Can Somebody solve the Rich Investor's Paradox?

  • A
  • Thread starter WWW Mechanical PE
  • Start date
  • Tags
    Paradox
In summary: In the original problem, a man is faced with two options: visit one of two equally distant universes, each of which has a different set of circumstances, or stay in his own universe and risk never knowing the outcome. In some variations, the man has the power to change the outcome of the experiment, but chooses not to because he fears he would become emotionally attached to one universe and miss the other.In summary, the rich investor's paradox is a scenario in which perfect information allows for market manipulation.
  • #1
WWW Mechanical PE
3
3
The Rich Investor’s Paradox

Let us assume you have been given an immense amount of money and you are worth $50 billion. In addition you have a clairvoyant that can read tomorrow’s edition of the Wall Street Journal. You decide to start investing in stock because you believe you have a sure thing. Now a fundamental-assumption in derivatives theory says all investor thinking is embedded in the market-pricing and hence the stock-market is omniscient. In addition all physical laws say a cause is required for every effect in a deterministic way.

Now consider 3 Cases:

Case 1

The clairvoyant looks in his crystal ball, reads off the stock prices, and sees 6,631,257 million shares of ABC company traded tomorrow with the price going up by $4.25 per share. ABC company is worth let’s say around $5 billion. You want to test his ability to predict, so you secretly decide to buy 100,000 shares today at around $20/share. The next day everything is exactly correct, and determinism appears to be working.

Case 2

So the next day your clairvoyant looks in his crystal ball, goes through the list and sees ABC Company with 19,925,918 million shares with the price going up by $30 per share, and you say whoa! You secretly order 15 million shares. The next day the headline reads right on target to the very last number of shares traded, but your order couldn’t execute on 5 million shares. The market couldn’t absorb that many trades in a day. You figure out that you’re just driving the price around with market purchasing power, and probably won’t make a profit when you sell-off. Determinism appears to be working.

Case 3

The clairvoyant was exactly right both times, but you aren’t making money the way you thought you would. So you plan your next move secretly, and decide to buy-out XYZ company (a different company) if the clairvoyant sees a drop in the price of XYZ as he takes his readings every morning. Your secret buyout price is considerably higher than the market valuation of the stock, and you wait it out with your hidden plan in place. a) Does the stock price rise to your secret buyout price? or b) Could the clairvoyant possibly read a price-drop, and then you buyout the stock as planned which in turn drives the price higher instead? With item 3a) it appears you can move the market price without doing anything and with item 3b) the clairvoyant's reading is wrong. Or perhaps your choice has no physical consequence either way, though billions of dollars are involved. That's the paradox.
 
Last edited:
  • Like
Likes EnumaElish
Physics news on Phys.org
  • #2
Where's the paradox ?
 
  • #3
BvU said:
Where's the paradox ?

Thank you. I edited the OP so it's more clear now.
Case 3 appears to be a paradox with supposedly perfect information about the future assuming determinism.
If you have more questions please let me know.
 
Last edited:
  • #4
Stilll no paradox
 
  • #5
The existence of the clairvoyant takes the issue out of the realm of mathematical analysis.
 
  • Like
Likes BvU
  • #6
Suppose we attempt to define a sequence of real numbers ##a[0],a[1],a[2],...## with the following properties:
##a[0] = 1## and if ##a[n+1] < a[n]## then ##a[n+1] = a[n] + 1##.

No such sequences of real numbers exist with a term such that ## a[k+1] < a[k]##, but this is not a paradox. If you assume some physical situation exists that is modeled by the above properties and has ##a[3] < a[4]## then you'd have a physical paradox.
 
  • #7
At time 0 the price of XYZ is $10/share. At time 0 you resolve "I shall buy XYZ shares at $20 as soon as the clairvoyant predicts a price drop." Then T periods elapse and XYZ's price goes up to $30. One day the clairvoyant sees a tumble. You offer $20 but nobody's selling. You sell short like crazy at $20, forcing a drop. Then you buy it back at $20. No paradox. Also no profit.
 
  • #8
You don't need the stock market. Ask the clairvoyant how many fingers you will show, and then show a different number.
The classical grandfather paradox, and the possible solutions to it are all well-studied. With the additional option of "the clairvoyant can be wrong".
 
  • Like
Likes stoomart

Related to Can Somebody solve the Rich Investor's Paradox?

1. What is the Rich Investor's Paradox?

The Rich Investor's Paradox is a phenomenon in economics where wealthy individuals or investors tend to accumulate more and more wealth, despite already having more than enough to sustain their lifestyle.

2. Why is the Rich Investor's Paradox a problem?

The Rich Investor's Paradox creates a significant wealth gap between the rich and the poor. It also leads to an unequal distribution of resources and can contribute to societal issues such as poverty and economic instability.

3. Can somebody solve the Rich Investor's Paradox?

While there is no one definitive solution to the Rich Investor's Paradox, there are various strategies that can be implemented to address it. These include implementing progressive tax policies, promoting social and economic equality, and encouraging responsible wealth distribution among investors.

4. What are the potential consequences of not addressing the Rich Investor's Paradox?

If the Rich Investor's Paradox is not addressed, it can lead to a concentration of wealth in the hands of a few individuals, weakening the overall economy and creating widespread social and political unrest.

5. How can individuals and governments work together to solve the Rich Investor's Paradox?

Individuals can make a conscious effort to support businesses and organizations that prioritize responsible wealth distribution. Governments can also implement policies that promote fairness and equality in the distribution of wealth, such as increasing taxes on the wealthy and implementing social welfare programs for those in need.

Similar threads

  • Computing and Technology
Replies
9
Views
1K
  • General Discussion
2
Replies
46
Views
3K
Replies
1
Views
3K
  • Special and General Relativity
Replies
24
Views
2K
Replies
12
Views
967
  • Special and General Relativity
2
Replies
40
Views
2K
  • Differential Equations
Replies
1
Views
770
  • Calculus and Beyond Homework Help
Replies
2
Views
2K
  • Precalculus Mathematics Homework Help
Replies
0
Views
2K
  • Aerospace Engineering
Replies
6
Views
3K
Back
Top