transaction costs

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pages: 1,164 words: 309,327

Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

active measures, Andrei Shleifer, AOL-Time Warner, asset allocation, automated trading system, barriers to entry, Bernie Madoff, Bob Litterman, book value, business cycle, buttonwood tree, buy and hold, compound rate of return, computerized trading, corporate governance, correlation coefficient, data acquisition, diversified portfolio, equity risk premium, fault tolerance, financial engineering, financial innovation, financial intermediation, fixed income, floating exchange rates, High speed trading, index arbitrage, index fund, information asymmetry, information retrieval, information security, interest rate swap, invention of the telegraph, job automation, junk bonds, law of one price, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market clearing, market design, market fragmentation, market friction, market microstructure, money market fund, Myron Scholes, National best bid and offer, Nick Leeson, open economy, passive investing, pattern recognition, payment for order flow, Ponzi scheme, post-materialism, price discovery process, price discrimination, principal–agent problem, profit motive, proprietary trading, race to the bottom, random walk, Reminiscences of a Stock Operator, rent-seeking, risk free rate, risk tolerance, risk-adjusted returns, search costs, selection bias, shareholder value, short selling, short squeeze, Small Order Execution System, speech recognition, statistical arbitrage, statistical model, survivorship bias, the market place, transaction costs, two-sided market, vertical integration, winner-take-all economy, yield curve, zero-coupon bond, zero-sum game

We will examine both retrospective and prospective measures of transaction costs. We consider first retrospective measures of transaction costs. We then consider how traders use information about past transaction costs to predict future transaction costs. 21.1 TRANSACTION COST COMPONENTS Defining and measuring exactly what we mean by the term “transaction costs” is difficult. This entire book is about understanding what transaction costs are, where they come from, and how to measure them. We explore these questions in detail throughout this book. For our present purpose, transaction costs include all costs associated with trading.

Accordingly, they try to trade more or less aggressively if, on a per unit basis, their missed trade opportunity costs are respectively greater or less than their transaction costs. Traders who are concerned about this issue should estimate their marginal transaction costs from the costs of executing the last trades that fill their orders. 21.7 TRANSACTION COST PREDICTION Traders need to predict transaction costs in order to evaluate active trading strategies. To this end, traders develop, estimate, and use transaction cost prediction models. Most transaction cost prediction analyses use explicit and implicit information to predict transaction costs. 21.7.1 Explicit Information About Future Transaction Costs Explicit information about future transaction costs consists of the contractual information about commissions and trading fees enumerated above.

In chapter 22, we consider why superior selection/composition performance is difficult to achieve and even more difficult to predict. 21 Liquidity and Transaction Cost measurement Traders pay attention to their transaction costs because transaction costs make implementation of their trading strategies expensive. Transaction costs are most important to traders who trade frequently or who trade large sizes. For most active traders, transaction costs are the most significant determinants of their total returns. Speculators who perform poorly usually do so because their transaction costs exceed the values of their trading strategies. Traders measure their transaction costs to evaluate how well they and their brokers have implemented their trading strategies.


pages: 504 words: 139,137

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

activist fund / activist shareholder / activist investor, Alan Greenspan, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, Black-Scholes formula, book value, Brownian motion, business cycle, buy and hold, buy low sell high, buy the rumour, sell the news, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, currency risk, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, global macro, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, junk bonds, late capitalism, law of one price, Long Term Capital Management, low interest rates, managed futures, margin call, market clearing, market design, market friction, Market Wizards by Jack D. Schwager, merger arbitrage, money market fund, mortgage debt, Myron Scholes, New Journalism, paper trading, passive investing, Phillips curve, price discovery process, price stability, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, risk free rate, risk-adjusted returns, risk/return, Robert Shiller, selection bias, shareholder value, Sharpe ratio, short selling, short squeeze, SoftBank, sovereign wealth fund, statistical arbitrage, statistical model, stocks for the long run, stocks for the long term, survivorship bias, systematic trading, tail risk, technology bubble, time dilation, time value of money, total factor productivity, transaction costs, two and twenty, value at risk, Vanguard fund, yield curve, zero-coupon bond

These are noisy observations of the expected transaction costs. Assuming that the expected transaction cost is constant for all these trades, we can estimate the expected transaction cost as the average observed costs: This expected transaction cost is useful in deciding which trading strategy to use, how frequently to trade, and so on. Furthermore, our estimate of expected transaction costs tells us how to adjust a backtest for transaction costs. Of course, transaction costs differ across securities. Small stocks with low trading volume tend to have larger transaction costs than large stocks, for instance.

Adjusting Backtests for Trading Costs Transaction costs reduce the returns of a trading strategy. A backtest is therefore much more realistic if it accounts for transaction costs. To adjust a backtest, we first need to have an estimate of the expected transaction costs for all securities and trading sizes. You can often obtain such estimates from brokers, or you can estimate the expected transaction costs, as discussed in section 5.3. Given these expected transaction costs, we can adjust the backtest in the following simple way. Each time a trade takes place in our backtest, we compute the expected transaction cost and subtract this cost from the backtest returns.

However, the amount that can be traded at the bid or ask price is often small relative to what a large hedge fund needs to execute. Therefore, the main source of transaction costs for large traders is market impact in these markets. Since prices move more the larger position you trade, this kind of transaction cost increases with trade size. The way to deal with this type of transaction cost is to split up a trade into many small orders and trade these small orders patiently over time, as described in more detail below. • Constant transaction costs: Bid–ask spreads. (Also called proportional transaction costs, since total transactions costs are proportional to trade size when average costs are constant.)


pages: 224 words: 13,238

Electronic and Algorithmic Trading Technology: The Complete Guide by Kendall Kim

algorithmic trading, automated trading system, backtesting, Bear Stearns, business logic, commoditize, computerized trading, corporate governance, Credit Default Swap, diversification, en.wikipedia.org, family office, financial engineering, financial innovation, fixed income, index arbitrage, index fund, interest rate swap, linked data, market fragmentation, money market fund, natural language processing, proprietary trading, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, short selling, statistical arbitrage, Steven Levy, transaction costs, yield curve

Brokerage commissions are at an all-time low, and a general reduction in trading personnel in favor of advanced electronic resources is further driving down transaction costs. Transaction cost research will play an increasingly important role in selecting the proper algorithm integrated with an order management system. Buy-side traders and money managers will view transaction cost research as another critical piece in making a trading decision with their national best bid or offer. The need to curb transaction costs and market impact for highvolume trades, direct market access, and front-end automation is starting to converge. Buy-side firms such as hedge funds are now starting to have greater access to algorithms from brokers via an order management system, as well as algorithmic trading capabilities provided by third-party software companies.

Implementation shortfall or arrival price Manages the trade-off between impact and risk to execute as close as possible to the midpoint when the order is entered.5 5 Tom Middleton, ‘‘Understanding How Algorithms Work,’’ in Algorithmic Trading: A BuySide Handbook, 22–23 (London: The Trade Ltd., 2005). This page intentionally left blank Chapter 10 Transaction Cost Research 10.1 Introduction New technologies, such as utilizing algorithms and straight-through processing, result from the drive to lower transaction costs, as well as the associated research involved behind each execution. According to the TABB Group, Transaction Cost Research (TCR) is defined as the amount of money spent to open a new position or to close an existing position. Transaction cost analysis started with fulfilling regulatory requirements. It can significantly drag performance, especially for portfolio strategies that include high turnover.

Basket analytics can judge the overall risk in a basket, its exposure to different industries, and the potential implicit costs of the basket. 10.5 Conclusion The interest in transaction cost research is widely attributable to increasing competition for lower transaction costs, and regulatory pressure. Investment managers are pushed to measure and manage transaction costs to increase investment returns, retain clients, attract new prospects, and satisfy regulators. When investment managers began to be judged by transaction costs, this began the push for algorithms and other advanced electronic execution tools. One universally known method of rating quality of execution is through achieving or exceeding the Volume-Weighted Average Price (VWAP).


Quantitative Trading: How to Build Your Own Algorithmic Trading Business by Ernie Chan

algorithmic trading, asset allocation, automated trading system, backtesting, Bear Stearns, Black Monday: stock market crash in 1987, Black Swan, book value, Brownian motion, business continuity plan, buy and hold, classic study, compound rate of return, Edward Thorp, Elliott wave, endowment effect, financial engineering, fixed income, general-purpose programming language, index fund, Jim Simons, John Markoff, Long Term Capital Management, loss aversion, p-value, paper trading, price discovery process, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Ray Kurzweil, Renaissance Technologies, risk free rate, risk-adjusted returns, Sharpe ratio, short selling, statistical arbitrage, statistical model, survivorship bias, systematic trading, transaction costs

This averaging over parameters will further help ensure that the actual trading performance of the model will not deviate too much from the backtest result. Sensitivity Analysis TRANSACTION COSTS No backtest performance is realistic without incorporating transaction costs. I discussed the various types of transactions costs P1: JYS c03 JWBK321-Chan September 24, 2008 13:52 Printer: Yet to come Backtesting 61 (commission, liquidity cost, opportunity cost, market impact, and slippage) in Chapter 2 and have given examples of how to incorporate transaction costs into the backtest of a strategy. It should not surprise you to find that a strategy with a high Sharpe ratio before adding transaction costs can become very unprofitable after adding such costs.

Also, at the beginning of the maximum drawdown, the equity was about $2.3 × 104 , and at the end, about $0.5 × 104 . So the maximum drawdown is about $1.8 × 104 . How Will Transaction Costs Affect the Strategy? Every time a strategy buys and sells a security, it incurs a transaction cost. The more frequent it trades, the larger the impact of transaction costs will be on the profitability of the strategy. These transaction costs are not just due to commission fees charged by the broker. There will also be the cost of liquidity—when you buy and sell securities at their market prices, you are paying the bid-ask spread.

Note that I count a round-trip transaction of a buy and then a sell as two transactions—hence, a round trip will cost 10 basis points in this example. If you are trading ES, the E-mini S&P 500 futures, the transaction cost will be about 1 basis point. Sometimes the authors whose strategies you read about will disclose that they have included transaction costs in their backtest performance, but more often they will not. If they haven’t, then you just to have to assume that the results are before transactions, and apply your own judgment to its validity. As an example of the impact of transaction costs on a strategy, consider this simple mean-reverting strategy on ES. It is based on Bollinger bands: that is, every time the price exceeds plus or minus 2 moving standard deviations of its moving average, short or buy, respectively.


pages: 1,082 words: 87,792

Python for Algorithmic Trading: From Idea to Cloud Deployment by Yves Hilpisch

algorithmic trading, Amazon Web Services, automated trading system, backtesting, barriers to entry, bitcoin, Brownian motion, cloud computing, coronavirus, cryptocurrency, data science, deep learning, Edward Thorp, fiat currency, global macro, Gordon Gekko, Guido van Rossum, implied volatility, information retrieval, margin call, market microstructure, Myron Scholes, natural language processing, paper trading, passive investing, popular electronics, prediction markets, quantitative trading / quantitative finance, random walk, risk free rate, risk/return, Rubik’s Cube, seminal paper, Sharpe ratio, short selling, sorting algorithm, systematic trading, transaction costs, value at risk

Whenever a trade takes place, the proportional transaction costs are subtracted from the strategy’s log return on that day. Figure 10-5. Gross performance of EUR/USD exchange rate and algorithmic trading strategy (before and after transaction costs) Vectorized backtesting has its limits with regard to how close to market realities strategies can be tested. For example, it does not allow one to include fixed transaction costs per trade directly. One could, as an approximation, take a multiple of the average proportional transaction costs (based on average position sizes) to account indirectly for fixed transactions costs. However, this would not be precise in general.

The driving factor in this regard is the relatively high frequency of trades that the strategy requires: In [90]: import MomVectorBacktester as Mom In [91]: mombt = Mom.MomVectorBacktester('XAU=', '2010-1-1', '2019-12-31', 10000, 0.0) In [92]: mombt.run_strategy(momentum=3) Out[92]: (20797.87, 7395.53) In [93]: mombt.plot_results() In [94]: mombt = Mom.MomVectorBacktester('XAU=', '2010-1-1', '2019-12-31', 10000, 0.001) In [95]: mombt.run_strategy(momentum=3) Out[95]: (10749.4, -2652.93) In [96]: mombt.plot_results() Imports the module as Mom Instantiates an object of the backtesting class defining the starting capital to be 10,000 USD and the proportional transaction costs to be zero. Backtests the momentum strategy based on a time window of three days: the strategy outperforms the benchmark passive investment. This time, proportional transaction costs of 0.1% are assumed per trade. In that case, the strategy basically loses all the outperformance. Figure 4-12. Gross performance of the gold price (USD) and the momentum strategy (last three returns, no transaction costs) Figure 4-13. Gross performance of the gold price (USD) and the momentum strategy (last three returns, transaction costs of 0.1%) Strategies Based on Mean Reversion Roughly speaking, mean-reversion strategies rely on a reasoning that is the opposite of momentum strategies.

Executing the Python script in “Long-Only Backtesting Class” yields backtesting results, as shown in the following. The examples illustrate the influence of fixed and proportional transaction costs. First, they eat into the performance in general. In any case, taking account of transaction costs reduces the performance. Second, they bring to light the importance of the number of trades a certain strategy triggers over time. Without transaction costs, the momentum strategy significantly outperforms the SMA-based strategy. With transaction costs, the SMA-based strategy outperforms the momentum strategy since it relies on fewer trades: Running SMA strategy | SMA1=42 & SMA2=252 fixed costs 0.0 | proportional costs 0.0 ======================================================= Final balance [$] 56204.95 Net Performance [%] 462.05 ======================================================= Running momentum strategy | 60 days fixed costs 0.0 | proportional costs 0.0 ======================================================= Final balance [$] 136716.52 Net Performance [%] 1267.17 ======================================================= Running mean reversion strategy | SMA=50 & thr=5 fixed costs 0.0 | proportional costs 0.0 ======================================================= Final balance [$] 53907.99 Net Performance [%] 439.08 ======================================================= Running SMA strategy | SMA1=42 & SMA2=252 fixed costs 10.0 | proportional costs 0.01 ======================================================= Final balance [$] 51959.62 Net Performance [%] 419.60 ======================================================= Running momentum strategy | 60 days fixed costs 10.0 | proportional costs 0.01 ======================================================= Final balance [$] 38074.26 Net Performance [%] 280.74 ======================================================= Running mean reversion strategy | SMA=50 & thr=5 fixed costs 10.0 | proportional costs 0.01 ======================================================= Final balance [$] 15375.48 Net Performance [%] 53.75 ======================================================= Chapter 5 emphasizes that there are two sides of the performance coin: the hit ratio for the correct prediction of the market direction and the market timing (that is, when exactly the prediction is correct).


pages: 318 words: 78,451

Kanban: Successful Evolutionary Change for Your Technology Business by David J. Anderson

airport security, anti-pattern, business intelligence, call centre, collapse of Lehman Brothers, continuous integration, corporate governance, database schema, domain-specific language, index card, Kaizen: continuous improvement, Kanban, knowledge worker, lateral thinking, loose coupling, performance metric, six sigma, systems thinking, tacit knowledge, Toyota Production System, transaction costs

In economic terms, these setup and cleanup activities are referred to as transaction costs. Every value-added activity has associated transaction costs. These transaction cost activities are things that the customer may not see, most likely does not value, and to which they are ambivalent at best. The customer may be forced to pay the costs of these activities but would prefer not to. How often have you called a plumber to fix a washing machine or dishwasher and been asked for a $90 call out fee? This is a transaction cost. Would you prefer a lower fee? Would you choose a plumber who did not charge such a fee? The transaction costs do not add value.

The driver actually picking up the machine at the warehouse, driving it to your home, and unpacking it for you is a transaction cost. Perhaps the same person, or another person, a plumber, installs it for you. The plumber takes time to drive to your home and yet more time to perform the installation. All of this time and effort for delivery and installation is part of the transaction cost of buying that washing machine. Economically, the retailer absorbs the cost of the credit card transaction. The other transaction costs for delivery and installation are often passed on to the consumer. Not all of the transaction costs are “seen” or “felt” by all the players in the value chain but they affect the economic performance of the system as a whole.

How much time will it consume? What opportunity cost is incurred when people are distracted from their regular activities? Transaction Costs of Delivery With physical goods, it is easy to understand the transaction costs of making a delivery. First there is payment. The customer will arrange to pay the supplier with some monetary instrument, a credit card, for example. For the pleasure of taking payment via credit card, the leading vendors such as MasterCard and Visa charge the vendor a transaction cost, typically two to four percent of the value of the transaction. In addition to costs on the financial transaction between the consumer and vendor, there also may be delivery charges.


The Volatility Smile by Emanuel Derman,Michael B.Miller

Albert Einstein, Asian financial crisis, Benoit Mandelbrot, Black Monday: stock market crash in 1987, book value, Brownian motion, capital asset pricing model, collateralized debt obligation, continuous integration, Credit Default Swap, credit default swaps / collateralized debt obligations, discrete time, diversified portfolio, dividend-yielding stocks, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, implied volatility, incomplete markets, law of one price, London Whale, mandelbrot fractal, market bubble, market friction, Myron Scholes, prediction markets, quantitative trading / quantitative finance, risk tolerance, riskless arbitrage, Sharpe ratio, statistical arbitrage, stochastic process, stochastic volatility, transaction costs, volatility arbitrage, volatility smile, Wiener process, yield curve, zero-coupon bond

When there are transaction costs, you do not want to hedge continuously. 125 The Effect of Transaction Costs on P&L A PDE Model of Transaction Costs Hoggard, Whalley, and Wilmott (1994) have developed an intuitively attractive treatment of transaction costs within the traditional BSM no-arbitrage framework that provides a way to estimate the effect of transaction costs on the option price by adjusting the BSM volatility. As usual, let √ dS = 𝜇Sdt + 𝜎SZ dt (7.7) where Z is drawn from a standard normal distribution. The change in the value of a hedged position when transaction costs are included is given by d𝜋 = dC − ΔdS − [Transaction costs] 𝜕2C 2 𝜕C 1 𝜕C Z dt − ΔdS − |NS| k dt + dS + 𝜎 2 S2 𝜕t 2 𝜕S 𝜕S2 ( )( √ ) 1 𝜕2C 2 𝜕C 𝜕C 𝜇Sdt + 𝜎SZ dt + 𝜎 2 S2 Z dt − |NS| k dt + −Δ = 𝜕t 2 𝜕S 𝜕S2 ( ( ) ) ) ( √ 1 2 2 𝜕2C 2 𝜕C 𝜕C 𝜕C Z + 𝜇S 𝜎 S dt − Δ 𝜎SZ dt + −Δ + = 2 𝜕t 𝜕S 𝜕S 𝜕S2 = − |NS| k (7.8) If we choose our initial hedge so that Δ = 𝜕C/𝜕S, then ( d𝜋 = ) 1 2 2 𝜕 2 C 2 𝜕C Z + 𝜎 S dt − |NS| k 2 𝜕t 𝜕S2 (7.9) Using Equation 7.5 for the transaction cost, we have ( d𝜋 = ) | 𝜕2C | 2 √ 1 2 2 𝜕 2 C 2 𝜕C Z + Z|| 𝜎S k dt 𝜎 S dt − || 2 2 𝜕t 𝜕S | 𝜕S2 | (7.10) This is not a perfectly riskless hedge because it depends on Z and Z2 .

This corresponds to a greater implied volatility in the BSM formula. Transaction costs, in short, introduce a natural bid-ask spread into option valuation. When there are no transaction costs, the value of a portfolio of two BSM options is equal to the sum of their individual values. This is not true when you have to pay a fee to buy or sell stocks. If you combine two options into a portfolio, their hedge ratios may partially cancel, and hence the transaction costs required to hedge two options together are not necessarily the sum of the transaction costs required to hedge each option separately. The transaction costs for a portfolio are nonlinear in the number of options, and you cannot unambiguously isolate the transaction costs for a single option if that option is part of a portfolio.

You can assume that both dividends and the riskless rate are zero. Hint: Use a first-order Taylor expansion of the cumulative normal distribution around zero. CHAPTER 7 The Effect of Transaction Costs on P&L Transaction costs make a long position worth less, a short position more. The tension between the accuracy and cost of hedging. The effective volatility of a hedged option. THE EFFECT OF TRANSACTION COSTS Though the Black-Scholes-Merton (BSM) model assumes that you can buy or sell stocks without incurring transaction fees, in the real world there are both explicit and implicit costs to trading.


pages: 313 words: 95,077

Here Comes Everybody: The Power of Organizing Without Organizations by Clay Shirky

Andrew Keen, Andy Carvin, Berlin Wall, bike sharing, bioinformatics, Brewster Kahle, c2.com, Charles Lindbergh, commons-based peer production, crowdsourcing, digital rights, en.wikipedia.org, Free Software Foundation, Garrett Hardin, hiring and firing, hive mind, Howard Rheingold, Internet Archive, invention of agriculture, invention of movable type, invention of the printing press, invention of the telegraph, jimmy wales, John Perry Barlow, Joi Ito, Kuiper Belt, liberation theology, Mahatma Gandhi, means of production, Merlin Mann, Metcalfe’s law, Nash equilibrium, Network effects, Nicholas Carr, Picturephone, place-making, Pluto: dwarf planet, power law, prediction markets, price mechanism, prisoner's dilemma, profit motive, Richard Stallman, Robert Metcalfe, Ronald Coase, Silicon Valley, slashdot, social software, Stewart Brand, supply-chain management, the Cathedral and the Bazaar, the long tail, The Nature of the Firm, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, transaction costs, ultimatum game, Vilfredo Pareto, Wayback Machine, Yochai Benkler, Yogi Berra

When the small group is a bunch of teenage girls trying to get or remain dangerously thin, against the judgment of their horrified parents and friends, then we disapprove. But the basic mechanism of mutual support remains the same. Falling transaction costs benefit all groups, not just groups we happen to approve of. The thing that kept phenomena like the Pro-Ana movement from spreading earlier was cost. The transaction costs of gathering a group of like-minded individuals, especially in an anonymous fashion, has historically been large, and self-funded and socially approved groups like AA were the only ones that could take on those costs. Once the transaction costs fell, however, the difficulties of putting such groups together disappeared; the potential members of such a group can now gather and set their own goals without needing any sort of social sponsorship or approval.

Every transaction it undertakes—every contract, every agreement, every meeting—requires it to expend some limited resource: time, attention, or money. Because of these transaction costs, some sources of value are too costly to take advantage of. As a result, no institution can put all its energies into pursuing its mission; it must expend considerable effort on maintaining discipline and structure, simply to keep itself viable. Self-preservation of the institution becomes job number one, while its stated goal is relegated to number two or lower, no matter what the mission statement says. The problems inherent in managing these transaction costs are one of the basic constraints shaping institutions of all kinds.

Coase realized that workers could simply contract with one another, selling their labor, and buying the labor of others in turn, in a market, without needing any managerial oversight. However, a completely open market for labor, reasoned Coase, would underperform labor in firms because of the transaction costs, and in particular the costs of discovering the options and making and enforcing agreements among the participating parties. The more people are involved in a given task, the more potential agreements need to be negotiated to do anything, and the greater the transaction costs, as in the movie example above. A firm is successful when the costs of directing employee effort are lower than the potential gain from directing. It’s tempting to assume that central control is better than markets for arranging all sorts of group effort.


pages: 324 words: 89,875

Modern Monopolies: What It Takes to Dominate the 21st Century Economy by Alex Moazed, Nicholas L. Johnson

3D printing, Affordable Care Act / Obamacare, Airbnb, altcoin, Amazon Web Services, Andy Rubin, barriers to entry, basic income, bitcoin, blockchain, book value, Chuck Templeton: OpenTable:, cloud computing, commoditize, connected car, disintermediation, driverless car, fake it until you make it, future of work, gig economy, hockey-stick growth, if you build it, they will come, information asymmetry, Infrastructure as a Service, intangible asset, Internet of things, invisible hand, jimmy wales, John Gruber, Kickstarter, Lean Startup, Lyft, Marc Andreessen, Marc Benioff, Mark Zuckerberg, Marshall McLuhan, means of production, Metcalfe’s law, money market fund, multi-sided market, Network effects, PalmPilot, patent troll, peer-to-peer lending, Peter Thiel, pets.com, platform as a service, power law, QWERTY keyboard, Ray Kurzweil, ride hailing / ride sharing, road to serfdom, Robert Metcalfe, Ronald Coase, Salesforce, self-driving car, sharing economy, Sheryl Sandberg, Silicon Valley, Skype, Snapchat, social graph, software as a service, software is eating the world, source of truth, Startup school, Steve Jobs, TaskRabbit, technological determinism, the medium is the message, transaction costs, transportation-network company, traveling salesman, Travis Kalanick, two-sided market, Uber and Lyft, Uber for X, uber lyft, vertical integration, white flight, winner-take-all economy, Y Combinator

In economic terms, GitHub significantly reduces transaction costs for people collaborating on software projects. The term “transaction cost,” coined by the economist Ronald Coase, refers to any cost incurred in making an exchange. Another term for it is a “coordination cost.” In essence, a transaction or coordination cost is the cost of participating in an interaction. Transaction costs arise because markets and communities in the real world aren’t like the perfect markets you learn about in Economics 101. For one thing, they lack the perfect information that these perfect-market models assume to exist. Transaction costs arise out of this and other imperfections or deviations from the ideal market scenario.

Information processing and storage costs are important parts of transaction costs. When these costs decline, the potential size of organizations increases. Intuitively this makes sense. With faster information processing and more information storage, you can manage a larger amount of information. But when processing costs fall, transaction costs also decline. Remember that transaction costs were the glue that held together a company’s value chain and determined what activities an organization internalized. As processing speeds radically increased and transaction costs fell at the end of the twentieth century, some value chains began to break up.

Take advantage of what you’ve learned in this book, as well as the next tips, to use this knowledge to your benefit. 1. Look for Technology that Reduces Transaction Costs and Removes Gatekeepers Look for industries where technology can reduce high transaction costs or remove high-cost gatekeepers. In many cases, you’re looking for transactions that can be automated and run by algorithms. The more you can use technology to reduce transaction costs, the more opportunity you’ll have to add value to both sides. The ultimate goal is to remove entire steps from the transaction. Remember, transaction costs aren’t always about money. They also include time and effort, among other things.


pages: 354 words: 26,550

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems by Irene Aldridge

algorithmic trading, asset allocation, asset-backed security, automated trading system, backtesting, Black Swan, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, computerized trading, diversification, equity premium, fault tolerance, financial engineering, financial intermediation, fixed income, global macro, high net worth, implied volatility, index arbitrage, information asymmetry, interest rate swap, inventory management, Jim Simons, law of one price, Long Term Capital Management, Louis Bachelier, machine readable, margin call, market friction, market microstructure, martingale, Myron Scholes, New Journalism, p-value, paper trading, performance metric, Performance of Mutual Funds in the Period, pneumatic tube, profit motive, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic trading, tail risk, trade route, transaction costs, value at risk, yield curve, zero-sum game

t=1 T E[R p,t ] ≥ µ, t=1 I xi = 1 (14.9) i=1 Portfolio Optimization in the Presence of Transaction Costs The portfolio optimization model considered in the previous section did not account for transaction costs. Transaction costs, analyzed in detail in Chapter 19, decrease returns and distort the portfolio risk profile; depending on the transaction costs’ correlation with the portfolio returns, transaction costs may increase overall portfolio risk. This section addresses the portfolio optimization solution in the presence of transaction costs. The trading cost minimization problem can be specified as follows: min E[TC] s.t.V [TC]≤K (14.10) where E[TC] is the average of observed trading costs, V[TC] is the variance of observed trading costs, and K is the parameter that specifies the maximum trading cost variance.

Holding periods for positions in market microstructure trading can vary in duration from seconds to hours. The optimal holding period is influenced by the transaction costs faced by the trader. A gross average gain for a position held just several seconds will likely be in the range of several basis points (1 basis point = 1 bp = 1 pip = 0.01%), at most. To make such trading viable, the expected gain has Trading on Market Microstructure 129 to surpass the transaction costs. In an institutional setting (e.g., on a proprietary trading desk of a broker-dealer), a trader will often face transaction costs of 1 bp or less on selected securities, making a seconds-based trading strategy with an expected gain of at least 2 bps per trade quite profitable.

Limit orders can be seen as pre-commitments to buy or sell a specified number of shares of a particular security at a prespecified price, whereas market orders are requests to trade the specified quantity of a given security as soon as possible at the best price available in the market. As a result, market orders execute fast, with certainty, at uncertain prices and relatively high transaction costs. Limit orders, on the other hand, have a positive probability of no execution, lower transaction costs, and Orders, Traders, and Their Applicability to High-Frequency Trading 63 Price Ask Price Depth Ap Resilience Breadth Depth Resilience Quantities Bp Bid Price A 0 Sale A´ Quantities Purchase FIGURE 6.1 Aspects of market liquidity (Bervas, 2006).


pages: 356 words: 103,944

The Globalization Paradox: Democracy and the Future of the World Economy by Dani Rodrik

"World Economic Forum" Davos, affirmative action, Alan Greenspan, Asian financial crisis, bank run, banking crisis, Bear Stearns, bilateral investment treaty, borderless world, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, classic study, collective bargaining, colonial rule, Corn Laws, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, Doha Development Round, en.wikipedia.org, endogenous growth, eurozone crisis, export processing zone, financial deregulation, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, George Akerlof, guest worker program, Hernando de Soto, immigration reform, income inequality, income per capita, industrial cluster, information asymmetry, joint-stock company, Kenneth Rogoff, land reform, liberal capitalism, light touch regulation, Long Term Capital Management, low interest rates, low skilled workers, margin call, market bubble, market fundamentalism, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, microcredit, Monroe Doctrine, moral hazard, Multi Fibre Arrangement, night-watchman state, non-tariff barriers, offshore financial centre, oil shock, open borders, open economy, Paul Samuelson, precautionary principle, price stability, profit maximization, race to the bottom, regulatory arbitrage, Savings and loan crisis, savings glut, Silicon Valley, special drawing rights, special economic zone, subprime mortgage crisis, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tobin tax, too big to fail, trade liberalization, trade route, transaction costs, tulip mania, Washington Consensus, World Values Survey

The abolition of the East India Company following the Indian Mutiny of 1858, and its replacement by direct colonial rule from London, provides another perfect example of the transition. When the private firm and its armies were no longer up to the task, the sovereign had to step in with his own, more effective powers of persuasion. Overcoming Transaction Costs A contemporary economist would summarize the argument thus far by saying that the role played by the Hudson’s Bay Company, the East India Company, and other chartered trading companies was to reduce the “transaction costs” in international trade to enable some degree of economic globalization. It is worth spending some time on this concept, as it holds the key to understanding globalization—what restricts or deepens it—and will recur throughout our discussion.

Economists like to think that the propensity to “truck, barter, and trade,” in Adam Smith’s evocative (but careful)13 phrasing, is such an ingrained element of human nature that it makes “free trade” the natural order of things. They even have coined a general term for different types of friction that prevent mutually beneficial trade or render it more difficult: “transaction costs.” Transaction costs are in fact rampant in the real world, and if we fail to see them all around us it is only because modern economies have developed so many effective institutional responses to overcome them. Think of all the things that we take for granted that are absolutely essential for trade to take place.

When something goes wrong in these relationships—a Chinese subcontractor passes on the iPhone’s proprietary designs to a competitor or Citigroup’s borrower refuses to service his debt obligations—there may be precious little that the aggrieved parties can do. The fear that such things can and will go wrong acts as a considerable deterrent to the transactions in the first place. In economists’ language, these are trades with potentially quite significant transaction costs. Institutions—at least those that support markets—are social arrangements designed to reduce such transaction costs. These institutions come in three forms: long-term relationships based on reciprocity and trust; belief systems; and third-party enforcement. The first of these generate cooperation through repeated interaction over time. For example, a supplier is deterred from cheating his customer because he worries that he would lose future business.


High-Frequency Trading by David Easley, Marcos López de Prado, Maureen O'Hara

algorithmic trading, asset allocation, backtesting, Bear Stearns, Brownian motion, capital asset pricing model, computer vision, continuous double auction, dark matter, discrete time, finite state, fixed income, Flash crash, High speed trading, index arbitrage, information asymmetry, interest rate swap, Large Hadron Collider, latency arbitrage, margin call, market design, market fragmentation, market fundamentalism, market microstructure, martingale, National best bid and offer, natural language processing, offshore financial centre, pattern recognition, power law, price discovery process, price discrimination, price stability, proprietary trading, quantitative trading / quantitative finance, random walk, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, Tobin tax, transaction costs, two-sided market, yield curve

Specific examples of constructing and using HFT signals are given later, after a brief discussion of the effect of adaptive algorithms on transaction cost. ALGORITHMS AND TRANSACTION COST In this section we discuss transaction cost at the client order level. Although this is not a high-frequency view of the trading process, we want to understand the general properties of price impact and also provide evidence that high-frequency signals reduce the total transaction cost. 28 i i i i i i “Easley” — 2013/10/8 — 11:31 — page 29 — #49 i i EXECUTION STRATEGIES IN EQUITY MARKETS Figure 2.2 Average arrival slippage by participation rate Arrival slippage (bp) 10 5 0 0 5 10 15 Participation rate (%) 20 25 Fully filled client orders of at least 1,000 shares and duration of at least one minute were used.

In the US flash crash, the Waddell and Reed trader would surely have been well advised to defer trading rather than to sell, as they did, in a market experiencing historically high toxicity levels. Choice #3: join the herd Trade with volume bursts, such as at the opening and closing of the session, when your footprint is harder to detect. Transaction costs now largely consist of price impact costs, and astute LF traders must use transaction cost analysis products that are predictive, rather than simply reactive. Naive trading strategies are simply bait for predatory algorithms. 15 i i i i i i “Easley” — 2013/10/8 — 11:31 — page 16 — #36 i i HIGH-FREQUENCY TRADING Choice #4: Use “smart brokers”, who specialise in searching for liquidity and avoiding footprints As we have seen, HFT algorithms can easily detect when there is a human in the trading room, and take advantage.

By summing over 185 i i i i i i “Easley” — 2013/10/8 — 11:31 — page 186 — #206 i i HIGH-FREQUENCY TRADING all child orders, we can thus measure the effect of the temporary component on overall trading costs. To be more precise, we extend the classic Perold (1988) “implementation shortfall” approach to decompose ex post transaction costs into various components, one of which accounts for the trading costs associated with transitory pricing errors. Because trading cost analysis is often performed on an institution’s daily trading, we first illustrate our transaction cost measurement approach at a daily frequency. However, our methods are much more precise when more disaggregated trading data are available. Using detailed information on the intra-day child order executions from a larger institutional parent order, we show how the transitory price component evolves with trading on a minute-by-minute basis, and we show how this transitory price component contributes to overall implementation shortfall.


pages: 346 words: 97,330

Ghost Work: How to Stop Silicon Valley From Building a New Global Underclass by Mary L. Gray, Siddharth Suri

"World Economic Forum" Davos, Affordable Care Act / Obamacare, AlphaGo, Amazon Mechanical Turk, Apollo 13, augmented reality, autonomous vehicles, barriers to entry, basic income, benefit corporation, Big Tech, big-box store, bitcoin, blue-collar work, business process, business process outsourcing, call centre, Capital in the Twenty-First Century by Thomas Piketty, cloud computing, cognitive load, collaborative consumption, collective bargaining, computer vision, corporate social responsibility, cotton gin, crowdsourcing, data is the new oil, data science, deep learning, DeepMind, deindustrialization, deskilling, digital divide, do well by doing good, do what you love, don't be evil, Donald Trump, Elon Musk, employer provided health coverage, en.wikipedia.org, equal pay for equal work, Erik Brynjolfsson, fake news, financial independence, Frank Levy and Richard Murnane: The New Division of Labor, fulfillment center, future of work, gig economy, glass ceiling, global supply chain, hiring and firing, ImageNet competition, independent contractor, industrial robot, informal economy, information asymmetry, Jeff Bezos, job automation, knowledge economy, low skilled workers, low-wage service sector, machine translation, market friction, Mars Rover, natural language processing, new economy, operational security, passive income, pattern recognition, post-materialism, post-work, power law, race to the bottom, Rana Plaza, recommendation engine, ride hailing / ride sharing, Ronald Coase, scientific management, search costs, Second Machine Age, sentiment analysis, sharing economy, Shoshana Zuboff, side project, Silicon Valley, Silicon Valley startup, Skype, software as a service, speech recognition, spinning jenny, Stephen Hawking, TED Talk, The Future of Employment, The Nature of the Firm, Tragedy of the Commons, transaction costs, two-sided market, union organizing, universal basic income, Vilfredo Pareto, Wayback Machine, women in the workforce, work culture , Works Progress Administration, Y Combinator, Yochai Benkler

See benefits; wages computers access to, 85, 122, 236 n26 algorithmic cruelty in, 67–69, 85–91 as executors of code, xiv–xv humans as, 39, 51–53, 54, 57 limitations of, 170–71, 231 n41 outsourcing, rise of, 54–56 consumer action, 193–94 content moderation, ix, x–xii, xxi, 19, 183 Contingent and Alternative Employment Arrangements, xxiv contingent work, xxii, xxiv, 8, 44, 46, 51, 53–55, 58–61 contract (temporary) work Amazon.com hiring of, 1–2 classification of, 57–63, 144–47 vs full-time work, 45–50, 159–60, 172–73, 185, 187–88 reliance on, 39 transaction costs, 68–69 See also on-demand employment corporate culture, transaction costs, 73 corporate firewalls, 16–21 cost-of-living allowance (COLA), 47 costs/expenses of employees, 39, 54 hiring, 32 outsourcing and, 55 platform fees, 144–47 shared workspaces, 180–81 social consequences, 68–69 transaction costs. see transaction costs up-front costs for workers, 108 See also double bottom line Craigslist, 4, 27, 32 creativity dependence on, xii, 31, 147, 170–71, 192 humans vs CPUs, xiv, 176, 231 n41 LeadGenius, 22 need for, 21, 161, 177–78 CrowdFlower, xv, 13, 34–35, 144–45 crowdsourcing.

So the humans, on both sides of the market, are left with the task of resolving these complexities at their own expense, though the workers bear the heavier brunt of these costs. The Cost of Doing Business At the heart of the on-demand economy is the premise that relying on ghost work cuts transaction costs and, therefore, boosts profits. Transaction costs are those expenses associated with managing the production and exchange of goods or services. Nobel laureate Ronald Coase, a key contributor to modern economic theory, popularized the notion of transaction costs, though he did not coin the phrase itself. His seminal 1937 article “The Nature of the Firm” was published only two years after Wagner passed the National Labor Relations Act.

