Speculation is often considered to be morally dubious. But, can speculation actually be useful to the market process? This video shows that speculation can actually
Speculation is often considered to be morally dubious. But, can speculation actually be useful to the market process? This video shows that speculation can actually smooth prices over time and increase welfare.
Speculators take resources from where they have low value and move them through time to where they have high value. We also take a look at speculation in the futures market — for instance, can orange juice future prices help predict Florida weather? Let’s find out.
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The problem with speculation is that the speculator might have an incentive to manipulate the market to get the result they want. If I think a war in the Middle East will drive up the price of oil and I have purchased oil futures, it might be in my own best interest to help cause trouble in the region and start a war that might not otherwise have occurred. The price of oil will be driven up and lots of people will die just so I can personally profit. The speculators are manipulating the invisible hand rather than letting the price system do its job.
I think there's a mistake worth correcting at 8:50 where Tyler said "there was an improvement" in the weather prediction.
That may be anecdotal, but impossible in the long run if the information the speculators used was the Weather Service itself. Surely there's additional information speculators bring to a decision that affects the price which makes the weather component diluted with noise.