Some Market Economics of a Paris Nightclub
Market strategy on the Dancefloor with Matheo
Matheo has been studying some basic economic principles in preparation for doing some trading on financial markets before going out with his friends to a nightclub in Paris. He arrives on the dance floor and is having fun, when suddenly someone spills a drink a few feet in front of him. Naturally, people don't want to get their feet wet so they move out of the area. However, Matheo realizes that space is rare and valuable on the dance floor and moves into spill space ground zero and starts having a good time dancing.
After a few minutes, he realizes that a space on the dancefloor is a lot like assets being traded on the exchanges he had been studying, and that spaces closer to the DJ booth demand a higher price. He also realizes that since he is one of the early arrivals at the club, as time passes, the value of spaces at the club will increase. By taking the action of moving into the space that was temporarily undesirable, Matheo took advantage of the situation he was presented in which the other dancers (market players) reacted emotionally to the event of the spilled drink. This is analogous to buying an asset that is temporarily undervalued due to an unfavorable recent event that will not affect its long-term value.
Insider Trading with Francois
As the night goes on, Matheo realizes that there are a lot of people making out and that this too is a marketplace, with men looking for someone to buy their love and women who may or may not accept the offers made to them. Matheo makes a bet with his friend claiming that he can increase the number of couples that hook up. Being the devious French fellow he is, Matheo devises a plan involving a few condoms in his pocket and comes up with the idea of using them as an incentive for single men to find a match. He proceeds to walk up to a young man, Francois, hands him a condom, tells him to "get lucky", and flashes a thumbs up as he walks away. Unfortunately for Matheo, Francois is an insecure French fellow, not a Californian, and misinterprets his friendly gesture as an invitation to have gay sex and then wants to fight him. Matheo and Francois almost get kicked out by the bouncers because their conflict is disturbing the experience of the other clubbers.
Trying to manipulate the market via insider trading or other means is kinda like a guy handing a French man a condom; it can either go incredibly right or terribly wrong. Either way, you should probably avoid it to be fair to the other market participants and so you don't get kicked out by the bouncers aka the SEC.
Volatility with Garcon and Marie
After getting away from Francois, Matheo observes a pudgy fellow of rather short stature named Garcon, who is very intoxicated. For some unknown reason, Garcon found the neon sign of the club to be offensive. In response, he bluntly hits the glass covered sign with all the force his sloppy self can muster. Not even a minute after his quarrel with the sign, Garcon is hugging a section of the wall near the sign with a big grin on his face and his eyes closed in contentment. Not too long afterward, Garcon had finished with the wall and stood a few feet back from the wall with his head drooped towards the ground with a puzzled look on his face. After a few moments in that position, Garcon busted out some hilariously uncoordinated, yet energized moves before falling back onto his friend in exhaustion. All the while, a timid girl named Marie sat and watched the actions of Garcon with horror. She was not very comfortable in the club and stayed rather uptight and in the same seat the entire night. Poor Marie.
Volatility is technically defined as the standard deviation of the returns of an asset in a market. For example, an asset having high variation in the returns, say 15% the first month and -20% the next month has high volatility, whereas an asset returning 5% the first month and 7% the next has low volatility. You can think of volatility as the rate at which someone’s emotions change from moment to moment, with Garcon being an example of high volatility, and Marie being an example of low volatility.
Efficient Market Hypothesis with Hugo and his cigarette
The efficient market hypothesis is basically the idea that all publicly available information is already incorporated into the price of assets being sold on the market. This means that any technical or fundamental analysis of the market does not yield any advantage over the competition looking at the same information.
If this theory applied to the Market of Love in the Club, then the efforts of Hugo, casually surveying the scene with his cigarette from the outskirts of the dance floor, would be as futile and meaningless as life, (Hugo is an Existential Nihilist) because all the information about the girls at the club would be publicly available on their Facebook for the whole world to see.
Fortunately for Hugo, and participants in financial markets, efficient market hypothesis is not always the case in practice as people are irrational and can be poor judges of value (or beauty).
