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August 28, 2008

The Option Market Speaks

Adam Smith's invisible hand decides all sorts of things for us: the price of oil, traffic patterns, your salary. Every time markets move through a price adjustment, market participants get a bit of information. If a good's price goes up and one assumes stable supply, it usually means that the market as a whole values the good more than it did before the price change. After all, someone is willing to pay a higher price for the commodity. If the price drops, one can assume the market values the commodity less because you can buy it for less.

At firstdibz.com, the market gets to buy and sell national championship aspirations. The site sells options on BCS Bowl tickets. You buy an option on tickets by team. So, if you buy a Georgia option and UGA makes the title game, you get to buy a ticket to the BCS Bowl for face value. If Georgia doesn't make it, your option is worthless and they keep your money.

This market should tell us who ticket purchasers think will make the title game. Fans and ticket scalpers should pay the most for the team option most likely to pay off in the end. Only two options, those team options entitling the holder to a valuable ticket, will have any value in December. What does the market say? Right now, the options market predicts USC ($140) and Ohio State ($156) will meet again in January's national title game. The backups are Florida ($135) and LSU ($122). Georgia comes in at $82, well below the top of the market, tied with Texas, Tennessee, and West Virginia.

"Impossible!" you say. That system simply rewards the team with the largest and most dilusional, arrogant fanbase. Are you saying the market is wrong? How dare you question the numerous varible assumptions of the science of economics? How dare you question the mechanism that said Enron was a rock solid retirement investment? That your house really was worth the value of that mortgage? That Kirk Ferentz is a better coach than Mark Richt, Mack Brown, and Steve Spurrier? The market has spoken. Sit back and accept its conclusions.

Quinton

13 comments:

Kris said...

it is now 2 days until kick-off

I can't sleep, lol.

Dan said...

Sounds like I need to write a check for $164.

Chuck said...

If the market is wrong, don't fret--just buy options.

Anonymous said...

Sounds to me like, not a lot UGA fans know about this site. Watch the Price skyrccket. now.

Ubiquitous GA Alum said...

PWD,

I think the site is firstdibz.com // The site you listed is a furniture company.

BYW, I bought two options last week for $82 each. I figure what the heck because if we make the MNC I'd be laying out around 3K for 2 tickets!

Paul Westerdawg said...

Ubiq,

I agree. That's not a bad price. Long as folks remember that it's the right to buy the ticket at face value + the cost of the option.

PWD

Anonymous said...

But wasn't Adam Smith wrong? Assuming game theories' bias towards utility, the set of values Adam Smith's theory represents excludes the options and decision of other players in the game.

To decide whether to buy tickets depends not upon what I think but what everybody thinks. I am pretty sure this is where Adam Smith got it wrong. He claimed that economic strategies were solely dependent upon a unilateral incentive to alter or change one's approach. So make a decision now to buy tickets should not depend upon what I think is best but what everyone else thinks is best as well. Doing so provides the best utility for me.

Anonymous said...

To decide whether to buy tickets depends not upon what I think but what everybody thinks also.

I forgot the "also."

Sorry

UgaMatt said...

With the fees, it comes out to $175.48 for the option to purchase two upper deck tickets for $250. I'm telling everyone I know about this site; I need some movement in the prices. In the words of Kevin from The Office, "I'm going to turn this petty cash into next month's rent!"

Xon said...

There's no need to sarcastically slap free market economics over this. As a general rule, people putting real money behind their predictions tend to be more accurate than people prognosticating with only their pride on the line. That doesn't mean that these futures markets are always right, or that free market economic theories have ever claimed that they are always right.

People are having trouble putting their actual money down on Georgia right now. That is worth taking seriously, but it is not conclusive. For one thing, much of the arguments are probably the same as the popular commentators are offering. In other words, people are worried about Georgia's schedule. Likewise, the political futures markets were not putting a lot of money on McCain back in October, November, or even January. There were just too many obstacles, etc. But then once he won a few, his price went way up.

If Georgia gets out to a 3-0 or 4-0 start (certainly doable), and has some "momentum", that will make their price start to rise. When one or two of their opponents start to slip and don't seem as formidable as they appeared in the preseason, that will also help.

The real time to check in on these futures markets is when the season is already somewhat underway, and a lot of people are (presumably) using various metrics and things based on actual season performance to determine who to buy.

But, at the end of the day, right or wrong, this is just one voice among many. The entire free market is not bound up in this one thing, so that if Georgia wins it all then we all have to become socialists. :-)

Quinton McDawg said...

Easy guys. Obviously we have a highly flawed market here with few participants and little or no transparency. I'm with you on free market economics given that the assumptions that usually come along with them are actually correct. I just pointed out that markets, even highly developed ones, can produce absurd abnormalities, like a USC and Ohio State rematch prediction.

Anonymous said...

Three words: Tech. Boise. Money.

Anonymous said...

So if you're looking to "invest" on this site, you've got to pay 17% juice. 7% to buy, and 10% to sell. If I buy $82 UGA options, they've got to get up to %96 just for me to break even.

 
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