...by Daniel Szego
quote
"Simplicity is the ultimate sophistication."
Leonardo da Vinci

Wednesday, April 12, 2017

On the economy of a goldrush


It is interesting to analyse the economy of a gold rush considering the two fundamental different roles who were taking part in the rush: The gold hunters and the shovel sellers.

The gold hunter: is motivated to find gold, to find the big business and for that takes a big risk and works (or realizes a negative cash flow) on a long run. If the gold is found or the business is succeeded then the return can be really big. On the other hand relative few of the people really found a big amount of gold.   

The shovel seller: is selling simply shovel for the people who are hunting the gold. It produces a stable low income on a long run, without the real possibility to get a big business very fast. Certainly the shovel seller is motivated that the gold rush is 'going on', as more people think there is a possibility to find gold, the more shovel can be sold. In this sense the shovel sellers market does not depend on the actual gold market but on the expected gold market. 



Figure 1. Cash Flow model of the gold hunter and shovel seller


Figure 2. Risk - Return diagram of the gold hunter and shovel seller