How to Call Someone's Bluff and Keep Your Gold

DESCRIPTIONPhoto: rastafabi

I’m watching Deadwood, the remarkably well-written HBO series of a few years ago. In Episode 16, several wealthy townspeople, including the hotel owner, are spreading rumors that the gold field claims will soon be voided.

One claimant thinks the rumors are bluffs circulated to get current claimants to sell out cheaply to large mining interests. Since the hotel’s revenue comes from the derived demand from gold mining, this claimant creates a strategy to induce the hotel owner to reveal the truth: she names a low price and offers to buy his hotel.

If the claims were to be voided, the hotel owner’s revenues would drop and he should be happy to sell out cheaply. But he refuses to sell, which tells her that he views the hotel as yielding a large stream of returns. She concludes the rumors are false and that her stake is still valuable. When asked, she thus refuses to sell her claim on the cheap.

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  1. Mac says:

    Bruce Schneier had a piece recently called “Self Enforcing Protocols” where he described a similar trick in regard with taxation:

    “Here’s a self-enforcing protocol for determining property tax: the homeowner decides the value of the property and calculates the resultant tax, and the government can either accept the tax or buy the home for that price. Sounds unrealistic, but the Greek government implemented exactly that system for the taxation of antiquities. It was the easiest way to motivate people to accurately report the value of antiquities.”

    http://www.schneier.com/blog/archives/2009/08/self-enforcing.html

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  2. Bryan Jackson says:

    It’s definitely one of the widow’s greatest moments: excellent contrast against her deceased husband (who would have found a way to sell for even less, one imagines).

    Just watched all there is of Deadwood this summer: excellent series, but no final season?! Great build up – huge let down.

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  3. br says:

    @mac — that would result in many people overvaluing their properties and overpaying their taxes to avoid the enormous costs that would be incurred if gov’t decided to buy. it is an interesting idea but completely unrealistic and unworkable for housing (for the reason i gave and any number of others).

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  4. Andrew says:

    This scenario assumes the hotel owner knows what will happen (i.e., has perfect information) while others do not. Does he?

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  5. Chris Dircks says:

    @br – You seem to be assuming that the govt is eager to purchase properties, rather than as a last ditch response to egregiously low valuations on property…

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  6. Steve says:

    br (#3), how can I say this — I don’t think you quite get it. The goal of the proposal in #1 is to give homeowners an incentive to value their property at a price they would realistically be willing to accept in a sale, and to pay taxes on that value, rather than an arbitrary value assigned by an assessor. It works because the seller is penalized for either assessing his own property too highly (you pay too much in taxes) or too cheaply (because you run the risk of having to sell it at your undervalued estimate). You’re right that this system wouldn’t work in practice (governments can’t afford to buy up every house in town which introduces opportunities to game the system), but not for the reasons you mention. The reason sellers won’t overvalue their houses is because doing so will cost them money. Economics 101…

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  7. Eric M. Jones says:

    The English had a customs system where the importer stated the value of the cargo and the customs office could buy it at that price to avoid fraudulently low stated values.

    When the Americans started to export mantle clocks to England in the early 19th century, the first shipment was seized and sold at auction for this reason. But the Americans were overjoyed at the price they got from customs and immediated packed up another shipment for them. There are a whole lot of 1800′s American mantle clocks in England.

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  8. Doc says:

    A great example of qui bono? Or, as the French say, cherchez le monnaie – follow the cash- Who benefits is usually the best first question to ask yourself as you try to understand a situation.

    When my pro bono work was being the tax assessor in a small town I could always end a tedious discusssion about valuation by offering to buy the property for the “too high value” that we’d assessed.Never had a taker.

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