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>This is called the Bid-Ask spread, and its always, always, always non-zero. Stocks have bid-ask spreads of a penny, but Pokemon Cards, Houses, Lumber, etc. etc. all have a spread in reality. There's never one price for things, there's a buyer's price vs a seller's price, the bid and the ask.

If a bid-ask spread can be positive (as in a stock where the bid is lower than the ask) and can be negative (as in your house example where the bid is higher than the ask), why can't it be zero?

It seems like you're conflating the bid-ask spread with consumer/producer surplus that arises from being willing to buy/sell at prices higher/lower than the market clearing price.

> If a bid-ask spread can be positive (as in a stock where the bid is lower than the ask) and can be negative (as in your house example where the bid is higher than the ask), why can't it be zero?

It can be, and indeed the Micro 101 model is that in ideal conditions it will be for an infinitesimal slice of transactions that actually take place, as all potential transactions with a 0-or-higher bid-ask spread will occur, but that the average across the market of all voluntary transactions will always be positive.

>as all potential transactions with a 0-or-higher bid-ask spread will occur,

bid-ask spread isn't a property of transactions, it's a property of markets. Transactions will occur when someone is willing to pay at least as much as a supplier is charging.

The bid-ask spread is how much less the highest bidder is willing to pay than the lowest seller is asking. It's a measure of how far apart buyers and sellers are from making a transaction, at a moment of time in a market.

> bid-ask spread isn't a property of transactions, it's a property of markets

The upthread poste by dragontamer which introduced it seemed to ascribe it specifically to particular transactions, and I responded to what waa described in that post, viewing terminological minutiae as less interesting than the concept being discussed for which there seemed adequate clarity in context.

Well yeah, that's why I felt like they were conflating two different topics. The bid-ask spread on a stock exchange doesn't really the same as my be willing to pay $350k for your house when you would be willing to go as low as $300k.

> The bid-ask spread on a stock exchange doesn't really the same as my be willing to pay $350k for your house when you would be willing to go as low as $300k.

It kind of is if its a transaction that both parties are considering because the buyer has no more attractive properties (considering asking price) to buy, and the seller has no better bids.

Its a different kind of market because houses aren't non-differentiated mass commodities, but from the perspective of either the buyer or seller the opposing offer is equivalent to the price on the opposite side of the market in stock trade, once things have been narrowed to the best alternative to either do the transaction or not.

It can be exactly 0, but that's the exception, not the rule.

If you treated them as true real numbers, the odds of bid and ask being exactly identical are zero. In reality we round the prices to some minimum unit of currency (or rational fraction thereof), so it's not impossible for the difference to be precisely zero.

Nonetheless, it demonstrates why it's not zero sum in general. If it happens to sum to zero, it's by coincidence, not a fundamental truth of the market.

even if the bid-ask spread is zero, the fact that someone put a bid at that price implies they value the item more than that at most that exact amount of money, and if someone put a ask at that price, that implies they value at least that much money more than that item, so it is STILL a non-zero trade.

Note that the bid-ask spread is a LOWER BOUND ESTIMATE on the amount of utility created by a trade, which is almost always nonzero.

Of course values are subjective, so you could press the "issue bid" or "issue ask" button and a fraction of a second later have your values shift, and then have the automated system execute trades... But I would say... that's life. Maybe don't click certain buttons if your preference schedule is so flighty?

Also, sure, someone could have a (metaphorical) gun to your head when you place the bid, which introduces external factors which could violate the platonic ideal that these trades must create positive value.

I value HN for these moments in which someone lucidly debunks an abstraction and undoes the epistemic closure that it had performed. Attempting to articulate my thanks brought to my attention this general idea, that all abstractions are [perhaps I should say 'also'] epistemic closures, so thank you twice.

Right, I was using "zero sum" by the author's naive definition to show that it doesn't make sense. My argument is that all voluntary trade has to be positive sum to both parties

> then there was at LEAST $60,000 of value created by the transaction.

That is not value creation, that is wealth transfer from Alice to Bob. Alice has to earn that excess $60,000 through labor, or exploiting labor.

Untrue. This is a huge misconception.

Value could have increased for many reasons having nothing to do with labor effectuated by either party.

The neighborhood might have changed, and now there are more restaurants. Or maybe it’s just considered more fashionable for intangible reasons.

The house could be on the beach, and Alice has decided to take up surfing, so values the location more than Bob ever did in the past.

And so on.

There can be an almost infinite combination of reasons why Alice may find more value in the property than Bob.

Edit: my previous version of this comment had Alice and Bob reversed.

Old retired couple have a 6-bedroom house for their former 4-kids (+masters bedroom + guest bedroom). All their kids have moved out, and they're tired of vacuuming so many empty rooms. They want to move to a retirement community.

