• The Efficiency of Silver Coins

    At some point you learned that U.S. quarters and dimes minted in years 1964 and prior contain silver. Maybe you learned it two seconds ago. It hardly matters. At least since 1964 many people have known that those coins would no longer contain silver and that the silver versions are worth more than their face value. Depending on the price of silver a circulated Roosevelt dime from 1946-1964 could be worth ~$1 and a circulated silver Washington quarter worth ~$2.50.

    Recently, while sitting on the train to work, I found myself looking at the dates of the quarters in my pocket. Of course I hoped I’d find a pre-1965 one. Was this a worthwhile activity? The financial economics theory of market efficiency says no.

    There is a famous joke about economists: Two economists are walking to the beanie propeller hat shop. One says, “Look! There’s a $20 U.S. Federal Reserve Note on the ground” (remember, he’s an economist). The other says, “Can’t be. If that were true, someone would have already picked it up.” They walk on, leaving the $20 bill on the ground.

    The joke is about the efficiency of markets. In an efficient market opportunities to systematically make profits above the market average don’t exist. Any news that suggests a profit opportunity is taken advantage of nearly instantly and the extra profit is arbitraged away. The $20 is gone. It can’t be there. Don’t bother looking for it. This is the efficient market hypothesis (EMH) in a nutshell. (By the way, I walk a lot–3 miles each direction of my commute. Over the past five years I’ve found ~$100 in cash on the street. Being merely an incidental economist, I picked it up.)

    How fresh is the news that pre-1965 quarters and dimes contain silver? Not very fresh. How likely am I to find one? Is it worth my time looking? For all practical purposes the “market” for happening upon silver U.S. coins is efficient. I can’t extract any profit. Or not much any way. It’s been arbitraged away. The early birds got the coins. To good approximation, they can’t be out there. The only reason to look for those coins is for fun. That’s the source of utility and the only one.

    Now, I have a hot stock tip for you…