Counterpoint: actually, you’re wrong, because most trades I make IRL leave me with a lot of consumer surplus, and in reality, conditional on me making a trade, it was pretty good.
The fact that you have to reach for exotic scenarios either involving government failures like subways or doing limit orders in highly efficient markets for financial speculation on liquid but volatile assets (not exactly an everyday ‘trade’ I hope you’ll concede) or contests or auctions by naive non-auction goers who don’t even know to account for winner’s curse or getting stuff for free should make you rethink what you are claiming about “most trades you make aren’t all that great”.
If your point was true, it should be as simple as “you go into the grocery store to buy a gallon of milk. You are filled with deep remorse and shame when you get home and look at the receipt and think about how much you spent in gas to boot. You look in your freezer for comfort. You are filled with deep remorse and shame when you are reminded how much you paid for the ice cream. With little choice, you pull out a spoon you bought years ago—and are filled with deep remorse and shame &etc &etc”. You wouldn’t need to invoke all these weird hypotheticals like “you ask your friend Drew to sell you under the table a cheap limited share of his cow’s monthly milk production in ice cream tickets through your company redeemable in NYC but only in an office which can be reached by an express subway (which runs on alternate Tuesdays)”...
I don’t claim here that all trades you get to do are bad. I claim that they’re worse than they might naively seem without accounting for adverse selection, i.e. for the fact that your opportunity to get something depends on nobody else wanting it (as in the case of the subway seat or the parking spot) or somebody else actively wanting the other side of the trade (as in the case of the zero-sum bedroom selection or the juggling contest).
I’m surprised that these are exotic scenarios to you. I regularly take the subway. I might not be understanding the relevance of subways as an example of “government failure,” but I’ll rephrase the example without needing to invoke a government resource:
1. The Restaurant Seat: You’re in a food court at dinnertime. Almost all of the restaurants are full to the brim, and don’t have any tables available, but you notice one that is entirely empty. You’ll be able to get a table! You enter the restaurant, order your food, and take a bite. The food is mediocre.
Bad restaurants are more likely to have open tables than good restaurants. Alice’s Restaurant and Bob’s Burgers might look identical to you from the outside, but if all the tables at Alice’s Restaurant are full and the tables at Bob’s Burgers are open, that’s evidence that Alice’s Restaurant is better quality—and you’d rather eat there. Unfortunately for you, all the tables there are full, so you can’t. The trades you get to do (eating at Bob’s) are worse than the ones you don’t (eating at Alice’s).
That doesn’t mean that eating at Bob’s is worse than going hungry. It might still be worth buying food there instead of not at all. But, if a week ago you had had the opportunity to make a reservation at either one (before Alice’s filled up), you would have been better off flipping a coin and reserving one at random than waiting to slot into whichever is available.
Does this help clarify the confusion? If so, I’ll edit in this example, so as to not have the government goods degrading element distract from the core idea.
Bad restaurants are more likely to have open tables than good restaurants.
That seems dependent on it being difficult to scale the specific skill that went into putting together the experience at the good restaurant. Things that are more scalable, like small consumer products, can be selected to be especially good trades (the bad ones don’t get popular and inexpensive).
I agree. Another way to say that is that if there’s competition for the good you want (because it’s in some way or other in limited supply—seats in the subway, shares in a specific company, pieces of candy of the flavor you like, …— and you win the competition too easily, you have to check you aren’t being screwed. But if the good is mass-produced to the point where you‘re not clearly competing with others for it, then there’s no reason to wonder why others are letting you win?
An amended slogan that more accurately captures the phenomenon the post is trying to point to would be “Conditional on your trade seemingly not creating value for your counterparty, your trade likely wasn’t all that good”.
Yes! The real moral of this story is that trades which seem like win-win are a better bet, since you understand what the other party is gaining from them. Trades which seem too-good-to-be-true and purely win-lose in your favor should strike you as suspicious. You should only engage in such trades when you are confident you have an information advantage.
I think this important point is obscured by a number of bad examples lumping in other, less related phenomena that have different ‘solutions’. The unifying theme might be, ‘make sure you have enough information to determine that the trade is good before going through with it.’ I still think that there are different patterns here that deserve to be categorized separately.
I think this post is just trying to be a set of examples of adverse selection, not really some kind of argument that there is tons of adverse selection everywhere. Lists of examples seem useful, even if they are about phenomena that are not universally present, or require specific environmental circumstances to come together in the right way.
