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The Monkey Trade

Shan sent me this modern parable titled: ‘Stock Market Simply Illustrated

Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10. The villagers seeing that there were many monkeys around, went out to the forest and started catching them.

The man bought several at $10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further and people started going back to their farms.

The offer rate increased to $25 and the supply of monkeys became so little that it as an effort to even see a monkey, let alone catch it. The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on his behalf.

In the absence of the man, the assistant told the villagers: “Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell it to him for $50.” The villagers squeezed up all their savings to buy the monkeys. Then they never saw the man or his assistant; only monkeys everywhere.

This got me thinking… These were my thoughts:

#1 We are assuming that 10a+20b+25c+50d < 35(a+b+c+d). Otherwise it was a net win for the villagers.

#2 Although, as a whole, this might be a net loss for the villagers, lets say 30% of people got interested in the proposition when the bid price was $10, 40% when the bid was $20 etc… (elastic supply & demand). The parable speaks of 100% sale, not 100% people participation. So, it is possible that some villagers got really wealthy from these transactions (if they had gone on a vacation just before the assistant came).

#3 We are assuming that the monkeys didn’t reproduce (bad deal for villagers) or die (bad deal for the conman). May be birth approx= death (no change). But monkeys don’t breed all that well in captivity. Plus pregnancy period for monkey is large enough to be really significant. Crowded cages cause fights and deaths… which is a bad deal for the conman.

#4 If feeding the monkeys during the holding period i.e. (a+b+c+d)*q [where q = cost of food consumed per day per monkey] is significant, it could be a REALLY bad deal for the conman. To be more accurate, it is:a*q*t + bq(t-t1) + … where t is the total time and t1 is the time elapsed between $10 bid and $20 bid etc.

So, may be the villagers had a net gain? ;-)

3 comments
maniosai wrote on Mar 28, 2007:
I am naive about the stock market but the parable doesnt seem to fit the stock market.

Every farmer in the village earns a certain dollar for each monkey he/she catches. That is fundamentally trade.

When there is shortage for monkeys there is increase in price of monkey that is still market demand supply theory and even then each farmer earns a certain value for the monkey.

The con part is very interesting though.

#1
Is there any other assumption than 10a+20b+25c+50d < 35(a+b+c+d) ?

#2
In the parable every villager gets richer by no: of monkey he/she sells at $x price.

#3,#4 Net gain - Expenses(death,feeding) = profit/loss for the conman

If the conman had sold all the monkeys he had brought with a price of $1 difference from what he has purchased the villagers are duped.
Mallik Reddy wrote on Apr 04, 2007:
Agree with mani. Doesnt fit the stock marktet. Any way, since we are into stock market, you may check this out..

Ad supported, free trading..
http://mallikreddy.blogspot.com/2007/04/free-trading-in-us-stock-markets.html
Marnie wrote on Nov 11, 2008:
This is great info to know.