Arbitrage is a fun word
Arbitrage is a fun word. When I first read about the principle way back when, I immediately connected it to that most glorious of Beastie Boys songs, “Sabotage.” To this day when I think the term in my head, I hear it as though it were the real end of the refrain. Traders who know what they’re doing love it, and state & local governments in the US that issue bonds despise it when the time comes to keep the IRS happy. It’s been discussed at macro, general levels in the past by others and is essential for obtaining the resources necessary to push effective altruism work, but I’d like to share an example from the micro.
Long before I knew I had a knack for forecasting, I worked for a local government in Colorado. While there, many employees would collect toys and other things for a local charity called Santa House. The operation ran each November and December, providing Christmas presents for the children of poor families. When I helped to drop off a few things one afternoon, I saw a medley of toys, games, and books ready to be donated. Speaking to one of the leaders of the operation, I learned that wrapping paper for the gifts was an issue due to its expense. I had that bit of knowledge tucked away in my head for a couple of months when I stopped by the clearance section of a retail store. There were boxes and boxes of wrapping paper, dozens of bags of bows, and other sundries for the holidays. I knew I had some space in my apartment that I wasn’t going to use, so I grabbed all of the 90% off merchandise I could to tuck it away until the next November. It wasn’t a ton of stuff, but if my dime now could save them a dollar in the future, that was a good use of my time.
What I had that season was gobbled up faster than my dog annihilates her dinner, so I knew I was on to something. Over the following dozen or so years, I became far more methodical by tracking when relevant materials would get their greatest discount, which retailers tended to have the most surplus inventory, and how to play 3D Tetris in my garage without crushing anything.
Including what I have for this winter, I’ve rounded up over five acres of wrapping paper, over 32,000 bows, and other relevant items I knew I could get at steep discounts. It’s become a game for me, with the prize being the reasonable expectation that many Christmas mornings would have been a bit dimmer without my efforts.
This is a small task I’ve taken upon myself, but the principle behind it-arbitrage-has plenty of similar potential applications. For any situation where 1) seasonalities create vast swings in price, and 2) the goods to be acquired have a sufficiently long shelf life, philanthropic opportunities await. (It’s difficult for me to rent out underutilized garage space, so I don’t bother with considering it to be a cost.) For school supply drives (backpacks and crayons are good, glue and markers not so much), those cheap boxes of school Valentines, winter coats and jackets, it’s as simple as buy low, give high.
Things like this probably won’t avert human extinction, make an all-powerful AI have pity on the human race, or convince bats to keep their viruses to themselves, but the impact in the aggregate would pay dividends in the mitigation of human misery. And that, to be sure, is what we all try to do every day.
This is also a good reminder that over time “arbitrage” often tends towards “work”. At first arbitrages are wide and easy. As more people get involved, the width of the arbitrage gets compressed, and effectively becomes fairly priced.
To take your example—there is some fair price for your labour + storage space + risk of not being able to offload the product. I don’t know how close you are to that breakeven, but generally these sorts of arbitrages tend to end up being ‘fairly’ priced once you account for these hidden costs.
In other situations, say HFT, the arbitrage is very clean, but there are large costs (exchange connectivity, hardware, software, employees) and a continuous arm race to keep up with the competition. Looks quite a bit like work to me.
Arguably the ultimate arbitrage is wage labour. Turn up regularly, provide some service and you get paid. Money for ‘nothing’.
You’re absolutely correct. Time, fuel, and back pain are all required inputs in my case. However, I look at it at the margin. In my case, while I would have put in less time, fuel, and back pain using the same amount of money to acquire relevant goods, I treat those as akin to fixed costs. There’s more time going from store to store, a bit more gas than I would have used with less cargo, and my back was going to hurt anyway. But since I had already made the decision that I was going to continue to do this, the real additional costs are only the marginal differences from what I was going to do in the first place. What I collected for 2022 already, just for the paper alone, would sell at retail for about $2,600 (paid about $400). So, even if I “paid” myself $150/hr, the retail value conveyed would have been greater than my expenses, including labor.