Speculation

Speculation is often considered to be morally dubious. But, can speculation actually be useful to the market process? This video shows that speculation can actually smooth prices over time and increase welfare.

Speculators take resources from where they have low value and move them through time to where they have high value. We also take a look at speculation in the futures market — for instance, can orange juice future prices help predict Florida weather? Let’s find out.

00:00 Introduction
00:42 Speculation
02:07 Speculation tends to smoothen prices
04:00 Speculation increases welfare
05:30 Futures market
07:57 The use of information in markets
08:56 Conclusion

[SuperGreatSphinx]

Speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable at a future date.

In finance, speculation is also the practice of engaging in risky financial transactions in an attempt to profit from short term fluctuations in the market value of a tradable financial instrument—rather than attempting to profit from the underlying financial attributes embodied in the instrument such as capital gains, dividends, or interest.

Many speculators pay little attention to the fundamental value of a security and instead focus purely on price movements.

Speculation can in principle involve any tradable good or financial instrument.

Speculators are particularly common in the markets for stocks, bonds, commodity futures, currencies, fine art, collectibles, real estate, and derivatives.

Speculators play one of four primary roles in financial markets, along with hedgers, who engage in transactions to offset some other pre-existing risk, arbitrageurs who seek to profit from situations where fungible instruments trade at different prices in different market segments, and investors who seek profit through long-term ownership of an instrument's underlying attributes.

[nthperson]

The problem with this analysis is that it ignores the existence of aspects of property law and taxation that create privilege at the expense of competitive market conditions. Economists such as Joseph Stiglitz and Mason Gaffney have zeroed in on the main public policies that reward "rent-seeking" (either by the hoarding of land and natural resources or engaging in speculations) where the gains in asset values are taxed at rates lower than the rates imposed on the actual production of goods or delivery of services.

The reference to Adam Smith's "invisible hand" needs to be countered with Smith's own analysis of rent-seeking privilege contained in the pages of The Wealth of Nations. Smith was not the first to suggest that rents were particularly appropriate to be taxed, as rents are societally- rather than individually-produced.

[glenn]

Nice short video on this important and misunderstood subject. TNX.

[rc]

How does this apply to real estate speculation? What do speculators store exactly? Land? Built property? These assets don't need storage. Storing/hoarding them means putting them out of market in the present from people who can use them for productive purposes. In the future, if there is some kind of crisis that makes demand on such assets much higher suddenly, their owners/users could sell them for those who really want them and are ready to pay more for them than the profit produced from the current user's activity. What is the economic logic that can defend real estate speculation?

[AmbienceAmplified]

What about when speculation on corn (in 2008) artificially inflates food prices and millions of poor people starve? Interesting to see the ways that the science of economics continues to use these models which only work on paper at the expense of the structurally disadvantaged.

[abodyashraf]

Thanks for Arabic translation
Awesome explanation

[liyexiang]

speculation reduce if they were wrong, they ll increase it...

[MRCKify]

7:15 The outstanding contract is settled by the method cheapest in transaction costs.

[jitendraitankar]

What an insight!!! Superb presentation

[alexanderlyzhov]

Futures is the only unclear topic I have encountered in the course so far. They sound like prediction markets but for prices. But how exactly are they a type of speculation equivalent to speculation in goods? I have a vague feeling that they may have the same effects as speculation in goods but I'm not sure why. For example, what are the means by which the futures increase welfare if the goods are not really bought and sold? This was not covered in the lecture.

[kaitlin]

So how is speculation different from buying and selling stocks?

[abubekeraziz]

He said himself that resources are not actually saved for the future to offset increase in cost. This is gambling with money lol

[MarcioFaustinoSantos]

The good speculators have larger share of the market because they have much more money and combined can buy more shares, but they are few in numbers. Most speculators loose money and they still and will always be larger in numbers. So we have two problems here. Few people with huge money artificially manipulating markets prices like Hedges Founds, take money from the majority of speculators which are small individual speculators doing wrong prediction and falling in the misleading market manipulation of big speculators, inflating prices, creating higher volatility and crises. Well come to the world outside of pure theory.

[silence-]

Yeah isn’t it better to keep the low prices, then when the disaster comes, most people would change product substitution. I get with oil it’s a little difficult. But corn, you could buy rice instead. By artificially lowering prices of a shortage, you are robbing from substitution producers, which is part of natural booms and busts. this is better than increasing the price of corn artificially through speculation to keep people buying it in the shortage time. It’s artificial market manipulation. A bunch of valueless middle men stealing value and causing unnatural market economies

[Eucalypten]

So you take value from stable periods in time, store them, promote crisis, then sell them during crisis? Crisis becomes not a crisis but an opportunity if you are extremely rich.

[Eucalypten]

So the existence of speculation, in this example, promotes incentives for warfare? How is that not morally wrong?

[christopherreef]

biased crony capitalism bullshit. was a good video for the first minute 50 seconds