Principles of Finance and Economics: The Sex and Money Edition
To keep the adrenalin flowing and, in the process, to promote greater understanding and knowledge of economics and finance I herewith offer a rejoinder to her delicious rant in that article about the young lady, Natalie Dylan, who is offering her virginity to the highest bidder.
Good morning, Jersey Cynic, and thank you for a stimulating post.
One minor correction is in order. In your article, you write the following:
"If this really is a legit auction (as it's being called) how is it that offering money for sex is o.k. over the internet, but illegal everywhere else (except in Vegas of course maybe that's the loop hole!)"
In point of fact, although prostitution has limited legal protection in Nevada, it is not legal is Las Vegas.
Somewhat simplified, the statutory standard for licensure of brothels and other venues of sex for money has to do with the size of the county; but Nevada state law allows any county or other incorporated entity to outlaw the trade as it chooses. The county in which Las Vegas is incorporated prohibits prostitution. So do Reno and several other tourist spots in the state.
That does not mean, of course, that prostitution does not exist in Vegas, Reno, and other places where free markets thwart the will of even the most ardent of morality regulators; it just means that the commercial trade in sex is not sanctioned by municipal law. This simply imposes an additional cost (part of which is borne through the bearing of risk) on the market participants.
Free markets will find a way to express themselves, whether they be functioning under the fist of the Right or the Left. Greed, in and of itself, is a powerful, animating force of human activity; coupled with lust or one of several other cardinal sins, it becomes commerce under a greater or lesser guise of civilization.
The moral of the story is clear: if you want butt, go to Nevada; if you want butt with a side of risk, go to Vegas (or any other place where "public policy" concerns itself with controlling the otherwise unbridled passions of people).
Now, with respect to the story of the young damsel selling her virtue at auction, this again is merely an expressively free market manifestly operating to the end of bringing together suppliers of a product with those willing and able to command it through the pricing mechanism. In this particular case, a subtle but important rule in economic behavior is brought to light by her efforts and the men who have bid for first access to the goods and services she is offering at auction: no principle of economics prohibits the fool from being taken by a lesser fool.
In fact, I emphasize in finance classes a related principle sometimes referred to as "the greater fool theory": whenever an investor purchases a stock, it must rationally be to the purpose of eventually finding a greater fool than himself who will buy it from him.
This principle is so obvious that it amazes me when people think I am being flip in stating it.
Think about it. If you have bought a share of common stock of, say, Microsoft, you might or might not have been particularly foolish. Ultimately, in order to realize any capital gain, you must sell it; and if you sell it, someone must exist on the other side of the transaction as the purchaser.
However, if you are selling that share of Microsoft common stock, you must have concluded that no further gain commensurate with the risk can be extracted by holding the security. That means, at least in your judgment, whoever buys it must be a greater fool than you were when you bought it! Whether you were smart or stupid when you bought the stock, in order to sell it you must find someone who is less smart or more stupid than you were. It is that simple.
Now, you might be thinking that someone might be compelled to sell a stock for reasons other than the assessment that its capital gains potential has run its course, but that cannot be the case: if you really just need money, you can surely pledge the security to acquire money you need; either that, or you could form a position in options to gather some money for a short time while retaining the underlying security.
No, stock markets work efficiently by the consistent, persistent existence of the greater fool theory. If no greater fool exists than the last buyer of a security, that instrument will never be sold.
With respect to the young trollop selling her virginity, a man who is to some greater or lesser degree a fool will buy it, having valued her asset at the closing price of the auction; then she will be handed off to a greater fool, the next gentleman to whom she will provide access to what remains of her much-depleted asset.
This, by the way, is related to yet another economics phenomenon called "winner's curse," something quite frequently observed at auction sites like eBay: with a curious degree of regularity, in an "English auction" (one where the bids rise from an initially low starting point) the winning bid is actually higher than the market clearing price the auctioned item would have commanded in a more traditional market environment like a store. The spread between the clearing price in a traditional market and the closing auction price can, to some extent, be assessed to a "winner's premium": at high probability there will be at least one among many bidders who is willing to pay a premium over what would otherwise be "rational," and that person takes the hit just to be the winner of the auction. He or she, in that circumstance, then, is the greater fool.
The bidding for the virgin has hit close to $4 million. The rising high bid means that more fools will find opportunity beneath the eventual winner at the initial auction. Given the entrepreneurial young tart's proclivity for commercial endeavors, and given that the winning bid will be astronomical by almost any bidder's standards, in the fullness of time Ms. Dylan will reveal to the world a veritable legion of greater and greater fools.
Provided, of course, that she does not work in Vegas, where she would be arrested.
Unless, of course, she holds her auctions in one of the better hotels on the strip.
The Dark Wraith has spoken.
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