I don’t think any of these examples are examples of adverse selection because they generate separating equilibria prior to the transaction without any types dropping out of the market, so there’s no social inefficiency.
Insurance markets are difficult (in the standard adverse selection telling) because insurers aren’t able to tell which customers are high risk vs low risk, and so offer prices for the average of the two, leading to the low-risk types dropping out because the price is more than they’re willing to pay. I think this formal explanation is good https://www.kellogg.northwestern.edu/faculty/georgiadis/Teaching/Ec515_Module14.pdf
I think this post makes an important point, that it’s important to take conditional expectations, where one is conditioned on being able to make a trade, but none of this is adverse selection, which is a specific type of dynamic Bayesian game that leads to socially inefficient outcomes which isn’t a property of dynamic bayesian games in general.
But OK, let’s leave aside the title and attempt to imply anything about 99% of trades out there, or the basically Marxist take on all exchanges being exploitation and obsession with showing how you are being tricked or ripped off.
The examples are still very bad and confused!
Like, these examples are not even all about adverse selection, and several of them are just wrong in portraying the hypothetical as a bad thing.
The first one about subways, isn’t even about adverse selection to begin with. A reminder of what “Adverse selection” is:
In economics, insurance, and risk management, adverse selection is a market situation where buyers and sellers have different information. The result is the unequal distribution of benefits to both parties, with the party having the key information benefiting more.
In the subway example, there is no different information: it’s about how governments do rationing and make markets clear by letting the goods degrade until the utility is destroyed because of lack of appetite for setting clearing prices like surge prices or fare enforcement; that’s not ‘adverse selection’ at all, any more than freeways reaching an equilibrium of misery where they are so slow that people avoid them is ‘adverse selection’. (If you think it’s ‘adverse selection’, explain what “buyers and sellers have different information” means in the context of lack of congestion pricing in transport...?)
#3 and #4 are not adverse selection either (still no difference in information), and are fundamentally wrong in portraying it as a bad outcome: the outcomes are not bad, but neutral or good—OP gives no reason to think that the outcomes would have been better if ‘you’ had gotten the good room or to eat whichever dish. (In fact, presumptively, those are the desirable outcomes: if ‘you’ cared so much, why did you leave it up to Bob; and why did you not eat the dish yourself, but someone hungrier did?)
#6 doesn’t demonstrate anything because no trade happened, so it can’t show anything about your surplus from trades that do happen.
And the Wall Street efficient market examples are true (finally, an actual adverse selection example!), but relevant to vanishingly few people who are also extremely aware of it and spend a lot of effort dealing with it, generally successfully; and people who do auctions more than occasionally generally do not have any problem with winner’s curses, and auctions are widely & intensively used in many fields by experts. And so on.
But OK, let’s leave aside the title and attempt to imply anything about 99% of trades out there, or the basically Marxist take on all exchanges being exploitation and obsession with showing how you are being tricked or ripped off.
My guess is you are pattern-matching this post and author to something that I am like 99% confident doesn’t match. I am extremely confident the author does not think remotely anything like “all exchanges [are] exploitation” or has a particular obsession with being tricked or ripped off (besides a broad fascination with adverse selection in a broad sense).
I thought it an odd quote for Karl but didn’t give much thought after that. However, with this information I have to wonder if the choice to obscure the actual person being quoted was not intnetional to make some type of point related to the post.
Still, seems like the aobe reference to marxist views on market trades seems to illustrate another way information asymmetry/advers selection plays out. I was just wondering if that was the intent when the first name was placed in the footnote rather than in the attribute for the quote.
But I have been accused of being humor challenged before ;-) -- or perhaps I should say demonstrated my humor disability?
I think all of them follow a pattern of “there is a naive baseline expectation where you treat other people’s maps as a blackbox that suggest a deal is good, and a more sophisticated expectation that involves modeling the details of other people’s maps that suggests its bad” and highlights some heuristics that you could have used to figure this out in advance (in the subway example, a fully empty car does indeed seem a bit too good to be true, in the juggling example you do really need to think about who is going to sign up, in the bedroom example you want to avoid giving the other person a choice even if both options look equally good to you, in the Thanksgiving example you needed to model which foods get eaten first and how correlated your preferences are with the ones of other people, etc.).
This feels like a relatively natural category to me. It’s not like an earth-shattering unintuitive category, but I dispute that it doesn’t carve reality at an important joint.