For all the claims that ghost work can combine algorithms, artificial intelligence, and platform interfaces to replace the company’s function as “the entrepreneur-coordinator, who directs production,”3 there is evidence to the contrary. The transaction costs of ghost work don’t melt away. Instead they are shifted to the shoulders of requesters and workers. Requesters must juggle all the management that typically comes with scoping a new project and handing it to a new employee. They spend extra time and energy explaining tasks that they thought needed no explication once converted to code and relayed via APIs. Workers pay a disproportionately higher price: they lose their time, even their paychecks, with no opportunity to appeal any mistreatment. Many of the transaction costs passed on to requesters mirror those shouldered by workers.


Capital Ideas Evolving by Peter L. Bernstein

Albert Einstein, algorithmic trading, Andrei Shleifer, asset allocation, behavioural economics, Black Monday: stock market crash in 1987, Bob Litterman, book value, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, computerized trading, creative destruction, currency risk, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, diversification, diversified portfolio, endowment effect, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, high net worth, hiring and firing, index fund, invisible hand, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, mental accounting, money market fund, Myron Scholes, paper trading, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, price anchoring, price stability, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, seminal paper, Sharpe ratio, short selling, short squeeze, Silicon Valley, South Sea Bubble, statistical model, survivorship bias, systematic trading, tail risk, technology bubble, The Wealth of Nations by Adam Smith, transaction costs, yield curve, Yogi Berra, zero-sum game

In contrast to Capital Ideas, this book is almost completely about the implementation of theory and only incidentally about the development of new theory. * Just incidentally, in relation to how transactions costs on October 19 nearly buried portfolio insurance, Bob Merton has pointed out to me the wonderful paradox that there would be no Black-Scholes-Merton option pricing model without transactions costs. Transactions costs make the replicating portfolio impractical and options irreplaceable. bern_a03fpref.qxd xii 3/23/07 8:43 AM Page xii PREFACE It is interesting to note that this process is not unique to finance.

The difficulty of executing transactions was overwhelming as panic transformed the whole market-making process into a disaster area. Because of the practical difficulties, especially the transactions costs of managing a replicating portfolio, investors are better off trading in a derivative instrument such as an option or a futures contract, if it is available. As Merton explains, “Black-Scholes has value because of the existence of transaction costs!” If there were no transactions costs to anyone, puts and calls would be useless, portfolio insurance would have been a glorious success, and Black, Scholes, and Merton would have had to find other ways to spend their time—and would they have won a Nobel anyway?

All the pieces had to fit and join together. Three elements were the focus of all this work: low transactions costs, control of risk, and strategies derived from the index fund platform where scale was a plus instead of a drawback and source of weakness. Scale was where Wells Fargo’s products could develop their comparative advantage and run ahead of the competition, especially for managers whose business was in stock picking and market timing. Wells Fargo did not emphasize low transactions costs just because they were something nice for clients. Low transactions costs meant Wells Fargo could pursue strategies that were out of the ranges of typical active management firms.


pages: 369 words: 128,349

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing by Vijay Singal

3Com Palm IPO, Andrei Shleifer, AOL-Time Warner, asset allocation, book value, buy and hold, capital asset pricing model, correlation coefficient, cross-subsidies, currency risk, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, fixed income, index arbitrage, index fund, information asymmetry, information security, junk bonds, liberal capitalism, locking in a profit, Long Term Capital Management, loss aversion, low interest rates, margin call, market friction, market microstructure, mental accounting, merger arbitrage, Myron Scholes, new economy, prediction markets, price stability, profit motive, random walk, Richard Thaler, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, short squeeze, survivorship bias, Tax Reform Act of 1986, transaction costs, uptick rule, Vanguard fund

Anomalies with high transactions costs may persist because large institutions or arbitrageurs may be reluctant to trade if large dollar positions cannot be taken without moving the price or if the bid-ask spreads are large. For example, the January effect has been known 15 16 Beyond the Random Walk for decades and is caused by tax-loss selling of small-size stocks. Nonetheless, the January effect persists because it is necessary to trade hundreds of small-size stocks. Small stocks have high bid-ask spreads and low liquidity, making the potential benefit insufficient to offset the transaction costs. PROFIT POTENTIAL IS INSUFFICIENT Certain anomalies may generate small profits that cannot be multiplied easily.

Note, however, that the evidence presented does not account for transaction costs. Since those costs are high for small firms, and sometimes prohibitively high, it may be necessary to alter the above recommendations for implementation of a trading strategy. Though it is important to keep the practicability of a trading strategy in mind, evidence reveals that copying the large trades (more than 10,000 shares) of top executives is profitable. Outsiders can mimic these trades and earn a return of 7 percent for purchases and 4.9 percent for sales over a twelve-month period after adjusting for the market and accounting for transaction costs. If all trades (large and small) based on a six-month period are considered, the insider purchases outperform insider sales by 7.8 percent over the next twelve-month period.

References for Further Reading Boehme, Rodney. 2002. Re-examining the Long-Run Stock Split Anomaly Puzzle. Working paper, Department of Finance, University of Houston. Brennan, M., and P. Hughes. 1991. Stock Splits, Stock Prices, and Transaction Costs. Journal of Finance 46, 1665–91. Brennan, M., and T. E. Copeland. 1988. Stock Splits, Stock Prices, and Transaction Costs. Journal of Financial Economics 22, 83–101. A Description of Other Possible Mispricings Byun, Jinho, and Michael S. Rozeff. 2003. Long-Run Performance After Stock Splits: 1927 to 1996. The Journal of Finance 58(3), 1063–86. Desai, H., and P.


pages: 350 words: 103,988

Reinventing the Bazaar: A Natural History of Markets by John McMillan

accounting loophole / creative accounting, Albert Einstein, Alvin Roth, Andrei Shleifer, Anton Chekhov, Asian financial crisis, classic study, congestion charging, corporate governance, corporate raider, crony capitalism, Dava Sobel, decentralized internet, Deng Xiaoping, Dutch auction, electricity market, experimental economics, experimental subject, fear of failure, first-price auction, frictionless, frictionless market, George Akerlof, George Gilder, global village, Great Leap Forward, Hacker News, Hernando de Soto, I think there is a world market for maybe five computers, income inequality, income per capita, independent contractor, informal economy, information asymmetry, invisible hand, Isaac Newton, job-hopping, John Harrison: Longitude, John Perry Barlow, John von Neumann, Kenneth Arrow, land reform, lone genius, manufacturing employment, market clearing, market design, market friction, market microstructure, means of production, Network effects, new economy, offshore financial centre, ought to be enough for anybody, pez dispenser, pre–internet, price mechanism, profit maximization, profit motive, proxy bid, purchasing power parity, Robert Solow, Ronald Coase, Ronald Reagan, sealed-bid auction, search costs, second-price auction, Silicon Valley, spectrum auction, Stewart Brand, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, War on Poverty, world market for maybe five computers, Xiaogang Anhui farmers, yield management

While the design does not control what happens in the market—as already noted, free decision-making is key—it shapes and supports the process of transacting.10 A workable market design keeps in check transaction costs—the various frictions in the process of making exchanges. These costs include the time, effort, and money spent in the process of doing business—both those incurred by the buyer in addition to the actual price paid, and those incurred by the seller in making the sale.11 Transaction costs are many and varied. Transaction costs can arise before any business is done. Locating potential trading partners may be costly and time-consuming. Comparing alternative sellers and choosing among them takes effort by the buyer.

A manufacturer making components like computer chips or car seats may make a uniform item and sell it to several firms rather than customizing to a single firm’s specific needs, because customizing its production, though it would create more value, would leave it vulnerable to the sole customer’s whims. Transaction costs use up resources in ways that are unrelated to the actual value of the business to be done. In the extreme, transaction costs can cause markets to be dysfunctional. If market information is so inadequate that a buyer is unable to locate more than one seller, then that seller can exploit the fact that the buyer is locked in by charging an exorbitant price. A still more extreme market malfunction occurs if the costs of transacting are so high as to swamp any potential benefits from the deal. Transaction costs can thwart exchanges that would otherwise be worthwhile.

The quality of the goods for sale is often not immediately apparent, and the buyer may have to go to some trouble to evaluate it. If it cannot be reliably checked, the buyer might be reluctant to purchase. In putting an agreement together, there are further transaction costs. Negotiations can be drawn out. Bargainers sometimes overreach in trying to squeeze out a good bargain, causing an impasse and spoiling what could have been a mutually beneficial deal. After the fact, there are still other transaction costs. Monitoring work costs time and money. The enforcement of contracts and the prevention and settling of disputes do not come for free. If agreements are not watertight, productive opportunities may be forgone.


pages: 443 words: 51,804

Handbook of Modeling High-Frequency Data in Finance by Frederi G. Viens, Maria C. Mariani, Ionut Florescu

algorithmic trading, asset allocation, automated trading system, backtesting, Bear Stearns, Black-Scholes formula, book value, Brownian motion, business process, buy and hold, continuous integration, corporate governance, discrete time, distributed generation, fear index, financial engineering, fixed income, Flash crash, housing crisis, implied volatility, incomplete markets, linear programming, machine readable, mandelbrot fractal, market friction, market microstructure, martingale, Menlo Park, p-value, pattern recognition, performance metric, power law, principal–agent problem, random walk, risk free rate, risk tolerance, risk/return, short selling, statistical model, stochastic process, stochastic volatility, transaction costs, value at risk, volatility smile, Wiener process

Mariani, Marc Salas, and Indranil SenGupta 13.1 13.2 13.3 13.4 Introduction, 347 Method of Upper and Lower Solutions, 351 Another Iterative Method, 364 Integro-Differential Equations in a Lévy Market, 375 References, 380 14 Existence of Solutions for Financial Models with Transaction Costs and Stochastic Volatility 383 Maria C. Mariani, Emmanuel K. Ncheuguim, and Indranil SenGupta 14.1 Model with Transaction Costs, 383 14.2 Review of Functional Analysis, 386 14.3 Solution of the Problem (14.2) and (14.3) in Sobolev Spaces, 391 14.4 Model with Transaction Costs and Stochastic Volatility, 400 14.5 The Analysis of the Resulting Partial Differential Equation, 408 References, 418 Index 421 Preface This handbook is a collection of articles that describe current empirical and analytical work on data sampled with high frequency in the financial industry.

Comput Meth Appl Mech Eng 1999;178:257–262. Chapter Fourteen Existence of Solutions for Financial Models with Transaction Costs and Stochastic Volatility MARIA C. MARIANI Department of Mathematical Sciences, University of Texas at El Paso, El Paso, TX EMMANUEL K. NCHEUGUIM Department of Mathematical Sciences, New Mexico State University, Las Cruces, NM I N D R A N I L S E N G U P TA Department of Mathematical Sciences, University of Texas at El Paso, El Paso, TX 14.1 Model with Transaction Costs In a complete financial market without transaction costs, the celebrated Black–Scholes model [1] provides not only a rational option pricing formula, but also a hedging portfolio that replicates the contingent claim.

The second idea is to use the CRPs (Algoet and Cover, 1988) within the day in order to take advantage of market volatility without increasing risk. The third idea is to use limit orders rather than market orders to minimize transaction costs. The algorithm was profitable during the PLAT competition, and after the competition, the authors enhanced it by including a market maker component. They show that the constantly rebalanced portfolio can improve if a classifier can anticipate the direction of the market: up, down, or no change. Additionally, transaction costs play a central role to raise performance. Instead of an automatic rebalance of the 66 CHAPTER 3 Using Boosting for Financial Analysis and Trading portfolio, the results of the PLAT competition indicate that if the CRP strategy is implemented only with limit orders, its results improve because of the rebates.


Alpha Trader by Brent Donnelly

Abraham Wald, algorithmic trading, Asian financial crisis, Atul Gawande, autonomous vehicles, backtesting, barriers to entry, beat the dealer, behavioural economics, bitcoin, Boeing 747, buy low sell high, Checklist Manifesto, commodity trading advisor, coronavirus, correlation does not imply causation, COVID-19, crowdsourcing, cryptocurrency, currency manipulation / currency intervention, currency risk, deep learning, diversification, Edward Thorp, Elliott wave, Elon Musk, endowment effect, eurozone crisis, fail fast, financial engineering, fixed income, Flash crash, full employment, global macro, global pandemic, Gordon Gekko, hedonic treadmill, helicopter parent, high net worth, hindsight bias, implied volatility, impulse control, Inbox Zero, index fund, inflation targeting, information asymmetry, invisible hand, iterative process, junk bonds, Kaizen: continuous improvement, law of one price, loss aversion, low interest rates, margin call, market bubble, market microstructure, Market Wizards by Jack D. Schwager, McMansion, Monty Hall problem, Network effects, nowcasting, PalmPilot, paper trading, pattern recognition, Peter Thiel, prediction markets, price anchoring, price discovery process, price stability, quantitative easing, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, reserve currency, risk tolerance, Robert Shiller, secular stagnation, Sharpe ratio, short selling, side project, Stanford marshmallow experiment, Stanford prison experiment, survivorship bias, tail risk, TED Talk, the scientific method, The Wisdom of Crowds, theory of mind, time dilation, too big to fail, transaction costs, value at risk, very high income, yield curve, you are the product, zero-sum game

I will go through this process again in the trade walkthrough at the end of this chapter. That should solidify your understanding. 5. EXECUTION Good execution reduces transaction costs and improves returns. This is important at all skill levels and in all trading businesses. Remember those charts that show the impact of transaction costs in Chapter 8? Transaction costs are important. It is lazy to ignore them or minimize their importance. Take TC seriously. Here are a few ways to reduce transaction costs and pay less spread. I discuss these approaches from the point of view of an equity trader, but these concepts apply to trading in most markets. 1.

Is there plenty of liquidity all the time, or do you need to consider liquidity when you execute? Let’s drill into liquidity a bit so you can think about the specific features of your market. Transaction costs and bid /ask spread The difference between the bid and the ask in a market is called the spread.102 Transaction costs are the amount of spread you pay when you trade. (SPREAD) X (NUMBER OF UNITS) = TRANSACTION COST If AAPL is trading 350.00 / 350.08, the spread is eight cents. This is often expressed either as a percentage of the mid-price103 or in basis points: = 0.08 / 350.04 = 0.029% = 2.9bps104 2.9bps is one of the tightest bid/offer spreads you will see.

Your estimate of bid/offer spreads does not have to be perfect, just eyeball it and multiply by your estimated number of trades per day to get a rough sense of your transaction costs (TC). TC is a slow and steady leak that adds up substantially. You need a significant edge to make money in any market because you don’t just need to generate alpha, you need to generate alpha net of transaction costs. Figure 8.1 and Figure 8.2 show the theoretical P&L for two different traders. The thinner gray line shows the P&L before transaction costs (known as “gross”) and the black line shows the P&L after TC (known as “net”). I used realistic bid/offer spreads to show the impact of trading costs on two realistic P&L streams so you can get a sense of the enormous strain TC exerts on performance.


pages: 220 words: 73,451

Democratizing innovation by Eric von Hippel

additive manufacturing, correlation coefficient, Debian, disruptive innovation, Free Software Foundation, hacker house, informal economy, information asymmetry, inventory management, iterative process, James Watt: steam engine, knowledge economy, longitudinal study, machine readable, meta-analysis, Network effects, placebo effect, principal–agent problem, Richard Stallman, software patent, systematic bias, the Cathedral and the Bazaar, tragedy of the anticommons, transaction costs, vertical integration, Vickrey auction

But what about manufacturers that specialize in custom products? Isn’t it their business to respond to special requests? To understand which way the innovate-or-buy choice will go, one must consider both transaction costs and information asymmetries specific to users and manufacturers. I will talk mainly about transaction costs in this chapter and mainly about information asymmetries in chapter 5. I begin this chapter by discussing four specific and significant transaction costs that affect users’ innovate-or-buy decisions. Next I review a case study that illustrates these. Then, I use a simple quantitative model to further explore when user firms will find it more cost-effective to develop a solution—a new product or service—for themselves rather than hiring a manufacturer to solve the problem for them.

For example, they will have the same costs to monitor the performance of the designer employees they hire. In this way we simplify our innovate-or-buy problem to one of transaction costs only. If there are no transaction costs (for example, no costs to write and enforce a contract), then by Coase’s theorem a user will be indifferent between making or buying a solution to its problem. But in the real world there are transaction costs, and so a user will generally prefer to either make or buy. Which, from the point of view of minimizing overall costs of obtaining a problem solution, is the better choice under any given circumstances?

Manufacturers, in turn, have an incentive to invest in understanding the nature of problems faced by users in the target market, the number of users affected, and the value that the users would attach to getting a solution in order to determine the potential profitability of markets from their point of view. 58 Chapter 4 We first consider the user’s payoff for solving a problem for itself. A user has no transaction costs in dealing with itself, so a user’s payoff for solving problem j will be Vij – Whj. Therefore, a user will buy a solution from an upstream manufacturer rather than develop one for itself if and only if Pj ≤ Whj. Next we consider payoffs to a manufacturer for solving problem j. In this case, transaction costs such as those discussed in earlier sections will be encountered. With respect to transaction costs assume first that t = 0 but T > 0. Then, the manufacturer’s payoff for solving problem j will be Vij – Whj, which needs to be positive in order for the manufacturer to find innovation attractive: Nj Pj – Whj – T > 0.


Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

addicted to oil, Alan Greenspan, asset allocation, backtesting, behavioural economics, Black-Scholes formula, book value, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Money creation, Myron Scholes, new economy, oil shock, passive investing, Paul Samuelson, popular capitalism, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, stock buybacks, stocks for the long run, subprime mortgage crisis, survivorship bias, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, uptick rule, Vanguard fund, vertical integration

Costs Return Risk % in Market No. of Switches 8.63% 17.3% 62.9% 350 Subperiods 1886 - 1925 9.08% 23.7% 9.77% 17.7% 8.11% 18.0% 57.1% 122 1926 - 1945 6.25% 31.0% 11.10% 21.8% 9.44% 22.7% 62.7% 60 1946 - 2006 11.23% 16.0% 10.21% 14.2% 8.70% 15.1% 67.4% 168 1990 - 2006 11.76% 14.7% 6.60% 16.9% 4.30% 18.3% 73.7% 74 11.30% 20.5% 10.80% 16.5% 9.23% 17.2% 64.2% 334 17.72% 25.9% 15.75% 14.24% 22.1% 71.2% 44 Excl. 1929 - 1932 Crash 1886 - 2006 1926 - 1945 21.3% years. In later years if this strategy is pursued with index futures or ETFs, the transactions costs would be lower. Each 0.1 percentage point increase of transactions costs lowers the compound annual returns by 29 basis points. Although the excess returns from the timing strategy disappear when transactions costs are considered, the major gain from the timing strategy is a reduction in risk. Since the market timer is in the market less than two-thirds of the time, the standard deviation of returns is reduced by about one-quarter.

This means that on a risk-adjusted basis, the return on the 200-day moving-average strategy is quite impressive, even when transactions costs are included. Unfortunately, the timing strategy has broken down in the last 17 years. The year 2000 was particularly disastrous for the timing strategy. With the Dow Industrials meandering most of the year above and below the 200-day moving average, the investor pursuing the timing strategy was whipsawed in and out of the market, executing a record 16 switches in and out of stocks. Each switch incurs transactions costs and must overcome the 1 percent pricing band. As a result, even ignoring transactions costs, the timing strategist lost over 28 percent in 2000 while the buy-and-hold strategist lost less than 5 percent.

Because of these costs, investors in earlier years purchased fewer stocks than in an index and were less diversified, thereby assuming more risk than implied by stock indexes. Alternatively, if investors attempted to buy all the stocks, their real returns could have been as low as 5 percent per year after deducting transactions costs. The collapse of transactions costs over the past two decades means that stockholders can now acquire and hold a completely diversified portfolio at an extremely low cost.11 It has been well established that liquid securities—that is, those assets that can be sold quickly and at little cost on short notice in the public market—command a premium over illiquid securities.


pages: 678 words: 216,204

The Wealth of Networks: How Social Production Transforms Markets and Freedom by Yochai Benkler

affirmative action, AOL-Time Warner, barriers to entry, bioinformatics, Brownian motion, business logic, call centre, Cass Sunstein, centre right, clean water, commoditize, commons-based peer production, dark matter, desegregation, digital divide, East Village, Eben Moglen, fear of failure, Firefox, Free Software Foundation, game design, George Gilder, hiring and firing, Howard Rheingold, informal economy, information asymmetry, information security, invention of radio, Isaac Newton, iterative process, Jean Tirole, jimmy wales, John Markoff, John Perry Barlow, Kenneth Arrow, Lewis Mumford, longitudinal study, machine readable, Mahbub ul Haq, market bubble, market clearing, Marshall McLuhan, Mitch Kapor, New Journalism, optical character recognition, pattern recognition, peer-to-peer, power law, precautionary principle, pre–internet, price discrimination, profit maximization, profit motive, public intellectual, radical decentralization, random walk, Recombinant DNA, recommendation engine, regulatory arbitrage, rent-seeking, RFID, Richard Stallman, Ronald Coase, scientific management, search costs, Search for Extraterrestrial Intelligence, SETI@home, shareholder value, Silicon Valley, Skype, slashdot, social software, software patent, spectrum auction, subscription business, tacit knowledge, technological determinism, technoutopianism, The Fortune at the Bottom of the Pyramid, the long tail, The Nature of the Firm, the strength of weak ties, Timothy McVeigh, transaction costs, vertical integration, Vilfredo Pareto, work culture , Yochai Benkler

And yet, this is precisely what is happening in the software world. 120 Industrial organization literature provides a prominent place for the transaction costs view of markets and firms, based on insights of Ronald Coase and Oliver Williamson. On this view, people use markets when the gains from doing so, net of transaction costs, exceed the gains from doing the same thing in a managed firm, net of the costs of organizing and managing a firm. Firms emerge when the opposite is true, and transaction costs can best be reduced by [pg 60] bringing an activity into a managed context that requires no individual transactions to allocate this resource or that effort.

It is enough that the net value of the information produced by commons-based social production processes and released freely for anyone to use as they please is no less than the total value of information produced through property-based systems minus the deadweight loss caused by the above-marginal-cost pricing practices that are the intended result of the intellectual property system. 211 The two scarce resources are: first, human creativity, time, and attention; and second, the computation and communications resources used in information production and exchange. In both cases, the primary reason to choose among proprietary and nonproprietary strategies, between marketbased systems--be they direct market exchange or firm-based hierarchical production--and social systems, are the comparative transaction costs of each, and the extent to which these transaction costs either outweigh the benefits of working through each system, or cause the system to distort the information it generates so as to systematically misallocate resources. 212 The first thing to recognize is that markets, firms, and social relations are three distinct transactional frameworks.

To succeed, therefore, peer-production systems must also incorporate mechanisms for smoothing out incorrect self-assessments--as peer review does in traditional academic research or in the major sites like Wikipedia or Slashdot, or as redundancy and statistical averaging do in the case of NASA clickworkers. The prevalence of misperceptions that individual contributors have about their own ability and the cost of eliminating such errors will be part of the transaction costs associated with this form of organization. They parallel quality control problems faced by firms and markets. 219 The lack of crisp specification of who is giving what to whom, and in exchange for what, also bears on the comparative transaction costs associated with the allocation of the second major type of scarce resource in the networked information economy: the physical resources that make up the networked information environment--communications, computation, and storage capacity.


pages: 345 words: 86,394

Frequently Asked Questions in Quantitative Finance by Paul Wilmott

Abraham Wald, Albert Einstein, asset allocation, beat the dealer, Black-Scholes formula, Brownian motion, butterfly effect, buy and hold, capital asset pricing model, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delta neutral, discrete time, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, fudge factor, implied volatility, incomplete markets, interest rate derivative, interest rate swap, iterative process, lateral thinking, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, martingale, Myron Scholes, Norbert Wiener, Paul Samuelson, power law, quantitative trading / quantitative finance, random walk, regulatory arbitrage, risk free rate, risk/return, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, stochastic volatility, transaction costs, urban planning, value at risk, volatility arbitrage, volatility smile, Wiener process, yield curve, zero-coupon bond

Although asymptotic analysis has been used in financial problems before, for example in modelling transaction costs, this was the first time it really entered mainstream quantitative finance. References and Further Reading Avellaneda, M, Levy, A & Parás, A 1995 Pricing and hedging derivative securities in markets with uncertain volatilities. Applied Mathematical Finance 2 73-88 Avellaneda, M & Parás, A 1994 Dynamic hedging portfolios for derivative securities in the presence of large transaction costs. Applied Mathematical Finance 1 165-194 Avellaneda, M & Parás, A 1996 Managing the volatility risk of derivative securities: the Lagrangian volatility model.

Example The implied volatility of a call option is 20% but you think that is cheap, volatility is nearer 40%. Do you put 20% or 40% into the delta calculation? The stock then moves, should you rebalance, incurring some inevitable transactions costs, or wait a bit longer while taking the risks of being unhedged? Long Answer There are three issues, at least, here. First, what is the correct delta? Second, if I don’t hedge very often how big is my risk? Third, when I do rehedge how big are my transaction costs? What is the correct delta? Let’s continue with the above example, implied volatility 20% but you believe volatility will be 40%. Does 0.2 or 0.4 go into the Black-Scholes delta calculation, or perhaps something else?

• In practice φ is not normally distributed: the fat tails, high peaks we see in practice will make the above observation even more extreme, perhaps a long gamma position will lose 80% of the time and win only 20%. Still the mean will be zero. How much will transaction costs reduce my profit? To reduce hedging error we must hedge more frequently, but the downside of this is that any costs associated with trading the underlying will increase. Can we quantify transaction costs? Of course we can. If we hold a short position in delta of the underlying and then rebalance to the new delta at a time δt later then we will have had to have bought or sold whatever the change in delta was.


Social Capital and Civil Society by Francis Fukuyama

Berlin Wall, blue-collar work, Fairchild Semiconductor, Fall of the Berlin Wall, feminist movement, Francis Fukuyama: the end of history, George Akerlof, German hyperinflation, Jane Jacobs, Joseph Schumpeter, Kevin Kelly, labor-force participation, low skilled workers, p-value, Pareto efficiency, postindustrial economy, principal–agent problem, RAND corporation, scientific management, Silicon Valley, The Death and Life of Great American Cities, the strength of weak ties, transaction costs, vertical integration, World Values Survey

In addition to principal-agent problems, organizations suff er from other diseconomies of scale related to information-processing. Many transaction costs are internal to organizations and are created by the difficulties in passing information up and down a large hierarchy. W e have all worked in hierarchical organizations in which Department X doesn’t know what Department Y on the next floor is doing. Ideally, information ought to be processed as close to its source within the organization as possible. Some decisions require higher-level monitoring and therefore the transaction costs of that monitoring; in other cases, organizations assign monitoring responsibilities unnecessarily, incorrectly, or inefficiently.

Professional education is consequently a major source of social capital in any advanced, postindustrial society and provides the basis for decentralized, flat organization. I would argue that social capital is important to certain sectors and certain forms of complex production precisely because exchange based on informal norms can avoid the internal transaction costs of large hierarchical organizations, as well as the external transaction costs of arms-length market transactions. The need for informal, norm-based exchange becomes more important as goods and services become more complex, difficult to evaluate, and differentiated. The increasing importance of social capital can be seen in the shift from low-trust to high-trust manufacturing, among other places.

There is a large law-and-economics literature using game theoretic methods to describe the emergence of spontaneously generated informal norms regulating economic behavior. Much of this literature originates from the so-called Coase theorem, which states that when transaction costs are zero, a change in the formal rules of liability will have no effect on the allocation of resources.2 Put differently, in a zero-transaction-cost world it is not necessary 1 Robert Axelrod, The Evolution of Cooperation (New York: Basic Books, 1984). 2 Strictly speaking, Coase himself did not postulate a “Coase theorem”: Ronald H. Coase, “The Problem of Social Cost,” Journal of Law and Economics 3 (1960) : 1-44.


pages: 504 words: 126,835

The Innovation Illusion: How So Little Is Created by So Many Working So Hard by Fredrik Erixon, Bjorn Weigel

Airbnb, Alan Greenspan, Albert Einstein, American ideology, asset allocation, autonomous vehicles, barriers to entry, Basel III, Bernie Madoff, bitcoin, Black Swan, blockchain, Blue Ocean Strategy, BRICs, Burning Man, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, classic study, Clayton Christensen, Colonization of Mars, commoditize, commodity super cycle, corporate governance, corporate social responsibility, creative destruction, crony capitalism, dark matter, David Graeber, David Ricardo: comparative advantage, discounted cash flows, distributed ledger, Donald Trump, Dr. Strangelove, driverless car, Elon Musk, Erik Brynjolfsson, Fairchild Semiconductor, fear of failure, financial engineering, first square of the chessboard / second half of the chessboard, Francis Fukuyama: the end of history, general purpose technology, George Gilder, global supply chain, global value chain, Google Glasses, Google X / Alphabet X, Gordon Gekko, Greenspan put, Herman Kahn, high net worth, hiring and firing, hockey-stick growth, Hyman Minsky, income inequality, income per capita, index fund, industrial robot, Internet of things, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, Just-in-time delivery, Kevin Kelly, knowledge economy, laissez-faire capitalism, low interest rates, Lyft, manufacturing employment, Mark Zuckerberg, market design, Martin Wolf, mass affluent, means of production, middle-income trap, Mont Pelerin Society, Network effects, new economy, offshore financial centre, pensions crisis, Peter Thiel, Potemkin village, precautionary principle, price mechanism, principal–agent problem, Productivity paradox, QWERTY keyboard, RAND corporation, Ray Kurzweil, rent-seeking, risk tolerance, risk/return, Robert Gordon, Robert Solow, Ronald Coase, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, Steve Ballmer, Steve Jobs, Steve Wozniak, subprime mortgage crisis, technological determinism, technological singularity, TED Talk, telemarketer, The Chicago School, The Future of Employment, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, transportation-network company, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, uber lyft, University of East Anglia, unpaid internship, Vanguard fund, vertical integration, Yogi Berra

Firms, after all, are complex social constructs, permeated with operational slack and inefficiencies that a perfectly functioning market could root out. Companies are hardly seamlessly connected and easily managed entities as described in glossy corporate presentations. Companies that fail often do so because internal transaction costs are too high. Yet firms also exist because of high market-transaction costs. And, in a way, the higher they are, the better it is to have companies, because the transaction costs partly set the value of a firm. Firms, if you want to be provocative, exist because markets fail, at least in a theoretical way. And the greater the failure, the more space there is for an upward valuation of companies.

They still operate, for want of a better word, on “the Coasean principle,” the source code of corporate behavior that we introduced in the previous chapter. The beauty of globalization was that it cut market transaction costs – and, as a consequence, allowed for a reorganization of production. That change also created new conditions for how companies balance internal and external transaction costs. Companies could contract away a larger part of production because falling trade and transmission costs also cut market transaction costs. What is more, they could now define and bundle their core assets in new ways, and change their strategies for how to make money. Globalization, then, helped companies to “marketize” their supply and value chains, and benefit from taking selected parts of them out of their own organizations.

Coase put it slightly more dryly: “The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism.”18 A successful firm can bank on the value of its unique combination of ideas, management, capital, and labor – or of what it has that cannot easily be reproduced by the market, or copied by another firm. Companies exist because they reduce market transaction costs. Yet if this is the case, why has the process of capitalist competition not coalesced all firms into a single gigantic unit? Why is there not just one company in a country, let alone the world, which rules the market? It is not just markets that have transaction costs; companies have them too. Companies can grow but there is a limit to the scale benefits received. Big companies that invest in expansion will sooner or later reach a point where it no longer saves costs and makes them more competitive.


pages: 297 words: 84,009

Big Business: A Love Letter to an American Anti-Hero by Tyler Cowen

"Friedman doctrine" OR "shareholder theory", 23andMe, Affordable Care Act / Obamacare, augmented reality, barriers to entry, Bernie Sanders, Big Tech, bitcoin, blockchain, Bretton Woods, cloud computing, cognitive dissonance, company town, compensation consultant, corporate governance, corporate social responsibility, correlation coefficient, creative destruction, crony capitalism, cryptocurrency, dark matter, David Brooks, David Graeber, don't be evil, Donald Trump, driverless car, Elon Musk, employer provided health coverage, experimental economics, Fairchild Semiconductor, fake news, Filter Bubble, financial innovation, financial intermediation, gentrification, Glass-Steagall Act, global reserve currency, global supply chain, Google Glasses, income inequality, Internet of things, invisible hand, Jeff Bezos, junk bonds, late fees, Mark Zuckerberg, mobile money, money market fund, mortgage debt, Network effects, new economy, Nicholas Carr, obamacare, offshore financial centre, passive investing, payday loans, peer-to-peer lending, Peter Thiel, pre–internet, price discrimination, profit maximization, profit motive, RAND corporation, rent-seeking, reserve currency, ride hailing / ride sharing, risk tolerance, Ronald Coase, shareholder value, Silicon Valley, Silicon Valley startup, Skype, Snapchat, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, The Nature of the Firm, Tim Cook: Apple, too big to fail, transaction costs, Tyler Cowen, Tyler Cowen: Great Stagnation, ultimatum game, WikiLeaks, women in the workforce, World Values Survey, Y Combinator

But you also can pick up on some significant hints of the fourth feature of how I view corporations, especially in chapter 3, on CEO pay, and in the chapter on finance.2 Still, I wish to push back against the focus on transactions costs in explaining modern business activity. If firms were mainly about lowering transactions costs, they would be loved much more than is the case. Firms do have low enough transactions costs to get the job done, at least compared with the other feasible alternatives. That said, firms do not have especially low or favorable transactions costs, and so we are frustrated with them often, including in our roles as employees. Unless we are working in a very small enterprise, we so often hate the bureaucracies in the companies we work in (even if we enforce comparable bureaucratic strictures when on the other side of the relationship).

You might be tempted to suggest that viewing companies as carriers of social and legal reputation ultimately boils down to transaction-costs-minimizing theories of the firm. To be sure, the firm as a carrier of reputation does minimize transaction costs to some extent, but it also increases transaction costs by making the firm more of a target. I would say the carrier-of-reputation element is not fundamentally a choice a firm makes at the margin, resulting in minimal transaction costs, but rather part of what a firm is required to be (with room for adjustment at the margins), and in this regard it still differs significantly from the Coase and Williamson models.

I agree that sometimes corporations reduce transactions costs, but they don’t always, and I am not sure they do on average. Ask yourself a simple question. Let’s say you want to buy a work computer for your desk. Which method involves lower transactions costs: going online with Amazon (or driving to Best Buy) or trying to get an order for a new computer through your company’s purchasing department? Of course, it depends on the company in question, but most of us already know the likely answer. A lot of markets today involve very, very low transactions costs. The purchasing department may get you a better price if they buy in bulk, but dealing with them probably is more of a pain.


pages: 242 words: 68,019

Why Information Grows: The Evolution of Order, From Atoms to Economies by Cesar Hidalgo

Ada Lovelace, Albert Einstein, Arthur Eddington, assortative mating, business cycle, Claude Shannon: information theory, David Ricardo: comparative advantage, Douglas Hofstadter, Everything should be made as simple as possible, Ford Model T, frictionless, frictionless market, George Akerlof, Gödel, Escher, Bach, income inequality, income per capita, industrial cluster, information asymmetry, invention of the telegraph, invisible hand, Isaac Newton, James Watt: steam engine, Jane Jacobs, job satisfaction, John von Neumann, Joi Ito, New Economic Geography, Norbert Wiener, p-value, Paul Samuelson, phenotype, price mechanism, Richard Florida, Robert Solow, Ronald Coase, Rubik’s Cube, seminal paper, Silicon Valley, Simon Kuznets, Skype, statistical model, Steve Jobs, Steve Wozniak, Steven Pinker, Stuart Kauffman, tacit knowledge, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, working-age population

On the contrary, transaction cost theory and economic sociology are complementary, since the economic effects of preexisting social networks can be interpreted in terms of the cost of links. In the words of Fukuyama: “Certain societies can save substantially on transaction costs because economic agents trust one another in their interactions and therefore can be more efficient than low trust societies, which require detailed contracts and enforcement mechanisms.”12 James Coleman, a sociologist well known for his work on social capital, has also emphasized the ability of trust to reduce transaction costs. In his seminal paper on social capital Coleman described the transactions between Jewish diamond merchants in New York, who have the tradition of letting other merchants inspect their diamonds in private before executing a transaction.

It is analogous to the personbyte, but instead of requiring the distribution of knowledge and knowhow among people, it requires them to be distributed among a network of firms.3 The factors that limit the size of firms—and imply a second quantization threshold—have been studied extensively in a branch of the academic literature known as transaction cost theory or new institutional economics. Additionally, the factors that limit the size of the networks humans form—whether firms or not—have been studied extensively by the sociologists, political scientists, and economists working on social capital and social networks. Since this is an extensive literature, I will review the basics of the new institutional economics in this chapter and leave the discussion of social capital theories for the next chapter. Transaction cost theory, or new institutional economics, is the branch of economics that studies the costs of transactions and the institutions that people develop to govern them.

Coase dedicated much of his academic career to explaining the existence and boundaries of these islands of power. His answers become known as the transaction cost theory of the firm. Coase’s explanation of the boundaries of a firm was brilliant and simple. It was based on the idea that economic transactions are costly and not as fluid as the cheerleaders of the price mechanism religiously believed. Often, market transactions require negotiations, drafting of contracts, setting up inspections, settling disputes, and so on. These transaction costs can help us understand the boundary of the firm, since according to Coase, a parsimonious way of understanding the islands of central planning that we know as firms is to search for the point at which the cost of transactions taking place internally within the firm equals the cost of market transactions.


pages: 517 words: 139,477

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel

Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, currency risk, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, Glass-Steagall Act, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Minsky moment, Money creation, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, uptick rule, Vanguard fund

These changes include a decrease in the cost of investing in equity indexes, a lower discount rate, and an increase in knowledge about the advantages of equity versus fixed-income investments. A Fall in Transaction Costs Chapter 5 confirmed that the real return on equity as measured by stock indexes was between 6 and 7 percent after inflation over the past two centuries. But over the nineteenth century and the early part of the twentieth century, it was extremely difficult, if not impossible, for an investor to replicate these stock returns because of transactions costs. Charles Jones of Columbia University has documented the decline in stock trading costs over the last century.18 These costs include both the fees paid to brokers and the bid-asked spread, or the difference between the buying and selling price for stocks.

If that period is excluded, the returns of the timing strategy are 68 basis points per year behind the holding strategy, although the timing strategy has lower risk. TABLE 20-1 Annualized Returns of Timing and Holding Strategies, 1886–2012 Moreover, if the transaction costs of implementing the timing strategy are included in the calculations, the excess returns over the whole period, including the 1929-to-1932 Great Crash, more than vanish. Transaction costs include brokerage costs and bid-asked spreads, as well as the capital gains tax incurred when stocks are sold, and are assumed to be on average half a percent when buying or selling the market. This number probably underestimates such costs, especially in the earlier years, but likely overstates these costs in more recent years.

