“A weak money pump is a money pump that returns us to the same situation that would have happened if we had never traded at all.”
Weak money pumps occur all the time in real life. People pay big bucks to let other people manage their money without knowing that they might have been better off doing it themselves. The pump is disguised by normal expected gains (in a well functioning economy), which the stock broker or hedgefund manger can claim was his doing.
Strong money pumps I would think almost as a rule don’t exist in individuals (since people wise up fast) but might occur institutionally in the form of regulatory loopholes. Any lawyers on the blog?
Weak money pumps occur all the time in real life. People pay big bucks to let other >people manage their money without knowing that they might have been better off >doing it themselves. The pump is disguised by normal expected gains (in a well >functioning economy), which the stock broker or hedgefund manger can claim was his >doing.
I really don’t see how this is a money pump. The broker isn’t exploiting the client’s bizarre preferences, he is exploiting their ignorance. Money pumps are about preferences not beliefs. Losing money due to ignorance/incorrect beliefs is just bad trading, not being money pumped.
Fair point. A better example would be that said money manager convinces the client at each trade that it is in his interest based on his preferences, when really these preferences lead back to where the client would have been if he hadn’t traded at all (minus the manager’s fee of course), but the client is unaware that his choices did him no good, because of marginal gains anyway. Unless you mean to say the pumped party must be aware that he is back where he started in order to be considered a pump.
You can see this in several ways—either the client is being inconsistent, as he makes different decisions based on how the the choices are presented; or he is being cheated by the money manager who lies about the value of the trades in question; or the client simply has non-independent preferences, which the money manager is exploiting (strict weak money pump).
I’m not sure either of the explanations is better than the other in this set-up; you’d have to experiment with the situation, change some variables, and see what comes up.
“A weak money pump is a money pump that returns us to the same situation that would have happened if we had never traded at all.”
Weak money pumps occur all the time in real life. People pay big bucks to let other people manage their money without knowing that they might have been better off doing it themselves. The pump is disguised by normal expected gains (in a well functioning economy), which the stock broker or hedgefund manger can claim was his doing.
Strong money pumps I would think almost as a rule don’t exist in individuals (since people wise up fast) but might occur institutionally in the form of regulatory loopholes. Any lawyers on the blog?
I really don’t see how this is a money pump. The broker isn’t exploiting the client’s bizarre preferences, he is exploiting their ignorance. Money pumps are about preferences not beliefs. Losing money due to ignorance/incorrect beliefs is just bad trading, not being money pumped.
Fair point. A better example would be that said money manager convinces the client at each trade that it is in his interest based on his preferences, when really these preferences lead back to where the client would have been if he hadn’t traded at all (minus the manager’s fee of course), but the client is unaware that his choices did him no good, because of marginal gains anyway. Unless you mean to say the pumped party must be aware that he is back where he started in order to be considered a pump.
You can see this in several ways—either the client is being inconsistent, as he makes different decisions based on how the the choices are presented; or he is being cheated by the money manager who lies about the value of the trades in question; or the client simply has non-independent preferences, which the money manager is exploiting (strict weak money pump).
I’m not sure either of the explanations is better than the other in this set-up; you’d have to experiment with the situation, change some variables, and see what comes up.
Wouldn’t most regrettable decision be considered a weak money pump?