They don’t. As I already explained, these examples are bad because the outcomes are not all bad, in addition to not reflecting the same causal patterns or being driven by adverse selection. The only consistent thing here is a Marxian paranoia that everyone else is naive and being ripped off in trades. Which is a common cognitive bias in denying gains to trade. The subway car is simply an equilibrium. You cannot tell if ‘you’ are better off or worse off in any car, so it is not the case that ‘the deal is bad’ The room and food examples actually imply the best outcome happened, as the room and food went to those who valued it more and so ate it sooner (it’s not about correlation of preferences, it’s about intensity); the deal was good there. And the Laffy Taffy example explicitly doesn’t involve anything like that but is pure chance (so it can’t involve “other people’s maps” or ‘adverse selection’).
I think you missed the point of the Laffy Taffy example. He got the flavor he didn’t like because he’d been systematically eating the ones he did like while leaving the flavor he didn’t like in the bowl. (Or his friend wasn’t actually picking at random.)
I think you might be slightly misunderstanding the intention of the subway example (1.) - the “market” described is one of commuters for seats, and the example is noting that if some subway seats appear underpriced—i.e. commuters are choosing to cram together in fewer cars rather than equalizing their density over all available subway cars—then those commuters likely know something about the unused seats that you don’t know.
The fact that you have to reach for exotic scenarios … [such as] auctions by naive non-auction goers who don’t even know to account for winner’s curse or getting stuff for free should make you rethink what you are claiming about “most trades you make aren’t all that great”.
The thing I’m describing here is winner’s curse—my point is that the winning bidder (in example #5) overpays relative to the true value, while the median bidder (in example #6) neither profits nor loses. (A bidder whose model is mistaken such that they substantially underbid also profits $0). That is, there’s an asymmetry between your PnL when your model is correct (#6) and when your model is incorrect (#5).
Some auction goers know about winner’s curse; they likely make more conservative bids to protect against this. Some auction goers don’t. The person winning the auction is more likely to not be thinking hard about winner’s curse, or to have a sufficiently wrong pricing model to counteract the size of their adjustment in light of it.
The point is: conditional on winning the auction, you outbid every other person. You are at the extreme end of bids. The price you bid ($180) is a combination of your model of the wheelbarrow’s price ($200, with some uncertainty) and the amount of edge you ask for on account of winner’s curse concerns (10%, or $20). If you are the winner, it means everybody else either models the price as lower, or asks for greater edge, or (most likely) some blend of the two. If it’s just because they’re asking for more edge, your bid may still be profitable. But it’s likely some combination of the two, and their price models all (or almost all) being lower than yours should cause you to update that the true value of the wheelbarrow is lower than you’d previously estimated.
Probably worth including that the winner’s curse will also tend to be a feature when the object to be bought is a one time, one customer type setting.
Or would you agree that under your view, the market clearing price of a Walrasian auctioneer the price is also too high in some way? After all, it’s pretty clear from the simple S & D graph that most of the buyers could have, in theory at least and likely in reality if they could directly communicate, bough whatever they bough at a price lower than the market clearing price; S slopes upwards and includes the producers required rate of return.
Probably worth including that the winner’s curse will also tend to be a feature when the object to be bought is a one time, one customer type setting.
I don’t think the winner’s curse is limited to this; e.g., I think if the top five bidders win in an auction for vacation tickets (not knowing the value of the vacation package in advance), the effect still exists. It also doesn’t need to be a one time thing, or a unique good.
Or would you agree that under your view, the market clearing price of a Walrasian auctioneer the price is also too high in some way? After all, it’s pretty clear from the simple S & D graph that most of the buyers could have, in theory at least and likely in reality if they could directly communicate, bough whatever they bough at a price lower than the market clearing price; S slopes upwards and includes the producers required rate of return.
I don’t think the clearing price in such an auction is skewed high (if it were, you could profit in expectation by consistently selling, and this should correct the effect). I do think adverse selection concerns should enter your calculation even when submitting orders to two sided auctions like this one (e.g. any US stock market opening/closing auction), because your orders are still getting filled by the market as a whole, but I agree the dynamic does not have the directional bias of the auction I describe here.
I think there’s an implicit element of scale or one offness. For buying milk you have multiple samples as to good price. Even if any is contrived, the bulk still capture something real
For buying milk you have multiple samples as to good price. Even if any is contrived, the bulk still capture something real
No, the bulk don’t, because I buy milk a lot more often than I go on Wall Street and try to get cute with limit orders or manufacturing options or straddles on speculative merger/takeover targets or sign up to MoviePass or park while ignorant in NYC. The bulk of my life is buying milk, not speculating on Widgets Inc. And if I did those enough times to come anywhere near the number of times I’ve bought milk, so that ‘the bulk’ could potentially be any of those things, I would also not be doing it nearly as badly as OP postulates I would. (Because I would be, say, a market-maker like Jane Street, which makes a lot of money off doing that sort of thing.)
