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Gresham's Law - Bad money drives the good money out

Suppose you live on a planet called “Same Price” where everything is for the same price, whether it’s a fruit or veggie or TV or Car or Gold or anything. I know this will create a chaotic economy but for the sake of illustration let’s assume everything is running peacefully on the planet of “Same Price” and people are very happy. 

One day, you, by mistake, landed on the Earth. On visiting Earth, you realized that each item has a different value on this planet. One gold brick can buy you many cars, one car can buy you many TVs and one TV can buy you many Tomatoes.

Your entrepreneur spirit realizes of business opportunity where you can sell gold bricks here, purchases tomatoes from here and then sell them at your planet of “Same Price” to purchase equivalent gold bricks.

Eventually, at your planet, all the gold bricks will be hoarded by you while tomatoes will be available in abundance – thanks to your business.

And you’ll become the richest person of the galaxy. 

Alas, this is not possible (at least for now).

But this hypothetical scenario illustrates Gresham’s Law.  

What is Gresham’s Law?

Gresham’s law states that bad money drives out good money. 

This is due to the fact that ‘bad money’ is overvalued so you want to use it; while good money is undervalued, so you want to save it. Thus, consumers will get more bang for the buck using the inferior money and will benefit from hoarding the superior money

In currency valuation, Gresham’s Law states that if a new coin (bad money) is assigned the same face value as an older coin containing a higher amount of precious metal (good money), then the new coin will be used in circulation while the old coin will be hoarded and will disappear from circulation. (Source: Wikipedia)

Last week, I went to a store to purchase a TV. There I saw two models of the same company and almost with identical features. But one was at 30% lesser price, the reason being it was the last year model. Now, in this situation, there are higher chances of you purchasing the discounted one and thus this model outselling the latest model (at least for a brief amount of the time)

Same is the case when you go for a shopping spree during Sale season, where stores, in order to get rid of excess good and thus free up space in their warehouse, lower the price of the goods

Another variation of this can be seen in those cases where goods were popular for very limited amounts of time, like fidget spinner and therefore merchants try to rid themselves of these goods faster and faster by giving a discount.

All of these can be use cases where companies employed Gresham’s law, where they prefer the sale of overvalued products as fast as possible while keeping the undervalued products at the constant pace. In order to do so, companies take good products out of the consumer reach by not giving any discounts or make them invite only products.

Thus, for certain periods, the bad or non-useful products drive the good products out of the market.

How Gresham’s Law can affect you

Decision Fatigue 
When you are forced to take a string of decisions – those which are routine and monotonous in nature, there is hardly any time and energy left to make some considerable and meaningful decisions. Thus, non-significant decisions are driving significant decisions out in this case.

Investment Decisions
During a bull’s run of the share market, where almost every other stock is on a rise, most of the investors prefer return % over the company fundamentals. Small or mid-cap shares, often with poor company base, take preference over the quality shares. Thus, owing to this greed, bad shares drive the good ones.

Knowledge Gathering
Today content is abundant (and mostly free) and so are the sources but we lack time. Additionally, we are not good in prioritization. This results in skimming through the content or hoping for short articles with 5 magic bullets. Owing to this habit of TL; DR (Too long don’t read), superficial content is driving fundamental and long-form explanation out.

Increase in inferior products reach
Getting freebies or side-products is common and it is a good promotional gimmick. But, this can be a cause of concern if freebies are included alongside inferior products as this will increase the reach of these inferior products, driving quality products which might be pricier or without free stuff, out.

Frequent-flyer miles
If you can't use all your miles on flights now, you could try to sell them. 
The fine print of every programme prohibits the sale or barter of miles, but there is a black market of brokers, such as Award Traveller, which will buy your miles at a discount.
However, if the buyer is caught with your award ticket, it will be confiscated and your frequent-flyer account permanently frozen. 
Some members who have sold their miles on eBay have also had their miles revoked

Now there is a likelihood that secondary exchanges will emerge (such as Account Market) which permit people to trade. This will eventually drive Airline Miles out of the system as people will sell off their miles instead of using or holding them.

Fake reviews
For most of the products, services, blogs we have a comment section. The purpose of this section is to share the views of the existing users. Informed the new viewer of the experience and opinions of the previous viewer.
Unfortunately, in the age of cut-throat competition, some products, people, services stooped too low that they deliberately add fake reviews – either good for their own product or bad for competitors or maybe both. This reduces the value of the reviews and thus eventually drives out the objective of adding the comment or review sections.

Summing it all up

Gresham’s law, although has an origin from the economic context, but in some form or other, it touched other industries as well.

Some of the questions which this law can trigger are still unanswered or are ambiguous such as Does Bitcoin exhibit Gresham’s Law? Can we expect another sub-prime mortgage incidents? Can information overload mean the end of the quality? Does voice searches means the end of the text-based search? Does Virtual reality and augmented reality means end of the experiential travel?

In whatever capacity we are, be it a policymaker or online reviewer or market person or financial advisor or anyone else, let’s try our best that good money (system) drives the bad money (system) out. 

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