When Stock Prices Go Down, Where Does the Money Go?

so, i've often wondered this question myself, so when i saw the name of the article, i had to read it. it turned out to be fairly insightful, and i thought maybe i'd share it with the class.

When Stock Prices Go Down, Where Does the Money Go?
by Mike Moffatt

so, Mr. Moffatt explains in this article where the money goes in the stock market. basically, he says that no matter how many people buy or sell a share of stock, the market will always break even. by this he means that all of the gains of the people who sold the stock on a profit will equal all of the losses by people who sold on a loss. he uses an excellent example involving AOL in order to explain it all handily.

although i understand this concept of how the profits in the market will equal the losses, i can't exactly comprehend how the market can go up collectively over a long period of time. i think he tries to explain it near the end of the article, but i still just can't quite grasp it. if anyone could shed some light on the topic, i'd really appreciate a post. thanks.

p.s. if you want to read the whole article because my explaination didn't quite cut it, here's the link: http://economics.about.com/cs/finance/a/money_lost.htm

The Winner's Curse

so, i stumbled upon an interesting article recently that said it had something to do with game theory.

the article was entitled "The Winner's Curse - Oil Field Economics and Baseball"
http://economics.about.com/cs/baseballeconomics/a/winners_curse.htm. it was written by David Marasco.

Mr. Marasco points out some interesting similarities between oil executives in the 1960s and baseball general managers today. He explains it in terms of the "winners curse." according to him, the winners curse is what happens when all parties involved in the purchase of something are underinformed. udoubtedly, some people will pay more than others for a product because they believe it is worth more than others. The winners curse is what happens when the person who paid more overvalued the product and ends up losing money.

as far as i can tell, the game theory comes into play when both oil companies and general managers began realizing that they were being bitten by winning and started to bid only fractions of what they thought their player or potential oil supply was worth. firms had to decide how much they were willing to bid on a player or reserve of oil based on both how much they thought it was worth and how much of that value they were willing to pay.

if several firms thought that the player or reserve was worth the same amount of money, but one firm was only going to pay 65% while another was willing to pay 70%, the firm willing to pay 70% would get the item while the other was simply left with its money to spend somewhere else. if the player lived up to standards, then the firm that won gained income from the player or oil. if the firms had overestimated the value, the firm that won lost money while the firm that lost stayed the same.

another place the game theory came into play was when new firms entered the markets for either oil or a new general manager was hired. this facet of the game dealt with letting the new people in on the secret of not getting bitten by the winners curse or not. for oil it was relatively simple. let them do it and let them lose money to learn, but for baseball its different. the salary cap on each team is reevaluated every year, so buying an expensive player means your teams resources go up next year, while other teams' go down. this means teams have to weigh whether or not to let the new guy in on the secret to keep their ability to spend higher or to stay quiet and let him make a fool of himself.

either way, its really amazing to me how very similar these two industries are while still being nowhere near each othere as far as what they provide.