Friday, December 2, 2011

Bankruptcy and self-realising expectations


It took just minutes after American Airlines Chapter 11 bankruptcy announcement for me to receive this offer from Expedia. Capitalism is wonderfully responsive.




Chapter 11 bankruptcy should allow a firm to restructure and continue to operating. The aim is to prevent the firm from ceasing to exist. In theory, the business should be unaffected from the point of view from the customer, so there should be no need to have any special offers. The risk though is that Chapter 11 might create fear. If I think that the firm might disappear and I'll lose my flight, I won't buy the ticket or else, I will need a special offer like this one. Worse, if I think that you think that the firm might go bankrupt then I know you won't buy flights so the firm is more likely to go bankrupt so I won't buy it. Worse still, if I think that you think that I think (even if I don't think) then I know you won't buy the ticket so I won't buy it either. (Read that sentence over again.) It is self-realising expectations. It is why I might need a high interest rate to lend to Spain. Or why banks might not lend to each other resulting in bankruptcy due to liquidity constraints.

I should buy some of these deals. But I have not...


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