Thankyou, Dr. Brett

Teresa, December 16, 2007 @ 4:04PM ET | Link | RSS | Read via Email | Start a Discussion  

Astute readers will notice that the site has undergone plenty of unannounced changes in a short while. Why?

16-lemons.jpg

A few weeks ago, Dr. Brett had a “moment” when he told it like it really was. That got me thinking. Then last week, Pete sent me a link to a post by John Andrews. While Andrews is in the search engine optimization business, I saw right away that his analysis was astute and 100% applicable to the market for trader education and trading systems:

A “Market for Lemons”, a Nobel Prize, and Snake Oil SEO
Akerlof analyzed the used car market, showing that the information disparity surrounding the value of a used car led to a collapse of the market as a used car market, creating instead a “market for lemons”. The used car salesman knew how good (or bad) a used car really was. The buyer could not determine that until after the car was purchased. Because of this “information asymmetry” in the used car market, used car salesmen could overprice “lemons” - the low value used cars that looked ok. Poor quality cars no longer priced as poor quality. Actually good used cars became too expensive for buyers to chance, as poor quality cars at middle-quality prices presented better perceived value and higher profits for salesmen. As non-selling good cars were removed from the market, masquerading “lemons” dominated, setting the tone for the used car market, and further blocking actually good used cars from appearing. In the end, the used car market becomes a market for lemons, not a used car market.

Dr. Akerlof went on to become the co-winner of the 2001 Nobel Prize in Economics. In the same paper, Dr. Akerlof explained how valuable information and products are driven away:

The Costs of Dishonesty
The Lemons model can be used to make some comments on the costs of dishonesty. Consider a market in which goods are sold honestly or dishonestly; quality may be represented, or it may be misrepresented. The purchaser’s problem, of course, is to identify quality. The presence of people in the market who are willing to offer inferior goods tends to drive the market out of existence — as in the case of our automobile “lemons.” It is this possibility that represents the major costs of dishonesty — for dishonest dealings tend to drive honest dealings out of the market. There may be potential buyers of good quality products and there may be potential sellers of such products in the appropriate price range; however, the presence of people who wish to pawn bad wares as good wares tends to drive out the legitimate business. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.

The bottom line is this: the market for trader education and trading systems is basically a market for lemons. In order to get sales, the vendor must either make incredible performance claims OR price it cheap enough for a potential buyer “to chance”.

I am willing to do neither; therefore, it is time to make lemon-aid…

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