Just... wow. Brad DeLong's almost Malthusian take on investing...

Brad DeLong has what has to be the last word on how modern financial markets operate, and it's a depressing take for anyone worried about their retirement portfolio. This excerpt is fairly long, but worthwhile. Go to Brad's website and Read the whole thing, though, if you dare:

There are three ways in which a financial transaction can be a good deal for both sides. First, people have different time preferences: I have money now that I do not want to spend on some useful commodity until sometime in the future, while you may have no money now and need some but anticipate being flush in the future; then we both benefit if I lend you the money-- at interest. Second, risks distributed and diversified are risks dissipated, and so even though the average customer pays money into the insurance system insurance is still a valuable thing to buy because the insurance company pays you when you really need the cash. Third, economies work best when benefits and losses run with decsion-making: those whose actions create or destroy value pay attention when they have "skin in the game", and financial transactions are a good way to make sure they have that "skin in the game".

Those three sources of value for both sides in financial transactions are powerful.

They motivate net investments and drawdowns, insurance and diversification, and the creation of equity interests for managers, partners, homeowners, and others.

They drive perhaps 1/1000 of the transactions we see on financial markets each day.

...

If I am completely ignorant about any financial asset, I nevertheless know one very very important thing: I know--unless saving or dissaving, insurance or diversification, or skin in the game considerations apply--that you cannot possibly know less than I do, and the fact that you think this is a good price for you to sell to me is a powerful reason for me to conclude that it is a bad price for me to buy at. When economists say that a financial transaction is motivated by "disagreement", what they mean is that there is not in fact value being created for both sides, and that the more ignorant party is being conned

This last factor is necessary to drive the vast majority of trades we see in modern financial markets. Look at any trade, and the odds are that on one side you will find people who know less than their counterparty and yet have not asked themselves the obvious question: "if this is a good price at which to buy, why are these people who know more than I do about the situation selling?"