May

29

in what other areas, apart from financial markets and sports betting, is there vig? and what is really relevant for everyday life? and how to avoid it?

maybe we don't see it that way because of Gell-Mann Amnesia affect.

Hernan Avella responds:

There’s a rich literature on rent-seeking behavior. It’s pervasive, Pharma, Telecom, Agriculture, Natural Resources. Not all lobbying is RS but the majority is.

Vic asks:

is there a universal law of vig where it goes to 2% in all activities like sports betting?

Jeff Watson offers:

I wrote this in 2009 about vig:

The Vig Keeps Grinding Away, from Jeff Watson

Steve Ellison comments:

Games that advertise that they're commission free usually charge the highest vig of all …

Mr. Watson's statement was written well before all the retail brokerages offered commission-free trading, which I contend simply means convoluted execution that costs customers much more than the $7.95 commissions that existed previously. "Where are the customers' yachts?", indeed.

Separately, the way the CME evolved is a good example of the Professor's constructal theory that all systems evolve to increase flow and velocity.

Hernan Avella disagrees:

Your insights on electronic trading seem to lack sufficient grounding. Abundant evidence disputes your hypothesis, highlighting the significance of the percentage extracted rather than the total volume. The evidence is clear that more opaque markets, like credit and emerging debt, are more expensive, for everybody except for a selected group that invests heavily in keeping the status quo. Electronic markets are more transparent, more anonymous, standardized, continuous, centralized, offer multilateral interaction and informationally more efficient.

Zubin Al Genubi responds:

Give the evidence then, if its so abundant, rather than your usual vague negative comments.

H. Humbert comments:

The beauty of long term investing is there's no vig and there are no taxes, other than once or twice in a few years.

The origin of the word is interesting. It's a Yiddish corruption of a Russian (or some other Slavic) word pronounced "vi igrish" or "gain", but it's more like "winning in a game", and the root means "game".

Alex Castaldo adds:

Interesting. The word can be found in online Russian dictionaries.

"vigorish" has a similar pronunciation, though the meaning has changed to be the fee for the game instead of the winnings.

Nils Poertner writes:

we want to battle against vig in all aspects of our lives. almost build a register where there is vig and share it with family and friends.

Henry Gifford comments:

Vig is one of the many things I find it helpful to view with an understanding of the laws of thermodynamics. The laws of thermodynamics describe the movement of heat in the universe, and because all energy is either heat now or becoming heat, they could be called the laws of heat.

The idea of “follow the money” to understand a system or organization or relationship is closely parallel by “follow the heat”, and heat follows clearly defined laws.

In approximate inverse sequence to importance, the fourth law says that if things A and B are at the same temperature, and things B and C are at the same temperature, then things A and C are at the same temperature. This is also called the zeroth law because it is so basic it should have been thought of first. The fourth law reminds me of the unlikelihood of much true arbitrage existing.

The third law says nothing can be cooled to absolute zero, because that would require something colder to absorb the heat, and nothing can be colder than absolute zero.

The first law says energy can neither be created nor destroyed.

The second law, most analogous to vig, says that heat always flows from hot things to cold things, and never flows the other way on its own. This law is the most profound, with many implications.

For example, one implication of the second law is that a car engine cannot convert all the energy in gasoline to mechanical energy - some will leave as heat that is not useful (except for heating the passenger compartment during the winter). Vig. A utility power plant burns fuel and about 31% of the energy in the fuel gets to the customer’s electric meter - 5 or 10% transmission losses (heat escaping from wires is “lost” - see first law), the rest is waste heat at the power plant. Vig. Various devices can reduce the amount lost to heat, but these devices have too high a vig themselves.

Big Al adds:

The first law makes me think of markets (not the Fed or banking) where money is neither created nor destroyed. For example, in the FTX collapse, the media talked about all the money that was "lost". But of course it wasn't lost, it was simply transferred from one group of entities to others.

Hernan Avella critiques:

This line of thought fails empirically when looking at deflationary crises, loss of crypto keys, central bank operations, bad loans, bankruptcy.

Henry Gifford responds:

Loss of crypto keys and central bank operations both follow the first law - printing money leads to inflation (if inflation is defined as a lowering of the value of money), destroying some of the money in circulation by losing keys, or destroying a dollar left in the pocket of clothing getting washed, increases the value of the remaining money.

I have heard the term “deflationary crisis” before, but don’t believe there has ever been a crisis whose root cause is the increase in the value of money.
In the saving and loan crisis of the late 80s, lenders sometimes asked borrowers to make sure they borrowed enough to make the payments for two years, as it was taxpayer money being lent out, and the lenders were collecting enough vig to make it worth going under I s couple of years.

A bankruptcy stops wasteful behavior, and the threat of bankruptcy causes people to take steps to prevent it. But I guess the waste in a government can continue forever, apparently violating the first law, while also proving that a perpetual motion mechanism really can exist, violating both the first and second laws.

Larry Williams comments:

printing money leads to inflation—data does not suggest that to be true


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