Tuesday, January 20, 2009

does faith have economic value

Frankly, I don't understand recession. The irony is that nobody really does (at least in my vicinity) but everybody talks about it. Like Feynman said
On the contrary, it's because someone knows something about it that we can't talk about physics. It's the things that nobody knows about that we can discuss. We can talk about the weather; we can talk about social problems; we can talk about psychology; we can talk about international finance... so it's the subject that nobody knows anything about that we can all talk about!

Anyways, here is one of my economic meanderings. Nothing related to recession though or maybe.(I don't understand money enough to even say whether this is related)

I go to a snacks-shop (where I go regularly).Eat at whatever I like and then I realize that I have forgotten my wallet. One option now is to look around and see if there is some friend who can lend me some money. Another way should be what if I promise the shopkeeper to pay him later. Kind of like the first option. Borrowing on faith. "Tomorrow I will give you 10% extra but today I have none." So it is like an unsecured loan .
Now, is it a proper trade to exchange money for faith.Now you ask where is the exchange? I reason - in fact there are two transactions here where faith is traded.

I will try to put it here as a table.

transaction 1: I take food(of value X) I give faith(value?!)
transaction 2: I take my faith back I give (X + Y) money

So basically, I pay X for the food. What do I pay Y for?

Lets see this from the shopkeepers point of view -
Suppose he believes that the chances that you will turn up tomorrow with the money (X) plus the extra money (Y) is 1/10. Say, he has 10 such customers. Then he would say "No no, 10% is too less, I need at least 900% to make the trade fair". Fair enough you think. Because in the end he should have got say 10 times 10 = 100 rupees. But if only one person turns up he ought to have brought these 100 rupees (10 plus 90).

So far so good.

Now lets look from your point of view.
You think that it is likely that you will bring the money to him say 9 out of 10 such times if he allows you for only 10% extra. Because this will be fair.

So in the same situation if the shopkeeper believes you not to cheat, he will charge exactly the same price as what will be fair and what you are ready to pay. If out of doubt he charges more, he further decreases your chances to turn up.
So the best bet for him would be to assume that you would not cheat, or in the other extreme case to take some other action (like call the cops).

So, now I come to my point. Is it a correct trade to tell the shopkeeper, in case he has less faith in you, that you will pay him more than just 10% extra (say 50% extra) tomorrow. Of course it would be a gamble for the shopkeeper. He will accept the gamble on the basis of the following:

1. There is a value of faith (we can say p/10, where p is the number of times you will return in 10 such situations) which the shopkeeper has for you in his mind.
2. He knows that your chances of coming is also a function of percentage extra (Y).
3. So he maximizes his faith*returns.
Possible complication-
What if , the shopkeeper has more faith in us and thinks we will return much often than we intend to go?

This post is very VAGUE ! Ya, i know...

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