Toilet Paper and the Stock Market
- Kruxi
- Apr 16, 2020
- 1 min read
What does the recent “toilet paper run” have in common with active stock trading? Sure, one thing they have in common is that both make little sense. Why would there not be enough toilet paper during the Corona Crisis? Why do you know more about the stock price than others?
But, on the other hand, both do make sense when taking human irrationality under consideration. Both are self-fulfilling prophecies. If everyone bulk buys toilet paper, there will be a short-term scarcity of wipes. Thus, when everyone buys toilet paper maybe you should too… Same thing in the financial markets. In theory the price of a stock should be strongly market efficient (efficient market hypothesis). This means that stock prices are random walks, instantaneously adjusted by new information. But if everyone buys, prices go up, and if everyone sells prices go down. Thus, maybe you should join the herd.
The takeaway might be that rational people can do irrational things if others do it too. It is smart to invest into a bubble if the bubble keeps increasing. It might also be smart to buy toilet paper even if there is enough for everyone.
The difference for me is exactly the two scenarios you mentioned. If with stocks you invest a lot before the crash - you will lose a lot of money/value. However, If you bought way too much toilet paper in a 'run' because you panicked, well then you just have a temporary reserve for the next 6 months lets say. In net terms, you're not going to really lose any money (value), and you just carried forward your purchase of toilet paper, which you will still utilize at the same pace and eventually return back to your long term average consumption (different with stocks). In my mind, there is no 'spending to much on present value' with toilet paper, since it's…
Hi Devils,
Thx for the reply.
I don't agree with you. I think both stocks and toilet paper can experience a "run", with similar implications. I think the only difference is the variance in cost and benefits. With the purchase of a toilet paper role you will experience less costs but also less benefits of hording it. With stocks its the same thing in green. Just that now stakes are higher, but the mechanism is the same.
In the stock market scenario you might have misread the bubble and invested right before the crash and lost money.
In the toilet paper scenario you might have miscalculated the supply of toiletpaper and end up spending too much present value (future…
I would argue that buying toilet paper in such situations would be rational, where as buying stocks with the herd would not. If I compare the two:
Buying stocks when everyone else is buying the stock will result in a temporary increase for all, however no one knows when the music stops. It is exactly because markets are efficient that the burst of a bubble is impossible to predict, and of course if it would be - bubbles would be priced away which they aren't. Therefore I think, in the long-run (and if you do not have insider info) one would be better off not buying into a bubble because more often than not they will mis-predict the peak and…