Ecosystem - Risk Article

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Risk Anatomy


Risk | Fear | Ecosystem | Market | Government | Firm | Cartel | Individual | Trust | Audit | Complexity | Prisoner’s dilemma | Transaction | benign | brutish Navigation: Risk taxonomy | Rumsfeld’s taxonomy

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The market is an analog for the ecosystem. How we believe human beings behave in the absence of rules conditions how we feel about the market. There are two basic models:

Model 1: Benign, per Adam Smith’s The Wealth of Nations

Assumes conditions for human interaction that do not in practice exist:

  • A level playing field: perfect equality, capability, opportunity and symmetry of information between participants.
  • Rational participants: players act in an economically rational way
  • Information is free: Information is universally, immediately available, and therefore has no value (so there is no particular value in keeping it).
  • No collusion: The corollary of the level playing field: participants are honest, do not abuse their natural advantages and do not conspire to subvert the market. Thus, a person can treat the market as it seems.
Model 2: Brutish, per Thomas HobbesLeviathan

Survival of the most brutish. Nature is red in tooth and claw.

  • No cooperation: Others will stab you as soon as look at you.
  • No altruism: Noone acts out of genuine disinterested compassion for another.
  • No trust: The delicate conditions required for trust to thrive do not exist. There is little trust, so no cooperation.

They are only models —“Nomological machines

  • They model reality by proxy, they don’t describe it.
  • They are idealised shorthand, and depend for their coherence on key simplifications that do not in fact appear in nature: no friction, symmetry, no supervening causes, homogeneity, infinite elasticity etc.
Problems

Of course, neither model completely reflects reality. For one thing, market conditions (the levelness of the playing field; availability of information) and prevalent cooperation strategies amongst participants are interdependent. Adam Smith’s conditions for a benign market are not stable: no equilibrium will ever form there, because we are social, hoarding animals.

  • Information
    • Information is inherently valuable': Information is not universal, immediate, or homogeneous. Much of commerce would fail if it were. Therefore those who have information first have a distinct advantage over those who do not.
    • Therefore it is economically rational to hoard information. This tends to make it less likely that information will be free, a key assumption of the Benign model.
  • Cooperation
  • We do cooperate' In the right conditions individuals form natural alliances to share and protect valuable assets (like information).
  • Cooperation brings economy of scale and natural advantage: Cooperation rigs the market in favour of the cooperators against the unaffiliated, thus taking the market further from the benign ideal. This is not, intrinsically, a bad thing. It is rational, logical and sensible behaviour. Nepotism is an instance of this kind of cooperation: it relies on a structure of trust. It is better viewed as a defensive strategy to ensure those we deal with we can trust, than an offensive strategy to keep strangers out.
  • Cooperation changes the market: where there were ten equal players, now there are nine: Eight equal small ones, and a bigger one.