But in 2010, 2011, and 2012, these investors were whipsawed, switching in and out of stocks 20 times, which caused about 20 percentage points to be clipped from the investors’ returns before transaction costs. Distribution of Gains and Losses The 200-day moving-average strategy does avoid large losses, but it suffers many small declines. Figure 20-3 shows the distribution of yearly gains and losses (after transaction costs) of the timing and the holding strategy for the Dow Industrials for every year from 1886 through 2012. The timing strategist participates in most bull markets and avoids bear markets, but the losses suffered when the market fluctuates with little trend are significant.


pages: 275 words: 84,980

Before Babylon, Beyond Bitcoin: From Money That We Understand to Money That Understands Us (Perspectives) by David Birch

"World Economic Forum" Davos, agricultural Revolution, Airbnb, Alan Greenspan, bank run, banks create money, bitcoin, blockchain, Bretton Woods, British Empire, Broken windows theory, Burning Man, business cycle, capital controls, cashless society, Clayton Christensen, clockwork universe, creative destruction, credit crunch, cross-border payments, cross-subsidies, crowdsourcing, cryptocurrency, David Graeber, dematerialisation, Diane Coyle, disruptive innovation, distributed ledger, Dogecoin, double entry bookkeeping, Ethereum, ethereum blockchain, facts on the ground, fake news, fault tolerance, fiat currency, financial exclusion, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, index card, informal economy, Internet of things, invention of the printing press, invention of the telegraph, invention of the telephone, invisible hand, Irish bank strikes, Isaac Newton, Jane Jacobs, Kenneth Rogoff, knowledge economy, Kuwabatake Sanjuro: assassination market, land bank, large denomination, low interest rates, M-Pesa, market clearing, market fundamentalism, Marshall McLuhan, Martin Wolf, mobile money, Money creation, money: store of value / unit of account / medium of exchange, new economy, Northern Rock, Pingit, prediction markets, price stability, QR code, quantitative easing, railway mania, Ralph Waldo Emerson, Real Time Gross Settlement, reserve currency, Satoshi Nakamoto, seigniorage, Silicon Valley, smart contracts, social graph, special drawing rights, Suez canal 1869, technoutopianism, The future is already here, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, wage slave, Washington Consensus, wikimedia commons

In chapter 14 I suggested that in the future all money will be local, belonging to the community in which it is used; it’s just that ‘community’ will mean something different in the connected world. Whether the community is Totnes or the Chinese diaspora or World of Warcraft won’t matter, but the shared desire to minimize transaction costs for ‘us’ at the possible expense of transactions costs with ‘them’ will. Since the overwhelming majority of retail transactions are local, most people’s transactions most of the time will be in their local currency, with minimal transaction costs. A small number of transactions will be in ‘foreign’ currencies (i.e. someone else’s local currency). From this perspective, the widespread view that ‘alternative’ money can work in isolated local environments but not at scale is wrong, because both locality and globalization will mean something different in the networked world and there’s no reason why interconnection between local money of one form or another (via markets) cannot operate globally.

He says that as a ‘concession to the poor’ we should keep a limited number of low-denomination notes and coins in circulation, but this doesn’t seem right to me. Cash isn’t a concession to the poor: it forces them to pay higher transaction costs than their better-off neighbours. And if the amount of cash falls, then the cost of the whole infrastructure of ATMs and cash registers, armoured vans and night safes will fall on the poor, thus further raising their transaction costs. It is clear, then, that cash plays a major role in facilitating crime, so cashlessness ought to tackle crime in useful ways: at least by making it more expensive, even if it is unable to eliminate it.

By and large, the retailers seemed positive (Leighton 2014). The shops and pubs didn’t particularly want to mess around with change or take bags of coins to the bank for deposit. Many of the retailers were enthusiastic because there was no transaction charge and for some of them the costs of cash handling and management were high for non-transaction cost reasons. I can remember talking to a hairdresser who was keen to get rid of cash because it was dirty and she had to keep washing her hands, a baker who was worried about staff ‘shrinkage’, and so on. But while ‘from a retailer’s point of view it’s very good’, news-stand manager Richard Jackson said, ‘less than one per cent of my actual customers use it’.


Trade Your Way to Financial Freedom by van K. Tharp

asset allocation, backtesting, book value, Bretton Woods, buy and hold, buy the rumour, sell the news, capital asset pricing model, commodity trading advisor, compound rate of return, computer age, distributed generation, diversification, dogs of the Dow, Elliott wave, high net worth, index fund, locking in a profit, margin call, market fundamentalism, Market Wizards by Jack D. Schwager, passive income, prediction markets, price stability, proprietary trading, random walk, Reminiscences of a Stock Operator, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, Sharpe ratio, short selling, Tax Reform Act of 1986, transaction costs

For example, my active trading system generated a 30 percent return in 2004 after transaction costs, but the transaction costs were still about 20 percent of the initial account value. Thus, I got 60 percent of the total profit, while my broker got 40 percent in transaction costs. If you are in and out of the market all the time, then such transaction costs can eat your profits down to nothing. This becomes a major factor if you are trading small size because your cost per trade is very high. I often see systems that over a number of years produce profits that are not much bigger than the transaction costs they generate. Losing much less money when you abort a trade is probably an exciting prospect to most of you.

Trend following is probably one of the easiest techniques for the new trader or investor to understand and use. The longer term the indicators, the less that total transaction costs will affect profits. Short-term models tend to have difficulty overcoming the costs of many transactions. Costs include not only commissions but also slippage on the trades. The fewer trades you make, provided you have the patience for it, the less you spend in transaction costs and the easier it is for you to make a profit. There are numerous examples where trend following is not appropriate. Floor traders who are scalping ticks are not likely to use a trend-following concept.

Second, tight stops dramatically increase your transaction costs because market professionals have developed a system to make sure they profit no matter what you do with your account. Transaction costs are a major part of doing business. Market makers get the benefit of the bid-ask spread. Your brokerage firm gets its commissions. And should you invest in any sort of fund, they get paid a fee based on the size of your investment. In fact, I often see systems that over a number of years produce profits that are not much bigger than the transaction costs they generate. For example, my active trading system generated a 30 percent return in 2004 after transaction costs, but the transaction costs were still about 20 percent of the initial account value.


pages: 356 words: 51,419

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John C. Bogle

asset allocation, backtesting, buy and hold, creative destruction, currency risk, diversification, diversified portfolio, financial intermediation, fixed income, index fund, invention of the wheel, Isaac Newton, John Bogle, junk bonds, low interest rates, new economy, passive investing, Paul Samuelson, random walk, risk tolerance, risk-adjusted returns, Sharpe ratio, stocks for the long run, survivorship bias, transaction costs, Upton Sinclair, Vanguard fund, William of Occam, yield management, zero-sum game

They pick funds based on the recent performance superiority—or even the long-term superiority—of a fund manager, and often hire advisers to help them achieve the same goal (Warren Buffett’s “Helpers,” described in the next chapter). But as I explain in Chapter 12, the advisers do it with even less success. Oblivious of the toll taken by costs, too many fund investors willingly pay heavy sales loads and incur excessive fund fees and expenses, and are unknowingly subjected to the substantial but undisclosed transaction costs incurred by funds as a result of their hyperactive portfolio turnover. Fund investors are confident that they can consistently select superior fund managers. They are wrong. Mutual fund investors are confident that they can easily select superior fund managers. They are wrong. Contrarily, for those who invest and then drop out of the game and never pay a single unnecessary cost, the odds in favor of success are awesome.

Here’s what he had to say in a 2004 BusinessWeek interview: “The investment business is a giant scam. Most people think they can find managers who can outperform, but most people are wrong. I will say that 85 to 90 percent of managers fail to match their benchmarks. Because managers have fees and incur transaction costs, you know that in the aggregate they are deleting value.” When asked if private investors can draw any lessons from what Harvard does, Mr. Meyer responded, “Yes. First, get diversified. Come up with a portfolio that covers a lot of asset classes. Second, you want to keep your fees low. That means avoiding the most hyped but expensive funds, in favor of low-cost index funds.

Malkiel, author of A Random Walk Down Wall Street, expresses these views: “Index funds have regularly produced [annual] rates of return exceeding those of active managers by close to 2 percentage points. Active management as a whole cannot achieve gross returns exceeding the market as a whole, and therefore they must, on average, underperform the indexes by the amount of these expense and transaction costs. “Experience conclusively shows that index-fund buyers are likely to obtain results exceeding those of the typical fund manager, whose large advisory fees and substantial portfolio turnover tend to reduce investment yields. . . . The index fund is a sensible, serviceable method for obtaining the market’s rate of return with absolutely no effort and minimal expense.”


pages: 453 words: 111,010

Licence to be Bad by Jonathan Aldred

"Friedman doctrine" OR "shareholder theory", Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, availability heuristic, Ayatollah Khomeini, behavioural economics, Benoit Mandelbrot, Berlin Wall, Black Monday: stock market crash in 1987, Black Swan, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Cass Sunstein, Charles Babbage, clean water, cognitive dissonance, corporate governance, correlation does not imply causation, cuban missile crisis, Daniel Kahneman / Amos Tversky, Donald Trump, Douglas Engelbart, Douglas Engelbart, Dr. Strangelove, Edward Snowden, fake news, Fall of the Berlin Wall, falling living standards, feminist movement, framing effect, Frederick Winslow Taylor, From Mathematics to the Technologies of Life and Death, full employment, Gary Kildall, George Akerlof, glass ceiling, Glass-Steagall Act, Herman Kahn, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jeff Bezos, John Nash: game theory, John von Neumann, Linda problem, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, meta-analysis, Mont Pelerin Society, mutually assured destruction, Myron Scholes, Nash equilibrium, Norbert Wiener, nudge unit, obamacare, offshore financial centre, Pareto efficiency, Paul Samuelson, plutocrats, positional goods, power law, precautionary principle, profit maximization, profit motive, race to the bottom, RAND corporation, rent-seeking, Richard Thaler, ride hailing / ride sharing, risk tolerance, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, scientific management, Skinner box, Skype, Social Responsibility of Business Is to Increase Its Profits, spectrum auction, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tragedy of the Commons, transaction costs, trickle-down economics, Vilfredo Pareto, wealth creators, zero-sum game

Finally, once a deal has been done, there are costs involved in monitoring the outcome to be sure that the other party has stuck to the agreement. And if they haven’t, there are further costs in trying to enforce the deal, perhaps through the courts. Transaction costs imply that the thing being argued over may not go to the individual, firm or organization which values it the most. This is because transaction costs often prevent deals being done, even when the deal is beneficial to all parties. If, for any of the parties involved, the overall transaction costs involved in arranging and enforcing a deal exceed the expected benefits from doing so, then the deal will not happen. But if a deal beneficial to all parties does not happen, then the outcome is in a sense wasteful: it wastes an opportunity to make all parties better off.

Coase was preoccupied with how previous economists had analysed problems such as pollution. The standard analysis assumed there were no transaction costs but nevertheless called for government intervention. Coase wanted to show that in this strictly blackboard world of zero transaction costs, government intervention would be unnecessary because the polluter and pollutee would make a deal. So, given Coase’s backward-looking gaze, his starting point of a zero transaction cost world made sense. But it helped entrench a disastrous misinterpretation of his ideas by future generations. By the 1970s Coase had begun to refer tentatively to such a misinterpretation, but he did not shout loudly enough and was drowned out by influential Chicago voices including Becker, Friedman and Stigler.

Coase regarded his story as obviously fiction, a kind of thought experiment to show the fantastic conclusions that follow from the story’s fictitious assumption: that there are no costs or other obstacles to private deal-making or, in Coase’s words, the assumption of ‘zero transaction costs’. While this style of reasoning is familiar to philosophers as a reductio ad absurdum, the Chicago economists missed the point: they treated the zero-transaction-costs assumption as essentially realistic, and as a result duly embraced the absurd conclusion. Their mistaken interpretation of Coase’s argument rapidly became hard to dislodge because it was elevated to the status of a ‘theorem’.


Governing the Commons: The Evolution of Institutions for Collective Action by Elinor Ostrom

agricultural Revolution, clean water, Garrett Hardin, Gödel, Escher, Bach, land tenure, Pareto efficiency, principal–agent problem, prisoner's dilemma, profit maximization, RAND corporation, The Nature of the Firm, Tragedy of the Commons, transaction costs

To distinguish between the successful and unsuccessful instances of self-organization to solve CPR problems, one must take account of how the strategies of external actors affect the costs and benefits of CPR appropriators. A third problem with current theories relates to the way that information and transactions costs are assumed away. To assume that complete in­ formation is freely available and that transactions costs can be ignored does not generate theoretical explanations that can be used in a setting where information is scant, potentially biased, and expensive to obtain and where most transactions are costly.2 Why individuals monitor each other's rule conformance would be difficult to explain using the assumption of com­ plete information.

Assum­ 190 191 1 the need to reflect the incremental, self-transforming nature of institu­ tional change, 2 the importance of the characteristics of external political regimes in an analysis of how internal variables affect levels of collective provision of rules, and 3 the need to include information and transaction costs. Governing the commons A framework for analysis of CPRs ing zero-cost monitoring does not push the analyst to examine cost and effectiveness for various monitoring rules. Assuming fixed structure does not push the analyst to examine whether or not and how individuals change their own rules and how the surrounding political regime enhances or inhibits institutional change.

The theoretical enterprise requires social scientists to engage in model-building,1° but not theoretical inquiry to that specific level of discourse. We need to appreciate the analytical power that can be derived from the prior in­ tellectual efforts of important contributors such as Hobbes, Montesquieu, Madison, Hamilton, Tocqueville, and many others.21 Con­ temporary studies in the theory of public and social choice, the economics of transactions costs, the new institutional economics, law and economics, game theory, and many related fields22 are making important contributions that need to be carried forward in theoretically informed empirical in­ quiries in both laboratory and field settings. 216 Notes 1. REFLECTIONS ON THE COMMONS 1 Attributed to Merrill M.


pages: 571 words: 105,054

Advances in Financial Machine Learning by Marcos Lopez de Prado

algorithmic trading, Amazon Web Services, asset allocation, backtesting, behavioural economics, bioinformatics, Brownian motion, business process, Claude Shannon: information theory, cloud computing, complexity theory, correlation coefficient, correlation does not imply causation, data science, diversification, diversified portfolio, en.wikipedia.org, financial engineering, fixed income, Flash crash, G4S, Higgs boson, implied volatility, information asymmetry, latency arbitrage, margin call, market fragmentation, market microstructure, martingale, NP-complete, P = NP, p-value, paper trading, pattern recognition, performance metric, profit maximization, quantitative trading / quantitative finance, RAND corporation, random walk, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, Silicon Valley, smart cities, smart meter, statistical arbitrage, statistical model, stochastic process, survivorship bias, transaction costs, traveling salesman

At a particular horizon h = 1, …, H, we have a forecasted mean μh, a forecasted variance Vh and a forecasted transaction cost function τh[ω]. This means that, given a trading trajectory ω, we can compute a vector of expected investment returns r, as where τ[ω] can adopt any functional form. Without loss of generality, consider the following: , for h = 2, …, H ω*n is the initial allocation to instrument n, n = 1, …, N τ[ω] is an Hx1 vector of transaction costs. In words, the transaction costs associated with each asset are the sum of the square roots of the changes in capital allocations, re-scaled by an asset-specific factor Ch = {cn, h}n = 1, …, N that changes with h.

Be certain about the timestamp for each data point. Take into account release dates, distribution delays, and backfill corrections. Storytelling: Making up a story ex-post to justify some random pattern. Data mining and data snooping: Training the model on the testing set. Transaction costs: Simulating transaction costs is hard because the only way to be certain about that cost would have been to interact with the trading book (i.e., to do the actual trade). Outliers: Basing a strategy on a few extreme outcomes that may never happen again as observed in the past. Shorting: Taking a short position on cash products requires finding a lender.

In words, the transaction costs associated with each asset are the sum of the square roots of the changes in capital allocations, re-scaled by an asset-specific factor Ch = {cn, h}n = 1, …, N that changes with h. Thus, Ch is an Nx1 vector that determines the relative transaction cost across assets. The Sharpe Ratio (Chapter 14) associated with r can be computed as (μh being net of the risk-free rate) 21.4 The Problem We would like to compute the optimal trading trajectory that solves the problem This problem attempts to compute a global dynamic optimum, in contrast to the static optimum derived by mean-variance optimizers (see Chapter 16). Note that non-continuous transaction costs are embedded in r. Compared to standard portfolio optimization applications, this is not a convex (quadratic) programming problem for at least three reasons: (1) Returns are not identically distributed, because μh and Vh change with h. (2) Transaction costs τh[ω] are non-continuous and changing with h. (3) The objective function SR[r] is not convex.


pages: 585 words: 165,304

Trust: The Social Virtue and the Creation of Prosperity by Francis Fukuyama

Alvin Toffler, barriers to entry, Berlin Wall, blue-collar work, business climate, business cycle, capital controls, classic study, collective bargaining, corporate governance, corporate raider, creative destruction, deindustrialization, Deng Xiaoping, deskilling, double entry bookkeeping, equal pay for equal work, European colonialism, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, George Gilder, glass ceiling, Glass-Steagall Act, global village, Gunnar Myrdal, hiring and firing, industrial robot, Jane Jacobs, job satisfaction, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kanban, Kenneth Arrow, land reform, liberal capitalism, liberation theology, low skilled workers, manufacturing employment, mittelstand, price mechanism, profit maximization, RAND corporation, rent-seeking, Ronald Coase, scientific management, Silicon Valley, Steve Jobs, Steve Wozniak, The Death and Life of Great American Cities, The Nature of the Firm, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, transfer pricing, traveling salesman, union organizing, vertical integration, W. E. B. Du Bois

Coase’s original thesis has been vastly elaborated, particularly by Oliver Williamson, into a broad theory of the modern corporation.12 In Williamson’s words, “The modern corporation is mainly to be understood as the product of a series of organizational innovations that have had the purpose and effect of economizing on transaction costs.”13 Transaction costs can be substantial, in turn, because human beings are not completely trustworthy. That is, if people pursued their economic self-interest and were at the same time completely honest, it might be possible to build cars by subcontracting. Suppliers could be relied on to provide their best price, not to renege on deals or give competitors proprietary information, to meet delivery schedules and maintain quality to the best of their ability, and so on.

But human beings are, in Williamson’s words, “opportunistic” and characterized by “bounded rationality” (meaning that they do not always make optimally rational decisions); integrated corporations are necessary because outside suppliers cannot be relied on to do what they contract to do.14 Firms integrate vertically, then, in order to reduce transaction costs. They continue to expand until the costs of large size begin to exceed the savings from these transaction costs. That is, large organizations suffer from diseconomies of scale: the free rider problem becomes more severe the larger the organization becomes;15 they are prone to agency costs, where the firm’s bureaucracy develops a stake in its own survival rather than profit maximization; and they suffer from information costs when managers lose track of what is happening in their own organizations.

In Williamson’s view, the multidivisional corporation, which was pioneered by American corporations at the beginning of the twentieth century, was an innovative response to this problem that combined the transaction cost economies of integration with decentralized, independent profit centers.16 It should be clear, however, that the Japanese keiretsu is another innovative solution to the problem of scale. The long-term relationships between keiretsu partners are a substitute for vertical integration, one that achieves similar efficiencies in terms of transaction cost savings. Toyota could have purchased outright one of its large subcontractors, Nippondenso, just as General Motors acquired Fisher Body in the 1920s.


pages: 140 words: 91,067

Money, Real Quick: The Story of M-PESA by Tonny K. Omwansa, Nicholas P. Sullivan, The Guardian

Blue Ocean Strategy, BRICs, business process, business process outsourcing, call centre, cashless society, cloud computing, creative destruction, crowdsourcing, delayed gratification, dematerialisation, democratizing finance, digital divide, disruptive innovation, end-to-end encryption, financial exclusion, financial innovation, financial intermediation, income per capita, Kibera, Kickstarter, M-Pesa, microcredit, mobile money, Network effects, new economy, reserve currency, Salesforce, Silicon Valley, software as a service, tontine, transaction costs

Cash is the enemy of governments, which must replace ripped notes by printing and distributing new currency; it is the enemy of bill payers, who must waste half days queuing to pay water and electric bills, or getting bank checks to pay school tuitions; it is the enemy of businesses, which have no easy and verifiable way to offer credit to customers or pay suppliers in advance, or to pay their workers in cash, which restricts them to doing business in small geographic circles. But cash is the most formidable enemy of the poor. Cash is difficult to store and certainly to save; and the transaction costs are prohibitive. That’s why, in many parts of the developing world, the idea of interest on savings is irrelevant; people often pay as much as 30% to get others to safely store money for them. That is a lower transaction cost than the alternative, which might mean seeing the money disappear altogether. The poor depend on cash but it is the enemy; the poor have little money but lead complex financial lives; the poor have low cash balances but move large amounts of cash every day, week and month.

Many of those phones are being used to, send, receive and save money. People who first used a phone five or 10 years ago and never had a bank account are now transferring money by phone. In countries where money means cash and cash typically moves by bus or post, the move to mobile is reducing transaction costs, and increasing the velocity and productivity of money. For the banked, mobile money provides superior speed, convenience and safety. For the unbanked, mobile money forms the beginning of a shadow banking system. For everyone, cash is the enemy—expensive to print, hard to store and move. Dematerializing money is good for people rich and poor, businesses, and governments.

M-PESA appeals to all segments of society—rich and poor, banked and un-banked, housed and un-housed, farmers and pastoralists, CEOs and janitors, street hawkers and shop merchants, small businesses and big businesses. The transactional platform for mobile money transfers is connecting the unbanked to the financial grid, and reducing transaction costs for every financial actor in society. Businesses run better, entrepreneurship is unleashed (Nairobi is becoming a leading innovation hub in Africa), productivity is increased, bills are paid instantaneously, money is redistributed from urban centers and market towns to rural villages, cash flow is smoothed during disruptions in income, just-in-time financing allows economic opportunism, domestic and international remittances are more regular, and the unbanked are slowly integrated into the formal financial system.


pages: 206 words: 70,924

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton by Colin Read

Abraham Wald, Albert Einstein, Bayesian statistics, Bear Stearns, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, Myron Scholes, Paul Samuelson, price stability, principal–agent problem, quantitative trading / quantitative finance, RAND corporation, random walk, risk free rate, risk tolerance, risk/return, Robert Solow, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, Thales and the olive presses, Thales of Miletus, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve

Ever since this formulation of the CAPM, we call this relative variance the beta , and interpret it as a relative measure of the required return of the asset over the market return, commensurate with its risk. Embedded in this elegant approach to pricing an individual security are a number of assumptions. First, we assume that the market is perfect. By this we mean that there are no transactions costs or taxes, that no trader has the power to influence prices and all are equally and costlessly informed, that assets can be traded in infinitely divisible amounts, and that expectations are homogenous while investors are rational maximizers in the domain of security means and variances. In addition, the market portfolio must contain all securities in proportion to their relative capitalization, and each security is efficiently priced according to its risk.

In fact, there is likely to be a different set of expectations of probabilities between current and future shareholders. This asymmetry has been treated by financial behaviorists who have developed psychologically based asset pricing models as an alternative to the CAPM.2 Extensions of the CAPM More complicated versions of the CAPM, including the subsequent work by John Lintner, included taxes and transactions costs that were originally omitted from the CAPM model. Perhaps less problematic is that the CAPM model also assumes that shares can be infinitely divisible, even if there are often premiums to be paid when securities are purchased in lots smaller than 100, and there cannot be fractional shares. The CAPM was initially developed as a static model, not an intertemporal and dynamic model, with a securities price determined at each instant over a dynamic time path.

Certainly, no one would deny that past observed measures of risk ought to influence expected returns, even if one can imagine other forces that could impinge as well. Of course, expected returns are not an observable variable. Our regressions are based on realized returns, with all their attendant noise from other unrelated factors. Indeed, the CAPM has constantly evolved to include other factors. Taxes, dividend yields, transactions costs, and intertemporal versions have all augmented its conceptual usefulness. Certainly, the CAPM’s principal ambassador, William Sharpe, and the only surviving academician of its founding four developers has always held faith in the utility of his model. When asked if he thought the model was something big, he responded: I didn’t know how important it would be, but I figured it was probably more important than anything else I was likely to do.


pages: 263 words: 75,455

Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors by Wesley R. Gray, Tobias E. Carlisle

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, Andrei Shleifer, asset allocation, Atul Gawande, backtesting, beat the dealer, Black Swan, book value, business cycle, butter production in bangladesh, buy and hold, capital asset pricing model, Checklist Manifesto, cognitive bias, compound rate of return, corporate governance, correlation coefficient, credit crunch, Daniel Kahneman / Amos Tversky, discounted cash flows, Edward Thorp, Eugene Fama: efficient market hypothesis, financial engineering, forensic accounting, Henry Singleton, hindsight bias, intangible asset, Jim Simons, Louis Bachelier, p-value, passive investing, performance metric, quantitative hedge fund, random walk, Richard Thaler, risk free rate, risk-adjusted returns, Robert Shiller, shareholder value, Sharpe ratio, short selling, statistical model, stock buybacks, survivorship bias, systematic trading, Teledyne, The Myth of the Rational Market, time value of money, transaction costs

The situation is similar, although less trading intensive, if we use a market capitalization–weighting scheme. In practice, all of this rebalancing incurs transaction costs. Investment simulations must take into account these transaction costs from the rebalancing. The more frequently the portfolio is rebalanced, the better the returns in the investment simulation, but the higher the transaction costs in the real world. It's possible that the transaction costs are so great as to erode all the expected return. Incorporating transaction costs into an investment simulation is difficult. Different investors will have different cost structures, tax statuses, and trading and execution skills.

Only in 1995 and 2004 to 2006, when strong economic growth generated earnings that caught up with earlier predictions, do forecasts actually hit the mark. When economic growth accelerates, the size of the forecast error declines; when economic growth slows, it increases. Transaction Costs We must decide at the outset of the investment simulation how we will manage the weight of each stock in the portfolio, and how this will affect rebalancing and transaction costs. Even simple methods of weighting introduce complexity and will require substantial rebalancing and incur transaction costs. If, for example, we employ a constant equal-weighting scheme, and the portfolio holds 100 stocks in equal weights and at the next rebalancing, 20 stocks are sold off and replaced by 20 new stocks.

Different investors will have different cost structures, tax statuses, and trading and execution skills. Cost assumptions for one group of investors will be a degree of magnitude larger (or smaller) for another set of investors. We try to minimize the distortions caused by transaction costs in our analysis by limiting ourselves to a yearly rebalance and trading in only relatively large, liquid stocks. Unless we explicitly state otherwise, we report all returns throughout this book without fees and transactions costs. Our philosophy is that investors are better able to gauge the expected costs of running their own portfolio than we are. THE PARAMETERS OF THE UNIVERSE For complete transparency, we outline in this section the details of the universe that we draw from to ensure that the back-test is repeatable and has integrity.


pages: 402 words: 110,972

Nerds on Wall Street: Math, Machines and Wired Markets by David J. Leinweber

"World Economic Forum" Davos, AI winter, Alan Greenspan, algorithmic trading, AOL-Time Warner, Apollo 11, asset allocation, banking crisis, barriers to entry, Bear Stearns, Big bang: deregulation of the City of London, Bob Litterman, book value, business cycle, butter production in bangladesh, butterfly effect, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, Charles Babbage, citizen journalism, collateralized debt obligation, Cornelius Vanderbilt, corporate governance, Craig Reynolds: boids flock, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Danny Hillis, demand response, disintermediation, distributed generation, diversification, diversified portfolio, electricity market, Emanuel Derman, en.wikipedia.org, experimental economics, fake news, financial engineering, financial innovation, fixed income, Ford Model T, Gordon Gekko, Hans Moravec, Herman Kahn, implied volatility, index arbitrage, index fund, information retrieval, intangible asset, Internet Archive, Ivan Sutherland, Jim Simons, John Bogle, John Nash: game theory, Kenneth Arrow, load shedding, Long Term Capital Management, machine readable, machine translation, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, market fragmentation, market microstructure, Mars Rover, Metcalfe’s law, military-industrial complex, moral hazard, mutually assured destruction, Myron Scholes, natural language processing, negative equity, Network effects, optical character recognition, paper trading, passive investing, pez dispenser, phenotype, prediction markets, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Metcalfe, Ronald Reagan, Rubik’s Cube, Savings and loan crisis, semantic web, Sharpe ratio, short selling, short squeeze, Silicon Valley, Small Order Execution System, smart grid, smart meter, social web, South Sea Bubble, statistical arbitrage, statistical model, Steve Jobs, Steven Levy, stock buybacks, Tacoma Narrows Bridge, the scientific method, The Wisdom of Crowds, time value of money, tontine, too big to fail, transaction costs, Turing machine, two and twenty, Upton Sinclair, value at risk, value engineering, Vernor Vinge, Wayback Machine, yield curve, Yogi Berra, your tax dollars at work

Slow computers, sending information to slow humans over slow lines, were easy marks for early algo warriors willing to buy faster machinery and smart enough to code the programs to use it. This aspect of the arms race continues unabated today. Algos for the Buy Side: Transaction Cost Control It didn’t take long to notice that these new electronic trading techniques had something to offer to the buy side. Financial journals offered a stream of opinion, theory, and analysis of transaction costs. Firms like Wayne Wagner’s Plexus Group—now part of Investment Technology Group, Inc. (ITG)—made persuasive, well-supported arguments about the importance of transaction costs. Pension plan sponsors, sitting at the top of the financial food chain, were convinced in large numbers.

It is a hot A Gentle Intr oduction to Computerized Investing 133 topic in algo trading, so a search may be overwhelming. Perold was the first to demonstrate the significance of trading costs in such a persuasive manner. The transaction cost measurement industry, which followed, was really originated by one firm, Plexus Group, founded by Wayne Wagner and now part of Investment Technology Group, Inc. (ITG). Wayne’s personal perspective is found in “The Incredible Story of Transaction Cost Management: A Personal Recollection,” Journal of Trading 3, no. 3 (Summer 2008). 8. See “Founders of Modern Finance” ((c) 1991, Research Foundation of the Institute of Chartered Financial Analysts, www.aimr.org) for the goods from the founders themselves, or Capital Ideas by Peter Bernstein for the salient points, intellectual history, and best stories. 9.

Source: Paul Tetlock, Maytal Saar-Tsechansky, and Sofus Macskassy, “More Than Words: Quantifying Language (in News) to Measure Firms’ Fundamentals,” Journal of Finance 63 ( June 2008): 1437–1467. discussion of overcoming the transaction cost hurdle in Chapter 5. When the authors factor in the cost of trading, they find that the positive 21 percent drops below zero when round-trip trading costs rise over 9 basis points. Round-trip costs of only 9 basis points would be truly spectacular trading. Most studies of actual transaction costs, including commissions and market impact, show one-way costs in the neighborhood of 50 basis points. This means that additional filtering of news would be needed for a profitable real-world strategy. eAnalyst: “Can Computerized Language Analysis Predict the Market?”


pages: 321

Finding Alphas: A Quantitative Approach to Building Trading Strategies by Igor Tulchinsky

algorithmic trading, asset allocation, automated trading system, backpropagation, backtesting, barriers to entry, behavioural economics, book value, business cycle, buy and hold, capital asset pricing model, constrained optimization, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, currency risk, data science, deep learning, discounted cash flows, discrete time, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial engineering, financial intermediation, Flash crash, Geoffrey Hinton, implied volatility, index arbitrage, index fund, intangible asset, iterative process, Long Term Capital Management, loss aversion, low interest rates, machine readable, market design, market microstructure, merger arbitrage, natural language processing, passive investing, pattern recognition, performance metric, Performance of Mutual Funds in the Period, popular capitalism, prediction markets, price discovery process, profit motive, proprietary trading, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, selection bias, sentiment analysis, shareholder value, Sharpe ratio, short selling, Silicon Valley, speech recognition, statistical arbitrage, statistical model, stochastic process, survivorship bias, systematic bias, systematic trading, text mining, transaction costs, Vanguard fund, yield curve

It can be treated as a proxy for the predictive ability of a model. The higher the Sharpe ratio, the more reliable the alpha tends to be. Turnover is a measure of the volume of trading required to reach the alpha’s desired positions over the simulation period. Each trade in or out of a position carries transaction costs (fees and spread costs). If the turnover number is high – for example, over 40% – the transaction costs may eradicate some or all of the PnL that the alpha generated during simulation. The other performance metrics and their uses in evaluating alpha performance are discussed in more detail in the WebSim user guides and in videos in the educational section of the website.

There are different ways to do this mapping, but the simplest is to assume the prediction strength of an alpha is the dollar position taken by the trading strategy. One issue with this mapping method is that alphas often will not map to good strategies on their own because they are designed to predict returns, not to make profitable trades net of costs. One way to address this issue is by charging reduced transaction costs in the simulation. Once the simulation has been constructed, some useful measurements that can be taken are: •• Information ratio. The mean of the alpha’s returns divided by the standard deviation of the returns, this measures how consistently the alpha makes good predictions. Combining the information ratio with the length of the observation period can help us determine our level of confidence that the alpha is better than random noise.

In practice, alphas have some fitting and some correlation to existing alphas, so the information ratio is typically a bit higher than this. •• Margin is the amount of profit the alpha made in the simulation divided by the amount of trading that was done. This is an indicator of how sensitive the alpha is to transaction costs. A higher margin means the alpha is not much affected by trading costs. Alphas with low margins won’t add value unless they are very different from the other alphas in the strategy. For an average daily alpha, a margin of 5 basis points typically is acceptable. •• Correlation measures the uniqueness of an alpha and often is measured against the most correlated alpha that exists in the alpha pool.


pages: 515 words: 126,820

Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World by Don Tapscott, Alex Tapscott

"World Economic Forum" Davos, Airbnb, altcoin, Alvin Toffler, asset-backed security, autonomous vehicles, barriers to entry, behavioural economics, bitcoin, Bitcoin Ponzi scheme, blockchain, Blythe Masters, Bretton Woods, business logic, business process, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, carbon credits, carbon footprint, clean water, cloud computing, cognitive dissonance, commoditize, commons-based peer production, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, crowdsourcing, cryptocurrency, currency risk, decentralized internet, digital capitalism, disintermediation, disruptive innovation, distributed ledger, do well by doing good, Donald Trump, double entry bookkeeping, driverless car, Edward Snowden, Elon Musk, Erik Brynjolfsson, Ethereum, ethereum blockchain, failed state, fiat currency, financial innovation, Firefox, first square of the chessboard, first square of the chessboard / second half of the chessboard, future of work, Future Shock, Galaxy Zoo, general purpose technology, George Gilder, glass ceiling, Google bus, GPS: selective availability, Hacker News, Hernando de Soto, Higgs boson, holacracy, income inequality, independent contractor, informal economy, information asymmetry, information security, intangible asset, interest rate swap, Internet of things, Jeff Bezos, jimmy wales, Kickstarter, knowledge worker, Kodak vs Instagram, Lean Startup, litecoin, Lyft, M-Pesa, Marc Andreessen, Mark Zuckerberg, Marshall McLuhan, means of production, microcredit, mobile money, money market fund, Neal Stephenson, Network effects, new economy, Oculus Rift, off grid, pattern recognition, peer-to-peer, peer-to-peer lending, peer-to-peer model, performance metric, Peter Thiel, planetary scale, Ponzi scheme, prediction markets, price mechanism, Productivity paradox, QR code, quantitative easing, radical decentralization, ransomware, Ray Kurzweil, renewable energy credits, rent-seeking, ride hailing / ride sharing, Ronald Coase, Ronald Reagan, Salesforce, Satoshi Nakamoto, search costs, Second Machine Age, seigniorage, self-driving car, sharing economy, Silicon Valley, Skype, smart contracts, smart grid, Snow Crash, social graph, social intelligence, social software, standardized shipping container, Stephen Hawking, Steve Jobs, Steve Wozniak, Stewart Brand, supply-chain management, systems thinking, TaskRabbit, TED Talk, The Fortune at the Bottom of the Pyramid, The Nature of the Firm, The Soul of a New Machine, The Wisdom of Crowds, transaction costs, Turing complete, Turing test, Tyler Cowen, Uber and Lyft, uber lyft, unbanked and underbanked, underbanked, unorthodox policies, vertical integration, Vitalik Buterin, wealth creators, X Prize, Y2K, Yochai Benkler, Zipcar

In fact, another Nobel Prize–winning economist (yes, there do seem to be a lot of them in this story), Joseph Stiglitz, argued that the sheer size and seeming complexity of these firms have increased agency costs even as a firm’s transaction costs have plummeted. Hence, the huge pay gap between CEO and front line. So where does blockchain technology come in and how can it change how firms are managed and coordinated internally? With smart contracts and unprecedented transparency, the blockchain should not only reduce transaction costs inside and outside of the firm, but it should also dramatically reduce agency costs at all levels of management. These changes will in turn make it harder to game the system. So firms could go beyond transaction cost to tackle the elephant in the boardroom—agency cost.

These platforms hold promise for protecting user identity, respecting user privacy and other rights, ensuring network security, and dropping transaction costs so that even the unbanked can take part. Unlike incumbent firms, they don’t need a brand to convey the trustworthiness of their transactions. By giving away their source code for free, sharing power with everyone on the network, using consensus mechanisms to ensure integrity, and conducting their business openly on the blockchain, they are magnets of hope for the many disillusioned and disenfranchised. As such, blockchain technology offers a credible and effective means not only of cutting out intermediaries, but also of radically lowering transaction costs, turning firms into networks, distributing economic power, and enabling both wealth creation and a more prosperous future. 1.

In the financial system, however, the problem is compounded because there has been no clean transition from one technology to the next; there are multiple legacy technologies, some hundreds of years old, never quite living up to their full potential. Why? In part, because finance is a monopoly business. In his assessment of the financial crisis, Nobel laureate Joseph Stiglitz wrote that banks “were doing everything they could to increase transaction costs in every way possible.” He argued that, even at the retail level, payments for basic goods and services “should cost a fraction of a penny.” “Yet how much do they charge?” he wondered. “One, two, or three percent of the value of what is sold or more. Capital and sheer scale, combined with a regulatory and social license to operate allows banks to extract as much as they can, in country after country, especially in the United States, making billions of dollars of profits.”11 Historically, the opportunity for large centralized intermediaries has been enormous.


The Concepts and Practice of Mathematical Finance by Mark S. Joshi

Black-Scholes formula, Brownian motion, correlation coefficient, Credit Default Swap, currency risk, delta neutral, discrete time, Emanuel Derman, financial engineering, fixed income, implied volatility, incomplete markets, interest rate derivative, interest rate swap, London Interbank Offered Rate, martingale, millennium bug, power law, quantitative trading / quantitative finance, risk free rate, short selling, stochastic process, stochastic volatility, the market place, time value of money, transaction costs, value at risk, volatility smile, yield curve, zero-coupon bond

A trading bank will typically have a team of research quantitative analysts working purely on the pricing 90 Practicalities of vanilla options in order to better understand these issues, to which we return in Chapter 18. 4.6 Transaction costs Although transaction costs are a reality, they tend not to be modelled explicitly when developing pricing models. There is a simple reason for this: transaction costs can never create arbitrages. In other words, if a price cannot be arbitraged in a world free of transaction costs, it cannot be arbitraged in a world with them either. The proof of this result is very simple. Suppose a price is arbitrageable in the world with transaction costs. Then we can set up a portfolio taking into account transaction costs at zero or negative cost today, which will be of non-negative and possibly positive value in the future.

