1499: Arbitrage

Explain xkcd: It's 'cause you're dumb.
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The invisible hand of the market never texts me back.
Title text: The invisible hand of the market never texts me back.


Ambox notice.png This explanation may be incomplete or incorrect: Very long and tedious explanation. Can anyone with knowledge of Arbitrage make it more compact and easier to read for the lay man. For instance what does "even if reactionary server slow down, and a minimum paid order per unit time rule were ignored" even mean? At least some wiki links would be in order. I have added several. Also the part of the title text about not getting text back is not mentioned. Is it clear what he means?
If you can address this issue, please edit the page! Thanks.

In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets to make risk-free profit by buying in the market with a lower price and simultaneously selling in the market with the higher price.

In real-world liquid financial markets, the possibility of arbitrage ensures that there is only a single price for a given product, since if a product is available for a low price in one market and a high price in another, the buying and selling by arbitrageurs will bid the price up in the low-price market and down in the high-price market until the prices are equal.

The place where Cueball and Hairy are eating is giving away unlimited free tortilla chips, effectively a market selling chips for $0. Hairy is taking advantage of this fact to turn a profit for himself by collecting the chips and attempting to resell them elsewhere. Any price higher than $0 would make him a profit. This is obviously much to the consternation of Cueball, who is (depending on how you interpret the simple art-style) holding his hands up in front of his mouth in shock, covering the lower half of his face in shame, covering his eyes out of denial, cradling his forehead in his hands to soothe the oncoming headache, or sliding his palms down the front of his face in disgust. Possibly all five in sequence.

In the real world an attempt to employ this strategy would fail for several reasons: One wouldn't be allowed to carry large bags full of chips out of the restaurant, not many people would buy chips taken from a restaurant in this manner, the servers would not continue to deliver arbitrarily large amounts of chips to the table, and the restaurant would require some minimum purchase to be allowed to sit at the table which would eat into any potential profits from chip-reselling. In financial terms, the extremely poor liquidity of the chip market is what allows the obvious arbitrage opportunity to persist indefinitely.

Another related issue is the poor fungibility of chips. Chips that are factory-sealed in a bag or served in a restaurant are served in a context where cleanliness and food safety practices can be assumed to have been followed. Chips sold from an open bag by some random person do not have that expectation associated with them and would not command as high a price as they do in a restaurant transaction.

In the caption below the comic, Randall suggests that society only functions because we don't take people like Hairy "out to dinner", i.e., we generally have an aversion to dealing with people with such extreme self-interest, bordering on sociopathic behavior. Apart from the fact that he intends to sell the chips, we also see from Cueball's reaction, how appalled he is by what Hairy is doing right in front of the waiters in the restaurant.

A distinguishing feature of social animals, rather than animals simply sharing a habitat, is that they perform tasks that benefit their group. All such societies rely on some situations where the individual is not working purely on short term self interest. The payoff for this is generally that co-operation makes things better for the group as a whole. Most people would find Hairy's behavior embarrassing and shameful, and thus would not socialize with people who behave like that. By rejecting such individuals, society protects itself from such people.

The title text mentions the invisible hand. In economics this is a metaphor used by Adam Smith to describe unintended social benefits resulting from the individual actions of self-interested parties. In the context of arbitrage, the "invisible hand" compels all of a given fungible substance to be sold for the same price, as a result of the actions of individuals like Hairy who are only seeking personal profit.


[Cueball and Hairy are sitting at a table with a bowl of chips in the middle. Hairy is taking chips from the bowl on the table with one hand, and his other hand is dropping chips into a large bag behind him. Cueball is double facepalming.]
Hairy: They're the ones giving chips away!
Hairy: If they don't see the arbitrage potential, sucks for them.
On the bag is written: Chips
[Below the main frame]: In a deep sense, society functions only because we generally avoid taking these people out to dinner.

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I've never been into an "explain" page so early... is everyone on March Break today? Jarod997 (talk) 12:56, 16 March 2015 (UTC)

The comic seemed to be very late, today, for reasons unknown (but perhaps Randall's been on a weekend Pratchett-bender, in memoriam). All the usual "early-birds" may have had nothing to work with, and perhaps even given up for the day/morning/whatever. 14:20, 16 March 2015 (UTC)
That's the case with me. I'm still waiting on Friday's What-If, but thinking it'll get skipped. Mikemk (talk) 22:45, 17 March 2015 (UTC)

Is that a facepalm by Cueball? 14:04, 16 March 2015 (UTC)

It looks more like a "My God, what are you DOING?" reaction from Cueball. (talk) (please sign your comments with ~~~~)

I think this might be a reference to Ultra-Low-Latency trading, where arbitreurs with Direct Market Access build faster parallel networks between two market and use the difference in latency to arbitrage before the two markets can communicate. This practice, along with many others, use the financial markets to generate revenue without any real contribution to the economy. (talk) (please sign your comments with ~~~~)

It is true that must current arbitrageurs are computer programs doing ultra-high-frequency trading, but arbitrage as a concept is far from limited to that regime. Arbitrage is pretty much the sole way that markets communicate to maintain consistent prices. Vyzen (talk) 19:29, 16 March 2015 (UTC)

In a nutshell, arbitrage is when you see a price disparity between two markets and you buy from one at a low price, and immediatly sell to the other at a profit. The distinct factor between this and normal trade is that the agent does not maintain an inventory, and the profit is not through interest or maket scarcity. In the case of the comic, the purchase of the chips is at no cost, and presumably he's bagging the chips to resell to the restaurant. 21:19, 16 March 2015 (UTC)

Interestingly, if we assume he's bagging the chips to resell to the restaurant, we could also assume this has already happened. So let's imagine he sold the chips to the restaurant, and now he's "taking" them back. The chips are not "at not cost" -- they are indirectly paid by the restaurant customers as a non-itemized portion of their bill. Presumably the restaurant would not give away the chips at a loss, so essentially he would be paying more for them from his meal's bill than he would get when selling them back to the restaurant. The only way to make a profit here is by being invited and not paying for the meal, or sell them to another restaurant at a higher price (thus the arbitrage.) Ralfoide (talk) 15:18, 19 March 2015 (UTC)

The title text could be in reference to "There Ain’t Such A Thing As a Free Lunch" (economic concept of arbitrage-freeness). 00:15, 17 March 2015 (UTC)