No. 212 · Strategy · Economics
Arbitrage
When the same thing sells for different prices in different places, someone profits from closing the gap.
In the Almanac
“Brannan’s shovels”, 1848 · “Wise”, 2011
Both stories in full, three ways to use it and where it misleads.
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Questions
What is Arbitrage?
Arbitrage is taking advantage of a price difference for the same asset or product in different markets, buying where it is cheap and selling where it is dear. Beyond creating profit, arbitrage makes markets more efficient, because as more people exploit a gap, it closes.
How do you use Arbitrage?
Regularly compare prices and opportunities across platforms and markets, whether for goods, services or job offers. Look for gaps others have overlooked, like a skill valued more highly in another field. Act quickly but carefully, because arbitrage opportunities tend to disappear once others spot them.
When does Arbitrage matter?
Arbitrage is one of the 56 mental models for strategy, the situations where you ask: How do I win when others want the same thing? Within that, it belongs to “Finding opportunities”, alongside Idea Maze, Joy’s Law and Local Optimum vs Global Optimum.
What is an example of Arbitrage?
Two stories show it at work: Brannan’s shovels (1848) and Wise (2011). Both are told in full in The Mental Models Daily Almanac, which has two stories for each of its 365 models.
Which mental models are related to Arbitrage?
Supply and Demand, Secrets and Comparative Advantage. Arbitrage itself comes from economics.