… I would also not be doing it nearly as badly as OP postulates I would. (Because I would be, say, a market-maker like Jane Street, which makes a lot of money off doing that sort of thing.)
I’m not sure I follow. Is the argument here that Jane Street is good enough at market-making that they are not vulnerable to adverse selection? i.e. that the dynamic in example #11 (Widgets stock) wouldn’t apply to them?
Counterpoint: actually, you’re wrong, because most trades I make IRL leave me with a lot of consumer surplus, and in reality, conditional on me making a trade, it was pretty good.
The fact that you have to reach for exotic scenarios either involving government failures like subways or doing limit orders in highly efficient markets for financial speculation on liquid but volatile assets (not exactly an everyday ‘trade’ I hope you’ll concede) or contests or auctions by naive non-auction goers who don’t even know to account for winner’s curse or getting stuff for free should make you rethink what you are claiming about “most trades you make aren’t all that great”.
If your point was true, it should be as simple as “you go into the grocery store to buy a gallon of milk. You are filled with deep remorse and shame when you get home and look at the receipt and think about how much you spent in gas to boot. You look in your freezer for comfort. You are filled with deep remorse and shame when you are reminded how much you paid for the ice cream. With little choice, you pull out a spoon you bought years ago—and are filled with deep remorse and shame &etc &etc”. You wouldn’t need to invoke all these weird hypotheticals like “you ask your friend Drew to sell you under the table a cheap limited share of his cow’s monthly milk production in ice cream tickets through your company redeemable in NYC but only in an office which can be reached by an express subway (which runs on alternate Tuesdays)”...
I don’t claim here that all trades you get to do are bad. I claim that they’re worse than they might naively seem without accounting for adverse selection, i.e. for the fact that your opportunity to get something depends on nobody else wanting it (as in the case of the subway seat or the parking spot) or somebody else actively wanting the other side of the trade (as in the case of the zero-sum bedroom selection or the juggling contest).
I’m surprised that these are exotic scenarios to you. I regularly take the subway. I might not be understanding the relevance of subways as an example of “government failure,” but I’ll rephrase the example without needing to invoke a government resource:
Bad restaurants are more likely to have open tables than good restaurants. Alice’s Restaurant and Bob’s Burgers might look identical to you from the outside, but if all the tables at Alice’s Restaurant are full and the tables at Bob’s Burgers are open, that’s evidence that Alice’s Restaurant is better quality—and you’d rather eat there. Unfortunately for you, all the tables there are full, so you can’t. The trades you get to do (eating at Bob’s) are worse than the ones you don’t (eating at Alice’s).
That doesn’t mean that eating at Bob’s is worse than going hungry. It might still be worth buying food there instead of not at all. But, if a week ago you had had the opportunity to make a reservation at either one (before Alice’s filled up), you would have been better off flipping a coin and reserving one at random than waiting to slot into whichever is available.
Does this help clarify the confusion? If so, I’ll edit in this example, so as to not have the government goods degrading element distract from the core idea.
That seems dependent on it being difficult to scale the specific skill that went into putting together the experience at the good restaurant. Things that are more scalable, like small consumer products, can be selected to be especially good trades (the bad ones don’t get popular and inexpensive).
I agree. Another way to say that is that if there’s competition for the good you want (because it’s in some way or other in limited supply—seats in the subway, shares in a specific company, pieces of candy of the flavor you like, …— and you win the competition too easily, you have to check you aren’t being screwed. But if the good is mass-produced to the point where you‘re not clearly competing with others for it, then there’s no reason to wonder why others are letting you win?
An amended slogan that more accurately captures the phenomenon the post is trying to point to would be “Conditional on your trade seemingly not creating value for your counterparty, your trade likely wasn’t all that good”.
Yes! The real moral of this story is that trades which seem like win-win are a better bet, since you understand what the other party is gaining from them. Trades which seem too-good-to-be-true and purely win-lose in your favor should strike you as suspicious. You should only engage in such trades when you are confident you have an information advantage.
I think this important point is obscured by a number of bad examples lumping in other, less related phenomena that have different ‘solutions’. The unifying theme might be, ‘make sure you have enough information to determine that the trade is good before going through with it.’ I still think that there are different patterns here that deserve to be categorized separately.
