
  turn out as expected?
• Who is liable?

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The Liability Question

• Question
• What would motivate a seller to accept more
  liability?

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The Liability Question

• Courts have been throwing out contractual
  agreements.
• Assuming unfair advantage
• Deep-pocket judgments have become common.

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The Liability Question

• Question
• What are the costs of the deep-pocket judgments?

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The Liability Question

• Caveat Emptor
• Let the buyer beware
• Caveat Venditor
• Let the seller beware

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The Liability Question

• Question
• What would sellers do if they were forced to pay
  for the foolish actions of buyers?

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Physicians andMalpractice Suits

• Malpractice
• Once meant negligent or improper action by a
  physician that resulted in death or injury to the
  patient.
• Question
• What does it mean today?

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Physicians andMalpractice Suits

• Questions
• Wont malpractice suits motivate physicians to
  try to make fewer mistakes?
• Is this good or bad?

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Physicians andMalpractice Suits

• Questions
• How many tests are necessary to ensure a
  diagnosis?
• What does this cost?
• Is prolonging life always worth the cost?

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End of Chapter 7