Something you can’t use at a price you can’t resist | Medium

I admit it: I own a pair of Ferragamo shoes that blister my big toes after a couple hours. They were on sale for $250. Half a size small, I rationalized that they’d break-in, despite knowing better — Ferragamo shoes justify their $1,000 price (to me) with shocking longevity and unchanging fit.

I grok the allure of a bargain. Also fortune cookie wisdom: “A bargain is something you can’t use at a price you can’t resist”

But spending $12,500,000 on the wrong $14,000,000 aircraft because it seems like a great deal? The fu behind bargains is strong. Very strong. What are the forces behind such irrational behavior? And what about the impact of blockchain, 4IR social media, and AI/ML on markets and prices?

In Priceless: The Myth of Fair Value, William Poundstone, writes: Price is a very special measure. If you’ve been reading regularly, you know a single measure brings into play Goodhart’s Law: the invisible hand that guides human interaction with measures.

Goodhart dictates that price isn’t a good measure of qualitative value. That creates a problem — because we mentally correlate price with value. Wrong! A price target (like asking-price or MSRP) has no correlation to value, until and unless someone accepts that price. If that happens frequently, it’s a liquid market. Only then, in a liquid market, and if it’s a fungible item, will market-price equal value (in that instant).

For liquid, fungible markets (NASDAQ, CME, etc.), 4IR — particularly algorithmic trading — is disruptive. Maybe destructive. This analysis says “it is difficult to imagine a situation with higher stakes, or more people held in the balance of mathematical formulas that were designed to generate profits, and nothing else.” I’ll leave it at that, in the hands of quants and philosophers — and keep my fingers crossed.

The rest of the world: shoes, lawyer rates, cars, a restaurant hamburger, and your salary — to name a few — are non-fungible, often hedonic items in variably illiquid markets. This includes private jets (which add another element: opacity). Private-jet aftermarket pricing illustrates evolving pricing concepts — with the added bonus that private jets are pretty cool.

Jets are non-fungible — identical private jets are a rare artifact of a fleet buyer like Netjets. A small group will start life as clones, but with time they gain an individual identity. Unlike rental cars, fleet-jets have prolonged service lives, so when they hit the aftermarket they’re really used — they usually set the bottom of the market and sell to the first reasonable offer. Purely based on price, a tail number ending in QS (Netjets) is a sure pre-owned bargain.

At the other end of the spectrum is the aircraft below: a virtually new Falcon 7X. Until dethroned by the 8X last year, it was the top of Dassult’s line — the aircraft of choice for a largely European customer base whose tastes run to Bordeaux rather than California Cabernet.

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Something you can’t use at a price you can’t resist.