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Money is like candles not cakes
Old 06-30-2008, 01:39 PM   #1
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Money is like candles not cakes

I just wanted to hear some opinions on this. I heard the analogy and it rang true but I'm not sure if it's one of those things that sounds good but upon closer inspection is either too simplistic or outright false.

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Money is like candles not cakes.

You go into a restaurant and sit at a table with everyone else. Cake is cut up and served to everyone. You decide you want more cake, so you go around and take a little bit from each of the others plates. Now you have more, but they have less.

This is not how our economy works. It's more analogous to candles. You walk in to the same restaurant with a bunch of unlit candles. Everyone else has lit candles on their table. You go to each and light one of your candles from their flame. They still have their candles, but you've used it to increase your own. Not only that, but you've increased the amount of heat, light and warmth in the room so everyone benefits.

Thoughts?
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Old 06-30-2008, 01:44 PM   #2
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You will hear it described as growing the pie as opposed to splitting the pie up as well. This is the idea of Real Per-Capita GDP growth. Real just means you take out inflation as a manner of growth, but everybody can be richer than they were a year ago, it is not just distribution methods. Many more fiscally/politically conservatives will describe the economy (including myself) a lot more like this, as trade makes both parties better off by definition (otherwise one would not have taken the trade). So there is no real winner or loser in a trade, just different valuations for people. This is generally a huge argument/point in economic growth.
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Old 06-30-2008, 01:53 PM   #3
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Quote:
Originally Posted by RDamien View Post
I just wanted to hear some opinions on this. I heard the analogy and it rang true but I'm not sure if it's one of those things that sounds good but upon closer inspection is either too simplistic or outright false.
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Thoughts?
That sounds a little new agey to me. I'm not much on analogies, though. I prefer facts. I do know the buying and selling part of the stock market is more like the cake. A few buy low and sell high, making money from the many who buy high and sell low. Not quite sure how to analogise the dividend part, though.

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Old 06-30-2008, 01:56 PM   #4
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Money is like an undercover prostitution sting but you get pulled in and don't know which side is the right side any more. Plus, everyone willing to give you money wants something in return and the one guy you thought you could trust will slap you if he doesn't get his cut.
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Old 06-30-2008, 02:16 PM   #5
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Originally Posted by CitricAcid View Post
You will hear it described as growing the pie as opposed to splitting the pie up as well.
I take the fiscally conservative approach myself. Or the more free market approach I suppose.

I wonder what the argument is on how the pie is grown exactly, but thanks very much for this input. Interesting.
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Old 06-30-2008, 02:52 PM   #6
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You walk in with a candle, and ask someone if you can trade your candle for a piece of cake. They do it, and they ask you how it tasted, and you say you'll tell them if they give you their fork. You then trade your fork for another piece of cake. You eat half, and feel sick, and a doctor charges you $1,000 to check you over. That's how the economy works.
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Old 06-30-2008, 03:55 PM   #7
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Money is like an undercover prostitution sting but you get pulled in and don't know which side is the right side any more.
I love the analogy!

It works well too, because I was always on the other side of that deal and I knew who was on what side. The sucker was the one who didn't know all the facts. It's like that in investing, if you don't understand both sides of the the deal you are taking on risk. And if there is a big unknown out there that can bite you, by the time you figure it out, it's too late.
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Old 06-30-2008, 06:48 PM   #8
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I just wanted to hear some opinions on this.
I think all the trouble starts when we start explaining game theory and investor psychology with analogies. Pretty soon everyone starts tweaking their analogies instead of dealing with the world as it is.

I have a hard time reading the researchers who use terms like "log-normal distribution" and "rational markets". I'm sure they're of great comfort during this summer's trading sessions.
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