Then we can set up a portfolio taking into account transaction costs at zero or negative cost today, which will be of non-negative and possibly positive value in the future. If we neglect to take into account transaction costs then the initial set-up cost of the portfolio will be even lower and thus still be negative or zero. The final value of the portfolio will however be at least as high as there will be no cash drain from any transaction costs during the portfolio's life. We therefore conclude that the portfolio is also an arbitrage portfolio in a world free of transaction costs. Thus the existence of arbitrage in the world with transaction costs implies arbitrage in a world free of them. A second reason they tend to be neglected is that hedging is carried out on a portfolio basis.

Whilst one can clearly not do this in the markets, when one is dealing in quantities of millions, which trading banks generally do, this is not so unreasonable the smallest unit one can hold is a millionth of the typical amount held, so any error is pretty small in comparison. 2.4.5 No transaction costs The fifth assumption is that there are no transaction costs. That is one can buy and sell assets without any costs. In the market, there are two typical ways to incur transaction costs. The first is just that doing something costs money. The second is that typically buy and sell prices differ slightly (or in the case of high street foreign exchange differ greatly.) This is called the bid-offer spread.


pages: 200 words: 54,897

Flash Boys: Not So Fast: An Insider's Perspective on High-Frequency Trading by Peter Kovac

bank run, barriers to entry, bash_history, Bernie Madoff, compensation consultant, computerized markets, computerized trading, Flash crash, housing crisis, index fund, locking in a profit, London Whale, market microstructure, merger arbitrage, payment for order flow, prediction markets, price discovery process, proprietary trading, Sergey Aleynikov, Spread Networks laid a new fibre optics cable between New York and Chicago, transaction costs, zero day

Here’s what Vanguard, the world’s largest single mutual fund manager, wrote to the SEC on the topic: “While the data universally demonstrate a significant reduction in transaction costs over the last ten to fifteen years, the precise percentages vary (estimates have ranged from a reduction of 35% to more than 60%). Vanguard estimates are in this range, and we conservatively estimate that transaction costs have declined 50 bps, or 100 bps round trip. This reduction in transaction costs provides a substantial benefit to investors in the form of higher net returns. For example, if an average actively managed equity mutual fund with a 100% turnover ratio would currently provide an annual return of 9%, the same fund would have returned 8% per year without the reduction in transaction costs over the past decade.

For example, if an average actively managed equity mutual fund with a 100% turnover ratio would currently provide an annual return of 9%, the same fund would have returned 8% per year without the reduction in transaction costs over the past decade. Today's investor with a 30 year time horizon would see a $10,000 investment in such a fund grow to approximately $132,000 in 30 years, compared to approximately $100,000 with the hypothetical return of 8% associated with the higher transaction costs. This roughly 25% decrease in the end value of the investment demonstrates the impact of reduced transaction costs on long-term investors. Thus, any analysis of "high frequency trading" must recognize the corresponding benefits that long-term investors have experienced through tighter spreads and increased liquidity.”[45] It’s worth reading this a second time.

The counter-argument is that high-frequency traders, specifically electronic market-makers, by competing with a fair set of rules, have dramatically reduced the cost of trading over the past decade, by five times or more. TD Ameritrade, the largest online retail broker, estimates that in the last ten years transaction costs have declined 80% for retail investors; Vanguard, the largest U.S. mutual fund manager, estimated that they now save $1 on every $100 of stock bought and sold. In short, everyone – retail investors, mutual funds, pension funds, whoever – has benefited significantly. In this version of the story, the only casualties of this increased efficiency are the old intermediaries who have been displaced by the computers – the Wall Street equities traders who, now, incidentally, allege this front-running conspiracy.


Risk Management in Trading by Davis Edwards

Abraham Maslow, asset allocation, asset-backed security, backtesting, Bear Stearns, Black-Scholes formula, Brownian motion, business cycle, computerized trading, correlation coefficient, Credit Default Swap, discrete time, diversified portfolio, financial engineering, fixed income, Glass-Steagall Act, global macro, implied volatility, intangible asset, interest rate swap, iterative process, John Meriwether, junk bonds, London Whale, Long Term Capital Management, low interest rates, margin call, Myron Scholes, Nick Leeson, p-value, paper trading, pattern recognition, proprietary trading, random walk, risk free rate, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, statistical model, stochastic process, systematic trading, time value of money, transaction costs, value at risk, Wiener process, zero-coupon bond

For example, in addition to just looking at profits, traders might examine: ■ ■ ■ ■ ■ ■ ■ What percentage of trades is expected to be profitable? Does this percentage vary over time or is it stable? What is the expected return on each trade? Has this been declining over time or holding steady? How quickly should a trade make money on average? How sensitive are profits to transaction costs? If transaction costs are higher than expected, does this make the strategy unprofitable? Are losses randomly distributed or correlated? What kind of losses can be expected, on average, once a month? What is the worst case scenario for a drawdown? (A drawdown is a peak to trough decline in profitability).

Simulating and testing the strategy as it would be executed once actual trading begins allows the strategy developer to identify implementation problems. For example, with historical testing, pricing data already exists. Backtesting and Trade Forensics 101 KEY CONCEPT: TRANSACTIONS COSTS AND TIMING Two items that are hard to model from historical data are the costs associated with making trades and timing of when market data arrives. Transaction Costs. Many strategies look profitable in simulation because no trades have occurred to bring prices back to equilibrium. The only way to fully determine if a price represents a transaction opportunity is to find someone willing to transact at that price during actual trading.

It is common for reallife problems that did not show up in historical testing to appear when trading is attempted in real life. TRANSACTION COSTS AND SLIPPAGE Models of trading strategies rarely work as well in practice as they do in simulation. A common reason for underperformance is the inability to get an execution at the desired market price. The root problem is that the market price is typically a historical price (perhaps the price of a recent transaction). 102 TABLE 4.1 RISK MANAGEMENT IN TRADING Transaction Costs and Slippage Type of Problem Description Bad Market Price If the market price was set by a mistake, made under duress, or news has just been released, the previous market price may not represent the market view as to a fair price.


Beat the Market by Edward Thorp

beat the dealer, book value, buy and hold, compound rate of return, Edward Thorp, margin call, Paul Samuelson, RAND corporation, short selling, short squeeze, transaction costs

Figures E.2, E.3, and E.4 show the average monthly percentage change for various hedged positions. 205 Figure E.1. Percentage gain from shorting warrant and covering in one month assuming 100% margin and no transaction costs. Figure E.2. Percentage gain for a 1 to 1 hedge held for one month, assuming 100% margin and no transaction costs. Figure E.3. Percentage gain for 2 to 1 hedge held for one month, assuming 100% margin and no transaction costs. Figure E.4. Percentage gain from 3 to 1 hedge held for one month, assuming 100% margin and no transaction costs. REFERENCES [1] [2] [3] [4] [5] [6] Bladen, Ashby, Techniques for Investing in Convertible Bonds. Salomon Bros. and Hutzler, New York, 1966.

To protect the warrant holder’s original rights, for each 100 warrants he holds he is allowed to buy, after the stock dividend, 102 shares of common; one warrant buys 1.02 new shares, still for $25. An anti-dilution provision to thus adjust the warrant’s terms after stock splits and dividends was made for the protection of the Sperry warrant holders when the warrants were issued. * Commissions are not a factor because some traders have virtually no transaction costs and are ready to exploit such opportunities. 24 There was another 2% stock dividend on September 28, 1961. The warrant was adjusted so that after the dividend one warrant plus $25 bought 1.02 times as many shares as before this second dividend. Since it could buy 1.02 shares before this second dividend, it became the right to buy 1.02 x 1.02 = 1.0404 shares after the dividend.

Exercise price is 10. Warrants are sold short and common is purchased at these prices, with the plan of liquidating the entire position just before expiration. Initial margin of 3 for the warrant and 5 for the common are assumed. Gains from intermediate decisions or from reinvesting profits are ignored, as are transactions costs. as roughly equal to the short-sale proceeds of about $300. (This happens, for instance, if the common at expiration is unchanged in price.) We have put up $300 initial margin for the 100 warrants short at 3. For 100 common long at 6, we ned $420 if initial margin is 70%, for a total original investment of $720.


pages: 416 words: 118,592

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, backtesting, Bear Stearns, beat the dealer, Bernie Madoff, book value, BRICs, butter production in bangladesh, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial engineering, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Japanese asset price bubble, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, margin call, market bubble, Mary Meeker, money market fund, mortgage tax deduction, new economy, Own Your Own Home, PalmPilot, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, stock buybacks, stocks for the long run, sugar pill, survivorship bias, The Myth of the Rational Market, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

If you ask me what this means, I cannot tell you, but I think the technician probably had the following in mind: “If the market does not go up or go down, it will remain unchanged.” Even the weather forecaster can do better than that. Obviously, I’m biased. This is not only a personal bias but a professional one as well. Technical analysis is anathema to much of the academic world. We love to pick on it. We have two main reasons: (1) after paying transactions costs and taxes, the method does not do better than a buy-and-hold strategy; and (2) it’s easy to pick on. And while it may seem a bit unfair, just remember that it’s your money we’re trying to save. Although the computer perhaps enhanced the standing of the technician for a time, and while charting services are widely available on the Internet, technology has ultimately proved to be the technician’s undoing.

Last week’s price change bears little relationship to the price change this week, and so forth. Whatever slight dependencies have been found between stock-price movements in different time periods are extremely small and economically insignificant. Although there is some short-term momentum in the stock market, as will be described more fully in chapter 11, any investor who pays transactions costs and taxes cannot benefit from it. Economists have also examined the technician’s thesis that there are often sequences of price changes in the same direction over several days (or several weeks or months). Stocks are likened to fullbacks who, once having gained some momentum, can be expected to carry on for a long gain.

Again, the investor following such a system is likely to be disappointed in the results. The buy and sell signals generated by the strategy contain no information useful for predicting future price movements. As with all technical strategies, however, the investor is obliged to do a great deal of in-and-out trading, and thus his transactions costs and taxes are far in excess of those necessitated in a buy-and-hold strategy. After accounting for these costs, the investor does worse than he would by simply buying and holding a diversified group of stocks. Reading Chart Patterns Perhaps some of the more complicated chart patterns, such as those described in the preceding chapter, are able to reveal the future course of stock prices.


pages: 474 words: 120,801

The End of Power: From Boardrooms to Battlefields and Churches to States, Why Being in Charge Isn’t What It Used to Be by Moises Naim

"World Economic Forum" Davos, additive manufacturing, AOL-Time Warner, barriers to entry, Berlin Wall, bilateral investment treaty, business cycle, business process, business process outsourcing, call centre, citizen journalism, Clayton Christensen, clean water, collapse of Lehman Brothers, collective bargaining, colonial rule, conceptual framework, corporate governance, creative destruction, crony capitalism, deskilling, disinformation, disintermediation, disruptive innovation, don't be evil, Evgeny Morozov, failed state, Fall of the Berlin Wall, financial deregulation, Francis Fukuyama: the end of history, illegal immigration, immigration reform, income inequality, income per capita, intangible asset, intermodal, invisible hand, job-hopping, Joseph Schumpeter, Julian Assange, Kickstarter, Lewis Mumford, liberation theology, Martin Wolf, mega-rich, megacity, military-industrial complex, Naomi Klein, Nate Silver, new economy, Northern Rock, Occupy movement, open borders, open economy, Peace of Westphalia, plutocrats, price mechanism, price stability, private military company, profit maximization, prosperity theology / prosperity gospel / gospel of success, radical decentralization, Ronald Coase, Ronald Reagan, seminal paper, Silicon Valley, Skype, Steve Jobs, The Nature of the Firm, Thomas Malthus, too big to fail, trade route, transaction costs, Twitter Arab Spring, vertical integration, Washington Consensus, WikiLeaks, World Values Survey, zero-sum game

He observed that modern firms faced numerous costs that were lower when the firm brought the functions in-house than they would have been when dealing at arms’ length with another enterprise. Included among such costs are those for drafting and enforcing sales contracts—expenses that Coase initially called “marketing costs” and later redubbed “transaction costs.” Specifically, transaction costs helped explain why some firms grew by vertically integrating—that is, by buying their suppliers or distributors—while others didn’t. Large oil producers, for example, prefer to own the refineries where their oil is processed, as this tends to be less risky and more efficient than relying on a commercial relationship with independent refiners whose actions the oil companies can’t control.

The propensity to operate through a vertically integrated firm is driven by the structure of the market of buyers and sellers active in the different stages of the industry and by the kinds of investments needed to enter the business. In short, transaction costs determine the contours, growth patterns, and, ultimately, the very nature of firms.21 Although Coase’s insight became an important underpinning of economics in general, its main initial impact was in the field of industrial organization, which focuses on factors that stimulate or hinder competition among firms. The idea that transaction costs determine the size and even the nature of an organization can be applied to many other fields beyond industry to explain why not just modern corporations but also government agencies, armies, and churches became large and centralized.

The idea that transaction costs determine the size and even the nature of an organization can be applied to many other fields beyond industry to explain why not just modern corporations but also government agencies, armies, and churches became large and centralized. In all such cases, it has been rational and efficient to do so. High transaction costs create strong incentives to bring critical activities controlled by others inside the organization, thereby growing it. And by the same token, the more the pattern of transaction costs made it rational for organizations to grow large by integrating vertically, the more daunting an obstacle this growth represented for new rivals trying to gain a foothold. It is harder for a new rival to challenge an existing company that also controls the main source of raw materials, for example, or has internalized the main distribution channels or retail chain.


pages: 358 words: 104,664

Capital Without Borders by Brooke Harrington

Alan Greenspan, banking crisis, Big bang: deregulation of the City of London, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, classic study, complexity theory, corporate governance, corporate social responsibility, diversified portfolio, emotional labour, equity risk premium, estate planning, eurozone crisis, family office, financial innovation, ghettoisation, Great Leap Forward, haute couture, high net worth, income inequality, information asymmetry, Joan Didion, job satisfaction, joint-stock company, Joseph Schumpeter, Kevin Roose, liberal capitalism, mega-rich, mobile money, offshore financial centre, prudent man rule, race to the bottom, regulatory arbitrage, Robert Shiller, South Sea Bubble, subprime mortgage crisis, the market place, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, transaction costs, upwardly mobile, wealth creators, web of trust, Westphalian system, Wolfgang Streeck, zero-sum game

This offers privacy for the transaction participants and lower transaction costs compared to the open market, providing more room for profit.78 This last point is crucial, and often overlooked: one way to get rich and stay that way is to keep transaction costs to a minimum. As the well-known American mutual fund manager Bill Miller is known for saying, “Lowest average cost wins.”79 That is, the way to make the most money—to “win”—isn’t just by earning the highest returns but also by minimizing costs. This is consistent with the observations of the Nobel Prize–winning political theorist Douglass North, who argued that transaction costs are the most significant determinant of wealth (and poverty) worldwide.80 Figure 5.1.

For many clients from civil-law jurisdictions, this combination of traits would seem to make the foundation a best-of-both-worlds proposition. As Parvita—a Mauritius practitioner—put it, “The foundation is dressed like a corporation yet has the soul of a trust.” However, foundations do have four significant downsides compared to trusts. For one thing, there is greater administrative complexity and thus higher transaction costs, which create a drain on the wealth held in the structure. Much like corporations, foundations are required to establish bylaws and articles, to create regular financial statements for the managing council to review, and to provide for audits.138 Second, in many jurisdictions, foundations are subject to taxation, and transfers of assets into noncharitable foundations can be taxed.139 Third, as a legal person that owns assets, foundations can be sued and go bankrupt.140 This is in contrast to a trust arrangement, in which there is no legal personality, but only a “natural person” (the fiduciary) who holds only partial ownership rights; this makes it difficult to access the trust assets through lawsuits.

However, a succession of further corporate crises, particularly in the past thirty years, has attracted even more regulatory attention to firms, again restricting their management and activities.147 This certainly has not eliminated the use of firms or the occurrence of fraud, but it has raised the transaction costs attached to corporate profits. The form remains popular for three reasons. First, it is universally recognized: unlike the trust, which is a product of England’s unique ecclesiastical equity courts and their rulings based on moral right, the corporation was created by statute law, which exists worldwide.148 This has made corporations an excellent vehicle for global trading, as exemplified by the multinational corporation.


Mathematics for Finance: An Introduction to Financial Engineering by Marek Capinski, Tomasz Zastawniak

Black-Scholes formula, Brownian motion, capital asset pricing model, cellular automata, delta neutral, discounted cash flows, discrete time, diversified portfolio, financial engineering, fixed income, interest rate derivative, interest rate swap, locking in a profit, London Interbank Offered Rate, margin call, martingale, quantitative trading / quantitative finance, random walk, risk free rate, short selling, stochastic process, time value of money, transaction costs, value at risk, Wiener process, zero-coupon bond

Theorem 8.2 The expectation of the discounted payoff computed with respect to the riskneutral probability is equal to the present value of the contingent claim, (8.3) D(0) = E∗ (1 + r)−1 f (S(1)) . 176 Mathematics for Finance Proof This is an immediate consequence of (8.1): f (S u ) − f (S d ) (1 + u)f (S d ) − (1 + d)f (S u ) + u−d (u − d) (1 + r) u 1 (r − d)f (S ) (u − r)f (S d ) = + 1+r (u − d) u−d 1 p∗ f (S u ) + (1 − p∗ )f (S d ) = 1+r = E∗ (1 + r)−1 f (S(1)) , D(0) = as claimed. Exercise 8.3 Find the initial value of the portfolio replicating a call option if proportional transaction costs are incurred whenever the underlying stock is sold. (No transaction costs apply when the stock is bought.) Compare this value with the case free of such costs. Assume that S(0) = X = 100 dollars, u = 0.1, d = −0.1 and r = 0.05, admitting transaction costs at c = 2% (the seller receiving 98% of the stock value). Exercise 8.4 Let S(0) = 75 dollars and let u = 0.2 and d = −0.1. Suppose that you can borrow money at 12%, but the rate for deposits is lower at 8%.

In practice it is impossible to hedge in a perfect way by designing a single portfolio to be held for the whole period up to the exercise time T . The hedging portfolio will need to be modified whenever the variables affecting the option change with time. In a realistic case of non-zero transaction costs these modifications cannot be performed too frequently and some compromise strategy may be required. Nevertheless, here we shall only discuss hedging over a single short time interval, neglecting transaction costs. 9.1.1 Delta Hedging The value of a European call or put option as given by the Black–Scholes formula clearly depends on the price of the underlying asset. This can be seen in a slightly broader context.

The choice between them depends on individual aims and preferences. We have not touched upon questions related to transaction costs or long term hedging. Nor have we discussed the optimality of the choice of an additional derivative instrument. Portfolios based on three Greek parameters would require yet another derivative security as a component. They could provide comprehensive cover, though their performance might deteriorate if the variables remain unchanged. In addition, they might prove expensive if transaction costs were included. 9.2 Hedging Business Risk We begin by introducing an alternative measure of risk, related to an intuitive understanding of risk as the size and likelihood of a possible loss. 202 Mathematics for Finance 9.2.1 Value at Risk Let us present the basic idea using a simple example.


pages: 367 words: 97,136

Beyond Diversification: What Every Investor Needs to Know About Asset Allocation by Sebastien Page

Andrei Shleifer, asset allocation, backtesting, Bernie Madoff, bitcoin, Black Swan, Bob Litterman, book value, business cycle, buy and hold, Cal Newport, capital asset pricing model, commodity super cycle, coronavirus, corporate governance, COVID-19, cryptocurrency, currency risk, discounted cash flows, diversification, diversified portfolio, en.wikipedia.org, equity risk premium, Eugene Fama: efficient market hypothesis, fixed income, future of work, Future Shock, G4S, global macro, implied volatility, index fund, information asymmetry, iterative process, loss aversion, low interest rates, market friction, mental accounting, merger arbitrage, oil shock, passive investing, prediction markets, publication bias, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Feynman, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, robo advisor, seminal paper, shareholder value, Sharpe ratio, sovereign wealth fund, stochastic process, stochastic volatility, stocks for the long run, systematic bias, systematic trading, tail risk, transaction costs, TSMC, value at risk, yield curve, zero-coupon bond, zero-sum game

The regime-switching model in Kritzman, Page, and Turkington (2012) combines turbulence, GDP, and inflation regimes. Regarding transaction costs, Fleming, Kirby, and Ostdiek (2001, 2003) assume execution via futures contracts and estimate transaction costs in the 10–20-bps range. Moreira and Muir (2017) report transaction costs in the 56–183-bps range for physicals. Dreyer and Hubrich (2019) use a 3-bps bid-ask spread for every futures trade, based on the actual trading pattern of the strategy. They show a 10–20% deterioration in results when adding these transaction costs to the simulation. However, they more than recover these costs when they also add caps on trading behavior: they only trade if the proposed trade is >10%, and they only implement up to 50% same day.

I prefer to focus on our process, because too many academics and practitioners explain how to forecast returns or build TAA strategies with sophisticated statistical studies and backtests, yet barely account for real-world, practical considerations. For example, the editors of the Financial Analysts Journal now reject any empirical study that doesn’t include transaction costs. The paper is not deemed worth the referees’ time—it goes straight back to the author(s) with a request to add transaction costs. In our case, we apply this process to tactically manage asset class exposures on more than $250 billion in assets. As practitioners, we sometimes sacrifice “rigor” for simplicity and transparency. We don’t want to overfit historical data, and we obsess over whether factor models, backtests, and other useful statistical analyses are relevant given the current environment and going forward.

Similarly, in their ubiquitous textbook Modern Portfolio Theory and Investment Analysis, Edwin Elton and Martin Gruber (1995) describe it as “one of the most important discoveries in the field of finance.” However, there are issues with the CAPM. Its derivation relies on a long list of questionable assumptions: investors are rational; taxes and transactions costs do not exist; all investors have the same information; etc. Even Harry Markowitz, father of portfolio theory, has expressed misgivings about the widespread use of the CAPM. In a paper titled “Market Efficiency: A Theoretical Distinction and So What?” published in the Financial Analysts Journal in 2005, he writes about the model’s “convenient but unrealistic assumptions.”


The Darwin Economy: Liberty, Competition, and the Common Good by Robert H. Frank

Alan Greenspan, behavioural economics, carbon footprint, carbon tax, carried interest, Cass Sunstein, clean water, congestion charging, congestion pricing, corporate governance, deliberate practice, full employment, Garrett Hardin, Gary Kildall, high-speed rail, income inequality, independent contractor, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Paul Samuelson, plutocrats, positional goods, profit motive, Ralph Nader, rent control, Richard Thaler, Ronald Coase, Ronald Reagan, sealed-bid auction, smart grid, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thomas Malthus, Tragedy of the Commons, transaction costs, trickle-down economics, Tyler Cowen, ultimatum game, vertical integration, winner-take-all economy

The whole process could be dramatically streamlined, he argued, by forming organizations in which employees simply did the bidding of supervisors. PERPETRATORS AND VICTIMS 91 In the wake of the 1937 paper’s publication, a new field in economics emerged and prospered. Called transaction cost economics, it tries to explain organizational forms and behavior as implicit or explicit consequences of attempts to economize on transaction costs.11 In the light of his intellectual history, there is no question that Coase was well aware of practical impediments that often make it prohibitively costly for private parties to negotiate agreements. His intended message simply cannot have been that government has no useful role to play in the regulation of activities that cause harm to others.

But defending that right means denying others the right to limit the amount of risk they permit themselves to take. Libertarians need to explain why the first right is more important to defend than the second. If rational libertarians would indeed have chosen to join the larger group that wanted safety regulation in a world with zero transaction costs, how can they then insist that safety regulation robs them of an essential right? The high transaction costs of the world we live in mean that one group or the other will not be able to get what it wants. What argument can libertarians offer to explain why wishes of the larger group should be discounted? How could a group that claims to celebrate freedom above all else argue for a result that people never would have endorsed in an environment in which everyone had complete freedom of choice?

But it’s not sufficient. The profession, after all, has incorporated numerous other forms of market failure into its arsenal of policy recommendations. Even the most ardent market enthusiasts, for example, are quick to concede a productive role for government intervention to curb pollution when transaction costs are high. A final possibility I consider is the one that strikes me as most plausible. In the more than thirty years I have been writing about positional concerns, the most frequent response of libertarians and others on the right has been to accuse me of trying to incite class warfare. They dismiss positional concerns for the same reason they dismiss the preferences of sadists.


State-Building: Governance and World Order in the 21st Century by Francis Fukuyama

Asian financial crisis, behavioural economics, Berlin Wall, Bretton Woods, centre right, corporate governance, demand response, Doha Development Round, European colonialism, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, George Akerlof, Hernando de Soto, information asymmetry, liberal world order, Live Aid, Nick Leeson, Pareto efficiency, Potemkin village, precautionary principle, price stability, principal–agent problem, rent-seeking, road to serfdom, Ronald Coase, structural adjustment programs, Suez crisis 1956, tacit knowledge, technology bubble, The Market for Lemons, The Nature of the Firm, transaction costs, vertical integration, Washington Consensus, Westphalian system

For example, many of the new technologies of the later nineteenth century, such as railroads, coal-powered energy sources, steel, and heavy manufacturing, benefited from extensive economies of scale and thus encouraged centralization.4 By contrast, Malone, Yates et al. (1989), building on Coase’s thesis about the relationship between transaction costs and hierarchy, have speculated that with the advent of inexpensive information technology, transaction costs would fall across the board and hierarchies would increasingly give way to either markets or to more decentralized forms of organization in which cooperating units did not stand in a hierarchical relationship to one another. Information technology creating lower transaction costs has provided the theoretical justification for many firms to flatten their managerial hierarchies, outsource, or “virtualize” their structures.

Institutional Economics and the Theory of Organizations Economic theories about organizations1 begin with Ronald Coase’s (1937) theory of the firm, which established the basic For overviews of the intellectual history of the economists’s approach to organizational theory, see Furubotn and Richter (1997, chapter 8) and Moe (1984). 1 46 state-building distinction between markets and hierarchies and argued that certain resource allocation decisions were made within hierarchical organizations because of a need to economize on transaction costs. The costs of finding information about products and suppliers, negotiating contracts, monitoring performance, and litigating and enforcing contracts in decentralized markets often meant that it was more efficient to bring all of these activities within the boundaries of a single hierarchical organization that could make decisions on the basis of an authority relationship.

The costs of finding information about products and suppliers, negotiating contracts, monitoring performance, and litigating and enforcing contracts in decentralized markets often meant that it was more efficient to bring all of these activities within the boundaries of a single hierarchical organization that could make decisions on the basis of an authority relationship. Coase’s theory of the firm was actually not a theory of organizations but rather a theory of why the boundary between markets and organizations was drawn the way it was. Williamson (1975, 1985, 1993) used Coase’s transaction cost framework and filled in many of the details about why hierarchies were used in preference to markets. According to Williamson, bounded rationality meant that parties to a contract could never fully anticipate all possible future contingencies and enact formal safeguards against possible forms of opportunism.


pages: 383 words: 81,118

Matchmakers: The New Economics of Multisided Platforms by David S. Evans, Richard Schmalensee

Airbnb, Alvin Roth, Andy Rubin, big-box store, business process, cashless society, Chuck Templeton: OpenTable:, creative destruction, Deng Xiaoping, digital divide, disruptive innovation, if you build it, they will come, information asymmetry, Internet Archive, invention of movable type, invention of the printing press, invention of the telegraph, invention of the telephone, Jean Tirole, John Markoff, Lyft, M-Pesa, market friction, market microstructure, Max Levchin, mobile money, multi-sided market, Network effects, PalmPilot, Productivity paradox, profit maximization, purchasing power parity, QR code, ride hailing / ride sharing, sharing economy, Silicon Valley, Snapchat, Steve Jobs, the long tail, Tim Cook: Apple, transaction costs, two-sided market, Uber for X, uber lyft, ubercab, vertical integration, Victor Gruen, Wayback Machine, winner-take-all economy

That’s the sort of problem that an important, but until recently overlooked, type of business sets out to solve by helping parties who have something valuable to exchange find each other, get together, and do a deal. Multisided Platforms In 1998, this important type of business didn’t have a name. That’s surprising, in retrospect. Many businesses had been built to reduce these sorts of market frictions, which economists tend to call transaction costs. Their basic business model had been around for thousands of years. But business schools didn’t teach classes on how to start or run businesses that help different parties get together to exchange value. Economists didn’t have a clue how these businesses worked. In fact, the companies that reduced these market frictions charged prices and adopted other strategies that economic textbooks insisted no sensible business would do.

Then smartphones and advances in the speed and reliability of wireless networks have put connected computing devices into the hands of almost two billion people around the world.20 More countries are getting wireless networks that can support Internet-connected devices, so that number will increase considerably in the coming years. The birth of the commercial Internet in the mid-1990s and mobile broadband in the early 2000s, combined with the earlier invention of personal computers and programming languages, has sent forth armies of multisided platforms working to reduce transaction costs of all sorts in most countries on the planet. Some stay within their own national borders. Others use the power of global connectivity to try to conquer the world. The pace has been frenetic for the last two decades and is quickening. The Internet and smartphones have turbocharged the ancient matchmaker business model.

We focus on six critical issues that multisided platforms must address. The opportunity for a multisided platform ordinarily arises when frictions keep market participants from dealing with each other easily and directly. Entrepreneurs can identify opportunities for starting a matchmaker by looking for significant transaction costs that keep willing buyers and sellers apart and that a well-designed matchmaker can reduce. Multisided platforms have to secure critical mass in order to ignite. They have to solve the chicken-and-egg problem of getting both sides on board, in adequate numbers, to create value. If they don’t, they will implode.


pages: 332 words: 81,289

Smarter Investing by Tim Hale

Albert Einstein, asset allocation, buy and hold, buy low sell high, capital asset pricing model, classic study, collapse of Lehman Brothers, corporate governance, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, fiat currency, financial engineering, financial independence, financial innovation, fixed income, full employment, Future Shock, implied volatility, index fund, information asymmetry, Isaac Newton, John Bogle, John Meriwether, Long Term Capital Management, low interest rates, managed futures, Northern Rock, passive investing, Ponzi scheme, purchasing power parity, quantitative easing, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, South Sea Bubble, technology bubble, the rule of 72, time value of money, transaction costs, Vanguard fund, women in the workforce, zero-sum game

However, always remember that even in markets where information is deemed to be less than perfect, if the anomalies cannot be exploited to exceed the transaction costs involved with investing in them, then active management for you or me is worthless. Transaction costs are significantly higher in smaller, less efficient, markets, negating much of the benefit. Remember that they are still playing in a zero-sum game, but with higher costs. What does the research tell us? The reality is that research suggests that few investors outperform the market portfolio consistently over time, especially after transaction costs and taxes are taken into account. The magnitude and consistency of this research, from a wide number of angles, supports this emphatically.

Replication methods affect tracking error The way in which the investment manager chooses to copy the index is important. There are three common methods that are used. Full replication: As its name suggests, each company in the index is purchased by the fund. This would give you zero tracking error in a world where transaction costs are zero, but it is not the world we live in. Inevitably, transaction costs will create some tracking error. In addition, smaller funds may suffer from having to buy odd lots of stock that cannot be split as the amount being purchased is too small. Corporate actions and dividend payments also create activity that may generate tracking error.

First, though, consider the following logical argument that immediately puts the active manager’s case on the back foot, with the probabilities favouring a passive (index) approach. Passive investors will beat the majority of active investors As we have discovered in the zero-sum game above, all investors are the market. So, the average investor will generate the market return before fees, transaction costs and taxes. In the real world these costs cannot be avoided so the average active investor must inevitably be below the market by the amount of these costs. If index funds have lower costs than the average active investor, which is most often the case, then they will beat the average active manager by the difference between these costs.


pages: 304 words: 80,965

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It by Stephen Davis, Jon Lukomnik, David Pitt-Watson

activist fund / activist shareholder / activist investor, Admiral Zheng, banking crisis, Basel III, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, buy and hold, Carl Icahn, centralized clearinghouse, clean water, compensation consultant, computerized trading, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, Dissolution of the Soviet Union, diversification, diversified portfolio, en.wikipedia.org, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Glass-Steagall Act, income inequality, index fund, information asymmetry, invisible hand, John Bogle, Kenneth Arrow, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, moral hazard, Myron Scholes, Northern Rock, passive investing, Paul Volcker talking about ATMs, payment for order flow, performance metric, Ponzi scheme, post-work, principal–agent problem, rent-seeking, Ronald Coase, seminal paper, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks

“The propensity to truck, barter or exchange one thing for another,” he wrote, “is common to all men.”29 But our ability to do so requires, at the least, that “transaction costs” be kept low. These are the costs involved in ensuring that the buyer gets the service he requires and that the supplier receives proper compensation. Where transaction costs are high, it is difficult to get markets to work. For example, lighthouses find it hard to charge passing ships for their service. Traditional economists had bundled these into a separate sort of product, known as “public goods,” where markets will fail and the goods must be purchased by the state. But as the Chicago economist Ronald Coase pointed out, the difference between the transaction costs involved in the provision of lighthouses and other goods is one of degree, not of quality.

We could allow the charlatan to compete with the ethical drug producer, and individual patients could all ask to review the clinical studies on competing drugs before deciding whether to follow their doctor’s prescription. But the cost for each of us to find and to assess those studies would be huge. An economist would say that the “transaction costs” would be high.4 It is less costly to pass legislation to require that when a drug maker makes claims about a drug’s benefits and safety, those claims have passed a certain level of scrutiny. Some, of course, argue that we should regulate less. As we write this, the British government has a significant program to lessen what it terms the “burden” of regulation.5 Often regulations can seem foolish and trivial.

He noted that the first lighthouses were privately provided by the operators of nearby ports, and concluded that by dividing the world into “private goods,” where markets would regulate prices effectively, and “public goods,” where they would not, economists had posed the wrong question.30 The issue was not about whether there should be state or private provision, but how best to manage transaction costs so that the buyer and seller could easily strike a good deal. For example, if you buy a pension or take out a loan from a bank, how can you know that it will provide you with what you want? How you can be sure that the seller will deliver? These are profound issues.31 If we knew the answers to them, it would give us some important clues about improving the productivity of financial services.


pages: 339 words: 109,331

The Clash of the Cultures by John C. Bogle

Alan Greenspan, asset allocation, buy and hold, collateralized debt obligation, commoditize, compensation consultant, corporate governance, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, estate planning, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Glass-Steagall Act, Hyman Minsky, income inequality, index fund, interest rate swap, invention of the wheel, John Bogle, junk bonds, low interest rates, market bubble, market clearing, military-industrial complex, money market fund, mortgage debt, new economy, Occupy movement, passive investing, Paul Samuelson, Paul Volcker talking about ATMs, Ponzi scheme, post-work, principal–agent problem, profit motive, proprietary trading, prudent man rule, random walk, rent-seeking, risk tolerance, risk-adjusted returns, Robert Shiller, seminal paper, shareholder value, short selling, South Sea Bubble, statistical arbitrage, stock buybacks, survivorship bias, The Wealth of Nations by Adam Smith, transaction costs, two and twenty, Vanguard fund, William of Occam, zero-sum game

State and local government officials, pressed by labor unions for higher wages and pensions, not only did the same, but failed to provide financial disclosure that revealed—or even hinted at—the dire long-term financial consequences that are already beginning to emerge. The Decline in Unit Transaction Costs It wasn’t just the rise in institutional ownership that fueled the rise of speculation. Speculation was also fueled by the dramatic decline in transaction costs. Simply put, trading stocks got a whole lot cheaper. Taxes virtually disappeared as a limiting factor in stock sales. The lion’s share of the assets managed by these now-dominant, powerful investment institutions were in accounts managed for tax-deferred investors such as pension plans and thrift plans, and in tax-exempt accounts such as endowment funds.

Contents Foreword Acknowledgments About This Book Chapter 1: The Clash of the Cultures The Rise of Speculation High-Frequency Trading Mission Aborted Futures and Derivatives The Wall Street Casino How Speculation Overwhelmed Investment The Decline in Unit Transaction Costs Hedge Fund Managers and Other Speculators We Can’t Say We Weren’t Warned The Wisdom of John Maynard Keynes Speculation Will Crowd Out Investment Fixing the Social Contract Compensation Issues Creating Value versus Subtracting Value Restoring Balance in Our Investment Sector Tax Policies and Financial Transactions Develop Limits on Leverage, Transparency for Derivatives, and Stricter Punishments for Financial Crimes The Rules of the Game The Goal: Stewardship Capitalism Chapter 2: The Double-Agency Society and the Happy Conspiracy The Development of the Double-Agency Society Examining the Conflict Agency Costs and Managerial Behavior The Ownership Revolution Changing Leadership Renters and Owners The Creation of Corporate Value Time Horizons and the Sources of Investment Return “Short-Termism” and Managed Earnings The Failure of the Gatekeepers Conclusion Chapter 3: The Silence of the Funds Why Mutual Funds Are Passive Participants in Corporate Governance The Picture Begins to Change Reporting Proxy Votes Mobilizing Institutional Investors The Rights and Responsibilities of Ownership Acting Like Owners “The Proof of the Pudding” Executive Compensation How Did It Happen?

The Big Picture In Chapter 1, I begin with the ideas that culminated in the “Clash of the Cultures,” an essay I wrote for the Journal of Portfolio Management in the spring of 2011, itself a product of my lecture at Wall Street’s Museum of American Finance just a few months earlier. The essay focused on how a culture of short-term speculation came to dominate a culture of long-term investment. One example: In recent years, annual trading in stocks—necessarily creating, by reason of the transaction costs involved, negative value for traders—averaged some $33 trillion. But capital formation—that is, directing fresh investment capital to its highest and best uses, such as new businesses, new technology, medical breakthroughs, and modern plant and equipment for existing business—averaged some $250 billion.


The Smartest Investment Book You'll Ever Read: The Simple, Stress-Free Way to Reach Your Investment Goals by Daniel R. Solin

Alan Greenspan, asset allocation, buy and hold, corporate governance, diversification, diversified portfolio, index fund, John Bogle, market fundamentalism, money market fund, Myron Scholes, PalmPilot, passive investing, prediction markets, prudent man rule, random walk, risk tolerance, risk-adjusted returns, risk/return, transaction costs, Vanguard fund, zero-sum game

Stated differently, Hyperactive Investors buy and sell stocks and/or mutual funds frequently. I ask you, what could be sillier than frequently buying and selling mutual funds? Mutual funds were originally conceived on the idea that small investors should not be buying and selling individual stocks frequently because transaction costs would eat up any potential profit. Instead, small investors should pool their money into a mutual fund, where a "professional" money manager buys and sells the stocks for them, in large blocks, 28 Your Broker or Advisor Is Keeping You from Being a Smart Investor with much lower commissions than an individual investor could get.

