What Is Arbitrage? Examples in Finance, Real Estate, & More
What do the theories of an 18th century Scottish economist and philosopher have to do with the price of consumer goods, financial assets like stocks and bonds, and even how to use Airbnb to make money from a property you don’t own? Surprisingly, quite a bit.
The economist in question is Adam Smith, who in his seminal book The Wealth of Nations posited the theory of the “invisible hand,” a metaphorical representation of how individual self-interest guides prices in a free market.
When acting in their self-interest, Smith claims that market participants will drive competition, reduce prices, and allocate resources efficiently, leading to economic growth and prosperity. But this can also lead to temporary imbalances in supply and…
