Thursday, April 22, 2010

Does Anybody Else Think Like This?

So my course had a dealing room simulator component and I just completed my first one. It was in the Money Markets trading bills and overnight cash.

I was in Group 4 (of 5) and necessarily certain groups were at different times (due to the limited capacity of the trading room) and some times were more attractive than others.

Group 4 was at an unattractive time (9.30am Friday) meaning that the students that signed up for it did so for lack of a better option. Namely the class was characterised by those students who are late for lectures, have low attendence and generally struggle.

But the cunning-animal tohm stirred in my brain, and expanded my strategic scope. That is not focusing on the in-game-world of the money simulator, but considering the class itself. It was a fine example of when it pays 'hypothetically' to be a brutish predator and not an economic rationalist.

Economists discount debt generally from their considerations of the macroeconomy because they assume people are 'rational utility maximisers' thus if the are in a debt transaction (borrowing or lending funds) they have weighed up the risks and returns and make the decision that maximises their returns.

Now I looked around and came to the conclusion that in this market 'incompetence prevails'. I mean it was only natural, this was Group 4 the stragglers group, it had a disproportionate representation of students who would fail this subject.

All I had to do was find them and take advantage. Of course, there are groups within the group, and a group could operate much like mine, that is if you have groups of 3 all you need do is have one competent member with a veto over all decisions.

Thanks to the 'miracle of groupism' though, incompetence tends to band together. Even in group 4 a group characterised by latecomers and absentees, their were people who were latecomers to our group.

This was one way that incompetence ended up clustered.

Add to that a basic confusion in trading, when you buy cash you are borrowing it purchased with interest. But when you buy bills you are depositing (investing cash) and paid with interest.

This creates a simple, but confusing switcheroo you either:

Buy Cash low and Sell Cash high
Sell Bills low and Buy Bills high (this is the correct pricing structure for bills and cash)

Buy Cash low and Sell Cash high
Buy Bills low and Sell Bills high (half right half wrong, a simple mental lapse: regular incompetence)

Sell Cash low and Buy Cash high
Sell Bills low and Buy Bills high (opposite of above, a simple mental lapse: regular incompetence)

Sell Cash low and Buy Cash high
Buy Bills low and Sell Bills high (completely wrong pricing structure, a recipe for losing money in every transaction you make, gross incompetence)

And for our team it was just a matter of reinforcing the rates we were looking for then looking around for a sucker. We had the correct pricing structure (bar one lapse made admittedly in the heat of a moment by me). So we simply borrowed at say 4.3% and lent at 4.8%.

We also removed the ambiguity, instead of asking for 'Bid' and 'Ask' rates we told people we were 'Buying' or 'Selling' and asked for their rate. Our decision rules to buy sell or wish them a pleasent day were relatively simple. For example we could just say 'Okay we want to Buy Bills at 4.8% on the shortest term possible. If they won't give us that or higher forget it.' and off we go.

Now as a bank we were supposed to be Price Makers, which meant we theoretically should sit around waiting for business to call us.

I knew though we shouldn't wait and let business set the pace. The Chauncey Billups in me bubbled up and we called around businesses to either raise funds, invest funds or let them know our rates.

This kept our competing business entities on their toes and with little time to consult with eachother (and thus mitigate incompetence).

As such we found our incompetent traders and took advantage of them. They would buy cash from us at 4.9% interest when the market rate was 4.2% thinking we were paying them instead of them paying us. We would sell bills at 4.1% thinking they had bought a bargain when in fact they had given us free money we could reinvest with them.

Few knew their credit ratings nor thought to ask us. There were even groups that made clerical errors (ie. made a transaction error that was to our detriment) and when instructed to reverse the transaction instead of just keying the inverse transaction as they should, called us up and asked to make the inverse transaction (which would inevitably be to our advantage).

Thus we made a hypothetical killing by exploiting and taking advantage of incompetence in the same way sociopaths exploit isolating corporate cultures.

It is however unattractive behaviour. I would never act like this in a real situation (so I claim, though I will freely admit I would be tempted, it is after all free money). Why?