. • Many hyperactive brokers and advisors in this system have successfully avoided being held to a fiduciary standard because they know they cannot meet that standard in their relationships with investors. 38 Your Broker or Advisor Is Keeping You from Being a Smart Investor In short, being a Hyperactive Investor is a fool's errand. It is a zero-sum game (or worse, when you consider transaction costs), except from the perspective of the hyperactive brokers and advisors. They make out just fine. Chapter 11 Brokers Aren't on Your Side It [is} a fundamental dishonesty, a fundamental problem that cuts to the core of the lack of integrity on Wall Street. -Eliot L. Spitzer, attorney general of New York.

"lI] n 2000 and 2001. the least recommended stocks earned an average abnormal return of 13%. while the most highly recommended stocks earned average abnormal returns of -7%." Ouch! Even studies that demonstrate that there can be value in analyst recommendations note that, in order to take advantage of them. such heavy trading is required that the transaction costs incurred essentially offset the benefits obtained by relying on these recommendations. If this is true, it is difficult to understand what value these recommendations really have--even when they are correct. Finally. given the number of analyst recommendations. and the conflicting studies about their reliabililY. how do Hyperactive lnvesfOrs know which oncs have value and which ones don't?


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, bond market vigilante , book value, borderless world, Bretton Woods, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, capital controls, Carl Icahn, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, disinformation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, Glass-Steagall Act, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, junk bonds, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, long and variable lags, Louis Bachelier, low interest rates, market bubble, Mexican peso crisis / tequila crisis, Michael Milken, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, planned obsolescence, plutocrats, Post-Keynesian economics, price mechanism, price stability, prisoner's dilemma, profit maximization, proprietary trading, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Savings and loan crisis, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, stock buybacks, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

Conventional economics still treats the market as essentially self-regulating: the system, outside the firm, still works itself. But in reality there are substantial costs of time and money devoted to making the system work. Sellers must seek buyers, and buyers must weigh the competence and honesty of sellers. Transactions costs are far from trivial — as much as half U.S. GDP, according to one estimate cited by Coase (quoted in Williamson and Winter 1993, p. 63). Though Coase didn't make the point, the transaction cost argument for the existence of the firm can be applied to the provision of capital. Con- WALL STREET ventional theory assumes that entrepreneurs can raise capital for their projects effortlessly and costlessly, when in fact they cannot; even the most seasoned corporation has to pay commissions to the bankers underwriting its paper, and for less established and virginal ventures, capital can be expensive to raise, if it's available at all.

.), 259 Templeton, Sir John, 311 Thatcher, Margaret. 108. 311 Third Worid debt crisis, 110 political uses of, 294-295 development finance and capital flows, 110 stock markets, 15 inexplicability of returns, 125 TTiomas, Michael, 286 thrift campaigns, Keynes's denunciation of, 196; see also austerity thrifts (S&Ls), 81 crisis, 1980s, 86, 101 and early-1990s credit crunch, 158 Wall Street fleecing of, 180-181, 186 tobacco, 311 Tobias, Andrew, 81 Tobin, James, 143, 318-319; see also q ratio 371 WALL STREET Tompkins, Doug, 245 trade, merchandise, and currency trading, 42 traders vs. investors, 104-105 trading prowess, 32 trading strategies, 104-106 trading week, 127-135 transactions-cost economics, 248-251 financial applications, 249 transactions costs and efficient market theory, l64 estimate of, 249 international comparisons, 317 transactions taxes, 317-319 Treasury bonds. See bond markets Triad, 111 triumphalism, capitalist, 187 Trump, Donald, 100, 239 truth, Wall Street, 127 Turner, Philip, 108-110 Twentieth Century Fund, 144, 260, 293, 300, 319 uncertainty.

.^ the technique of economics Charles Plosser (1984) listed some of the basic assumptions on which modern financial theory is based: Most of the fundamental contributions to financial economics, including portfolio theory, the Modigliani-Miller Theorem, efficient markets, and virtually all of the asset-pricing models, have been developed under the assumption of a perfect market by which I mean (1) no transaction costs, (2) complete and costless information, and (3) competition. As Plosser noted, "theorists, especially of the Keynesian variety, are quick to assume the existence of arbitrary constraints and/or market failures," such as "institutional and/or wage-price rigidities, nonmarket clearing, exogenously determined long-term contracts, and the money illusion, to which you may add your favorites."


pages: 512 words: 162,977

New Market Wizards: Conversations With America's Top Traders by Jack D. Schwager

backtesting, beat the dealer, Benoit Mandelbrot, Berlin Wall, Black-Scholes formula, book value, butterfly effect, buy and hold, commodity trading advisor, computerized trading, currency risk, Edward Thorp, Elliott wave, fixed income, full employment, implied volatility, interest rate swap, Louis Bachelier, margin call, market clearing, market fundamentalism, Market Wizards by Jack D. Schwager, money market fund, paper trading, pattern recognition, placebo effect, prediction markets, proprietary trading, Ralph Nelson Elliott, random walk, Reminiscences of a Stock Operator, risk tolerance, risk/return, Saturday Night Live, Sharpe ratio, the map is not the territory, transaction costs, uptick rule, War on Poverty

One day somebody will be standing next to you in the pit, the next day they’re gone. It happens all the time. I also learned a lot about Monroe Trout / 153 transaction costs. I’m able to estimate transaction costs fairly accurately on various types of trades. This information is essential in evaluating the potential performance of any trading model I might develop. Give me a practical example. Let’s take bonds. The average person off the floor might assume that the transaction costs beyond commissions is at least equal to the bid/ask spread, which in the bond market is one tick [$31.25]. In reality, if you have a good broker, it’s only about half a tick, because if he’s patient, most of the time he can get filled at the bid.

The undisciplined use of leverage is the single most important reason why most traders lose money in the futures markets. In generals, futures prices are no more volatile than the underlying cash prices or, for that matter, many stocks. The high-risk reputation of futures is largely a consequence of the leverage factor. 5. Low transaction costs—Futures markets provide very low transaction costs. For example, it is far less expensive for a stock portfolio manager to reduce market exposure by selling the equivalent dollar amount of stock index futures contracts than by selling individual stocks. 6. Ease of offset—A futures position can be offset at any time during market hours, providing prices are not locked at limit-up or limit-down.

Is that, in fact, what you think? I think that the execution edge was probably the primary reason for my success as a floor trader. The major factor that whittles down small customer accounts is not that the small traders are so inevitably wrong, but simply that they can’t beat their own transaction costs. By transaction costs I mean not only commissions but also the skid in placing an order. As a pit trader, I was on the other side of that skid. As a former Ph.D. candidate in mathematics, did you miss the intellectual challenge in what you were doing? Initially, yes. But I eventually got into serious research on prices, and that was as tough a problem as anything I ever came across in academia.


pages: 246 words: 116

Tyler Cowen-Discover Your Inner Economist Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist-Plume (2008) by Unknown

"World Economic Forum" Davos, airport security, Andrei Shleifer, big-box store, British Empire, business cycle, cognitive dissonance, cross-subsidies, fundamental attribution error, gentrification, George Santayana, haute cuisine, low interest rates, market clearing, microcredit, money market fund, pattern recognition, Ralph Nader, retail therapy, Stephen Hawking, The Wealth of Nations by Adam Smith, trade route, Tragedy of the Commons, transaction costs, Tyler Cowen

Our culture is not very good at constraining or regulating vanity. MAR K E T S N EVE ReO V E R or offer all options, if only because of economic and legal constraints. Economists refer to "transaction costs" and "fixed costs." Most of these constraints are weakening over time, and thus we witness an intensifying proliferation of markets, including those cited above. That places a greater burden on our faculties of self-control. Transaction costs reflect the difficulty of bringing together buyers and sellers and getting them to agree on terms. For instance, I continue to look for an extra copy of the CD The Kampala Sound, a collection of top Ugandan tunes from the 1960s.

It has been estimated that all the synthetic economies put together, with about 10 million players, are in value terms about equal to the size of the economies of Bosnia and Herzegovina. Ten years ago, these games did not exist. The "fixed costs" idea-another limit on markets-is a little more difficult to define than transaction costs, but we all understand it intuitively through our Inner Economist. Fixed costs are the reason why we don't see many walk-in, quirky bohemian bookshops in rural Nebraska. There just aren't enough buyers to cover the basic expenses of operation. But like transaction costs, fixed costs have been falling rapidly, and for many of the same reasons. Even though more markets are possible than ever before, our legislators have decided that there should not be markets in everything.

For instance, I continue to look for an extra copy of the CD The Kampala Sound, a collection of top Ugandan tunes from the 1960s. The Web fails me, and even Original Music, the issuer, claims to have no back copies. But finding a seller may just be a matter of time. The Internet is causing transaction costs to fall to ever-lower levels. FedEx, fax machines, credit bureaus, eBay buyer ratings, and cheaper air travel all make it easier to cut deals and move the goods. Sometimes the parties to an exchange come together quite easily and through established channels. For $430 a square foot, a person can buy the air rights for an unfettered view of Central Park. That means no one can build to block the current view.


pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

3Com Palm IPO, Alan Greenspan, Albert Einstein, Alvin Roth, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, behavioural economics, Berlin Wall, Bernie Madoff, Black-Scholes formula, book value, business cycle, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, information asymmetry, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, Kenneth Arrow, Kickstarter, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, low interest rates, market clearing, Mason jar, mental accounting, meta-analysis, money market fund, More Guns, Less Crime, mortgage debt, Myron Scholes, Nash equilibrium, Nate Silver, New Journalism, nudge unit, PalmPilot, Paul Samuelson, payday loans, Ponzi scheme, Post-Keynesian economics, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, risk free rate, Robert Shiller, Robert Solow, Ronald Coase, Silicon Valley, South Sea Bubble, Stanford marshmallow experiment, statistical model, Steve Jobs, sunk-cost fallacy, Supply of New York City Cabdrivers, systematic bias, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Vilfredo Pareto, Walter Mischel, zero-sum game

His wife, Gertrude (also an economist), was in the crowd as well and asked a question about the mugs study. Couldn’t the low trading of the mugs be explained by transaction costs? I explained that the tokens experiment had ruled out this explanation—after all, the tokens had the same transaction costs as the mugs, and the tokens did trade as much as the theory predicted. She seemed satisfied, but then Lott jumped in to “help.” “Well,” he asked, “couldn’t we just call the endowment effect itself a transaction cost?” I was shocked by this comment; transaction costs are supposed to be the cost of doing a transaction—not the desire to do a transaction. If we are free to re-label preferences as “costs” at will so that behavior appears to be consistent with the standard theory, then the theory is both untestable and worthless.

A reader who claims that an alleged anomaly is actually the rational response to taxes should be willing to make some prediction based on that hypothesis; for example, the anomaly will not be observed in a country with no taxes, or for non-taxed agents, or in time periods before the relevant tax existed. Someone offering an explanation based on transaction costs might suggest an experimental test in which the transaction costs could be eliminated, and should be willing to predict that the effect will disappear in that environment. I wrote a column in every issue, that is, quarterly, for nearly four years. The articles were about ten to twelve published pages, short enough to make them a quick read, but long enough to give a fair amount of detail.

This ploy will make each bottle he drinks render considerable transaction utility. Another letter came from well-known University of Chicago accounting professor Roman Weil. Roman, who became a friend when I became his colleague at Chicago, comes as close to being an Econ as anyone I have encountered. “You left out the right answer. I feel the loss is $75 less the transaction costs of selling it (which are about $15). So, I think of the bottle as costing about $60. Since I do have plenty of wine in lifetime inventory, net realizable value is correct. If I did not have sufficient lifetime inventory, I’d use replacement cost, $75 plus commission, plus shipping—about $90.


How I Became a Quant: Insights From 25 of Wall Street's Elite by Richard R. Lindsey, Barry Schachter

Albert Einstein, algorithmic trading, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, asset allocation, asset-backed security, backtesting, bank run, banking crisis, Bear Stearns, Black-Scholes formula, Bob Litterman, Bonfire of the Vanities, book value, Bretton Woods, Brownian motion, business cycle, business process, butter production in bangladesh, buy and hold, buy low sell high, capital asset pricing model, centre right, collateralized debt obligation, commoditize, computerized markets, corporate governance, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency risk, discounted cash flows, disintermediation, diversification, Donald Knuth, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, full employment, George Akerlof, global macro, Gordon Gekko, hiring and firing, implied volatility, index fund, interest rate derivative, interest rate swap, Ivan Sutherland, John Bogle, John von Neumann, junk bonds, linear programming, Loma Prieta earthquake, Long Term Capital Management, machine readable, margin call, market friction, market microstructure, martingale, merger arbitrage, Michael Milken, Myron Scholes, Nick Leeson, P = NP, pattern recognition, Paul Samuelson, pensions crisis, performance metric, prediction markets, profit maximization, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Richard Feynman, Richard Stallman, risk free rate, risk-adjusted returns, risk/return, seminal paper, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, sorting algorithm, statistical arbitrage, statistical model, stem cell, Steven Levy, stochastic process, subscription business, systematic trading, technology bubble, The Great Moderation, the scientific method, too big to fail, trade route, transaction costs, transfer pricing, value at risk, volatility smile, Wiener process, yield curve, young professional

At each point in time, the stock portfolio has two costs associated with it: a risk cost and a market impact cost. The risk cost is the theoretical cost associated with holding a risky position that you do not want to be holding. The transaction cost is the cost associated with the market impact of the position’s changing through time. The total cost is the sum of the transaction costs and the risk cost appropriately adjusted by a risk aversion parameter, which controls for how urgently you want to reduce the risk. When you look at the problem this way, it naturally fits into the mathematical framework of the calculus of variations.

Furthermore, with an integrated process, actual portfolio results can be used to evaluate security selection and provide input to the research process. Insights can also be eroded by transaction costs, but we hold several advantages in the trading arena. First, because of our disentangling JWPR007-Lindsey 274 May 28, 2007 15:46 h ow i b e cam e a quant approach, we can profit from multiple inefficiencies for each security that we trade. Second, with our integrated systems, transaction costs are estimated and fed back to the portfolio construction process, helping to ensure that only economical trades are made. Third, we were early advocates and users of low-cost electronic trading venues.

Due to the fundamental law, quantitative active strategies tend to take many small bets as opposed to a few concentrated bets. The goal, based on this framework, is to deliver consistent performance. Beyond these basics, the book provided considerable guidance into how to build and test investment strategies, how to properly optimize portfolios, how to model and account for transactions costs, and how to analyze performance ex post. The book did not provide alpha ideas—as such, ideas only work if the market doesn’t already understand them. Active Portfolio Management has played an important role in legitimizing the science of investing. While the consistent investment performance of quantitative managers like Barclays Global Investors was critically important, the flow of institutional assets into quantitatively JWPR007-Lindsey 44 May 7, 2007 16:30 h ow i b e cam e a quant managed investments also required intellectual legitimacy, which Active Portfolio Management has helped provide.


Stock Market Wizards: Interviews With America's Top Stock Traders by Jack D. Schwager

Asian financial crisis, banking crisis, barriers to entry, Bear Stearns, beat the dealer, Black-Scholes formula, book value, commodity trading advisor, computer vision, East Village, Edward Thorp, financial engineering, financial independence, fixed income, implied volatility, index fund, Jeff Bezos, John Meriwether, John von Neumann, junk bonds, locking in a profit, Long Term Capital Management, managed futures, margin call, Market Wizards by Jack D. Schwager, money market fund, Myron Scholes, paper trading, passive investing, pattern recognition, proprietary trading, random walk, risk free rate, risk tolerance, risk-adjusted returns, short selling, short squeeze, Silicon Valley, statistical arbitrage, Teledyne, the scientific method, transaction costs, Y2K

Even if you were somehow able to find one of the remaining inefficiencies without going through an extremely expensive, long-term research effort of the sort we've conducted over the past eleven years, you'd probably find that one such inefficiency wouldn't be enough to cover your transaction costs. As a result, the current barriers to entry in this field are very high. A firm like ours that has identified a couple dozen market inefficiencies in a given set of financial instruments may be able to make money even in the presence of transaction costs. In contrast, a new DAVID SHAW entrant into the field who has identified only one or two market inefficiencies would typically have a much harder time doing so. What gives you that edge? It's a subtle effect. A single inefficiency may not be sufficient to overcome transaction costs. When multiple inefficiencies happen to coincide, however, they may provide an opportunity to trade with a statistically expected profit that exceeds the associated transaction costs.

When multiple inefficiencies happen to coincide, however, they may provide an opportunity to trade with a statistically expected profit that exceeds the associated transaction costs. Other things being equal, the more inefficiencies you can identify, the more trading opportunities you're likely to have. How could the use of multiple strategies, none of which independently yields a profit, be profitable? As a simple illustration, imagine that there are two strategies, each of which has an expected gain of $100 and a transaction cost of $110. Neither of these strategies could be applied profitably on its own. Further assume that the subset of trades in which both strategies provide signals in the same direction has an average profit of $180 and the same $110 transaction cost.

Further assume that the subset of trades in which both strategies provide signals in the same direction has an average profit of $180 and the same $110 transaction cost. Trading the subset could be highly profitable, even though each individual strategy is ineffective by itself. Of course, for Shaw's company, which trades scores of strategies in many related markets, the effect of strategy interdependencies is tremendously more complex. As the field matures, you need to be aware of more and more inefficiencies to identify trades, and it becomes increasingly harder for new entrants. When we started trading eleven years ago, you could have identified one or two inefficiencies and still beat transaction costs. That meant you could do a limited amount of research and begin trading profitably, which gave you a way to fund future research.


pages: 490 words: 117,629

Unconventional Success: A Fundamental Approach to Personal Investment by David F. Swensen

asset allocation, asset-backed security, Benchmark Capital, book value, buy and hold, capital controls, classic study, cognitive dissonance, corporate governance, deal flow, diversification, diversified portfolio, equity risk premium, financial engineering, fixed income, index fund, junk bonds, law of one price, Long Term Capital Management, low interest rates, market bubble, market clearing, market fundamentalism, money market fund, passive investing, Paul Samuelson, pez dispenser, price mechanism, profit maximization, profit motive, risk tolerance, risk-adjusted returns, Robert Shiller, Savings and loan crisis, shareholder value, Silicon Valley, Steve Ballmer, stocks for the long run, survivorship bias, technology bubble, the market place, transaction costs, Vanguard fund, yield curve, zero-sum game

If the stock performs poorly relative to the market, the overweighters lose and the underweighters win. Before considering transaction costs, active management appears to be a zero-sum game, a contest in which the winners’ gains exactly offset the losers’ losses. Unfortunately for active portfolio managers, investors incur significant costs in pursuit of market-beating strategies. Stock pickers pay commissions to trade and create market impact with buys and sells. Mutual-fund purchasers face the same market-related transactions costs in addition to management fees paid to advisory firms and distribution fees paid to brokerage firms.

In 2002, value-stock commissions amounted to 0.16 percent of assets, falling well below the equity fund average of 0.20 percent and the growth fund average of 0.28 percent. Market impact impedes value funds to a far lesser degree than growth funds. Value-fund traders accommodate the market, buying what others want to sell and selling what others want to buy. From a transactions-cost perspective, value trumps growth. Size matters in transactions costs. Small-cap growth funds lead the pack in commissions with a charge of 0.41 percent of assets, well above the large-cap growth commission level of 0.25 percent of assets. The same phenomenon exists in the value arena, with small-cap value posting commissions of 0.26 percent of assets relative to the large-cap value level of 0.13 percent.

Passive investors who select Russell style-based indices lose a substantial share of the transactions-cost benefits of index-fund investing. The shortcomings of the Russell indices as vehicles for investment translate into shortcomings as benchmarks for performance measurement. Year-to-year changes in composition cause active managers to face a changing benchmark. Quite unfairly from the manager’s perspective, the index changes composition without facing the real-world performance drag of transactions costs. Counterbalancing (and likely overwhelming) the lack of a fair cost accounting, reconstitution arbitrage activity pulls in the opposite direction.


pages: 425 words: 122,223

Capital Ideas: The Improbable Origins of Modern Wall Street by Peter L. Bernstein

Albert Einstein, asset allocation, backtesting, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, corporate raider, debt deflation, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, full employment, Glass-Steagall Act, Great Leap Forward, guns versus butter model, implied volatility, index arbitrage, index fund, interest rate swap, invisible hand, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Arrow, law of one price, linear programming, Louis Bachelier, mandelbrot fractal, martingale, means of production, Michael Milken, money market fund, Myron Scholes, new economy, New Journalism, Paul Samuelson, Performance of Mutual Funds in the Period, profit maximization, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk free rate, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, stochastic process, Thales and the olive presses, the market place, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, transfer pricing, zero-coupon bond, zero-sum game

Efforts to do so—and regulation has come in many different forms—impair the efficiency with which financial assets perform the broad social function of serving as a store of value. Liquidity, low transaction costs, and the freedom of investors to act on information are essential to that function. ••• If individual investors had dominated the financial markets during the 1970s and 1980s, the revolution we have been describing would in all likelihood never have taken place; the ingenious journal articles would have stimulated more ingenious journal articles, but little change would have occurred on Wall Street. In any case, tax constraints and high transaction costs would have prevented individual investors from transforming their portfolios to accord with the new theories.

Although the owners of a company that borrows money are in a riskier position than the owners of a debt-free company, the value of the company’s bonds and stock, taken as a totality, will still depend on the company’s overall expected earning power and the basic risks the company faces. That is the essence of Williams’s law of the Conservation of Investment Value. Under these conditions, and ignoring just for the moment transactions costs, taxes, and the possible lack of sufficient information, the market will place the same valuation on all companies with equal earning power and equal risk. No other outcome is possible when the market is functioning as Samuelson theorized that it should and as research into the efficiency of capital markets has demonstrated that it does.

If the only thing that matters is the fundamental earning power of the corporations’s underlying assets, why are all those corporate finance officers and their investment bankers spending so much time fine-tuning and modulating the firm’s financial structure? MM theory was admittedly an abstraction when it was originally presented. Like all economists, Modigliani and Miller tried to run their experiments with clean test tubes. In their antiseptic world there are no taxes, no transaction costs, information is freely available to everyone, growth is treated in simplified fashion, and corporations make investment decisions first and then worry about how to finance them. No one—least of all Modigliani and Miller—would claim that the real world looks like this. But by starting with immaculate laboratory equipment, they can test their hypotheses, analyze the consequences of their assumptions, and determine how closely their theory accords with the real world.


pages: 257 words: 13,443

Statistical Arbitrage: Algorithmic Trading Insights and Techniques by Andrew Pole

algorithmic trading, Benoit Mandelbrot, constrained optimization, Dava Sobel, deal flow, financial engineering, George Santayana, Long Term Capital Management, Louis Pasteur, low interest rates, mandelbrot fractal, market clearing, market fundamentalism, merger arbitrage, pattern recognition, price discrimination, profit maximization, proprietary trading, quantitative trading / quantitative finance, risk tolerance, Sharpe ratio, statistical arbitrage, statistical model, stochastic volatility, systematic trading, transaction costs

While the technicalities are important for understanding and analysis, the practical value for application in the late 1980s and early 1990s was minimal: Reversion was evident on such a large scale and over such a wide range of stocks that it was impossible not to make good returns except by deliberate bad practice! That rich environment has not existed for several years. As volatility in some industries declined—the utilities sector is a splendid example (Gatev, et al.)—raw standard deviation rules were rendered inadequate as the expected rate of return on a trade shrank below transaction costs. Implementing a minimum rate of return lower bound on trades solved that, and in later years provided a valuable risk management tool. 2.3 POPCORN PROCESS The trading rules exhibited thus far make the strong statement that a spread will systematically vary from substantially above the mean to substantially below the mean and so forth.

This net gain can be realized if one can make a sufficient number of bets. The latter caveat is crucial because averages are reliable indicators of performance only in the aggregate. Guaranteeing that 2% of one’s bets is the net outcome of a strategy is not sufficient, by itself, to guarantee making a profit: Those bets must cover transaction costs. And remember, it is not the 1 The situation is actually more complicated in a manner that is advantageous to a fund manager. Symmetry on gains and losses makes for a simple presentation of the point that a small bias can drive a successful strategy; one can readily live with relative odds that would cause a physician nightmares.

A few periods of glee before inevitable catastrophe supplanted with prolonged, ulcer inducing negativity, despondency, despair, and (if you can stand the wait) possible vindication! It is still an uncertain game. Just different rules. There are many kinds of randomness. Structural Models 61 average transaction cost that must be covered by the net gain. It is the much larger total cost of all bets divided by the small percentage of net gain bets that must be covered. For example, if my model wins 51 percent of the time, then the net gain is 51 − 49 = 2 percent of bets. Thus, out of 100 bets (on average) 51 will be winners and 49 will be losers.


pages: 335 words: 94,657

The Bogleheads' Guide to Investing by Taylor Larimore, Michael Leboeuf, Mel Lindauer

asset allocation, behavioural economics, book value, buy and hold, buy low sell high, corporate governance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, endowment effect, estate planning, financial engineering, financial independence, financial innovation, high net worth, index fund, John Bogle, junk bonds, late fees, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, margin call, market bubble, mental accounting, money market fund, passive investing, Paul Samuelson, random walk, risk tolerance, risk/return, Sharpe ratio, statistical model, stocks for the long run, survivorship bias, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

FEES NOT COVERED BY THE PROSPECTUS Now we come to the costs of mutual fund ownership we seldom find in the prospectus. Hidden Transaction Costs A mutual fund incurs a cost every time it buys or sells a security. Transaction costs, caused by fund turnover, include brokerage commissions, bid-offer spreads, and market impact costs. Together, they may easily exceed the expense ratio and other costs disclosed in the prospectus. Brokerage Commissions In a study titled, "Portfolio Transaction Costs at U.S. Equity Mutual Funds," researchers Jason Karceski, Miles Livingston, and Edward O'Neal found that the average brokerage commission cost for mutual fund managers was 0.38 percent of fund assets.

We are talking about advisory fees, brokerage commissions, customer fees, legal fees, marketing expenditures, sales loads, securities processing expenses, and transaction costs. Not included in the $300 billion figure is the cost of taxes. We will discuss taxes in Chapters 10 and 11. FEES COVERED BY THE PROSPECTUS It's important that we understand the different mutual fund fees and expenses that are listed in every mutual fund prospectus. Later, we will investigate mutual fund transaction costs that are little known and seldom reported. Stephen Schutt, senior editor of TheStreet.com, writes: "Death by a thousand fees isn't going to show up in a quarterly fund statement."

Richard Ferri, author of Protecting Your Wealth in Good Times and Bad: "When you are finished choosing a bond index fund, a total U.S. stock market index fund, and a broad international index fund, you will have a very simple, yet complete portfolio." Walter R. Good and Roy W. Hermansen, authors of Index Your Way to Investment Success: "Index funds save on management and marketing expenses, reduce transaction costs, defer capital gain, and control risk-and in the process, beat the vast majority of actively managed mutual funds!" Arthur Levitt, former chairman of the Securities Exchange Commission and author of Take on the Street: "The fund industry's dirty little secret: Most actively managed funds never do as well as their benchmark."


pages: 345 words: 87,745

The Power of Passive Investing: More Wealth With Less Work by Richard A. Ferri

Alan Greenspan, asset allocation, backtesting, Benchmark Capital, Bernie Madoff, book value, buy and hold, capital asset pricing model, cognitive dissonance, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, endowment effect, estate planning, Eugene Fama: efficient market hypothesis, fixed income, implied volatility, index fund, intangible asset, John Bogle, junk bonds, Long Term Capital Management, money market fund, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, Ponzi scheme, prediction markets, proprietary trading, prudent man rule, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, survivorship bias, Tax Reform Act of 1986, too big to fail, transaction costs, Vanguard fund, yield curve, zero-sum game

The following is Carhart’s conclusion: The evidence of the article suggests three important rules-of-thumb for wealth-maximizing mutual fund investors: (1) Avoid funds with persistently poor performance; (2) funds with high returns last year have higher-than-average expected returns next year, but not in the years thereafter; and (3) the investment costs of expense ratios, transaction costs, and load fees all have a direct, negative impact on performance. While the popular press will no doubt continue to glamorize the best-performance mutual fund managers, the mundane explanations of strategy and investment costs account for almost all of the important predictability in mutual fund returns. One caveat of Carhart’s study is transaction costs. His study was conducted with no penalty for the additional costs from sales loads or brokerage commissions. In addition, Carhart made no exception for funds closed to new investment.

Sharpe found sufficient evidence that all three ratios had some predictability for selecting funds relative to each other, although no one method isolated funds that consistently outperformed the market as measured by the DJIA (Sharpe doesn’t disclose why he chose this limited market indicator when the more comprehensive S&P 500 existed). Sharpe acknowledged that the DJIA had no transaction cost or administrative expenses; however, he also noted that the fund returns were calculated without deducting their sales commission, which for most was 8.5 percent. Here are the results: The market as measured by the DJIA was less than 11 active funds and better than the remaining 23 funds.

Since it is defined as the 1001st through 3000th stocks ranked by market cap, and since it is the most widely used small-cap index, savvy traders can easily predict which stocks will be added and dropped from the index, bidding these stocks up or down before June 30, adversely impacting the indexers who must buy or sell these stocks after June 30, lest they incur increased tracking error.13 There has been significant analysis conducted on the reconstitution of the Russell 2000 index and the tough issues that index managers face.b Tracking the Russell 2000 is “the equivalent of an Army obstacle course, complete with water hazards, balance beams and hand-to-hand combat” according to one New York Times journalist.14 Vanguard fund managers were able to deftly outperform the Russell 2000 index because of the way they traded around the reconstitution period as mutual fund industry insider Gary Gastineau explains: For the ten years ending in 2001, the Vanguard Small Cap Index Fund beat its Russell 2000 benchmark index by an average of 76 basis points or 0.76% per year. . . . The outperformance that Vanguard achieved came largely from recapturing part of these embedded transaction costs. It did this by making annual reconstitution transactions at a time other than the market close on the last trading day of June when Russell index rebalancing is formally implemented.15 Kudos to Vanguard for smart trading practices that reduced some costs, but this didn’t solve the big issue of the Russell index.


pages: 219 words: 15,438

The Essays of Warren Buffett: Lessons for Corporate America by Warren E. Buffett, Lawrence A. Cunningham

book value, business logic, buy and hold, compensation consultant, compound rate of return, corporate governance, Dissolution of the Soviet Union, diversified portfolio, dividend-yielding stocks, fixed income, George Santayana, Henry Singleton, index fund, intangible asset, invisible hand, junk bonds, large denomination, low cost airline, Michael Milken, oil shock, passive investing, price stability, Ronald Reagan, stock buybacks, Tax Reform Act of 1986, Teledyne, the market place, transaction costs, Yogi Berra, zero-coupon bond

But we do believe that the listing will reduce transaction costs for Berkshire's shareholders-and that is important. Though we want to attract shareholders who will stay around for a long time, we also want to minimize the costs incurred by shareholders when they enter or exit. In the long run, the aggregate pre-tax rewards to our owners will equal the business gains achieved by the company less the transaction costs imposed by the marketplace-that is, commissions charged by brokers plus the net realized spreads of 1997] THE ESSAYS OF WARREN BUFFETT 121 market-makers. Overall, we believe these transaction costs will be reduced materially by a NYSE listing. . . .

Cunningham All Rights Reserved Includes Previously Copyrighted Material Reprinted with Permission TABLE OF CONTENTS INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 PROLOGUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 I. CORPORATE GOVERNANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . A. B. C. D. E. II. I. COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. A. B. C. D. E. F. IV. The Bane of Trading: Transaction Costs..... . . . . .. Attracting the Right Sort of Investor. . . . . . . . . . . . . .. Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Stock Splits and Trading Activity Shareholder Strategies Berkshire's Recapitalization MERGERS AND ACQUISITIONS. . . . . . . . . . . . . . . . . . . . . . . ..

Long-term investment success depends not on studying betas and maintaining a diversified portfolio, but on recognizing that as an investor, one is the owner of a business. Reconfiguring a portfolio by buying and selling stocks to accommodate the desired beta-risk profile defeats long-term investment success. Such "flitting from flower to flower" imposes huge transaction costs in the forms of spreads, fees and commissions, not to mention taxes. Buffett jokes that calling someone who trades actively in the market an investor "is like calling someone who repeatedly engages in one-night stands a romantic." Investment knitting turns modern finance theory's folk wisdom on its head: instead of "don't put all your eggs in one basket," we get Mark Twain's advice from Pudd'nhead Wilson: "Put all your eggs in one basket-and watch that basket." 1997] THE ESSAYS OF WARREN BUFFETT 15 Buffett learned the art of investing from Ben Graham as a graduate student at Columbia Business School in the 1950s and later working at Graham-Newman.


No Slack: The Financial Lives of Low-Income Americans by Michael S. Barr

active measures, asset allocation, Bayesian statistics, behavioural economics, business cycle, Cass Sunstein, cognitive load, conceptual framework, Daniel Kahneman / Amos Tversky, financial exclusion, financial innovation, Home mortgage interest deduction, income inequality, information asymmetry, it's over 9,000, labor-force participation, late fees, London Interbank Offered Rate, loss aversion, low interest rates, machine readable, market friction, mental accounting, Milgram experiment, mobile money, money market fund, mortgage debt, mortgage tax deduction, New Urbanism, p-value, payday loans, race to the bottom, regulatory arbitrage, Richard Thaler, risk tolerance, Robert Shiller, search costs, subprime mortgage crisis, the payments system, transaction costs, unbanked and underbanked, underbanked

Unfortunately, families often have only limited access to the sound financial products that could help them generate financial slack. In fact, higher-cost financial services can reduce the slack available to households. For example, many lowwage individuals see their take-home pay reduced by the high transaction costs they face when using check-cashing services to obtain their income. Moreover, inadequate access to financial services—such as direct deposit to a bank account or its functional equivalent—can contribute to taxpayers’ using refund anticipation loans and expensive check-cashing services that diminish the value of the earned-income tax credit.

High fees for tax preparation and filing, check cashing, and refund anticipation loans can reduce the value of earned-income tax credits by over 10 percent (Barr 2004; Berube and others 2002). Bringing low- and moderate-income families into the banking system, if key changes were made to financial products, could help reduce these high transaction costs, substantially increasing the purchasing power of these families. Second, without a bank account, low-income households face key barriers to saving. Promoting low-income household savings is critical to reducing reliance on high-cost, short-term credit; lowering the risk of financial dislocation resulting from job loss or injury; and improving prospects for longer-term asset building through home ownership, skills development, and education.

Thus, this survey can provide a more nuanced and textured understanding of LMI households than can be gained solely with aggregated national data (see, for example, FDIC 2009). The results presented in chapter 2 suggest that existing financial services, credit, and payment systems impose high transaction costs on lower-income households, increase their costs of credit, and reduce their opportunities to save. Like their higher-income counterparts, lower-income households regularly conduct financial transactions, but the financial services system is not designed to serve them well. About 30 percent of the adults surveyed were unbanked.


pages: 494 words: 142,285

The Future of Ideas: The Fate of the Commons in a Connected World by Lawrence Lessig

AltaVista, Andy Kessler, AOL-Time Warner, barriers to entry, Bill Atkinson, business process, Cass Sunstein, commoditize, computer age, creative destruction, dark matter, decentralized internet, Dennis Ritchie, disintermediation, disruptive innovation, Donald Davies, Erik Brynjolfsson, Free Software Foundation, Garrett Hardin, George Gilder, Hacker Ethic, Hedy Lamarr / George Antheil, history of Unix, Howard Rheingold, Hush-A-Phone, HyperCard, hypertext link, Innovator's Dilemma, invention of hypertext, inventory management, invisible hand, Jean Tirole, Jeff Bezos, John Gilmore, John Perry Barlow, Joseph Schumpeter, Ken Thompson, Kenneth Arrow, Larry Wall, Leonard Kleinrock, linked data, Marc Andreessen, Menlo Park, Mitch Kapor, Network effects, new economy, OSI model, packet switching, peer-to-peer, peer-to-peer model, price mechanism, profit maximization, RAND corporation, rent control, rent-seeking, RFC: Request For Comment, Richard Stallman, Richard Thaler, Robert Bork, Ronald Coase, Search for Extraterrestrial Intelligence, SETI@home, Silicon Valley, smart grid, software patent, spectrum auction, Steve Crocker, Steven Levy, Stewart Brand, systematic bias, Ted Nelson, Telecommunications Act of 1996, the Cathedral and the Bazaar, The Chicago School, tragedy of the anticommons, Tragedy of the Commons, transaction costs, vertical integration, Yochai Benkler, zero-sum game

First advanced by Edward Kitch, the prospect theory says there is good reason to hand out broad, strong patents because then others will know with whom they should negotiate if they want to build upon a certain innovation.91 This in turn will create incentives for people to invent, and as information is a by-product of invention, it will induce “progress” in the “useful arts.”92 The problem with this theory, however, is its very strong assumption (in some contexts, at least) that the parties will know enough to properly license the initial foundational invention, or that other issues won't muck up the incentives to license.93 Both limitations on the ability to license are what economists would call transaction costs.94 The transaction cost from ignorance is similar to the insight the founders of the Net had when they embraced an end-to-end architecture: rather than architecting a system of control from which changes could be negotiated, they were driven by humility to a system of noncontrol to induce many others to experiment with ways of using the technology that the experts wouldn't get.95 The transaction cost affecting incentives to license is in part a problem of ignorance, but in part the problem of strategic behavior that we've seen in many different contexts.

But because this research plan would not be protectable as intellectual property, the competitor might fear that the patent holder would appropriate the information for its own use, with no compensating benefit to the competitor. Even if these difficulties did not lead to bargaining breakdown, they would create transaction costs that reduced the cooperative surplus to be gained from a license and would thus deter at least some inventors and improvers from negotiating in the first instance. Transaction costs would be compounded by the likelihood that the would-be follow-on improver would likely have to negotiate licenses not simply with one owner of basic research but with many such owners. For example, in order to develop a commercial treatment for a genetic disease (particularly a polygenic disease), it may be necessary to have access to a large number of ESTs and SNPs, each conceivably patented by a different entity.