I think this post is just trying to be a set of examples of adverse selection, not really some kind of argument that there is tons of adverse selection everywhere. Lists of examples seem useful, even if they are about phenomena that are not universally present, or require specific environmental circumstances to come together in the right way.
I don’t think any of these examples are examples of adverse selection because they generate separating equilibria prior to the transaction without any types dropping out of the market, so there’s no social inefficiency.
Insurance markets are difficult (in the standard adverse selection telling) because insurers aren’t able to tell which customers are high risk vs low risk, and so offer prices for the average of the two, leading to the low-risk types dropping out because the price is more than they’re willing to pay. I think this formal explanation is good https://www.kellogg.northwestern.edu/faculty/georgiadis/Teaching/Ec515_Module14.pdf
I think this post makes an important point, that it’s important to take conditional expectations, where one is conditioned on being able to make a trade, but none of this is adverse selection, which is a specific type of dynamic Bayesian game that leads to socially inefficient outcomes which isn’t a property of dynamic bayesian games in general.
But the framing here is completely wrong...
But OK, let’s leave aside the title and attempt to imply anything about 99% of trades out there, or the basically Marxist take on all exchanges being exploitation and obsession with showing how you are being tricked or ripped off. The examples are still very bad and confused! Like, these examples are not even all about adverse selection, and several of them are just wrong in portraying the hypothetical as a bad thing.
The first one about subways, isn’t even about adverse selection to begin with. A reminder of what “Adverse selection” is:
In the subway example, there is no different information: it’s about how governments do rationing and make markets clear by letting the goods degrade until the utility is destroyed because of lack of appetite for setting clearing prices like surge prices or fare enforcement; that’s not ‘adverse selection’ at all, any more than freeways reaching an equilibrium of misery where they are so slow that people avoid them is ‘adverse selection’. (If you think it’s ‘adverse selection’, explain what “buyers and sellers have different information” means in the context of lack of congestion pricing in transport...?)
#3 and #4 are not adverse selection either (still no difference in information), and are fundamentally wrong in portraying it as a bad outcome: the outcomes are not bad, but neutral or good—OP gives no reason to think that the outcomes would have been better if ‘you’ had gotten the good room or to eat whichever dish. (In fact, presumptively, those are the desirable outcomes: if ‘you’ cared so much, why did you leave it up to Bob; and why did you not eat the dish yourself, but someone hungrier did?)
#6 doesn’t demonstrate anything because no trade happened, so it can’t show anything about your surplus from trades that do happen.
And the Wall Street efficient market examples are true (finally, an actual adverse selection example!), but relevant to vanishingly few people who are also extremely aware of it and spend a lot of effort dealing with it, generally successfully; and people who do auctions more than occasionally generally do not have any problem with winner’s curses, and auctions are widely & intensively used in many fields by experts. And so on.
My guess is you are pattern-matching this post and author to something that I am like 99% confident doesn’t match. I am extremely confident the author does not think remotely anything like “all exchanges [are] exploitation” or has a particular obsession with being tricked or ripped off (besides a broad fascination with adverse selection in a broad sense).
(And in case anyone was led astray: the Marx quote at the start is from Groucho, not Karl.)
I thought it an odd quote for Karl but didn’t give much thought after that. However, with this information I have to wonder if the choice to obscure the actual person being quoted was not intnetional to make some type of point related to the post.
I think it is pretty obviously a joke :P
Equally obvious that it went right over my head.
Still, seems like the aobe reference to marxist views on market trades seems to illustrate another way information asymmetry/advers selection plays out. I was just wondering if that was the intent when the first name was placed in the footnote rather than in the attribute for the quote.
But I have been accused of being humor challenged before ;-) -- or perhaps I should say demonstrated my humor disability?
I think all of them follow a pattern of “there is a naive baseline expectation where you treat other people’s maps as a blackbox that suggest a deal is good, and a more sophisticated expectation that involves modeling the details of other people’s maps that suggests its bad” and highlights some heuristics that you could have used to figure this out in advance (in the subway example, a fully empty car does indeed seem a bit too good to be true, in the juggling example you do really need to think about who is going to sign up, in the bedroom example you want to avoid giving the other person a choice even if both options look equally good to you, in the Thanksgiving example you needed to model which foods get eaten first and how correlated your preferences are with the ones of other people, etc.).
