If there are more than 1,010 “rack stolen” credits available at a price of $0.01 then you could buy all the “rack stolen” credits for $0.01 and then steal the rack yourself for $1,000.
Since this is true, it would be irrational for participants to sell the market down to $0.01. They should be taking into account the fact that the value of stealing the rack now includes the value of happening to have advance information about stealing the rack, so thieves should be more likely to steal it.
This is pretty interesting: it implies that making a market on the rack theft increases the probability of the theft, and making more shares increases the probability more.
One way to think about this is that the money the market-maker puts into creating the shares is subsidizing the theft. In a world with no market, a thief will only steal the rack if they value it at more than $1,000. But in a world with the market, a thief will only steal the rack if they value the rack + [the money they can make off of buying “rack stolen” shares] more than $1000.
I still feel confused about something, though: this situation seems unnaturally asymmetric. That is, why does making more shares subsidize the theft outcome but not the non-theft outcome?
An observation possibly related to this confusion: suppose you value the rack at a little below $1000, and you also know that you are the person who values the rack most highly (so if anyone is going to steal the rack, you will). Then you can make money either off of buying “rack stolen” and stealing the rack, or by buying “rack not stolen” and not stealing the rack. So it sort of seems like the market is subsidizing both your theft and non-theft of the rack, and which one wins out depends on exactly how much you value the rack and the market’s belief about how much you value the rack (which determines the share prices).
I really like this framing of the market as a subsidization!
To your confusion, both outcomes are indeed subsidized—the observed asymmetry comes from the fact that the theft outcome is subsidized more than the non-theft outcome. This is due to the fact that the return on the “rack stolen” credit is a 100x profit whereas the “rack not stolen” credit is only a 1.01x profit.
If instead the “not stolen” credit cost $0.01 with a similar credit supply you would expect to see people buying “not stolen” credits and then not just deciding not to steal the rack but instead proactively preventing it from being stolen by actually bolting it down, or hiring a security guard to watch it, etc. Different cost ratios and fluctuating supply could even lead to issues where one party is trying to steal the rack on the same day that another party is trying to defend it.
Sidenote (very minor spoilers): this reminds me of a gamble in the classic manga Usogui, in which the main character bets that a plane will fly overhead in the next hour. He makes this bet having pre-arranged many flights at this time, and is thus very much expecting to win. However, his opponent, who has access to more resources and a large interest in not losing the bet, is able to prevent this from occurring. Don’t underestimate your opponent, I guess.
Ahh, I had forgotten that “not stolen” shareholders can also take actions that make their desired outcome more likely. If you erroneously assume that only someone’s desire to steal the rack—and not their desire to defend the rack from theft—can be affected by the market, then of course you’ll find that the market asymmetrically incentivizes only rack-stealing behavior. Thanks for setting me straight on that!
Since this is true, it would be irrational for participants to sell the market down to $0.01. They should be taking into account the fact that the value of stealing the rack now includes the value of happening to have advance information about stealing the rack, so thieves should be more likely to steal it.
This is pretty interesting: it implies that making a market on the rack theft increases the probability of the theft, and making more shares increases the probability more.
One way to think about this is that the money the market-maker puts into creating the shares is subsidizing the theft. In a world with no market, a thief will only steal the rack if they value it at more than $1,000. But in a world with the market, a thief will only steal the rack if they value the rack + [the money they can make off of buying “rack stolen” shares] more than $1000.
I still feel confused about something, though: this situation seems unnaturally asymmetric. That is, why does making more shares subsidize the theft outcome but not the non-theft outcome?
An observation possibly related to this confusion: suppose you value the rack at a little below $1000, and you also know that you are the person who values the rack most highly (so if anyone is going to steal the rack, you will). Then you can make money either off of buying “rack stolen” and stealing the rack, or by buying “rack not stolen” and not stealing the rack. So it sort of seems like the market is subsidizing both your theft and non-theft of the rack, and which one wins out depends on exactly how much you value the rack and the market’s belief about how much you value the rack (which determines the share prices).
I really like this framing of the market as a subsidization!
To your confusion, both outcomes are indeed subsidized—the observed asymmetry comes from the fact that the theft outcome is subsidized more than the non-theft outcome. This is due to the fact that the return on the “rack stolen” credit is a 100x profit whereas the “rack not stolen” credit is only a 1.01x profit.
If instead the “not stolen” credit cost $0.01 with a similar credit supply you would expect to see people buying “not stolen” credits and then not just deciding not to steal the rack but instead proactively preventing it from being stolen by actually bolting it down, or hiring a security guard to watch it, etc. Different cost ratios and fluctuating supply could even lead to issues where one party is trying to steal the rack on the same day that another party is trying to defend it.
Sidenote (very minor spoilers): this reminds me of a gamble in the classic manga Usogui, in which the main character bets that a plane will fly overhead in the next hour. He makes this bet having pre-arranged many flights at this time, and is thus very much expecting to win. However, his opponent, who has access to more resources and a large interest in not losing the bet, is able to prevent this from occurring. Don’t underestimate your opponent, I guess.
Ahh, I had forgotten that “not stolen” shareholders can also take actions that make their desired outcome more likely. If you erroneously assume that only someone’s desire to steal the rack—and not their desire to defend the rack from theft—can be affected by the market, then of course you’ll find that the market asymmetrically incentivizes only rack-stealing behavior. Thanks for setting me straight on that!