Scarcity is the nature of all valuable resources; but not all valuable resources are allocated by the government—at least, not in a free society. 14 Rather than a regime of licensing, Coase argued, spectrum should be allocated into property rights and sold to the highest bidder.15 A market for spectrum would better and more efficiently allocate spectrum than a system of government-granted licenses. History has been kinder to Coase than to the regulators of the early FCC. In 1991, he won a Nobel Prize for his work on transaction cost economics. And long before the Nobel committee recognized his genius, many policy makers in the United States came to believe that Coase's system was better than the FCC's. A market in spectrum would more efficiently allocate spectrum than any system controlled by the government. This is the debate I described at the start of the book.


pages: 582 words: 160,693

The Sovereign Individual: How to Survive and Thrive During the Collapse of the Welfare State by James Dale Davidson, William Rees-Mogg

affirmative action, agricultural Revolution, Alan Greenspan, Alvin Toffler, bank run, barriers to entry, Berlin Wall, borderless world, British Empire, California gold rush, classic study, clean water, colonial rule, Columbine, compound rate of return, creative destruction, Danny Hillis, debt deflation, ending welfare as we know it, epigenetics, Fall of the Berlin Wall, falling living standards, feminist movement, financial independence, Francis Fukuyama: the end of history, full employment, George Gilder, Hernando de Soto, illegal immigration, income inequality, independent contractor, informal economy, information retrieval, Isaac Newton, John Perry Barlow, Kevin Kelly, market clearing, Martin Wolf, Menlo Park, money: store of value / unit of account / medium of exchange, new economy, New Urbanism, Norman Macrae, offshore financial centre, Parkinson's law, pattern recognition, phenotype, price mechanism, profit maximization, rent-seeking, reserve currency, road to serfdom, Ronald Coase, Sam Peltzman, school vouchers, seigniorage, Silicon Valley, spice trade, statistical model, telepresence, The Nature of the Firm, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, trade route, transaction costs, Turing machine, union organizing, very high income, Vilfredo Pareto

Nobel Prize-winning economist Ronald Coase helped launch a new direction in economics by asking some of these important questions. The answers he helped to frame hint at the revolutionary consequences of information technology for the structure of business. Coase argued that firms were an efficient way to overcome information deficits and high transaction costs.26 Information and Transaction Costs To see why, consider the obstacles you would have faced in trying to operate an industrial-era assembly line without a single firm to coordinate its activities. In principle, an automobile could have been produced without production being centralized under the oversight of a single firm.

As Putterman and Kroszner observe, this tends to imply that organizations like firms have no inherent "economic raison d'etre."27 In this sense, firms are mainly artifacts of information and transaction costs, which information technologies tend to reduce drastically. Therefore, the Information Age will tend to be the age of independent contractors without "jobs" with long-lasting "firms." As technology lowers transaction costs, the very process that will enable individuals to escape from domination by politicians will also prevent "rule by corporations." Corporations will compete with "virtual corporations" from across the globe to a degree that will disturb and threaten all but a few.

Yet its consequences will not be imaginary, but real. To a far greater extent than many now understand, the instantaneous sharing of information will be like a solvent dissolving large institutions. It will not only alter the logic of violence, as we have already explored; it will radically alter information and transaction costs that determine how businesses organize and the way the economy functions. We expect microprocessing to change the economic organization of the world. 144 "It is today possible, to a greater extent than at any time in the worlds' history, for a company to locate anywhere, to use resources from anywhere to produce a product that can be sold anywhere."


pages: 482 words: 121,672

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition) by Burton G. Malkiel

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, beat the dealer, Bernie Madoff, bitcoin, book value, butter production in bangladesh, buttonwood tree, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Detroit bankruptcy, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, equity risk premium, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial engineering, financial innovation, financial repression, fixed income, framing effect, George Santayana, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Japanese asset price bubble, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, margin call, market bubble, Mary Meeker, money market fund, mortgage tax deduction, new economy, Own Your Own Home, PalmPilot, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Salesforce, short selling, Silicon Valley, South Sea Bubble, stock buybacks, stocks for the long run, sugar pill, survivorship bias, Teledyne, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond, zero-sum game

If you ask me what this means, I cannot tell you, but I think the technician probably had the following in mind: “If the market does not go up or go down, it will remain unchanged.” Even the weather forecaster can do better than that. Obviously, I’m biased. This is not only a personal bias but a professional one as well. Technical analysis is anathema to much of the academic world. We love to pick on it. We have two main reasons: (1) after paying transactions costs and taxes, the method does not do better than a buy-and-hold strategy; and (2) it’s easy to pick on. And while it may seem a bit unfair, just remember that it’s your money we’re trying to save. Although the computer perhaps enhanced the standing of the technician for a time, and while charting services are widely available on the Internet, technology has ultimately proved to be the technician’s undoing.

While the market does exhibit some momentum from time to time, it does not occur dependably, and there is not enough persistence in stock prices to make trend-following strategies consistently profitable. Although there is some short-term momentum in the stock market, as will be described more fully in chapter 11, any investor who pays transactions costs and taxes cannot benefit from it. Economists have also examined the technician’s thesis that there are often sequences of price changes in the same direction over several days (or several weeks or months). Stocks are likened to fullbacks who, once having gained some momentum, can be expected to carry on for a long gain.

Again, the investor following such a system is likely to be disappointed in the results. The buy and sell signals generated by the strategy contain no information useful for predicting future price movements. As with all technical strategies, however, the investor is obliged to do a great deal of in-and-out trading, and thus his transactions costs and taxes are far in excess of those necessitated in a buy-and-hold strategy. After accounting for these costs, the investor does worse than he would by simply buying and holding a diversified group of stocks. Reading Chart Patterns Perhaps some of the more complicated chart patterns, such as those described in the preceding chapter, are able to reveal the future course of stock prices.


pages: 290 words: 76,216

What's Wrong With Economics: A Primer for the Perplexed by Robert Skidelsky

additive manufacturing, agricultural Revolution, behavioural economics, Black Swan, Bretton Woods, business cycle, carbon tax, Cass Sunstein, central bank independence, cognitive bias, conceptual framework, Corn Laws, corporate social responsibility, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, degrowth, disruptive innovation, Donald Trump, Dr. Strangelove, full employment, George Akerlof, George Santayana, global supply chain, global village, Gunnar Myrdal, happiness index / gross national happiness, hindsight bias, Hyman Minsky, income inequality, index fund, inflation targeting, information asymmetry, Internet Archive, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labour market flexibility, loss aversion, Mahbub ul Haq, Mark Zuckerberg, market clearing, market friction, market fundamentalism, Martin Wolf, means of production, Modern Monetary Theory, moral hazard, paradox of thrift, Pareto efficiency, Paul Samuelson, Philip Mirowski, Phillips curve, precariat, price anchoring, principal–agent problem, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, shareholder value, Silicon Valley, Simon Kuznets, sunk-cost fallacy, survivorship bias, technoutopianism, The Chicago School, The Market for Lemons, The Nature of the Firm, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, Tragedy of the Commons, transaction costs, transfer pricing, Vilfredo Pareto, Washington Consensus, Wolfgang Streeck, zero-sum game

Coase’s answer is that they exist to reduce the costs to individuals of doing business separately. His argument is that people organise production in firms when the transaction costs of coordinating production through market exchange are greater than internalising them within the firm. The costs of transacting in markets include discovering relevant prices, negotiating and writing enforceable contracts, and haggling about the division of the surplus.4 What gives rise to transaction costs is incomplete information about relevant prices and the costs of monitoring and enforcing good performance. It is because production has a time-element that production transactions are not typically like those which take place in a fruit and vegetable market, where both buyer and seller know the prices of all the products.

Rather than presupposing the direction of causality and performing a revisionist exercise to provide a semi-coherent interpretation of apparently disconfirming facts, such as Becker and Murphy’s theory of rational addiction, ontological enquiry should be a normal part of economic practice.21 That is, in attempting to answer any given problem, economists should think seriously about the structures and elements involved, and whether or when reduction to a lower level adds or subtracts from explanatory power. 8 INSTITUTIONAL ECONOMICS The nature of the firm is not simply a minimizer of transaction costs, but a kind of protective enclave from the potentially volatile and sometimes destructive, ravaging speculation of a competitive market. Geoffrey Hodgson, Economics and Institutions Anglo-American thinkers of the Enlightenment had an intense suspicion of institutions, which they saw as impediments to the flowering of individual liberty.

So the assumption of profit maximisation can be retained: in setting up firms owners (shareholders) cede technical authority to managers to maximise profits on their behalf. Though somewhat of an intruder on the map of individual maximisation, the firm fulfils the neoclassical criterion of rational choice. The economic historian Douglass North (1920–2015) received a Nobel prize for using the theory of transaction costs to explain the institutional innovations which led to economic growth in the eighteenth century. The institution ‘is an arrangement between economic units which defines and specifies the ways by which they can cooperate and compete’.5 Economic institutions, like products, are innovated when the gains from the innovation exceed the costs of innovating.


pages: 491 words: 77,650

Humans as a Service: The Promise and Perils of Work in the Gig Economy by Jeremias Prassl

3D printing, Affordable Care Act / Obamacare, Airbnb, algorithmic management, Amazon Mechanical Turk, Andrei Shleifer, asset light, autonomous vehicles, barriers to entry, call centre, cashless society, Clayton Christensen, collaborative consumption, collaborative economy, collective bargaining, creative destruction, crowdsourcing, death from overwork, Didi Chuxing, disruptive innovation, Donald Trump, driverless car, Erik Brynjolfsson, full employment, future of work, George Akerlof, gig economy, global supply chain, Greyball, hiring and firing, income inequality, independent contractor, information asymmetry, invisible hand, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Kevin Roose, Kickstarter, low skilled workers, Lyft, machine readable, Mahatma Gandhi, Mark Zuckerberg, market friction, means of production, moral hazard, Network effects, new economy, obamacare, pattern recognition, platform as a service, Productivity paradox, race to the bottom, regulatory arbitrage, remote working, ride hailing / ride sharing, Robert Gordon, Ronald Coase, Rosa Parks, scientific management, Second Machine Age, secular stagnation, self-driving car, shareholder value, sharing economy, Silicon Valley, Silicon Valley billionaire, Silicon Valley ideology, Simon Singh, software as a service, Steve Jobs, TaskRabbit, TechCrunch disrupt, The Future of Employment, The Market for Lemons, The Nature of the Firm, The Rise and Fall of American Growth, transaction costs, transportation-network company, Travis Kalanick, two tier labour market, two-sided market, Uber and Lyft, Uber for X, uber lyft, union organizing, warehouse automation, work culture , working-age population

Regulatory Arbitrage Professor Julia Tomassetti is highly critical of the suggestion that platforms’ primary value creation is achieved through better matching and lower transaction cost: ‘What happens when we actually subject the Uber narra- tive to scrutiny under Coasian theory? It does not hold up. From the Coasian perspective, Uber does not write the epitaph of the firm.’32 Platforms, she argues, speak the language of markets—but they operate like old- fashioned employers, relying on technology to exercise tight control over their workforce. Tomassetti doesn’t deny that gig-economy platforms have dramatically lowered transaction cost in comparison with established competitors. Lowering transaction cost alone, however, cannot account for platforms’ phenomenal valuations and claims to disruptive innovation: there is, despite all claims to the contrary, little that is genuinely novel as far as platforms’ production pro- cesses are concerned.

The platform economy, breathless futurologists assure us, is the future of work: with ‘freelancing [as] the new normal’,12 it will fundamentally reshape the organization of businesses, the economy, and our working lives. Not everyone agrees. Frank Kalman, editor of Talent Economy magazine, is ‘not buying it’.13 The gig economy, he argues, represents a tiny fraction of our labour markets, goes against the grain of corporate work culture, and imposes a host of hidden coordination and transaction costs on traditional businesses. In short, ‘gig work is likely to remain a small part of the overall labor force, both from an economic perspective and a cultural, performance and man- agement perspective’.14 How big, then, is the gig economy? Depending on where we look, we are faced with wildly different numbers—especially when trying to deter- mine what proportion of the overall workforce are engaged in the gig economy.15 Very little, some argue: economists Lawrence Katz of Harvard University and Alan Krueger of Princeton University, for example, esti- mated in 2016 that a mere 0.5 per cent of the US workforce worked for on-demand platforms—that is, no more than 800,000 workers.16 US Senator Mark Warner, meanwhile, cites a much larger (if hardly credible) range of estimates: ‘I've seen it range from 3 million to 53 million.’17 The truth lies somewhere in between those extremes.

In an open-market transaction with an independent entrepreneur, consumers would have to spend significant amounts of time and effort to find out information about the service provider’s background and experi- ence, control the quality of the work, and negotiate prices. This is the real value of digital work intermediation: gig-economy operators also provide information about how reliable a worker is, take care of invoicing and pay- ments, and provide a (digital) infrastructure within which the entire exchange can take place. With transaction cost so drastically reduced, the narrative continues, the traditional firm as described by Ronald Coase becomes obsolete; instead, we move into a hybrid world between markets and hierarchies. According to Coase’s theory of the firm, companies exist because the control exercised by an entrepreneur-coordinator over her workforce and other factors of pro- duction is much cheaper than the cost involved in going out to the market and haggling over each individual transaction.31 On the other hand, once an app has taken all of the hassle out of such transactions, Coase’s entrepreneur will no longer need to strike long-term bargains with workers, let alone invest in assets; she can replace her workforce with an external crowd, ready to complete individual tasks as and when required.


pages: 287 words: 62,824

Just Keep Buying: Proven Ways to Save Money and Build Your Wealth by Nick Maggiulli

Airbnb, asset allocation, Big Tech, bitcoin, buy and hold, COVID-19, crowdsourcing, cryptocurrency, data science, diversification, diversified portfolio, financial independence, Hans Rosling, index fund, it's over 9,000, Jeff Bezos, Jeff Seder, lifestyle creep, mass affluent, mortgage debt, oil shock, payday loans, phenotype, price anchoring, risk-adjusted returns, Robert Shiller, Sam Altman, side hustle, side project, stocks for the long run, The 4% rule, time value of money, transaction costs, very high income, William Bengen, yield curve

If you can’t meet all of these conditions, then you should probably be renting. Let me explain. Given that the transaction costs of buying a home are 2%–11% of the home’s value, you will want to ensure that you stay in the home long enough to make up for these costs. For practical purposes let’s choose the middle of this range and assume that the transaction cost of buying a home is 6%. Using Shiller’s estimate for real U.S. housing returns of 0.6% per year, this means it would take ten years for the typical U.S. home to appreciate enough to offset this 6% transaction cost. On a similar note, if you plan to stay in an area for ten years but your personal or professional life isn’t stable, then buying a home may not be the right choice.

In full, the one-time costs of buying a home can range anywhere from 5.5%–31% of the value of the home depending on the down payment, closing costs, and real estate agents employed. If we ignore the down payment, the transaction cost associated with buying a home ranges from 2%–11% of the home’s value. This is why buying a home usually only makes sense for people who will stay in it for the long term. The transaction costs alone can eat away any expected price appreciation if you buy and sell too often. In addition to the one-time costs of buying a home, the ongoing costs can be significant as well. After paying for the home itself you will also need to pay property taxes, maintenance, and insurance.

Think of it like a snowball rolling down a hill. Just keep buying and watch that ball grow. In fact, Just Keep Buying is easier to follow today than at any point throughout history. Why is that? Because if you had implemented this advice just two decades ago, you would have racked up some hefty fees and transaction costs along the way. At $8 per trade in the 1990s, Just Keep Buying would’ve gotten very expensive, very fast. But things have since changed. With free trading on many major investment platforms, the rise of fractional share ownership, and the availability of cheap diversification, Just Keep Buying has an edge like never before.


pages: 375 words: 88,306

The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism by Arun Sundararajan

"World Economic Forum" Davos, additive manufacturing, Airbnb, AltaVista, Amazon Mechanical Turk, asset light, autonomous vehicles, barriers to entry, basic income, benefit corporation, bike sharing, bitcoin, blockchain, book value, Burning Man, call centre, Carl Icahn, collaborative consumption, collaborative economy, collective bargaining, commoditize, commons-based peer production, corporate social responsibility, cryptocurrency, data science, David Graeber, distributed ledger, driverless car, Eben Moglen, employer provided health coverage, Erik Brynjolfsson, Ethereum, ethereum blockchain, Frank Levy and Richard Murnane: The New Division of Labor, future of work, general purpose technology, George Akerlof, gig economy, housing crisis, Howard Rheingold, independent contractor, information asymmetry, Internet of things, inventory management, invisible hand, job automation, job-hopping, John Zimmer (Lyft cofounder), Kickstarter, knowledge worker, Kula ring, Lyft, Marc Andreessen, Mary Meeker, megacity, minimum wage unemployment, moral hazard, moral panic, Network effects, new economy, Oculus Rift, off-the-grid, pattern recognition, peer-to-peer, peer-to-peer lending, peer-to-peer model, peer-to-peer rental, profit motive, public intellectual, purchasing power parity, race to the bottom, recommendation engine, regulatory arbitrage, rent control, Richard Florida, ride hailing / ride sharing, Robert Gordon, Ronald Coase, Ross Ulbricht, Second Machine Age, self-driving car, sharing economy, Silicon Valley, smart contracts, Snapchat, social software, supply-chain management, TaskRabbit, TED Talk, the long tail, The Nature of the Firm, total factor productivity, transaction costs, transportation-network company, two-sided market, Uber and Lyft, Uber for X, uber lyft, universal basic income, Vitalik Buterin, WeWork, Yochai Benkler, Zipcar

In a world with no “frictions,” that is, in a world where you could buy or sell instantaneously and without regard to transaction costs, you might freely adjust your ownership at any time to match your current needs, buying a Porsche when you feel like taking a drive down the beach, and then selling it and buying a minivan later that day to pick up your kids from soccer. In practice, of course, this isn’t possible because durable goods are “illiquid”—you can’t just simply buy and sell them instantly. There are significant and large transaction costs associated with buying and selling. As soon as you buy a car, it loses a lot of its value.

Now, not everyone agreed with MYB’s unilateral prediction. Several years later Vijay Gurbaxani and Seungjin Whang acknowledged that “recent advances in IT have obviously introduced a great deal of operational efficiency in the market economy by providing more efficient market mechanisms and thus lowering the associated market transaction costs,” but they noted some additional tradeoffs.9 Apart from the “external coordination costs” associated with transacting through the market, there is a set of “internal coordination costs” that hierarchies bear. These grow as the organization scales; as the management structure gets more bloated, the interests and incentives of workers are increasingly misaligned or disconnected from the broader objectives of the firm.

The coin provides returns to early contributors—of human capital, of risky early participation, of effort publicizing the marketplace and facilitating critical mass—a new breed of purpose-driven investors. Value Creation and Capture in Decentralized Exchange There are a number of new forms of economic activity that new decentralized peer-to-peer marketplaces will facilitate simply because they lower transaction costs. Other decentralized systems, either independent or embedded in traditional privately owned corporations or markets, may emerge in contexts where there was previously insufficient trust for digital exchange, where the potential market was too small to attract private capital in the past, or where the blockchain lowers operating costs.


pages: 829 words: 186,976

The Signal and the Noise: Why So Many Predictions Fail-But Some Don't by Nate Silver

airport security, Alan Greenspan, Alvin Toffler, An Inconvenient Truth, availability heuristic, Bayesian statistics, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, big-box store, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, book value, Broken windows theory, business cycle, buy and hold, Carmen Reinhart, Charles Babbage, classic study, Claude Shannon: information theory, Climategate, Climatic Research Unit, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, computer age, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, Daniel Kahneman / Amos Tversky, disinformation, diversification, Donald Trump, Edmond Halley, Edward Lorenz: Chaos theory, en.wikipedia.org, equity premium, Eugene Fama: efficient market hypothesis, everywhere but in the productivity statistics, fear of failure, Fellow of the Royal Society, Ford Model T, Freestyle chess, fudge factor, Future Shock, George Akerlof, global pandemic, Goodhart's law, haute cuisine, Henri Poincaré, high batting average, housing crisis, income per capita, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet Archive, invention of the printing press, invisible hand, Isaac Newton, James Watt: steam engine, Japanese asset price bubble, John Bogle, John Nash: game theory, John von Neumann, Kenneth Rogoff, knowledge economy, Laplace demon, locking in a profit, Loma Prieta earthquake, market bubble, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, Monroe Doctrine, mortgage debt, Nate Silver, negative equity, new economy, Norbert Wiener, Oklahoma City bombing, PageRank, pattern recognition, pets.com, Phillips curve, Pierre-Simon Laplace, Plato's cave, power law, prediction markets, Productivity paradox, proprietary trading, public intellectual, random walk, Richard Thaler, Robert Shiller, Robert Solow, Rodney Brooks, Ronald Reagan, Saturday Night Live, savings glut, security theater, short selling, SimCity, Skype, statistical model, Steven Pinker, The Great Moderation, The Market for Lemons, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, Timothy McVeigh, too big to fail, transaction costs, transfer pricing, University of East Anglia, Watson beat the top human players on Jeopardy!, Wayback Machine, wikimedia commons

Had the investor pursued his Manic Momentum strategy for ten years beginning in January 2000, his $10,000 investment would have been whittled down to $4,000 by the end of the decade even before considering transaction costs.40 If you do consider transaction costs, the investor would have had just $141 left over by the end of the decade, having lost almost 99 percent of his capital. In other words: do not try this stuff at home. Strategies like these resemble a high-stakes game of rock-paper-scissors at best,* and the high transaction costs they entail will deprive you of any profit and eat into much of your principal. As Fama and his professor had discovered, stock-market strategies that seem too good to be true usually are.

No investor can beat the stock market over the long run relative to his level of risk. No investor can beat the stock market over the long run relative to his level of risk and accounting for his transaction costs. No investor can beat the stock market over the long run relative to his level of risk and accounting for his transaction costs, unless he has inside information. Few investors beat the stock market over the long run relative to their level of risk and accounting for their transaction costs, unless they have inside information. It is hard to tell how many investors beat the stock market over the long run, because the data is very noisy, but we know that most cannot relative to their level of risk, since trading produces no net excess return but entails transaction costs, so unless you have inside information, you are probably better off investing in an index fund.

Our investor, using a very basic strategy that exploited a simple statistical relationship in past market prices, substantially beat the market average, seeming to disprove the efficient-market hypothesis in the process. But there is a catch. We ignored this investor’s transaction costs. This makes an enormous difference. Suppose that the investor had pursued the Manic Momentum strategy as before but that each time he cashes into or out of the market, he paid his broker a commission of 0.25 percent. Since this investor’s strategy requires buying or selling shares hundreds of times during this period, these small costs will nickel-and-dime him to death. If you account for his transaction costs, in fact, the $10,000 investment in the Manic Momentum strategy would have been worth only about $1,100 ten years later, eliminating not only his profit but also almost all the money he put in originally.


file:///C:/Documents%20and%... by vpavan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Alan Greenspan, AOL-Time Warner, asset allocation, Bear Stearns, Berlin Wall, book value, business cycle, buttonwood tree, buy and hold, Carl Icahn, corporate governance, corporate raider, currency risk, disintermediation, diversification, diversified portfolio, Donald Trump, estate planning, financial engineering, fixed income, index fund, intangible asset, interest rate swap, John Bogle, junk bonds, Larry Ellison, margin call, Mary Meeker, money market fund, Myron Scholes, new economy, payment for order flow, price discovery process, profit motive, risk tolerance, shareholder value, short selling, Silicon Valley, Small Order Execution System, Steve Jobs, stocks for the long run, stocks for the long term, tech worker, technology bubble, transaction costs, Vanguard fund, women in the workforce, zero-coupon bond, éminence grise

Both cases— the cost of not finding the best match for your order and the cost exacted by the exchange and its various middlemen who handle your trade— are called transaction costs. They are costs over which you have little control. But that is changing. Transaction costs are the cause of much debate and controversy today, and the root of an immense struggle pitting the NYSE against Nasdaq; both established exchanges against new electronic networks; large investment banking firms against the exchanges; and small investors against institutional investors. In this chapter, you'll learn all about transaction costs and how they affect you. You'll also learn about recent structural changes in the stock markets, some of which have been revolutionary, that affect trading costs.

And 2001 was one of the better years for managed funds. For years, experts have debated whether index funds are superior to managed funds. Index-fund proponents argue that actively managed funds waste money by paying higher salaries for top-flight analysts and stock pickers to put together a winning portfolio. They also incur higher transaction costs because they engage in frequent trading. But after all that, most managed funds still can't beat the passive index funds. On the other hand, managed-fund backers say that index funds don't always perform better, such as in the twelve months following the March 2000 technology bust. And managed-fund aficionados say index funds are, well, boring.

So why do managers persist with their frenetic buying and selling? Because they are convinced that they can add value by outsmarting the market on a day-to-day basis rather than buying and holding for the long term. "Short-term speculation is what they're doing," gripes Vanguard founder Bogle. "All this thrashing around hits investors with higher transaction costs and higher taxes, but no observable improvement in fund performance." Too many fund managers also buy stocks when they think the market is about to move up and sell when they believe the market is getting ready to swoon. In other words, they try to time the market, a strategy most experts warn is a foolish attempt at achieving the impossible.


pages: 119 words: 10,356

Topics in Market Microstructure by Ilija I. Zovko

Brownian motion, computerized trading, continuous double auction, correlation coefficient, financial intermediation, Gini coefficient, information asymmetry, market design, market friction, market microstructure, Murray Gell-Mann, p-value, power law, quantitative trading / quantitative finance, random walk, stochastic process, stochastic volatility, transaction costs

Variations in patience might be explained by a rationality-based explanation in terms of information arrival, or a behavioral-based explanation driven by emotional response, but in either case it suggests that patience is a key factor. These results have several practical implications. For market practitioners, understanding the spread and the market impact function is very useful for estimating transaction costs and for developing algorithms that minimize their effect. For regulators they suggest that it may be possible to make prices less volatile and lower transaction costs, if this is desired, by creating incentives for limit orders and disincentives for market orders. These scaling laws might also be used to detect anomalies, e.g. a higher than expected spread might be due to improper market maker behavior.

Our analysis looks at the price placement of limit orders across a much wider range of prices. Since placing orders out of the market carries execution and adverse selection risk, our work is relevant in understanding the fundamental dilemma of limit order placement: execution certainty vs. transaction costs (see, e.g., Cohen, et al. (1981); Harris (1997); Harris and Hasbrouck (1996); Holden and Chakravarty (1995); Kumar and Seppi (1992); Lo, et al. (2002)). In addition to the above, our work relates to the literature on clustered volatility. It is well known that both asset prices and quotes display ARCH or GARCH effects (Engle (1982); Bollerslev (1986)), but the origins of these phenomena are not well understood.

The solid line is a regression; the dashed line is the diagonal, representing the model’s prediction with A = 1 and B = 0. spread, R2 = 0.76, so the model still explains most of the variance. 3.3 Average market impact Market impact is practically important because it is the dominant source of transaction costs for large trades, and conceptually important because it provides a convenient probe of the revealed supply and demand functions in the limit order book (see SM Section 3.5.7). When a market order of size ω arrives, if it removes all limit orders at the best bid or ask it will immediately change the midpoint price m ≡ (a + b)/2.


pages: 338 words: 85,566

Restarting the Future: How to Fix the Intangible Economy by Jonathan Haskel, Stian Westlake

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Andrei Shleifer, Big Tech, Black Lives Matter, book value, Boris Johnson, Brexit referendum, business cycle, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, Charles Lindbergh, charter city, cloud computing, cognitive bias, cognitive load, congestion charging, coronavirus, corporate governance, COVID-19, creative destruction, cryptocurrency, David Graeber, decarbonisation, Diane Coyle, Dominic Cummings, Donald Shoup, Donald Trump, Douglas Engelbart, Douglas Engelbart, driverless car, Edward Glaeser, equity risk premium, Erik Brynjolfsson, Estimating the Reproducibility of Psychological Science, facts on the ground, financial innovation, Francis Fukuyama: the end of history, future of work, general purpose technology, gentrification, Goodhart's law, green new deal, housing crisis, income inequality, index fund, indoor plumbing, industrial cluster, inflation targeting, intangible asset, interchangeable parts, invisible hand, job-hopping, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, knowledge worker, lockdown, low interest rates, low skilled workers, Marc Andreessen, market design, Martin Wolf, megacity, mittelstand, new economy, Occupy movement, oil shock, patent troll, Peter Thiel, Phillips curve, postindustrial economy, pre–internet, price discrimination, quantitative easing, QWERTY keyboard, remote working, rent-seeking, replication crisis, risk/return, Robert Gordon, Robert Metcalfe, Robert Shiller, Ronald Coase, Sam Peltzman, Second Machine Age, secular stagnation, shareholder value, Silicon Valley, six sigma, skeuomorphism, social distancing, superstar cities, the built environment, The Rise and Fall of American Growth, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, Tyler Cowen, Tyler Cowen: Great Stagnation, Uber for X, urban planning, We wanted flying cars, instead we got 140 characters, work culture , X Prize, Y2K

Daron Acemoglu and James Robinson (2019, 126ff) draw attention to this fresco as an example of an institutional system whereby the state had sufficient power to provide communal goods (supervisors of public buildings and weights and measures, six “good men” who oversaw taverns and prevented swearing) but not too much power to become autocratic. 2. North 1993. 3. Smith 1904, 1:xxxv. 4. Marx and Engels 2002 [1848]. 5. Acemoglu, Johnson, and Robinson 2004, 395. 6. Kling and Schultz 2009. 7. North 1993, 97. 8. The “transactions costs” approach to exchange notes that exchange is affected by the transactions costs in each situation. This analysis is often, but not always, applied to a situation in which two parties are trading but face the problems that the assets they bring to the match are specific, there is uncertainty, and exchange might be infrequent (Milgrom and Roberts 2009; Williamson 2009).

We wish to step back from this approach and make sure we include in the process of exchange the finding of a partner in the first place. We also think that, following Milgrom and Roberts (2009), treating the exchange as the unit of analysis, rather than the transactions costs of the matched transaction, helps us be more specific about what the transactions costs are. In conditions of incomplete contracts with asset specificity, uncertainty and infrequent trade arise because these conditions induce high bargaining costs, problems of commitment and information, and the like. 9. Milgrom and Roberts 1990. 10.

We have assigned its own institutional heading to trust and reciprocity, given its historical and anthropological importance. 15. Regarding transactions costs, Mançur Olson (1965) (discussed in more detail below) pointed out that the benefits of many policies are concentrated, whereas the costs are dispersed. So, for example, all London taxi drivers benefit from regulators setting a high price for a taxi ride. This benefit is concentrated in comparison with the dispersed benefit of low prices for the much broader community of taxi riders. But it’s very expensive for the taxi riders to arrange themselves in a coalition and push for low taxi prices; in economists’ language, the transactions costs of organising the large community who benefit from such low prices are simply too high.


pages: 196 words: 57,974

Company: A Short History of a Revolutionary Idea by John Micklethwait, Adrian Wooldridge

affirmative action, AOL-Time Warner, barriers to entry, Bear Stearns, Bonfire of the Vanities, book value, borderless world, business process, Carl Icahn, Charles Lindbergh, classic study, company town, Corn Laws, Cornelius Vanderbilt, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, double entry bookkeeping, Etonian, Fairchild Semiconductor, financial engineering, Great Leap Forward, hiring and firing, Ida Tarbell, industrial cluster, invisible hand, James Watt: steam engine, John Perry Barlow, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, junk bonds, knowledge economy, knowledge worker, laissez-faire capitalism, manufacturing employment, market bubble, Michael Milken, military-industrial complex, mittelstand, new economy, North Sea oil, pneumatic tube, race to the bottom, railway mania, Ronald Coase, scientific management, Silicon Valley, six sigma, South Sea Bubble, Steve Jobs, Steve Wozniak, strikebreaker, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, Triangle Shirtwaist Factory, tulip mania, wage slave, William Shockley: the traitorous eight

In an article called “The Nature of the Firm,” he argued that the main reason why a company exists (as opposed to individual buyers and sellers making ad hoc deals at every stage of production) is because it minimizes the transaction costs of coordinating a particular economic activity. Bring all the people in-house, and you reduce the costs of “negotiating and concluding a separate contract for each exchange transaction.” But the gains from reducing transaction costs that companies deliver have to be balanced against “hierarchy costs”—the costs of central managers ignoring dispersed information. In the nineteenth century, the gains to be had from integrating mass production with mass distribution were enormous—as Alfred Chandler, the doyen of business historians, puts it, the “visible hand of managerial direction” replaced “the invisible hand of market mechanisms.”

Five years later, Ronald Coase published his ideas in a paper in Economica called “The Nature of the Firm.” Coase tried to explain why the economy had moved beyond individuals selling goods and services to each other. The answer, he argued, had to do with the imperfections of the market and particularly to do with transaction costs—the costs sole traders might incur in getting the best deal and coordinating processes such as manufacturing and marketing. The history of the company since 1850 validated Coase’s point. General Motors, for instance, reaped enormous economies of scale by bundling together plenty of transactions that had previously been done independently.

In the last three decades of the twentieth century, the cost of computing processing power tumbled by 99.99 percent—or 35 percent a year.22 Computers thrust ever more power down the corporate hierarchy—to local area networks, to the desktop, and increasingly to outside the office altogether. Meanwhile, the Internet reduced transaction costs. By the end of the century, General Electric and Cisco were forcing their suppliers to bid for their business in on-line auctions; and eBay, the main independent on-line auction house, had 42 million users around the world. In the last three months of 2001, those eBay customers listed 126 million items and spent $2.7 billion.


pages: 209 words: 13,138

Empirical Market Microstructure: The Institutions, Economics and Econometrics of Securities Trading by Joel Hasbrouck

Alvin Roth, barriers to entry, business cycle, conceptual framework, correlation coefficient, discrete time, disintermediation, distributed generation, experimental economics, financial intermediation, index arbitrage, information asymmetry, interest rate swap, inventory management, market clearing, market design, market friction, market microstructure, martingale, payment for order flow, power law, price discovery process, price discrimination, quantitative trading / quantitative finance, random walk, Richard Thaler, second-price auction, selection bias, short selling, statistical model, stochastic process, stochastic volatility, transaction costs, two-sided market, ultimatum game, zero-sum game

Similar events do not, however, characterize the government bond and foreign exchange markets. Models of these markets, therefore, must rely on a broader concept of private information. This important point has been stressed by Lyons (2001). 5.4.2 Fixed Transaction Costs Suppose that in addition to asymmetric information considerations, the dealer must pay a transaction cost c on each trade (as in the Roll model). The modification is straightforward. The ask and bid now are set to recover c as well as the information costs: A = E[V |Buy ] + c and B = E[V |Sell] − c. The ask quote sequence may still be expressed as a sequence of conditional expectations: Ak = E[V |k ] + c, where k is the information set that includes the direction of the kth trade.

The dealer’s bid is set as B = E[V |Sell] = V (1 + µ) δ + V (1 − µ)(1 − δ) . 1 + µ(1 − 2δ) (5.6) The bid-ask spread is A−B = 4(1 − δ)δµ(V − V ) . 1 − (1 − 2δ)2 µ2 (5.7) In the symmetric case of δ = 1/2, A − B = (V − V )µ. In many situations the midpoint of the bid and ask is taken as a proxy for what the security is worth absent transaction costs. Here, the midpoint is equal to the unconditional expectation EV only in the symmetric case (δ = 1/2). More generally, the bid and ask are not set symmetrically about the efficient price. Exercise 5.1 As a modification to the basic model, take δ = 1/2 and suppose that immediately after V is drawn (as either V or V ), a broker is randomly drawn.

If the size of the incoming order is in fact q = 2, the limit order is profitable: P(q = 2) > E[X |q = 2]. The limit order will also execute, however, if q = 8, in which case P(q = 2) < E[X |q = 8], the limit order incurs a loss. Finally, limq→0+ P(q) > µX = 5, that is, even a infinitesimal purchase will incur a transaction cost. Another way of putting this is that the bid-ask spread is positive even for arbitrarily small quantities. (In the competitive dealer model, in contrast, limq→0+ P(q) = limq→0− P(q) = µX .) The pricing schedule is sufficiently discriminatory that a ω considerably greater than µX is necessary before the customer will consider an even an infinitesimal purchase.


pages: 305 words: 75,697

Cogs and Monsters: What Economics Is, and What It Should Be by Diane Coyle

3D printing, additive manufacturing, Airbnb, Al Roth, Alan Greenspan, algorithmic management, Amazon Web Services, autonomous vehicles, banking crisis, barriers to entry, behavioural economics, Big bang: deregulation of the City of London, biodiversity loss, bitcoin, Black Lives Matter, Boston Dynamics, Bretton Woods, Brexit referendum, business cycle, call centre, Carmen Reinhart, central bank independence, choice architecture, Chuck Templeton: OpenTable:, cloud computing, complexity theory, computer age, conceptual framework, congestion charging, constrained optimization, coronavirus, COVID-19, creative destruction, credit crunch, data science, DeepMind, deglobalization, deindustrialization, Diane Coyle, discounted cash flows, disintermediation, Donald Trump, Edward Glaeser, en.wikipedia.org, endogenous growth, endowment effect, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, Evgeny Morozov, experimental subject, financial deregulation, financial innovation, financial intermediation, Flash crash, framing effect, general purpose technology, George Akerlof, global supply chain, Goodhart's law, Google bus, haute cuisine, High speed trading, hockey-stick growth, Ida Tarbell, information asymmetry, intangible asset, Internet of things, invisible hand, Jaron Lanier, Jean Tirole, job automation, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, knowledge worker, Les Trente Glorieuses, libertarian paternalism, linear programming, lockdown, Long Term Capital Management, loss aversion, low earth orbit, lump of labour, machine readable, market bubble, market design, Menlo Park, millennium bug, Modern Monetary Theory, Mont Pelerin Society, multi-sided market, Myron Scholes, Nash equilibrium, Nate Silver, Network effects, Occupy movement, Pareto efficiency, payday loans, payment for order flow, Phillips curve, post-industrial society, price mechanism, Productivity paradox, quantitative easing, randomized controlled trial, rent control, rent-seeking, ride hailing / ride sharing, road to serfdom, Robert Gordon, Robert Shiller, Robert Solow, Robinhood: mobile stock trading app, Ronald Coase, Ronald Reagan, San Francisco homelessness, savings glut, school vouchers, sharing economy, Silicon Valley, software is eating the world, spectrum auction, statistical model, Steven Pinker, tacit knowledge, The Chicago School, The Future of Employment, The Great Moderation, the map is not the territory, The Rise and Fall of American Growth, the scientific method, The Signal and the Noise by Nate Silver, the strength of weak ties, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, Uber for X, urban planning, winner-take-all economy, Winter of Discontent, women in the workforce, Y2K

These chapters use material from a lecture at the Oxford Martin School in June 2019, https://www.oxfordmartin.ox.ac.uk/events/changing-technology-changing-economics-with-prof-diane-coyle/ and at Nottingham Trent University in February 2020, https://www.ntu.ac.uk/about-us/events/events/2020/02/professor-diane-coyle-cbe. 5 Changing Technology, Changing Economics My first book on the digital economy was published almost a quarter of a century ago (Coyle 1997). Engrossed in the research and writing in the year or so prior to its publication, I enthused about the revolutionary prospects of the internet to a very distinguished economist. He replied, ‘It’s going to reduce transactions costs a bit, but we already know how to handle transactions costs in our models. Why are you wasting your time on this?’ He was—obviously with hindsight—wrong. The distinctive economic characteristics of digital technology mean that the way we think about economics itself has to change. Digital Is Different ‘Digital’ has become shorthand for ICTs or information and communication technologies.

