The Wolf of Wall Street - A True Story of Fallen Brokerage Giant and Its Deadweight Loss

On a chill night, in celebration of my roommate’s recruitment into an investment banking firm, we watched the classic move - the Wolf of Wall Street. The movie is based on a true memoir of Jordan Belfort, the founder of Stratton Oakmont, a brokerage firm in Long Island, New York. Jordan led the firm on participating in several financial frauds, including pump-and-dump schemes, defined as a security fraud that “involves artificially inflating the price of the owned stock through false and misleading positive statements, in order to sell cheaply purchased stocks at a higher price.”

Jordan Belfort’s life started off as a son of two accountants. As Belfort slowly explored his career as a broker and accumulated wealth through running Stratton Oakmont, he developed a lavish lifestyle filled with luxury ownerships, sex parties, and abusive use of recreational drugs. He became fanatic with money-making; under his leadership, the firm had developed a cult-like culture where all employees submitted themselves unconditionally to the principle of the firm and became completely money-driven. Everyone who came in as financially-incapable has now become millionaires, sitting on top of the money they have defrauded from investors through convincing them to purchase large quantities of penny stocks. Belfort showed excessive greed for the possession of wealth and women, and have committed over 21 cases of money-laundering to scale up his earnings. 

Halfway through the film, me and my roommates began to wonder if we could ever adopt a similar lifestyle portraited in the movie and whether money could ever be of such big attractions to us. We concluded that the marginal private benefits we may receive from earning an extra $10k - $1M is not worth trading in our sanity and basic moral grounds. As wealth accumulates, the private marginal benefit (PMB) diminishes, and private marginal cost (PMC) also grows at a faster rate because the risk that Belfort had to bare became larger and larger under illegal operation as the volume of transactions grew. In real life, as Belfort committed more fraudulent deals, the social marginal cost (SMC) brought along by the existence of Stratton Oakmont had gone way up, not only incurring an opportunity cost on the money tied to those pump-and-dump schemes when it could have been invested elsewhere and generated tangible return, but also resulted in investor net losses of $200 million dollars when the overvalued scheme collapsed. This case differs from market production inefficiency cases that we learned from Gruber's reading; it is more like a market failure resulted from information deficiency which ended up creating an off-balance between the supply and demand for stocks. The financial operation of Stratton Oakmont still created a deadweight loss for its investors and the society as a whole. As a consequence, Belfort lost everything and was federally imprisoned for 2 years.