An Arbitrage Parable

From the introduction to The Arbitrage Principle in Financial Economics comes this amusing and illustrative joke:

An econ professor and a farmer were waiting for a bus. To pass the time, the farmer suggested they play a game. "What kind of game?" asked the professor, who loved games.

"Well," said the farmer, "how about I ask a question, and if you can't answer, I'll give you a buck. Then you ask me a question, and if I can't answer, I'll give you a buck."

"The prospect seems attractive," replied the professor. But I must warn you: I'm not merely an ordinary person, I'm a professor of economics!"

"Oh," said the farmer. "Hmm, maybe we should change the rules. How about this, if you can't answer my question, you give me a buck, but if I can't answer yours, I only have to pay fifty cents."

"That sounds more fair," responded the professor confidently.

"Okay," said the farmer, "Here's my question: what goes up the hill on seven blue legs and down the hill on 3 green ones?"

Now, the professor pondered this riddle long and hard, but eventually he replied, "Well, I sure don't know. So I'll ask you: what does go up the hill on seven blue legs and down on 3 green ones?"

"I have no idea," said the farmer. "But if you give me your dollar, I'll give you my fifty cents!"

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