It recognises that people have different interests and that politics (with either a small or a large ‘p’), history, and culture will have an important effect on economics. Economic history and sociology generally are exerting greater influence on mainstream economics. Research is alive to issues such as asymmetries of information and transactions costs affecting economic choices. This means that much of the framework that academic economists now habitually use bears little relation to the everyday economics debated in politics and applied in public policy. Paradoxically, commentators who are very critical of ‘economics’ often celebrate leading economists practising in this eclectic modern mainstream.

It is a useful inoculation against the temptation to indulge in social engineering, because it is so hard to think through all the possible consequences of any action or policy. General equilibrium as a specific theory is an abstract, ideal world of identical individuals making their own choices according to pre-determined preferences, with no transactions costs or externalities. With these assumptions, it is possible to prove that competitive equilibrium will replicate the decisions of an omniscient and benign central planner. In these abstract conditions, the market—a series of trades between individuals regulated by price—is the most efficient way of discovering and satisfying individual preferences.


pages: 436 words: 76

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

Alan Greenspan, Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, behavioural economics, Berlin Wall, Big bang: deregulation of the City of London, Bletchley Park, business cycle, California gold rush, Charles Babbage, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Dr. Strangelove, Dutch auction, Edward Lloyd's coffeehouse, electricity market, equity premium, equity risk premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, Fairchild Semiconductor, financial innovation, flying shuttle, Ford Model T, Francis Fukuyama: the end of history, George Akerlof, George Gilder, Goodhart's law, Great Leap Forward, greed is good, Gunnar Myrdal, haute couture, Helicobacter pylori, illegal immigration, income inequality, industrial cluster, information asymmetry, intangible asset, invention of the telephone, invention of the wheel, invisible hand, John Meriwether, John Nash: game theory, John von Neumann, junk bonds, Kenneth Arrow, Kevin Kelly, knowledge economy, Larry Ellison, light touch regulation, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Michael Milken, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, Pareto efficiency, Paul Samuelson, pets.com, Phillips curve, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, proprietary trading, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, Right to Buy, risk tolerance, road to serfdom, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, Stuart Kauffman, telemarketer, The Chicago School, The Market for Lemons, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Vilfredo Pareto, Washington Consensus, women in the workforce, work culture , yield curve, yield management

I described in the last chapter how neoclassical economics was enhanced both by game theory and by transactions costs economics. But neoclassical rationality assumptions were imposed on both. The transactions costs solution to the wilderness dilemma is that the economist should optimize within constraints. He should do just the amount of calculation needed to find the best strategy in the light of his knowledge that every second devoted to calculation increases the chances ofbeing caught by the bear. 18 Borrowing Herbert Simon's term (but for a very different concept), Oliver Williamson calls this optimization under constraints-bounded rationality. 19 In this vein, transactions costs economics often degenerates into a Panglossian view of the world: institutions that exist must be the solution to some constrained-optimization problem.

The Arrow-Debreu results are the culmination of a long tradition in economics that emphasizes supply and demand, perfectly competitive markets, and the search for market equilibrium, conducted by independent, self-regarding agents. Economic research since Arrow and Debreu has drawn game theory, transactions costs, and most recently behavioral economics into the mainstream of economic theory. In the Arrow-Debreu framework, interactions are anonymous and every market has many buyers and sellers. In game theory, the players are few and not anonymous. In the Arrow-Debreu framework, institutions do not exist or are dealt with in a reductionist way. Institutional, or transactions costs, economics recognizes that economic lives are lived in and through economic institutions. Behavioral economics contemplates alternative assumptions about motives and the nature of economic behavior.

John Nash was author of the principal solution concept in game theory-the Nash equilibrium-but his productive career was ended by schizophrenia. His health partially restored, he was awarded the Nobel Prize in 1994. 21 Nash was played by Russell Crowe in an Oscar-winning film of his life, A Beautiful Mind. Institutional (or transactions cost) economics regards as its founder Ronald Coase,n a British economist who spent most of his career at the University of Chicago. His claim to fame rests mainly on two articles, published almost twenty-five years apart. The first was concerned with the theory of the firm. In the perfectly competitive world of Part III, firms played little or no role.


pages: 769 words: 169,096

Order Without Design: How Markets Shape Cities by Alain Bertaud

autonomous vehicles, call centre, colonial rule, congestion charging, congestion pricing, creative destruction, cross-subsidies, Deng Xiaoping, discounted cash flows, Donald Trump, Edward Glaeser, en.wikipedia.org, extreme commuting, garden city movement, gentrification, Google Earth, Great Leap Forward, Jane Jacobs, job satisfaction, Joseph Schumpeter, land tenure, manufacturing employment, market design, market fragmentation, megacity, microapartment, new economy, New Urbanism, openstreetmap, Pearl River Delta, price mechanism, rent control, Right to Buy, Ronald Coase, self-driving car, Shenzhen special economic zone , Silicon Valley, special economic zone, the built environment, trade route, transaction costs, transit-oriented development, trickle-down economics, urban planning, urban sprawl, zero-sum game

The use of spreadsheets soon became common in all sectors of the economy, but the spillover occurred first in large cities, spreading from MIT in Cambridge, Massachusetts, where it was originally invented. Knowledge spillovers are responsible for agglomeration economies (i.e., economies that increase productivity due to the rapid dissemination of new ideas because of large numbers of workers in close contact).2 Agglomeration economies also result from a lowering of transaction costs in larger cities because of the proximity of competing suppliers and consumers. Economic literature linking the wealth of cities to spatial concentration is quite abundant and is no longer controversial in academic circles. National accounts show that the output share of large cities is always much higher than their share of the national population.

If we agree that consumption is a market issue, then planners could consider several possible solutions based on market mechanisms that would increase consumption. For instance, planners could increase the supply of developed land by increasing the speed of transport so that more land could be opened for development; they could lower the cost of construction by increasing the productivity of the building industry or by decreasing the transactions costs linked to building permits and land acquisition. Planners could also use a demand side approach, stimulating demand by increasing access to mortgage credit or even by indirectly causing an increase in salaries by opening the city to outside investments in manufacturing or services. All these measures are likely to contribute to an increase in housing consumption per household.

Planners should therefore fully understand market mechanisms. Every planning department should monitor the spatial distribution of changes in real estate prices. Attention should be given to the supply side, including the elasticity of land supply, the productivity of the real estate industries, and the reduction of transaction costs imposed on building permits and property title transfers. Planners Can Influence Consumption by Using Markets, Not by Imposing Norms Clearly separating markets from design in the development of cities does not mean that planners should just passively monitor markets. For instance, planners should certainly be concerned by very low housing consumption among lower-income households and should act to increase it.


Remix: Making Art and Commerce Thrive in the Hybrid Economy by Lawrence Lessig

Aaron Swartz, Amazon Web Services, Andrew Keen, Benjamin Mako Hill, Berlin Wall, Bernie Sanders, Brewster Kahle, carbon tax, Cass Sunstein, collaborative editing, commoditize, disintermediation, don't be evil, Erik Brynjolfsson, folksonomy, Free Software Foundation, Internet Archive, invisible hand, Jeff Bezos, jimmy wales, John Perry Barlow, Joi Ito, Kevin Kelly, Larry Wall, late fees, Mark Shuttleworth, Netflix Prize, Network effects, new economy, optical character recognition, PageRank, peer-to-peer, recommendation engine, revision control, Richard Stallman, Ronald Coase, Saturday Night Live, search costs, SETI@home, sharing economy, Silicon Valley, Skype, slashdot, Steve Jobs, the long tail, The Nature of the Firm, thinkpad, transaction costs, VA Linux, Wayback Machine, yellow journalism, Yochai Benkler

Indeed, to the extent that the hybrid is spreading the right to innovate, the dynamic is again following the very old principle I described above: shifting innovation out of the core of the corporation where transaction costs permit. The hybrid teaches us that this strategy will increase as technologies for reducing transaction costs proliferate. And conversely, it would be checked by changes that increase the transaction costs of the hybrid. Perceptions of Fairness Will in Part Mediate the Hybrid Relationship Between Sharing and Commercial Economies We are not far into the history of these hybrid economies. And early enthusiasm will no doubt soon give way to a more measured, 80706 i-xxiv 001-328 r4nk.indd 231 8/12/08 1:55:55 AM 232 REMI X perhaps skeptical view.

Why weren’t firms built like free markets? The answer was “transaction costs.” It cost money to go to the market: time, bargaining costs, costs of capital, etc. Coase reasoned that this cost would help explain the size of a firm. A firm would go 80706 i-xxiv 001-328 r4nk.indd 139 8/12/08 1:55:21 AM REMI X 140 to the market to obtain a product when doing so was cheaper than producing the product inside the firm. It would produce the product in house when the costs of the market were too high. Yochai Benkler summarizes the point: [P]eople use markets when the gains from doing so, net of transaction costs, exceed the gains from doing the same thing in a managed firm, net of the costs of organizing and managing a firm.

Yochai Benkler summarizes the point: [P]eople use markets when the gains from doing so, net of transaction costs, exceed the gains from doing the same thing in a managed firm, net of the costs of organizing and managing a firm. Firms emerge when the opposite is true, and transaction costs can best be reduced by bringing an activity into a managed context that requires no individual transactions to allocate this resource or that effort.31 It follows from this insight that as transaction costs fall, all things being equal, the amount of stuff done inside a firm will fall as well. The firm will outsource more. It will focus its internal work on the stuff it can do best (meaning more efficiently than the market). LEGO-ized innovation is simply the architectural instantiation of this economic point.


pages: 819 words: 181,185

Derivatives Markets by David Goldenberg

Black-Scholes formula, Brownian motion, capital asset pricing model, commodity trading advisor, compound rate of return, conceptual framework, correlation coefficient, Credit Default Swap, discounted cash flows, discrete time, diversification, diversified portfolio, en.wikipedia.org, financial engineering, financial innovation, fudge factor, implied volatility, incomplete markets, interest rate derivative, interest rate swap, law of one price, locking in a profit, London Interbank Offered Rate, Louis Bachelier, margin call, market microstructure, martingale, Myron Scholes, Norbert Wiener, Paul Samuelson, price mechanism, random walk, reserve currency, risk free rate, risk/return, riskless arbitrage, Sharpe ratio, short selling, stochastic process, stochastic volatility, time value of money, transaction costs, volatility smile, Wiener process, yield curve, zero-coupon bond, zero-sum game

Further, the synthetic strategies are (economically) equivalent to their corresponding natural strategies. Therefore, except for transactions costs, they should have the same prices. Otherwise, there would be arbitrage opportunities. If there are transactions costs, then there could be infinitely more synthetic strategies that would not be arbitrage strategies if their execution prices differ by more than the transactions costs of executing the arbs, depending on by how much they differ. If the difference between the cost of executing the synthetic strategies and the cost of executing the natural strategies is less than the transaction costs involved, then these could be arbitrage strategies.

If a bank borrows at one rate, LIBID3, in this case and lends at a higher rate, LIBOR3, then that has the appearance of an arbitrage strategy. However, there are transactions costs to the bank of arranging these transactions, and these costs can eat up the apparent arbitrage profits. What looks like arbitrage profits are just compensation for the services provided. The same thing happens in many markets in which there is a bid-asked spread, and that includes most markets. The spread represents transactions costs and the dealer offering the ability to transact is just earning those transactions costs. Concept Check 10 The dealer would have to go out, at time T, into the spot market for 3-month Eurodollar time deposits and purchase it for the going spot price As shown in Chapter 5, section 5.8.1, he would still effectively pay the futures price he contracted at for the investment vehicle, due to his long ED futures position.

Zero in both cases. So we have matched up the natural instrument (a long forward position) with the synthetic instrument (a 100% leveraged position in the underlying commodity) exactly. To all intents and purposes, the natural position and the synthetic position are economically equivalent (we ignore transactions costs). What then is a long forward position? It is a 100% leveraged long position in the underlying commodity. That’s the economics. The difference between a fully paid for long position in the underlying commodity and a fully financed long position in the underlying commodity is the zero-coupon bond issuance.


pages: 1,202 words: 424,886

Stigum's Money Market, 4E by Marcia Stigum, Anthony Crescenzi

accounting loophole / creative accounting, Alan Greenspan, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, Black-Scholes formula, book value, Brownian motion, business climate, buy and hold, capital controls, central bank independence, centralized clearinghouse, corporate governance, credit crunch, Credit Default Swap, cross-border payments, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, disintermediation, distributed generation, diversification, diversified portfolio, Dutch auction, financial innovation, financial intermediation, fixed income, flag carrier, foreign exchange controls, full employment, Glass-Steagall Act, Goodhart's law, Greenspan put, guns versus butter model, high net worth, implied volatility, income per capita, intangible asset, interest rate derivative, interest rate swap, inverted yield curve, junk bonds, land bank, large denomination, locking in a profit, London Interbank Offered Rate, low interest rates, margin call, market bubble, market clearing, market fundamentalism, Money creation, money market fund, mortgage debt, Myron Scholes, offshore financial centre, paper trading, pension reform, Phillips curve, Ponzi scheme, price mechanism, price stability, profit motive, proprietary trading, prudent man rule, Real Time Gross Settlement, reserve currency, risk free rate, risk tolerance, risk/return, Savings and loan crisis, seigniorage, shareholder value, short selling, short squeeze, tail risk, technology bubble, the payments system, too big to fail, transaction costs, two-sided market, value at risk, volatility smile, yield curve, zero-coupon bond, zero-sum game

In a study, Sack found that the arbitrage opportunities between coupon-bearing Treasury securities and the reconstitutable portfolio of STRIPS is limited and that most of the price differences likely fall within the range of transaction costs. The study found that, under the typical transaction cost (a bid-offer spread of about of a point), only about 15% of the study’s 57,084 observations presented a stripping arbitrage opportunity. The actual profit potential may be smaller than that because the actual transaction costs could be greater than is apparent. This results from slight differences in the taxation of these instruments, although this seems to have a trivial effect.

The dealer might put on a 5-year swap for maybe $100 million and then let that 5-year become a 4-year and then a 3-year, and then maybe get rid of it. This approach reduces not only spread (basis) risk, but transaction costs as well. Every time a dealer shorts a Treasury and then has to buy it back, she loses as much as a 32nd. For a shop that maintains ongoing positions in MTNs, a cheaper way (from the point of view of transaction costs) to hedge that core position may be to book an interest rate: be the payer of fixed and receiver of floating to hedge fixed-rate MTNs. MTNs VERSUS CORPORATE BONDS In the beginning and in its purest form, the MTN market dealt in unsecured, fixed-rate, medium-term paper, typically sold on a continuous basis by several dealers who acted on an agency basis.

Buying securities and rolling them involves more work than some people sometimes care to do or have time for, and having a bank or broker do the job may involve high transaction costs. Also, for some instruments, yields on small denominations are lower than those on large denominations. Finally, an investor with limited funds can’t easily reduce risk by diversifying: by buying a mix of different names or instruments. None of these difficulties exists for mutual funds such as money funds, which pool the resources of many investors. Because such a fund handles large sums of money, high minimum denominations pose no problem. FIGURE 26.1 Assets of mutual funds, January 1984–August 2000 (in billions of dollars) Transaction costs in terms of both money and time spent per dollar invested are minuscule compared to the costs that small investors incur.


pages: 374 words: 97,288

The End of Ownership: Personal Property in the Digital Economy by Aaron Perzanowski, Jason Schultz

3D printing, Airbnb, anti-communist, barriers to entry, behavioural economics, bitcoin, blockchain, carbon footprint, cloud computing, conceptual framework, crowdsourcing, cryptocurrency, Donald Trump, Eben Moglen, Edward Snowden, en.wikipedia.org, endowment effect, Firefox, Free Software Foundation, general purpose technology, gentrification, George Akerlof, Hush-A-Phone, independent contractor, information asymmetry, intangible asset, Internet Archive, Internet of things, Isaac Newton, it's over 9,000, loss aversion, Marc Andreessen, means of production, minimum wage unemployment, new economy, Open Library, Paradox of Choice, peer-to-peer, price discrimination, Richard Thaler, ride hailing / ride sharing, rolodex, self-driving car, sharing economy, Silicon Valley, software as a service, software patent, software studies, speech recognition, Steve Jobs, subscription business, telemarketer, the long tail, The Market for Lemons, Tony Fadell, transaction costs, winner-take-all economy

In the language of economists, property rights increase efficiency by lowering transaction costs. Transaction costs are all of the costs aside from the sticker price that we incur when we buy a product or engage in some transaction.22 Let’s say you want to buy a newly released bestseller. The retail price for the book is $25. But that price doesn’t take into account all of the relevant costs of acquiring the book. You have to drive to the bookstore; you have to spend time looking for the book on the shelf; in some cultures, you may have to haggle over the price. These are all transaction costs. Even information about the book comes at a cost.

To go back to a requirement of individualized contracts, he says, would “return transactions to the horse-and-buggy era.” Standardized mass contracts, in contrast, hold out the promise of drastically reducing transaction costs for sellers. Easterbrook is right that standardized contracts lower costs for software makers. They draft one license, likely cobbled together from existing terms, and use it in thousands or even millions of transactions. No messy negotiations, no discussions, no explanations. Undoubtedly, that reduces costs within the software industry. And while it is generally true that reducing transaction costs is a good thing, here those costs are not eliminated. They are just shifted from sellers to buyers.

They are just shifted from sellers to buyers. In a world governed by EULAs, life is easier for software companies and much harder for all of us. We are the ones expected to read and understand page after page of license text. And those costs add up. The failure to account for them shows that Easterbrook is keenly concerned with transaction costs when they harm software makers, but remarkably insensitive to those costs when they are imposed on individuals. Next, Easterbrook gestures toward competition as a check on abusive license terms. If people are unhappy with a term that restricts how they can use a product, he speculates, surely competitors will offer more attractive terms to win them over.


pages: 348 words: 97,277

The Truth Machine: The Blockchain and the Future of Everything by Paul Vigna, Michael J. Casey

3D printing, additive manufacturing, Airbnb, altcoin, Amazon Web Services, barriers to entry, basic income, Berlin Wall, Bernie Madoff, Big Tech, bitcoin, blockchain, blood diamond, Blythe Masters, business process, buy and hold, carbon credits, carbon footprint, cashless society, circular economy, cloud computing, computer age, computerized trading, conceptual framework, content marketing, Credit Default Swap, cross-border payments, crowdsourcing, cryptocurrency, cyber-physical system, decentralized internet, dematerialisation, disinformation, disintermediation, distributed ledger, Donald Trump, double entry bookkeeping, Dunbar number, Edward Snowden, Elon Musk, Ethereum, ethereum blockchain, failed state, fake news, fault tolerance, fiat currency, financial engineering, financial innovation, financial intermediation, Garrett Hardin, global supply chain, Hernando de Soto, hive mind, informal economy, information security, initial coin offering, intangible asset, Internet of things, Joi Ito, Kickstarter, linked data, litecoin, longitudinal study, Lyft, M-Pesa, Marc Andreessen, market clearing, mobile money, money: store of value / unit of account / medium of exchange, Network effects, off grid, pets.com, post-truth, prediction markets, pre–internet, price mechanism, profit maximization, profit motive, Project Xanadu, ransomware, rent-seeking, RFID, ride hailing / ride sharing, Ross Ulbricht, Satoshi Nakamoto, self-driving car, sharing economy, Silicon Valley, smart contracts, smart meter, Snapchat, social web, software is eating the world, supply-chain management, Ted Nelson, the market place, too big to fail, trade route, Tragedy of the Commons, transaction costs, Travis Kalanick, Turing complete, Uber and Lyft, uber lyft, unbanked and underbanked, underbanked, universal basic income, Vitalik Buterin, web of trust, work culture , zero-sum game

All these solutions worked for those who could afford them. But, inevitably, the added transaction costs translated into barriers to entry that helped the largest incumbents ward off competitors, limiting innovation and denying billions of financially excluded people the opportunity to fully exploit the Internet’s many possibilities for advancement. It’s how we’ve ended up with Internet monopolies. Those with first-mover advantages have not only enjoyed the benefits of network effects; they’ve been indirectly protected by the hefty transaction costs that competitors face in trying to grow to the same scale. In a very tangible way, then, the high cost of trust management has fed the economic conditions that allow the likes of Amazon, Netflix, Google, and Facebook to keep squashing competitors.

It was another jury-rigged solution that meant that the banking system, the centralized ledger-keeping solution with which society had solved the double-spend problem for five hundred years, would be awkwardly bolted onto the ostensibly decentralized Internet as its core trust infrastructure. With customers now sufficiently confident they wouldn’t be defrauded, an explosion in online shopping ensued. But the gatekeeping moneymen now added costs and inefficiencies to the system. The result was high per-transaction costs that made it too expensive, for example, to sustain micropayments—extremely low payments, maybe as little as pennies, that otherwise promised to open up a whole new world of online business models. That nixed a dream of early Internet visionaries, who saw that idea feeding into a global marketplace where software, storage, media content, and processing power would be bought and sold in fractional amounts to maximize efficiency.

He raised $5 million, partially with tokens, to launch a startup called Lykke, whose mission, he says, is to “build a matching engine that can offer a fair market price across any digital coin, whatever its nature.” Confident that the scaling problems of blockchains will be resolved one way or another, he is convinced that open data and middleman-free blockchain-based asset markets will trend toward zero transaction costs for cross-trading in all securitized digital assets. He plans to deploy into that efficient market setting a network of high-speed, computerized trading machines. Much like Wall Street bond traders, these will “make markets” to bring financial liquidity to every countervailing pair of tokens—buying some here and selling others there—so that if anyone wants to trade 100 BATs for a third of a Jackson Pollock, they can be assured of a reasonable market price.


pages: 492 words: 118,882

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

"World Economic Forum" Davos, accounting loophole / creative accounting, Ada Lovelace, Adam Curtis, Airbnb, Alan Greenspan, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, behavioural economics, Ben Bernanke: helicopter money, bitcoin, Bletchley Park, blockchain, Bretton Woods, Brexit referendum, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Charles Babbage, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, crowdsourcing, cryptocurrency, data science, David Graeber, deep learning, deskilling, Diane Coyle, discrete time, disruptive innovation, distributed ledger, diversification, double entry bookkeeping, Ethereum, ethereum blockchain, fiat currency, financial engineering, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, Glass-Steagall Act, Higgs boson, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, large denomination, Large Hadron Collider, Lewis Mumford, liquidity trap, London Whale, low interest rates, low skilled workers, M-Pesa, machine readable, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, Michael Milken, MITM: man-in-the-middle, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, power law, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, robo advisor, Satoshi Nakamoto, Satyajit Das, Savings and loan crisis, savings glut, seigniorage, seminal paper, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, Stuart Kauffman, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Vitalik Buterin, Von Neumann architecture, Washington Consensus

Menu costs can prevent firms from setting their prices optimally, thus causing private profit losses which are, however, lower than these menu costs. By engaging in “near-rational behaviour” these firms deviate from the optimal price (wage) setting. and reduce their transaction costs associated with searching information about demand (labor supply) changes. In such case, profit losses caused by deviations of prices (wages) from their optimal value can be offset by reductions of their transaction costs. Such behaviour cab be optimal from the firm’s perspective but causes significant losses of aggregate output and employment. The extensive use of DSGE models in the past few decades have not been without strife.

Owing to uncertainty, opportunism and limited information (bounded rationality), the lack of trust between agents limits the number of interactions and bonds that are formed in a network. This hesitation to form links based on lack of trust has been extensively studied in the field of transaction cost theory (also called new institutional economics) which was developed by Ronal Coase in 1937. Transactional cost theory (TCT) is the branch of economics that deals with the costs of transactions and the institutions that are developed to govern them. It studies the cost of economic links and the ways in which agents organize themselves to deal with economic interactions.

At about the same time that SWIFT was putting a call out for papers, Earthport partnered with Ripple, a company that helps construct quasi-private Blockchains for clients, to implement an instant cross-border payment system. Using Ripple’s blockchain-based RTGS**, Earthport launched the Distributed Ledger Hub (DLH), which provides its clients instant payments and liquidity, transaction cost efficiencies, a high standard of compliance control, and elimination of counter-party risk via pre-funding (Earthport, 2015). As stated by Jonathan Lear, Earthport’s President, “The world is getting smaller and payments needs to move faster… The legacy way of making cross-border payments, well there is only one way to describe it—it’s a real bloody mess….


Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, book value, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, Cornelius Vanderbilt, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, flying shuttle, Glass-Steagall Act, Gordon Gekko, Henri Poincaré, Henry Singleton, high net worth, impact investing, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, John Bogle, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, margin call, means of production, Menlo Park, merger arbitrage, Michael Milken, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Performance of Mutual Funds in the Period, Ponzi scheme, Post-Keynesian economics, price mechanism, principal–agent problem, profit maximization, proprietary trading, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Sand Hill Road, Savings and loan crisis, seminal paper, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, tail risk, technology bubble, Teledyne, The Wealth of Nations by Adam Smith, time value of money, tontine, too big to fail, transaction costs, two and twenty, underbanked, Vanguard fund, working poor, yield curve

Contemporary Views of Usury Currently, credit markets now mostly operate free of religious criteria, and this has created more economically appropriate pricing of borrowing in today’s sophisticated markets. Overall, even though usury laws never entirely ruled out commercial lending, they did have substantial influence on the development of the financial system. In raising the transaction cost of lending and suppressing the growth of debt financing, usury implicitly encouraged equity financing and innovative business contracts and structures in societies that took strong stances against the practice.100 In recent decades, attitudes toward usurious interest rates seem to have changed completely—at times, it may appear that an insufficient premium and an unduly relaxed attitude is being taken toward higher-risk and lower-quality borrowers.

The third development was the construction of a means to connect empowered savers with these investment projects, which was accomplished through the emergence of public markets. The public market was, in the long term, the mechanism to join the two sides of the coin. Public markets offered liquidity, publicized value, broadcast availability, lowered transaction costs, and permitted investors to gain wide diversification with relative ease. Public markets, furthermore, aided in initiating the opportunity and need for regulation. The democratization of investment is not a finished project. Just as the political democratization of the eighteenth and nineteenth centuries is still playing out (it left key demographics still disenfranchised and has not yet spread to all corners of the world), the project of democratization of investment is incomplete.

Privately held equity stakes in business organizations and firms became publicly traded entities on what eventually evolved into high-volume public securities exchanges in the modern era. The emergence of public markets connected savers with investment projects all around the world, all the while providing liquidity, publicized value, broadcast availability, asset diversification potential, and lowered transaction costs. Publicly traded companies arose largely as a result of the Industrial Revolution, drawing on the experience of the joint-stock companies that preceded them. They aided the pace and scale of growth in the era of nineteenth-century railroads and the twentieth century’s automobiles, computers, airplanes, and industry.


pages: 120 words: 39,637

The Little Book That Still Beats the Market by Joel Greenblatt

backtesting, book value, General Magic , index fund, intangible asset, random walk, survivorship bias, transaction costs

But their sales fees and expenses were way too high. Then came no-load funds, which were better. They eliminated the sales fee, but were still burdened with management fees and with the tax and transactional burden that comes from active management. Then came “index funds,” which cut fees, taxes, and transaction costs to the bone. Very, very good. What Joel would have you consider, in effect, is an index-fund-plus, where the “plus” comes from including in your basket of stocks only good businesses selling at low valuations. And he has an easy way for you to find them. Not everyone can beat the averages, of course—by definition.

The study was biased because the database used in the study had been “cleaned up” and excluded companies that later went bankrupt, making the study results look better than they really were (a.k.a. survivorship bias). 3. The study included very small companies that couldn’t have been purchased at the prices listed in the database and uncovered companies too small for professionals to buy. 4. The study did not outperform the market by a significant amount after factoring in transaction costs. 5. The study picked stocks that were in some way “riskier” than the market, and that’s why performance was better. 6. The stock selection strategy was based on back-testing many different stock selection strategies until one was found that worked (a.k.a. data mining). 7. The stock selection strategies used to beat the market included knowledge gained from previous “market-beating” studies that was not available at the time the stock purchases were made in the study.

By using only this special database, it was possible to ensure that no look-ahead or survivorship bias took place. Further, the magic formula worked for both small-and large-capitalization stocks, provided returns far superior to the market averages, and achieved those returns while taking on much lower risk than the overall market (no matter how that risk was measured). Consequently, small size, high transaction costs, and added risk do not appear to be reasonable grounds for questioning the validity of the magic formula results. As for data mining and using academic research not available at the time of stock selection, this did not take place, either. In fact, the two factors used for the magic formula study were actually the first two factors tested.


pages: 316 words: 117,228

The Code of Capital: How the Law Creates Wealth and Inequality by Katharina Pistor

Andrei Shleifer, Asian financial crisis, asset-backed security, barriers to entry, Bear Stearns, Bernie Madoff, Big Tech, bilateral investment treaty, bitcoin, blockchain, Bretton Woods, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, colonial rule, conceptual framework, Corn Laws, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, digital rights, Donald Trump, double helix, driverless car, Edward Glaeser, Ethereum, ethereum blockchain, facts on the ground, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, full employment, global reserve currency, Gregor Mendel, Hernando de Soto, income inequality, initial coin offering, intangible asset, investor state dispute settlement, invisible hand, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, land reform, land tenure, London Interbank Offered Rate, Long Term Capital Management, means of production, money market fund, moral hazard, offshore financial centre, phenotype, Ponzi scheme, power law, price mechanism, price stability, profit maximization, railway mania, regulatory arbitrage, reserve currency, Robert Solow, Ronald Coase, Satoshi Nakamoto, secular stagnation, self-driving car, seminal paper, shareholder value, Silicon Valley, smart contracts, software patent, sovereign wealth fund, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, trade route, Tragedy of the Commons, transaction costs, Wolfgang Streeck

If property rights have been clearly allocated, that is, if the two parties know what their respective rights are and what they are worth in monetary terms, they can calculate the costs each would have to incur, enabling them to resolve their dispute and reach an optimal solution through negotiation. Such an efficient outcome is achievable at least in a world without transaction costs. However, Coase himself stressed that in the real world, transaction costs are ubiquitous, which is why the initial allocation of property rights by the law actually matters a great deal. Yet, as we have seen, landowners did not just bargain with creditors to protect their interests; they employed lawyers who coded their interests in law and thereby helped tilt the playing field in their favor.

Conversely, given that the greatest value is created by coding capital, most law school graduates flock to the firms that hire them in large numbers to do just that. The account of transactional lawyers as the code’s masters offered here differs from two other accounts that can be found in the literature, one portraying lawyers as transaction cost engineers, the other as rent seekers. Ronald Gilson has characterized lawyers as “transaction cost engineers”; according to him, they navigate complex regulations, structure transactions so as to avoid unnecessary costs, and from time to time negotiate with regulators to obtain clearance for more adventurous transactions.13 In doing so, they are said to reduce the tension between “transaction form and regulatory purpose.”14 There are obvious parallels to their role as master coders, but there is also an important difference.

If, instead, each line of business, each division, or each location can be placed behind a separate legal shield, creditors can focus on the business of their choice. Using a separate legal entity for each operation thus can offer superior protection to creditors. Creditors may not be able to reach other assets of the firm easily, but, if all goes well, they save a lot of transaction costs.20 A good illustration for the power of asset-shielding devices is the partnership system of the Medici, the family that ruled over Florence for almost a century, from 1434 to the 1530s.21 The Medici business included textile manufacturing, banking, and trade, with far-flung operations that crisscrossed Europe and reached as far as Rome, Antwerp, London, Bruges, and Paris.


pages: 677 words: 121,255

Giving the Devil His Due: Reflections of a Scientific Humanist by Michael Shermer

Alfred Russel Wallace, anthropic principle, anti-communist, anti-fragile, barriers to entry, Berlin Wall, Black Lives Matter, Boycotts of Israel, Chelsea Manning, clean water, clockwork universe, cognitive dissonance, Colonization of Mars, Columbine, cosmological constant, cosmological principle, creative destruction, dark matter, deplatforming, Donald Trump, Edward Snowden, Elon Musk, fake news, Flynn Effect, germ theory of disease, Great Leap Forward, gun show loophole, Hans Rosling, heat death of the universe, hedonic treadmill, helicopter parent, Higgs boson, hindsight bias, illegal immigration, income inequality, intentional community, invisible hand, Johannes Kepler, Joseph Schumpeter, Kim Stanley Robinson, laissez-faire capitalism, Laplace demon, luminiferous ether, Mars Society, McMansion, means of production, mega-rich, Menlo Park, microaggression, military-industrial complex, moral hazard, moral panic, More Guns, Less Crime, Multics, Oklahoma City bombing, Peter Singer: altruism, phenotype, positional goods, power law, public intellectual, race to the bottom, Richard Feynman, Ronald Coase, Silicon Valley, Skype, social intelligence, Social Justice Warrior, stem cell, Stephen Hawking, Steve Jobs, Steven Pinker, Suez crisis 1956, TED Talk, the scientific method, The Wealth of Nations by Adam Smith, Timothy McVeigh, transaction costs, WikiLeaks, working poor, Yogi Berra

The Hidden Costs of Market Failures and Moral Hazards Moving from examples to analysis, Frank employs a technical model developed by the economist Ronald Coase that shows precisely how economists can take into account such transaction costs in order to better understand macroeconomic phenomena and correct for market failures. Here Frank claims that the transaction costs of keeping up with the Joneses are not presently included in the price of homes, suits, shoes, and parties in terms of the real benefit to the owners, so this is an example of a market failure (and, he opines, a moral hazard) that he suggests can be remedied through a progressive consumption tax wherein these newfound liabilities would not only adjust the transaction costs to account for the hedonic treadmill while simultaneously curtailing needless consumptive behavior, it would also generate additional tax revenues from the rich that could be used to shore up our crumbling Social Security and Medicare accounts.

In order to make money they must use available resources in a way that creates more value than anyone else and with lower costs. In fact, most profit is made from reducing the transactions costs associated with getting products to consumers, which means lower prices. When some guy willingly works 80 hours a week managing the distribution system of a moderately sized corporation everyone else benefits from that hard, and probably dull, work in the form of low prices and increasing quality of goods and services. So, eliminating the “yacht” incentive to reduce transactions costs will just … increase transaction costs, making us all poorer, not just the peacocks.28 Fatal Conceit Redux Robert Frank strikes me as an intelligent and thoughtful man who genuinely wants to employ science and reason to improve the design of society for the betterment of all.

Other Hidden Costs: What Is Seen and What Is Not Seen in Government Actions Even if evolutionary psychologists are wrong in this analysis of sexual selection and costly signaling theory, and it was determined that ostentatious displays of wealth, power, prestige, and creativity should be penalized through a consumption tax because of Frank’s analysis using Coase’s transaction models that reveal the hidden transaction costs of positional ranking and subsequent arms races, there are transaction costs of implementing such a tax. In fact, once you concede the point that at least some government services are necessary and must be paid for by taxes, then to the short list of services such as military, police, courts, and tax collectors, one can bolt on any number of additional services justified under the collective action problem rubric: fire departments, roads and bridges, schools, libraries, national parks and forests, postal service, social security, welfare, Medicare and Medicaid, foreign aid, and countless others embodied in the alphabet soup that this slippery slope line of reasoning has given us.


pages: 202 words: 62,901

The People's Republic of Walmart: How the World's Biggest Corporations Are Laying the Foundation for Socialism by Leigh Phillips, Michal Rozworski

Alan Greenspan, Anthropocene, Berlin Wall, Bernie Sanders, biodiversity loss, call centre, capitalist realism, carbon footprint, carbon tax, central bank independence, Colonization of Mars, combinatorial explosion, company town, complexity theory, computer age, corporate raider, crewed spaceflight, data science, decarbonisation, digital rights, discovery of penicillin, Elon Musk, financial engineering, fulfillment center, G4S, Garrett Hardin, Georg Cantor, germ theory of disease, Gordon Gekko, Great Leap Forward, greed is good, hiring and firing, independent contractor, index fund, Intergovernmental Panel on Climate Change (IPCC), Internet of things, inventory management, invisible hand, Jeff Bezos, Jeremy Corbyn, Joseph Schumpeter, Kanban, Kiva Systems, linear programming, liquidity trap, mass immigration, Mont Pelerin Society, Neal Stephenson, new economy, Norbert Wiener, oil shock, passive investing, Paul Samuelson, post scarcity, profit maximization, profit motive, purchasing power parity, recommendation engine, Ronald Coase, Ronald Reagan, sharing economy, Silicon Valley, Skype, sovereign wealth fund, strikebreaker, supply-chain management, surveillance capitalism, technoutopianism, TED Talk, The Nature of the Firm, The Wealth of Nations by Adam Smith, theory of mind, Tragedy of the Commons, transaction costs, Turing machine, union organizing, warehouse automation, warehouse robotics, We are all Keynesians now

Models of markets working together in seamless harmony, as well as arguments about the market system producing the best outcomes, relied on the pretty fantastical assumption that each of us have any and all information permanently at our fingertips. As some economists began to question the notion of hyperrational humans, they found Coase’s notion of transaction costs to be a useful concept that could help save the rest of the discipline. The new field of transaction cost economics turned Coase’s insights about planning within capitalism into a story about flawed humanity. If our world diverged from one populated by perfectly rational beings, then some nonmarket transactions could be grudgingly admitted into the market system—as long as our imperfections were more costly than the benefits we could get from markets.

Coase argued that companies do all of this apparent in-house imitation of the Soviet Union simply because the cost is too high of leaving up to markets every last coordinating decision. This was quite a clever explanation for the dissonance between copious corporate planning within and throughout a free market system. Economists are fond of the saying that “there is no free lunch.” Coase applied this to markets themselves. Markets introduce a whole web of what he called “transaction costs.” Writing a contract, setting up a market or finding the best price all take up resources and time. So long as the cost of doing all this was cheaper in house than on the market (and it was), it was only rational to keep it in house. So the “free” market isn’t really free either! Coase argued that it only makes sense that some decisions would be left to planning—a decision is made, and it is done.

The manager’s exercise of central planning over his small province of tyranny is therefore not simply a better means to an end, as Coase thought, but a reflection of how the economy actually works. The adversarial relationship between bosses and workers that capitalism creates is no accident of markets merely introducing transaction costs that are best avoided through planning. Yet for mainstream economists, the confrontation between workers and managers only comes up in the context of “shirking.” The GPS device in the UPS driver’s truck, the call center badge that monitors washroom breaks or the white-collar worker’s app that tracks web browsing history are the sticks requiring one does as one is told; the bonuses are the carrots.


pages: 239 words: 60,065

Retire Before Mom and Dad by Rob Berger

Airbnb, Albert Einstein, Apollo 13, asset allocation, Black Monday: stock market crash in 1987, buy and hold, car-free, cuban missile crisis, discovery of DNA, diversification, diversified portfolio, en.wikipedia.org, fixed income, hedonic treadmill, index fund, John Bogle, junk bonds, mortgage debt, Mr. Money Mustache, passive investing, Ralph Waldo Emerson, robo advisor, The 4% rule, the rule of 72, transaction costs, Vanguard fund, William Bengen, Yogi Berra, Zipcar

., 0.05%) to well over 200 (2%). Transaction Costs Mutual funds pay fees to buy and sell stocks and bonds. In this way, they are no different than if you and I bought and sold individual stocks and bonds. We’d have to pay a brokerage fee. So do mutual funds. Here’s the dirty little secret few people know. The transaction costs that mutual funds pay do not come out of the Expense Ratio we just looked at. They are a separate fee. What’s more, we don’t know ahead of time what those fees will be. Why? Because not even the mutual funds know what their transaction costs will be until they actually decide to buy or sell something.