Well I work in a call center. Thus I can observe the phenomena of 'social moods' for lack of a technical or correct name for it.

That is some days everyone you talk to is in a good mood and happy to help you out. You go call to call and so fourth. Other days everyone is shitty, tired and angry even though between one call and the next may be 100's of kilometers.

It all suggests that our moods are interconnected. In the example of the call center the most likely connection point is actually me, as the caller. My mood will come out in my voice in some way. Even though I try to be positive and calm all the time on different days it requires different energy. And this will come through as either genuine or deceptive. I must assume I get treated accordingly.

But then there's other things that affect people's moods like it being tuesday, worst day of the working week. Or it being pay day. Or it being just after a long weekend. Or the news that day was bad. Or today tonight ran a story on telemarketing scams.

With moods though there's a bunch of theories and you can observe them. Generally if you take two different people in two different emotional states the most consistent state wins. This is why I generally exert an effort to stay calm all the time.

You take a person who is pissed off and just flared up and you get them to talk to me who is calm, that person will calm down. Alternatively take somebody who is very angry all the time and constantly in a bad mood, they will eventually wear me down until my resistance is gone and I will be in a bad mood.

Our moods in short are either infecting other people (infectuously cheerful) or being infected by others (rush hour traffic) in every interpersonal transaction we have.

Our networks (globally) have never been more interconnected. Our welfare depends on the aggregate happiness out there (which will via consistent infection, decimate the aggregate misery/cunti-tude/anger out there) and hapiness is consistent with optimism, and optimism is consistent with business confidence and business confidence is consistent with greater risk tolerence, and greater risk tolerance is consistent with profitability.

So in a real context I like to think I would never take advantage of some incompetent employee who slips up and offers to pay me their uncompetitive rip off rate on a very large transaction rather than charge me their uncompetitive rip off rate on a very large transaction. Because that employee is going to get fired, his manager is going to be really pissed off. The customers of that institution will get pissed off and bingo - thousands of pissed off people have just been created.

An economist might poo-poo me and point out that my customers would be very happy. But, fuck my customers, a psychologist would readily point out that people would rather avoid pain than seek pleasure. The outcomes would not cancel eachother out. (my customers will probably be more concentrated too... more on that later) the net effect of my exploitation would be negative.

I mean we would have allowed an irrational transaction to go through which means unearned income which by symmetry means an unearned or deadweight loss to people. My customers would be happy if I made a good transaction in competent circumstances, they wouldn't (hopefully) notice that I had foregone an opportunity to rip an unearned windfall out of the market for them redistributing wealth into their hands at the hands of innocent customers with incompetent representation.

Sadly though, law actually encourages sociopathic behaviour in that it is illegal for me to knowingly not maximise shareholder returns. (it is okay by contrast to minimise shareholder returns by grossly overestimating profits and underestimating risks using standard practice).

I can act like a sociopath in a simulator, because we are dealing with hypothetical money with no real customers to suffer or gain (unless RMIT is playing some version of ender's gae, but why?) furthermore, the assesment isn't based on our performance but our understanding. If the incompetents I ripped off care to look at their transaction report to see where they lost all their money and understood how, they could still by rights score full marks on their assignment. People get caught up in games and can forget these things. For me it was good to let my inner animal out for a stroll in the park, but outside of this I keep it in captivity.

So when I ask 'Does anybody else think like this?' the question is two-fold.

1. Is anybody as ruthless as I can be?

Which is just a question of pure curiosity. More importantly:

2. Can other people clearly distinguish between a game with no real stake-holders and reality with real winners and losers?

Businesses after all create wealth, by value-adding or gaining in efficiency, their gain is not strictly speaking meant to be to the detriment of others. (hence the introduction of triple-bottom-line practices and what-not). Profit is supposed to be profit in the net sense, not merely a transfer of wealth.

In times of turmoil wealth flows from weak hands to strong hands, and I do agree that resources should gravitate to those who can use it most constructively/competently. But this can happen smoothly in a marketplace, there's no need for some confident alpha-male bears to bludgeon to death all the little cubs and take their mammas into their harem.

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