Why mispricings persist: limits to arbitrage

Today we discuss one of the most popular and influential economic books of the last few decades - The Winner’s Curse. Originally published in 1994, a new version has just been released and we are joined by co-author Alex Imas who wrote the new edition alongside Nobel Prize winner Richard Thaler. When are we likely to spend a windfall and when are we likely to save it? When is it most dangerous to bid for business against competitors? And are ‘arbitrage’ opportunities in markets really a free lunch?

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Episode TimeStamps:

00:00 - Opening remarks and framing the law of one price

01:42 - Introducing the Ideas Lab series and Alex Imas

03:44 - From pre med to behavioral economics

08:15 - Mental accounting and how people really treat money

10:45 - Housing wealth, illiquidity, and self control

15:39 - Savings behavior, capital gains, and inequality

17:11 - Attention, salience, and why nudges work or fail

22:07 - Nudges versus incentives and policy confusion

25:18 - The winner’s curse and common value auctions

30:01 - Auctions, IPOs, and competitive overbidding

33:44 - The law of one price and market mispricing

36:50 - Limits to arbitrage and hidden risks

39:32 - Why mispricing persists even without confusion

43:26 - Why behavioral economics stays outside textbooks

46:53 - What makes decisions difficult and why it matters

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