This feels like a relatively natural category to me. It’s not like an earth-shattering unintuitive category, but I dispute that it doesn’t carve reality at an important joint.
They don’t. As I already explained, these examples are bad because the outcomes are not all bad, in addition to not reflecting the same causal patterns or being driven by adverse selection. The only consistent thing here is a Marxian paranoia that everyone else is naive and being ripped off in trades. Which is a common cognitive bias in denying gains to trade. The subway car is simply an equilibrium. You cannot tell if ‘you’ are better off or worse off in any car, so it is not the case that ‘the deal is bad’ The room and food examples actually imply the best outcome happened, as the room and food went to those who valued it more and so ate it sooner (it’s not about correlation of preferences, it’s about intensity); the deal was good there. And the Laffy Taffy example explicitly doesn’t involve anything like that but is pure chance (so it can’t involve “other people’s maps” or ‘adverse selection’).
I think you missed the point of the Laffy Taffy example. He got the flavor he didn’t like because he’d been systematically eating the ones he did like while leaving the flavor he didn’t like in the bowl. (Or his friend wasn’t actually picking at random.)
I think you might be slightly misunderstanding the intention of the subway example (1.) - the “market” described is one of commuters for seats, and the example is noting that if some subway seats appear underpriced—i.e. commuters are choosing to cram together in fewer cars rather than equalizing their density over all available subway cars—then those commuters likely know something about the unused seats that you don’t know.
The thing I’m describing here is winner’s curse—my point is that the winning bidder (in example #5) overpays relative to the true value, while the median bidder (in example #6) neither profits nor loses. (A bidder whose model is mistaken such that they substantially underbid also profits $0). That is, there’s an asymmetry between your PnL when your model is correct (#6) and when your model is incorrect (#5).
Some auction goers know about winner’s curse; they likely make more conservative bids to protect against this. Some auction goers don’t. The person winning the auction is more likely to not be thinking hard about winner’s curse, or to have a sufficiently wrong pricing model to counteract the size of their adjustment in light of it.
The point is: conditional on winning the auction, you outbid every other person. You are at the extreme end of bids. The price you bid ($180) is a combination of your model of the wheelbarrow’s price ($200, with some uncertainty) and the amount of edge you ask for on account of winner’s curse concerns (10%, or $20). If you are the winner, it means everybody else either models the price as lower, or asks for greater edge, or (most likely) some blend of the two. If it’s just because they’re asking for more edge, your bid may still be profitable. But it’s likely some combination of the two, and their price models all (or almost all) being lower than yours should cause you to update that the true value of the wheelbarrow is lower than you’d previously estimated.
Probably worth including that the winner’s curse will also tend to be a feature when the object to be bought is a one time, one customer type setting.
Or would you agree that under your view, the market clearing price of a Walrasian auctioneer the price is also too high in some way? After all, it’s pretty clear from the simple S & D graph that most of the buyers could have, in theory at least and likely in reality if they could directly communicate, bough whatever they bough at a price lower than the market clearing price; S slopes upwards and includes the producers required rate of return.
I don’t think the winner’s curse is limited to this; e.g., I think if the top five bidders win in an auction for vacation tickets (not knowing the value of the vacation package in advance), the effect still exists. It also doesn’t need to be a one time thing, or a unique good.
I don’t think the clearing price in such an auction is skewed high (if it were, you could profit in expectation by consistently selling, and this should correct the effect). I do think adverse selection concerns should enter your calculation even when submitting orders to two sided auctions like this one (e.g. any US stock market opening/closing auction), because your orders are still getting filled by the market as a whole, but I agree the dynamic does not have the directional bias of the auction I describe here.
I think there’s an implicit element of scale or one offness. For buying milk you have multiple samples as to good price. Even if any is contrived, the bulk still capture something real
No, the bulk don’t, because I buy milk a lot more often than I go on Wall Street and try to get cute with limit orders or manufacturing options or straddles on speculative merger/takeover targets or sign up to MoviePass or park while ignorant in NYC. The bulk of my life is buying milk, not speculating on Widgets Inc. And if I did those enough times to come anywhere near the number of times I’ve bought milk, so that ‘the bulk’ could potentially be any of those things, I would also not be doing it nearly as badly as OP postulates I would. (Because I would be, say, a market-maker like Jane Street, which makes a lot of money off doing that sort of thing.)
I’m not sure I follow. Is the argument here that Jane Street is good enough at market-making that they are not vulnerable to adverse selection? i.e. that the dynamic in example #11 (Widgets stock) wouldn’t apply to them?