misconception of wealth
Almost all introductory economics courses start off by defining economics as the science of scarcity. The world is pictured as a place with a finite set of resources and markets are depicted as arenas where these resources get allocated via pricing mechanisms. Wealth is fixed but its distribution among the market participants changes over time.
These teachings reinforce a misleading perception of wealth as something tangible and relatively stable. However the reality is quite different. Wealth is a creation of expectations of the market participants and it can fluctuate wildly as these expectations change.
Asset values are especially suspect to such fluctuations. Unlike that of regular commodities, valuation of assets involves assumptions that extend far into the future. Changes in taxes, legal framework, political dynamics, technology, interest rates, inflation, consumption trends, consumer confidence, investors’ risk appetite, and market structure and microstructure affect valuations.
You may not care about any of these variables while buying a commodity for your immediate consumption, but you will do so while buying the company which produces that commodity.
Whenever you are buying a company you are in fact just buying a story that comes equipped with a list of various assumptions:
1) Think of stock exchanges as places where people buy and sell stories.
2) Remember that wealth can be literally created out of thin air because there is a very fine distinction between fiction and non-fiction.
These teachings reinforce a misleading perception of wealth as something tangible and relatively stable. However the reality is quite different. Wealth is a creation of expectations of the market participants and it can fluctuate wildly as these expectations change.
Asset values are especially suspect to such fluctuations. Unlike that of regular commodities, valuation of assets involves assumptions that extend far into the future. Changes in taxes, legal framework, political dynamics, technology, interest rates, inflation, consumption trends, consumer confidence, investors’ risk appetite, and market structure and microstructure affect valuations.
You may not care about any of these variables while buying a commodity for your immediate consumption, but you will do so while buying the company which produces that commodity.
Whenever you are buying a company you are in fact just buying a story that comes equipped with a list of various assumptions:
1) Think of stock exchanges as places where people buy and sell stories.
2) Remember that wealth can be literally created out of thin air because there is a very fine distinction between fiction and non-fiction.