New up-and-coming couple not only have 4-kids, but one more is on the way. They suddenly got an opportunity to work in... Chicago (or insert any other city here), and are looking for a new home to raise their kids in.

-----------

The old-couple will likely be willing to sell the house below market value, while the younger couple may be stressed out and otherwise willing to pay above market value.

Clearly, value will be created as the new couple buys the home from the old couple. The majority of transactions between rational individuals are of this nature. The only detail remaining is how to proceed with negotiations, but assuming they're rational, the two sides will come to a price point that's favorable to both sides.

> If Bob was willing to sell the house for $270,000 and Alice was willing to buy the house for $330,000, then there was at LEAST $60,000 of value created by the transaction.

Where each participants marginal utility function is represented by their name, and P is the actual transaction price, there is exactly Bob(P-$270k) + Alice($330k-P) value created.

Calling this “at least $60k value” is wrong, and even calling it “$60k value” ignores the fact that value of $ is no more constant across different market participants than any other item, and that the benefits accrue in particular places.

In your example, the bid is 350K and the ask is 250K; this is not like a bid-ask spread in a regulated market, in which the bid is by definition lower than the ask, and any bids that exceed the ask take the ask off the books at exactly the ask price.

What you are describing is more like arbitrage, and it creates no value, but instead exploits inefficient markets, disparate regulatory environments, or unequal access to markets.

How do you distinguish between true value creation and simple asset inflation? Low interest rates cause soaring asset prices, which can create an illusion of "value creation", but I don't see it actually increasing the value much.

Low interest rates actually do increase preferences (and hence value) for cash-generating assets. The competition (keeping the money in risk-free assets, usually expressed as T-bills) becomes less valuable, which means that other assets become relatively more valuable. There are a bunch of results from both behavioral economics and psychology that suggest humans can't actually determine absolute value, and can only determine relative value, comparing two alternatives against each other.

This also gets at the paradox behind a lot of our intuitive notions of "value creation". If a person buys high and sells low, taking a loss, they've lost value. Or have they? At the time they made the first transaction, they valued the new asset higher; at the time they made the second one, they valued it lower. As my therapist used to say, "The past and the future don't actually exist; there is only the present."

I've seen writers try to resolve the paradox by introducing the idea of "time preferences" or "future selves". You, right now, are not the same person you will be in the future. You can express compassion for your future self by taking action - like delaying gratification, investing in personal development, or saving money - that benefits your future self. The degree to which people preference their future self over their present self is culturally dependent, which is why certain ethnic groups and social classes tend to amass large amounts of wealth while others are perpetually living on the edge of subsistence. The rate of interest is a quantitative measure of how much people preference their future self over their present.

> If a person buys high and sells low, taking a loss, they've lost value. Or have they? At the time they made the first transaction, they valued the new asset higher; at the time they made the second one, they valued it lower.

Right, it seemed like a good idea at the time. But they're experiencing regret because an alternate past action (just holding cash, or buying a better performing asset) would have given them more value now.

Of course you can regret any suboptimal action (anything less optimal than buying the best performing asset), but that's not most people's baseline. I think the baseline for most people is holding cash, hence they mostly feel regret when their assets' cash value decreases.

Unless interest rates stay low forever, at some point the asset inflation they cause has to deflate.

> How do you distinguish between true value creation and simple asset inflation? Low interest rates cause soaring asset prices, which can create an illusion of "value creation", but I don't see it actually increasing the value much.

This is exactly the problem with inflation. It creates all sorts of distortion of what people value, by fucking with our concept of what cash is worth. Do keep in mind that "value" is not some sort of objective thing. Everyone values things differently. Someone who is allergic to peanuts, may have a negative value for peanuts, someone who thinks peanuts will give them immortality might have an unreasonably high value for peanuts. And capitalism just doesn't care. Live and let live. Important thing is that it's not just true for things, it's also true for money. (note that value is not price, though often times it's rhetorically convenient to conflate the two).

So the phrase "value creation" does not refer to some sort of intrinsic improvement in any given thing. What it means is, say the peanut allergy guy comes into posession of peanuts somehow, and he exchanges to peanut immortality gal for a wad of cash. This created VALUE for the allergy guy because he values cash more than the peanuts, and created value for immortality gal because she values peanuts more than (that amount) of cash.

Moreover, using amount denominated in money to track value creation is dangerous (note I didn't say necessarily wrong, I said dangerous), because it assumes that money is equally valued by everyone. That's not really true, and we probably shouldn't, in policy, implicitly judge people in one way or another for having different values for money.

I do not think home buying is exactly this. It's much emotional and sometimes both parties involved are green - this may describe a transaction between two veteran RE investors.