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There is no perfect marketplace. <br> | There is no perfect marketplace. <br> | ||
===Survival of the fittest=== | ===Survival of the fittest=== | ||
====[[Nomological machine]]s==== | |||
: | *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. | |||
: | =====Markets===== | ||
: | Modeling how human beings behave in the absence of rules. | ||
'''Model 1: {{author|Adam Smith}}’s {{br|The Wealth of Nations}}''': Smith's theory assumes the following qualities that do not in practice exist | |||
*'''a [[level playing field]]''': perfect equality, capability, opportunity and symmetry of information between all participants.<br> | |||
*'''Rational participants''': players act in an economically rational way. | |||
*'''No collusion''': Participants are honest, do not take advantage of natural advantages and do not conspire to subvert market conditions. | |||
: | These conditions are '''not''' an equilibrium state among human beings. | ||
: | *we have dissimilar information | ||
*we naturally form alliances | |||
*we protect valuable assets (like information - hence information is not free) <br> | |||
'''Model 2: {{author|Thomas Hobbes}}’ {{br|Leviathan}}''': The basic rule is survival of the most brutish. Nature is red in tooth and claw. <br> | |||
:::(iii) What can overcome the [[Hobbes]]ian state of raw nature? Cooperation. Cooperating actors can do two things <br> | :::(iii) What can overcome the [[Hobbes]]ian state of raw nature? Cooperation. Cooperating actors can do two things <br> | ||
::::(1) They can canrig the market in their favour <br> | ::::(1) They can canrig the market in their favour <br> | ||
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:::::(e) The bonus culture. No doubt to redress the fear / reward balance, investment banks shifted towards a bonus culture throughout the eighties. <br> | :::::(e) The bonus culture. No doubt to redress the fear / reward balance, investment banks shifted towards a bonus culture throughout the eighties. <br> | ||
::::::(i) Many of these firms started out life as partnerships, where those bringing in the profits were personally liable for losses, and the compensation they shared was specifically the equity. These firms took advantage of regulatory change to incorporate. The partners changed their formal status (if not their titles) from partner to employee, but the compensation structure remained. While these firms encouraged equity participation (to the point of paying compensation in shares) employees main source of income was celery and not share performance. Indeed the manual dilution of equity capital in the bonus round had the typical effect of depressing share performance. In this way and in many others comma employees in these Incorporated partnerships were and continue to be systematically preferred over equity holders. The same pay structure has been adopted by competing banks which have always had a corporate structure full stop the lesson of the last 30 years has been only a mug is long banking stock .<br> | ::::::(i) Many of these firms started out life as partnerships, where those bringing in the profits were personally liable for losses, and the compensation they shared was specifically the equity. These firms took advantage of regulatory change to incorporate. The partners changed their formal status (if not their titles) from partner to employee, but the compensation structure remained. While these firms encouraged equity participation (to the point of paying compensation in shares) employees main source of income was celery and not share performance. Indeed the manual dilution of equity capital in the bonus round had the typical effect of depressing share performance. In this way and in many others comma employees in these Incorporated partnerships were and continue to be systematically preferred over equity holders. The same pay structure has been adopted by competing banks which have always had a corporate structure full stop the lesson of the last 30 years has been only a mug is long banking stock .<br> | ||
===The nature of [[risk]]=== | ===The nature of [[risk]]=== | ||
:(a) The real risks are the ones that people don’t recognise as risks AT ALL. All significant market dislocations have come from blind spots.<br> | :(a) The real risks are the ones that people don’t recognise as risks AT ALL. All significant market dislocations have come from blind spots.<br> | ||