Because not even the mutual funds know what their transaction costs will be until they actually decide to buy or sell something. We can, if we want, see what a mutual fund company paid in the past for transaction costs. We’d do that by digging into what is called a Statement of Additional Information. These are dense impenetrable documents filed with the Securities and Exchange Commission in Washington, DC. Here’s what you need to know. Index funds tend to have far fewer transaction costs than actively managed funds. Once again, index funds win out over actively managed funds. Load Fees Some, but not all, mutual funds charge what are called Load Fees. These are fees you pay when you either buy shares of the fund or sell shares of the fund.

Money Mustache 32 Mutual Fund 19-20, 38, 80, 139-140, 143, 145-147, 149, 151-155, 157-159, 161-162, 164, 183-185, 187, 190-191, 195-196, 200, 205, 207, 246 Passive Investing 141 Paul Merriman 161 Progress Principle 48, 211-214, 229 Reit 147 Rick Ferri 164 Roth 401(K) 64, 169-170, 172, 174-177, 179, 183, 238 Roth IRA 170-173, 175, 177, 179-181, 189 Rule Of 72 37-38, 40 Rule Of 752 32-33 Rule Of 857 33, 50, 73, 89 Rule Of 36,036 33 Saving Rate 53-55, 57-61, 63, 66-69, 71-76, 85-86, 98, 115, 154, 176, 195, 211, 213, 215, 222, 224 Schwab 164, 180, 192 Slingshot Effect 58-59, 61, 67, 72, 74, 76, 97, 222 S&P 500 136-137, 140-142, 146, 186, 196-197, 199-200 Spending Rate 55, 57-59, 61, 66, 71-72, 74, 98, 154, 176, 222 Stock 4, 20, 33, 38, 64-65, 101, 129-132, 134-141, 143, 145-147, 150-152, 157-160, 162-163, 184-186, 191-192, 195-203, 207, 233, 246 Target Date Retirement Funds 158-161, 165, 184 Taxes 1, 57, 63-64, 66, 143, 169, 172, 174, 178-179 TDR 158, 160-163, 185, 187, 190-192 Ticker 146, 159, 184, 186, 190, 195 Tips 48, 54, 149 Transaction Costs 152 Value 17, 64, 122, 133-135, 137, 144, 146-148, 158-161, 163, 172, 186, 197, 200-202, 220-221, 226 Vanguard 20, 38, 85, 87, 146, 151, 154, 158-159, 161-164, 191-192, 200, 207, 244 Acknowledgments My wife, Victoria, has managed to survive this life with me by her side for nearly 31 years and counting.


pages: 247 words: 60,543

The Currency Cold War: Cash and Cryptography, Hash Rates and Hegemony by David G. W. Birch

"World Economic Forum" Davos, Alan Greenspan, algorithmic management, AlphaGo, bank run, Big Tech, bitcoin, blockchain, Bretton Woods, BRICs, British Empire, business cycle, capital controls, cashless society, central bank independence, COVID-19, cross-border payments, cryptocurrency, Diane Coyle, disintermediation, distributed ledger, Donald Trump, driverless car, Elon Musk, Ethereum, ethereum blockchain, facts on the ground, fault tolerance, fiat currency, financial exclusion, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, global reserve currency, global supply chain, global village, Hyman Minsky, information security, initial coin offering, Internet of things, Jaron Lanier, Kenneth Rogoff, knowledge economy, M-Pesa, Mark Zuckerberg, market clearing, market design, Marshall McLuhan, mobile money, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, new economy, Northern Rock, one-China policy, Overton Window, PalmPilot, pattern recognition, Pingit, QR code, quantum cryptography, race to the bottom, railway mania, ransomware, Real Time Gross Settlement, reserve currency, Satoshi Nakamoto, seigniorage, Silicon Valley, smart contracts, social distancing, sovereign wealth fund, special drawing rights, subscription business, the payments system, too big to fail, transaction costs, Vitalik Buterin, Washington Consensus

— Detlev S. Schlichter, Paper Money Collapse (2011) We are used to one particular kind of currency: government currency. The argument for maintaining this monopoly stems from economic efficiency and stability. Society obtains efficiency because a uniform currency with only one issuer minimizes transaction costs in a world of incomplete (or expensive) information. It is not necessary to have information about the creditworthiness of each and every issuer because there is only one. Society obtains stability (we hope) because the currency is issued by a central banker who understands economics (Eichengreen 2019).

This was because a collection of interlinked community currencies seemed to me less economically efficient in aggregate. I still think this is true, but it may not be the point. I am wondering if we need to explore ways to increase economic activity within communities at the expense of inter-community transaction costs as a response to inequality and the unrest that it may cause. This has several implications, because if communities rather than individuals become central to money creation, then these currencies will be imbued with the values of the communities that create them. New York, New York The idea of cities creating currencies that are optimized to meet their requirements rather than those of the nation state may seem far-fetched.

If both the sender and the receiver of funds have opted to use shielded addresses, the amount sent will be encrypted as well. Light and dark The idea that counterparties can choose whether a transaction is visible or not is interesting and under-explored. We can use the meta-technology to construct a cash replacement system in which anonymous transactions cost more than non-anonymous transactions. One way to do this is via the Crime Pays System, or CPS, conceived by the artist Austin Houldsworth.20 It was Houldsworth’s idea to have me present CPS at the British Computer Society (BCS) in 2012. In the guise of ‘Mr Don Rogers’, an alter ego created for the performance, I set out the new payment system to an unsuspecting audience, who, I have to say, were excellent sports about the whole thing!


pages: 661 words: 185,701

The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance by Eswar S. Prasad

access to a mobile phone, Adam Neumann (WeWork), Airbnb, algorithmic trading, altcoin, bank run, barriers to entry, Bear Stearns, Ben Bernanke: helicopter money, Bernie Madoff, Big Tech, bitcoin, Bitcoin Ponzi scheme, Bletchley Park, blockchain, Bretton Woods, business intelligence, buy and hold, capital controls, carbon footprint, cashless society, central bank independence, cloud computing, coronavirus, COVID-19, Credit Default Swap, cross-border payments, cryptocurrency, deglobalization, democratizing finance, disintermediation, distributed ledger, diversified portfolio, Dogecoin, Donald Trump, Elon Musk, Ethereum, ethereum blockchain, eurozone crisis, fault tolerance, fiat currency, financial engineering, financial independence, financial innovation, financial intermediation, Flash crash, floating exchange rates, full employment, gamification, gig economy, Glass-Steagall Act, global reserve currency, index fund, inflation targeting, informal economy, information asymmetry, initial coin offering, Internet Archive, Jeff Bezos, Kenneth Rogoff, Kickstarter, light touch regulation, liquidity trap, litecoin, lockdown, loose coupling, low interest rates, Lyft, M-Pesa, machine readable, Mark Zuckerberg, Masayoshi Son, mobile money, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, offshore financial centre, open economy, opioid epidemic / opioid crisis, PalmPilot, passive investing, payday loans, peer-to-peer, peer-to-peer lending, Peter Thiel, Ponzi scheme, price anchoring, profit motive, QR code, quantitative easing, quantum cryptography, RAND corporation, random walk, Real Time Gross Settlement, regulatory arbitrage, rent-seeking, reserve currency, ride hailing / ride sharing, risk tolerance, risk/return, Robinhood: mobile stock trading app, robo advisor, Ross Ulbricht, Salesforce, Satoshi Nakamoto, seigniorage, Sheryl Sandberg, Silicon Valley, Silicon Valley startup, smart contracts, SoftBank, special drawing rights, the payments system, too big to fail, transaction costs, uber lyft, unbanked and underbanked, underbanked, Vision Fund, Vitalik Buterin, Wayback Machine, WeWork, wikimedia commons, Y Combinator, zero-sum game

Taking Stock of Looming Changes Recent Fintech innovations—including those underpinning cryptocurrencies such as Bitcoin—herald broader access to the financial system, quicker and more easily verifiable settlement of transactions and payments, and lower transaction costs. Domestic and cross-border payment systems are on the threshold of major transformation, with significantly higher speed and lower transaction costs on the horizon. There are, however, likely to be trade-offs. Decentralized payment and settlement systems could certainly generate efficiency gains and, so long as the market is not dominated by a small number of players, create redundancies that render the failure of any single payment provider less consequential.

First, as these economies become richer, there is enormous latent demand for higher-quality financial services (for example, wealth management, retirement planning) and products (such as mutual funds, stock options, automobile and mortgage loans) from their fast-expanding middle-class populations. The size of some of these economies also allows innovations to be scaled up quickly to reduce per-unit or per-transaction costs. Second, financial regulators in these countries seem to be more willing to take chances on such advances. In China, payment providers such as Alipay met little resistance from financial regulators in their early days. This enabled them to experiment and innovate, quickly moving from just providing payment apps to offering other financial products, with few constraints.

This is a somewhat less clunky term than nonofficial cryptocurrencies, which would be a more accurate way to describe digital currencies that are not backed by any government authority (nor, in most cases, by any financial or tangible assets either) and whose building blocks include some cryptographic tools. Insofar as cryptocurrencies lack the backing of a government or other institution, they might appear to stand little chance of competing with fiat currencies in the long run. Moreover, it has become clear that Bitcoin is subject to volatile prices and high transaction costs and does not truly guarantee anonymity of transacting parties, which ought to make it less attractive as a payment system. The market response has been the proliferation of cryptocurrencies that attempt to address one or more of these concerns. As of May 2021, there were about seventeen hundred cryptocurrencies with a market capitalization of at least $1 million each (and another five hundred with a market capitalization in excess of $100,000).


pages: 153 words: 45,721

Making Work Visible: Exposing Time Theft to Optimize Workflow by Dominica Degrandis, Tonianne Demaria

cloud computing, cognitive bias, cognitive load, DevOps, Elon Musk, en.wikipedia.org, informal economy, Jeff Bezos, Kanban, loose coupling, microservices, Parkinson's law, Sheryl Sandberg, sunk-cost fallacy, systems thinking, TED Talk, transaction costs, two-pizza team

Optimal Batch Size The optimal batch size for delivery then depends on the combination of the impact of economies of scale and the cost of delaying responses (holding cost and transaction cost). Some people have a bias for large batch sizes because of the concept of economies of scale. Economies of scale is the cost advantage that arises with increased output of a product. The cost advantage is seen in some areas of manufacturing. Boeing produces large quantities of a single product on its assembly line. The transaction cost to create airplane engines needed for just one airplane at a time is too high, so they create a larger batch of engines at one time to reduce the associated overhead cost.

The shorter window provides a sense of urgency to get something done faster, and it encourages me to break down work into smaller chunks. Ultimately, I am more efficient. Imagine you’re grocery shopping for bananas. If you buy a six-month supply of bananas at one time, your transaction cost is low, but most of the bananas will be rotten within ten days, so you’ve wasted money. If you buy a one-day supply of bananas at one time, they won’t rot, but your transaction costs will be high, because you’ll be grocery shopping every day. Somewhere in between is the right batch size of bananas. The reduction of batch size is a critical principle of Lean manufacturing. Small batches allow manufacturers to slash work in process and accelerate feedback, which, in turn, improves cycle times, quality, and efficiency.

KEY TAKEAWAYS Delays are common; use metrics, particularly flow metrics, to help you make good decisions on priorities, WIP limits, and capacity utilization. Stop letting yourself and your team reach 100% capacity utilization. Look for the optimal batch size to help you achieve efficiency while keeping transaction costs down. Invest energy in collecting metrics that help you make decisions. —Eric Ries 3.2 THE TIME THIEF O’GRAM Ladies and gents, I give you the Time Thief O’Gram. Think of this tool as a spotlight, shining a light on a criminal lineup of the uncertainty across your organization. The intent here is to look at metrics that reveal high risk.


pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

accounting loophole / creative accounting, affirmative action, Alan Greenspan, An Inconvenient Truth, bank run, banking crisis, behavioural economics, Berlin Wall, bonus culture, Branko Milanovic, BRICs, business cycle, call centre, carbon tax, Cass Sunstein, central bank independence, classic study, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, different worldview, disintermediation, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, general purpose technology, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, hedonic treadmill, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, income inequality, income per capita, industrial cluster, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, Paradox of Choice, Pareto efficiency, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Robert Solow, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, social contagion, South Sea Bubble, Steven Pinker, tacit knowledge, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, the strength of weak ties, Tragedy of the Commons, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, vertical integration, web application, web of trust, winner-take-all economy, World Values Survey, zero-sum game

The work of institutional economists explains the structure of organizations in terms of transactions costs. Relationships are brought within an institution when the costs of a transaction in a market would be too high. Information makes up one important element of transaction costs, and by decreasing them so much the information revolution has thus contributed to a widespread crisis of governance.23 Another important transaction cost is created by distrust. The corrosion of trust in Western societies, described earlier, has increased transaction costs at the same time that reductions in information and communication costs have worked in the other direction.

They will involve a more productive and thoughtful interplay between markets and governments than we’ve typically had in the past, one taking account of the dramatic technological and structural change in the economy. Markets and governments need each other to function well, and indeed often “fail” in the same contexts. The existence of transactions costs and information asymmetries present a challenge to any institutional framework. The work of the 2009 Nobel laureates Elinor Ostrom and Oliver Williamson focuses precisely on the way these aspects of reality shape different kinds of institutional response. The utterly transformed world of information, due to ICTs, is revolutionizing the governance of every economy, and we’re only partway through the revolution.

There is nothing in this that runs counter to human nature—on the contrary, it’s in the genes. And the assumption of rational self-interest forms the basis of a powerful way to analyze situations where people do appear to be acting counter to their own interests—it can help identify the information asymmetry or the transaction cost or the psychological trait that would explain the divergence between actual behavior and rational calculation. What’s more, there is much empirical evidence that in many practical situations people with all their cognitive limitations and inconsistencies nevertheless do make choices leading to exactly the outcomes predicted by textbook economic theory.


pages: 337 words: 89,075

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio by Victor A. Canto

accounting loophole / creative accounting, airline deregulation, Alan Greenspan, Andrei Shleifer, asset allocation, Bretton Woods, business cycle, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, equity risk premium, financial engineering, fixed income, frictionless, global macro, high net worth, index fund, inflation targeting, invisible hand, John Meriwether, junk bonds, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low cost airline, low interest rates, market bubble, merger arbitrage, money market fund, new economy, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, Phillips curve, price mechanism, purchasing power parity, risk free rate, risk tolerance, risk-adjusted returns, risk/return, rolling blackouts, Ronald Reagan, Savings and loan crisis, selection bias, seminal paper, shareholder value, Sharpe ratio, short selling, statistical arbitrage, stocks for the long run, survivorship bias, systematic bias, Tax Reform Act of 1986, the market place, transaction costs, Y2K, yield curve, zero-sum game

Yet, when leverage is ruled out on theoretical grounds, whether one chooses an alpha strategy over an asset-allocation strategy is a matter of indifference because the two are equivalent. Transaction costs, however, tilt the balance in one strategy’s favor over the other. For small investors, the transaction costs of implementing a portable-alpha strategy with some market exposure may not be feasible. Most hedge funds have liquidity constraints, net worth conditions, and leverage requirements, all which combine to exclude many investors from pursuing a full fledged alpha strategy. The transaction-cost barrier alone keeps many investors in a pure asset-allocation strategy. This does not mean, however, alpha strategies cannot play a role in asset-allocation plans.

In addition, they have liquidity requirements and necessitate investors keep track of their market exposure (that is, long–short positions) to add market (beta) exposure. This is something individuals may not be willing to do or may not be able to do. The various transaction costs may in effect prevent most investors from pursuing alpha strategies. As wealth levels increase, however, investors may be able to amortize these transaction costs over their higher net worths and hire managers who can perform all the needed services. Some portable-alpha strategies may only be available to the wealthiest investors and larger pension plans. This does not rule out the role of pure-alpha strategies in a regular asset-allocation portfolio.

Largely due to the client base’s geographic location, the firm’s managers have tried to provide less U.S.-centric allocations than ones guided by market-capitalization weights. To this end, the firm’s strategy has been to reallocate some funds away from the U.S. and into other areas of the world, specifically the Pacific region. Transaction costs, taxes, and other considerations have dictated that portfolio allocations be revisited only once a year, with exceptions made for extraordinary events. Finally, the firm’s portfolio revisions are designed to take advantage of a changing economic environment; a top-down approach is used to tilt portfolios toward perceived changes in the macro environment.


pages: 270 words: 79,180

The Middleman Economy: How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit by Marina Krakovsky

Affordable Care Act / Obamacare, Airbnb, Al Roth, Ben Horowitz, Benchmark Capital, Black Swan, buy low sell high, Chuck Templeton: OpenTable:, Credit Default Swap, cross-subsidies, crowdsourcing, deal flow, disintermediation, diversified portfolio, experimental economics, George Akerlof, Goldman Sachs: Vampire Squid, income inequality, index fund, information asymmetry, Jean Tirole, Joan Didion, John Zimmer (Lyft cofounder), Kenneth Arrow, Lean Startup, Lyft, Marc Andreessen, Mark Zuckerberg, market microstructure, Martin Wolf, McMansion, Menlo Park, Metcalfe’s law, moral hazard, multi-sided market, Network effects, patent troll, Paul Graham, Peter Thiel, pez dispenser, power law, real-name policy, ride hailing / ride sharing, Robert Metcalfe, Sand Hill Road, search costs, seminal paper, sharing economy, Silicon Valley, social graph, supply-chain management, TaskRabbit, the long tail, The Market for Lemons, the strength of weak ties, too big to fail, trade route, transaction costs, two-sided market, Uber for X, uber lyft, ultimatum game, Y Combinator

Proponents of that idea, which has been called the “threatened intermediaries hypothesis,” began their argument with the premise that middlemen have traditionally been necessary to reduce the high transaction costs of the brick-and-mortar world. So far so good. But the rest of the argument was flawed: they reasoned that if the Internet reduced transaction costs, middlemen would become less necessary. The big flaw is to view all middlemen as providing just one service.18 But reducing transaction costs covers a large mix of services that don’t necessarily come in one bundle.19 If the Internet lowers transaction costs, it could actually create more demand for middlemen. After all, the Internet reduces costs for everyone—and when it reduces a middleman’s costs more than it does someone else’s, buyers and sellers prefer to keep doing business through the middleman.20 That’s why, despite the obsolescence of many travel agency jobs, for example, a certain class of travel agent is still thriving.21 Ellison Poe, owner of Poe Travel in Little Rock, Arkansas, is a perfect example, and after you meet her in a later chapter, you will understand why she says the Internet has had no downside whatsoever for her and why, on the contrary, it has been “a total pro, a great thing, a positive force in the world.”22 As some middlemen disappear, others will become more successful.

How do they form those connections, and what can they do to strengthen them? In answering such questions, I contend that middlemen provide value by playing some combination of six roles and that the most successful middlemen are those who play those roles best.17 Each role solves a particular problem—reduces a specific friction, a specific transaction cost—that, without the middleman, would inhibit or prevent mutually beneficial deals: •The Bridge promotes trade by reducing physical, social, or temporal distance. •The Certifier separates the wheat from the chaff and gives buyers reassuring information about the seller’s underlying quality. •The Enforcer makes sure buyers and sellers put forth full effort, cooperate, and stay honest.

A Course on Middlemen * * * The most admirable middlemen never got a formal education in being a middleman because no such classes exist. Yet there’s plenty of material for such an education because lots of social scientists have studied, from one angle or another, the questions of how middlemen provide value and profit from their roles between buyers and sellers. For example, economic theory has much to say about transaction-cost economics, two-sided markets, and intermediaries’ ability to reduce information asymmetries between buyers and sellers. In particular, game theory informs our understanding of repeated interactions, reputations, shirking and cheating, and third-party enforcement. Social psychology and experimental economics show how acting on behalf of others affects people’s behavior and impressions.


pages: 411 words: 80,925

What's Mine Is Yours: How Collaborative Consumption Is Changing the Way We Live by Rachel Botsman, Roo Rogers

"World Economic Forum" Davos, Abraham Maslow, Airbnb, Apollo 13, barriers to entry, behavioural economics, Bernie Madoff, bike sharing, Buckminster Fuller, business logic, buy and hold, carbon footprint, Cass Sunstein, collaborative consumption, collaborative economy, commoditize, Community Supported Agriculture, credit crunch, crowdsourcing, dematerialisation, disintermediation, en.wikipedia.org, experimental economics, Ford Model T, Garrett Hardin, George Akerlof, global village, hedonic treadmill, Hugh Fearnley-Whittingstall, information retrieval, intentional community, iterative process, Kevin Kelly, Kickstarter, late fees, Mark Zuckerberg, market design, Menlo Park, Network effects, new economy, new new economy, out of africa, Paradox of Choice, Parkinson's law, peer-to-peer, peer-to-peer lending, peer-to-peer rental, planned obsolescence, Ponzi scheme, pre–internet, public intellectual, recommendation engine, RFID, Richard Stallman, ride hailing / ride sharing, Robert Shiller, Ronald Coase, Search for Extraterrestrial Intelligence, SETI@home, Simon Kuznets, Skype, slashdot, smart grid, South of Market, San Francisco, Stewart Brand, systems thinking, TED Talk, the long tail, The Nature of the Firm, The Spirit Level, the strength of weak ties, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thorstein Veblen, Torches of Freedom, Tragedy of the Commons, transaction costs, traveling salesman, ultimatum game, Victor Gruen, web of trust, women in the workforce, work culture , Yochai Benkler, Zipcar

Such exchanges have not been particularly efficient through off-line channels, but in the Internet age, redistribution is becoming a way of life. Collapse of “Transaction Costs” When we asked Beal which are the most commonly listed items on Freecycle, he explained that “there isn’t one particular thing” but instead massive categories of “inconvenient things” (old pianos, sofas, and televisions) and “unusual items” (disco balls, fish tanks, and even stuffed animals). These are the items that would have been a pain to lug to the dump (and sometimes you would even have to pay to dispose of them) or tricky to unload on a neighbor. The transaction costs to ensure they were kept in use, not in landfill, would have been high.

In his paper “The Nature of the Firm,” economist and Nobel laureate Ronald Coase coined the term “transaction costs” to refer to the cost of making any form of exchange or participating in a market.3 If you go to the supermarket, for example, and buy some groceries, your costs are not just the price of the groceries but the energy, time, and effort required to write your list, travel to and from the store, wheel around your cart and choose your products, wait in the checkout line, and unpack and put away the groceries when you get back home. Your total “costs” are greater than the dollar number on your receipt. In the pre-Internet age, the transaction costs of coordinating groups of people with aligned wants and needs or even just similar interests were high, making the sharing of products tricky and inconvenient.

The residents of Topanga had so many ideas that they had to decide where to start. The challenge the residents experienced was coordination. This barrier has historically prevented most people from attempting to “share nicely,” as the perceived effort and energy needed to make it work negate the value in return. The apparent transaction costs have been too high. They were happy to carpool, but how could they easily be aware of each other’s schedules? They wanted to share chores such as grocery shopping, but how would they know who wanted what and when? Meeting to decide these things would defeat the purpose of making life easier.


pages: 791 words: 85,159

Social Life of Information by John Seely Brown, Paul Duguid

Alvin Toffler, business process, Charles Babbage, Claude Shannon: information theory, computer age, Computing Machinery and Intelligence, cross-subsidies, disintermediation, double entry bookkeeping, Frank Gehry, frictionless, frictionless market, future of work, George Gilder, George Santayana, global village, Goodhart's law, Howard Rheingold, informal economy, information retrieval, invisible hand, Isaac Newton, John Markoff, John Perry Barlow, junk bonds, Just-in-time delivery, Kenneth Arrow, Kevin Kelly, knowledge economy, knowledge worker, lateral thinking, loose coupling, Marshall McLuhan, medical malpractice, Michael Milken, moral hazard, Network effects, new economy, Productivity paradox, Robert Metcalfe, rolodex, Ronald Coase, scientific management, shareholder value, Shoshana Zuboff, Silicon Valley, Steve Jobs, Superbowl ad, tacit knowledge, Ted Nelson, telepresence, the medium is the message, The Nature of the Firm, the strength of weak ties, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, Turing test, Vannevar Bush, Y2K

Microsoft continues to grow while other high-tech start-ups compete for the title of "fastest growing ever." 22 Downes and Mui draw on the theory of the firm proposed by the Nobel Prize-winning economist Ronald Coase. Coase developed the notion of transaction costs. These are the costs of using the marketplace, of searching, evaluating, contracting, and enforcing. When it is cheaper to do these as an organization than as an individual, organizations will form. Conversely, as transaction costs fall, this glue dissolves and firms and organizations break apart. Ultimately, the theory suggests, if transaction costs become low enough, there will be no formal organizations, but only individuals in market relations. And, Downes and Mui argue, information technology is relentlessly driving down these costs.

There are more "Ds" that could be added, such as Kevin Kelly's displacement and devolution. 22. Downes and Mui, 1998. 23. Coase, 1937. Coase's theory should be seen not so much as an attack on neoclassical individualism as an attempt to save it from itself. We return to transaction cost theory briefly in our discussion of the future of the firm in chapter 6. There we take a "knowledge based," rather than transaction cost, view of the firm. 24. Among the targets of early, landmark trust cases were Northern Securities (1911), Standard Oil (1911), and American Tobacco (1911). In November 1998, Philip Morris acquired several brands from the Ligget corporation. 25.

And, Downes and Mui argue, information technology is relentlessly driving down these costs. Page 24 Though he produced elegant economic theory, Coase had strong empirical leanings. He developed his theory of transaction costs in the 1930s to bridge the gap between theoretical accounts of the marketplace and what he saw in the actual marketplaceparticularly when he traveled in the United States. There, business was dominated by huge and still-growing firms. These defied the purity and simplicity of the theoretical predictions, which envisaged markets comprising primarily individual entrepreneurs. 23 In honor of Coase's empiricism, it's important to look around now.


pages: 117 words: 31,221

Fred Schwed's Where Are the Customers' Yachts?: A Modern-Day Interpretation of an Investment Classic by Leo Gough

Albert Einstein, banking crisis, Bernie Madoff, book value, corporate governance, discounted cash flows, disinformation, diversification, fixed income, index fund, John Bogle, junk bonds, Long Term Capital Management, Michael Milken, Northern Rock, passive investing, Ralph Waldo Emerson, random walk, short selling, South Sea Bubble, The Nature of the Firm, the rule of 72, The Wealth of Nations by Adam Smith, transaction costs, young professional

HAVING YOUR CAKE AND EATING IT 22. EXCEPTIONS ARE THE RULE 23. FUNDAMENTAL ANALYSIS 24. NEW ISSUES 25. TRUSTEES, EXECUTORS AND LAWYERS 26. RETIREMENT PLANNING 27. INDEX INVESTING 28. DON’T INVEST ON A HIGH 29. COMPANIES DON’T OFTEN TURN AROUND 30. RIDE THE WINNERS 31. THE TROUBLE WITH TRANSACTION COSTS 32. CROOKS 33. AVOIDING THE BIG COLLAPSES 34. COUNTER-CYCLICAL INVESTMENT 35. GLOBALISATION 36. NUMERACY REQUIRED 37. SHORT SELLING 38. THOSE CRAZY REGULATORS 39. COLLECTIVE INVESTMENTS 40. MERGERS AND ACQUISITIONS 41. MASSAGING THE FIGURES 42. LOOKING FOR BARGAINS 43. DISCOUNTED CASH FLOW 44.

Although it may work for portfolios that are less than expertly picked, if you really believe in your shares – because you have studied them properly, with your business brain in gear – then there shouldn’t be much that happens that should change your mind, and you ought to be willing to hold onto great companies through some lean times. However, as a psychological trick to keep you from buying and selling too often, it’s probably okay as a creed. 31 THE TROUBLE WITH TRANSACTION COSTS ‘The man who chooses to take his money and churn it furiously … cannot in any way predict his fate, save for a single assurance. So long as any money still clings to the side of the churn, he will not be bored.’ DEFINING IDEA… All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies

~ WARREN BUFFETT People who have never owned shares often imagine that investors spend their time buying and selling every day, if not every hour – and they also imagine that this is fun. That might be okay if you are a large institution with a department full of traders with nothing else to do, because financial institutions pay very low transaction charges. For the private investor, though, it’s an expensive activity, because the transaction costs are higher, so the more you trade, the more the charges eat into your overall return. What’s worse, if you like to speculate in less well-known companies, like the ones quoted on AIM (the Alternative Investment Market) or the OTC (the Over The Counter market), you’ll find that the ‘spread’ can be very much wider than in the main market – that’s the difference between the price at which a dealer will buy from you (the ‘bid’) and the price at which he will sell to you (the ‘offer’).


pages: 472 words: 117,093

Machine, Platform, Crowd: Harnessing Our Digital Future by Andrew McAfee, Erik Brynjolfsson

"World Economic Forum" Davos, 3D printing, additive manufacturing, AI winter, Airbnb, airline deregulation, airport security, Albert Einstein, algorithmic bias, AlphaGo, Amazon Mechanical Turk, Amazon Web Services, Andy Rubin, AOL-Time Warner, artificial general intelligence, asset light, augmented reality, autism spectrum disorder, autonomous vehicles, backpropagation, backtesting, barriers to entry, behavioural economics, bitcoin, blockchain, blood diamond, British Empire, business cycle, business process, carbon footprint, Cass Sunstein, centralized clearinghouse, Chris Urmson, cloud computing, cognitive bias, commoditize, complexity theory, computer age, creative destruction, CRISPR, crony capitalism, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, Dean Kamen, deep learning, DeepMind, Demis Hassabis, discovery of DNA, disintermediation, disruptive innovation, distributed ledger, double helix, driverless car, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Ethereum, ethereum blockchain, everywhere but in the productivity statistics, Evgeny Morozov, fake news, family office, fiat currency, financial innovation, general purpose technology, Geoffrey Hinton, George Akerlof, global supply chain, Great Leap Forward, Gregor Mendel, Hernando de Soto, hive mind, independent contractor, information asymmetry, Internet of things, inventory management, iterative process, Jean Tirole, Jeff Bezos, Jim Simons, jimmy wales, John Markoff, joint-stock company, Joseph Schumpeter, Kickstarter, Kiva Systems, law of one price, longitudinal study, low interest rates, Lyft, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, Marc Andreessen, Marc Benioff, Mark Zuckerberg, meta-analysis, Mitch Kapor, moral hazard, multi-sided market, Mustafa Suleyman, Myron Scholes, natural language processing, Network effects, new economy, Norbert Wiener, Oculus Rift, PageRank, pattern recognition, peer-to-peer lending, performance metric, plutocrats, precision agriculture, prediction markets, pre–internet, price stability, principal–agent problem, Project Xanadu, radical decentralization, Ray Kurzweil, Renaissance Technologies, Richard Stallman, ride hailing / ride sharing, risk tolerance, Robert Solow, Ronald Coase, Salesforce, Satoshi Nakamoto, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Skype, slashdot, smart contracts, Snapchat, speech recognition, statistical model, Steve Ballmer, Steve Jobs, Steven Pinker, supply-chain management, synthetic biology, tacit knowledge, TaskRabbit, Ted Nelson, TED Talk, the Cathedral and the Bazaar, The Market for Lemons, The Nature of the Firm, the strength of weak ties, Thomas Davenport, Thomas L Friedman, too big to fail, transaction costs, transportation-network company, traveling salesman, Travis Kalanick, Two Sigma, two-sided market, Tyler Cowen, Uber and Lyft, Uber for X, uber lyft, ubercab, Vitalik Buterin, warehouse robotics, Watson beat the top human players on Jeopardy!, winner-take-all economy, yield management, zero day

Often called the theory of the firm, TCE is a branch of economics important enough to have merited three Nobel prizes: the first in 1991 to Coase; the second in 2009 to his student Oliver Williamson, who was recognized along with Elinor Ostrom;†† and most recently a third, to Oliver Hart and Bengt Holm-ström, who were recognized in 2016. As you’ve no doubt inferred from the name, transaction costs turn out to be deeply important: when markets have lower total transaction costs, they win out over hierarchies, and vice versa. We can’t possibly do a fair job of conveying here all the insights of transaction cost economics; there’s too much rich and excellent work. Instead, we want to concentrate on one aspect of TCE that’s especially helpful for understanding the impact of the powerful new digital technologies of the crowd.

., 305 Spotify, 146–48 stacks, 295–96, 298 Stallman, Richard, 243 standard partnership creativity and, 119, 120 defined, 37 demand for routine skills and, 321 HiPPO and, 45, 59 inversion of, 56–60 modified by data-driven decision making, 46–60 structure of, 31 Starbucks, 185 statistical pattern recognition, 69, 72–74, 81–82, 84 statistical prediction, 41 status quo bias, 21 steampunk, 273 Sterling, Bruce, 295, 298 S3 (Amazon Web Service), 143 Stites-Clayton, Evan, 263 STR, 221 “stranger-danger” bias, 210 streaming services, 146–48 Street, Sam, 184 Street Bump, 162–63 Stripe, 171–74, 205 structured interviews, 57 students, gifted, 40 Sturdivant, Jeremy, 286 subscription services, 147–48 suitcase words, 113 Suleyman, Mustafa, 78 “superforecasters,” 60–61 supervised learning, 76 supply and demand; See also demand; demand curves; supply curves O2O platforms for matching, 193 platforms and, 153–57 and revenue management, 47 supply curves, 154–56 Supreme Court, US, 40–41 surge pricing, 55 Svirsky, Dan, 209n Sweeney, Latanya, 51–52 Swift, Taylor, 148 switching costs, 216–17, 219 Sydney, Australia, hostage incident (2014), 55 symbolic artificial intelligence, 69–72 introduction of, 69–70 reasons for failure of, 70–72 synthetic biology, 271–72 systems integration, 142 System 1/System 2 reasoning, 35–46 and confirmation bias, 57 defined, 35–36 and second-machine-age companies, 325 undetected biases and, 42–45 weaknesses of, 38–41 Szabo, Nick, 292, 294–95 Tabarrok, Alex, 208–9 Tapscott, Alex, 298 Tapscott, Don, 298 Tarantino, Quentin, 136n TaskRabbit, 261, 265 taxi companies, Uber’s effect on, 201 TCE (transaction cost economics), 312–16 TechCrunch, 296 technology (generally) effect on employment and wages, 332–33 effect on workplace, 334 as tool, 330–31 Teespring, 263–64 Teh, Yee-Whye, 76 telephones, 129–30, 134–35 tenure predictions, 39 Tesla (self-driving automobile), 81–82, 97 Tetlock, Philip, 59 text messages, 140–41 Thank You for Being Late (Friedman), 135 theories, scientific, 116–17 theory of the firm, See TCE (transaction cost economics) Thierer, Adam, 272 “thin” companies, 9 Thingiverse, 274 Thinking, Fast and Slow (Kahneman), 36, 43 Thomas, Rob, 262 Thomke, Stefan, 62–63 3D printing, 105–7, 112–13, 273, 308 Thrun, Sebastian, 324–25 TNCs (transportation network companies), 208 TØ.com, 290 Tomasello, Michael, 322 Topcoder, 254, 260–61 Torvalds, Linus, 240–45 tourists, lodging needs of, 222–23 Tower Records, 131, 134 trade, international, 291 trading, investment, 266–70, 290 Transfix, 188, 197, 205 transparency, 325 transportation network companies (TNCs), 208; See also specific companies, e.g.: Uber Transportation Security Administration (TSA), 89 Tresset, Patrick, 117 trucking industry, 188 T-shirts, 264 tumors, 3D modeling of, 106 Turing, Alan, 66, 67n Tuscon Citizen, 132 TV advertising, 48–51 Tversky, Amos, 35 Twitter, 234 two-sided networks credit cards, 214–16 Postmates, 184–85 pricing in, 213–16, 220 pricing power of, 210–11 switching costs, 216–17 Uber, 200, 201, 218–19 two-sided platforms, 174, 179–80 Two Sigma, 267 Uber driver background checks, 208 future of, 319–20 information asymmetry management, 207–8 lack of assets owned by, 6–7 as means of leveraging assets, 196–97 network effects, 193, 218 as O2O platform, 186 origins, 200–202 and Paris terrorist attack, 55 pricing decisions, 212–15, 218–19 rapid growth of, 9 regulation of, 201–2 reputational systems, 209 routing problems, 194 separate apps for drivers and riders, 214 and Sydney hostage incident, 54–55 value proposition as compared to Airbnb, 222 UberPool, 9, 201, 212 UberPop, 202 UberX, 200–201, 208, 212, 213n Udacity, 324–25 unbundling, 145–48, 313–14 unit drive, 20, 23 Universal Music Group, 134 University of Louisville, 11 University of Nicosia, 289 unlimited service ClassPass Unlimited, 178–79, 184 Postmates Plus Unlimited, 185 Rent the Runway, 187–88 unsupervised learning, 76, 80–81 Upwork, 189, 261 Urmson, Chris, 82 used car market, information asymmetry and, 207 Usenet, 229, 271 user experience/interface as platforms’ best weapon, 211 and successful platforms, 169–74 users, as code developers, 242 “Uses of Knowledge in Society, The” (Hayek), 235–37 utilization rate, O2O platforms, 196–97 Van Alstyne, Marshall, 148 Van As, Richard, 272–74 Vancouver, Canada, Uber prohibition in, 202 venture capital, DAO vs., 302 verifiability, 248 verifiable/reversible contributions, 242–43 Verizon, 96, 232n Veronica Mars (movie), 262 Veronica Mars (TV show), 261–62 Viant, 171 video games, AI research and, 75 videos, crowd-generated, 231–32 Viper, 163 virtualization, 89–93; See also robotics vision, Cambrian Explosion and, 95 “Voice of America” (Wright), 229–30 von Hippel, Eric, 265 wage declines, 332 Wagner, Dan, 48–50 Waldfogel, Joel, 144 Wales, Jimmy, 234, 246–48 Walgreens, 185 Walmart, 7, 47 Wanamaker, John, 8–9 warehousing, 102–3, 188 Warner Brothers, 262 Warner Music Group, 134 Washington Post, 132 Washio, 191n waste reduction, 197 Watson (IBM supercomputer) health claim processing, 83 Jeopardy!

Satoshi Nakamoto, whoever that is, really did bring something new and powerful into the world. But not powerful enough to make companies go away, or even to significantly reduce their importance in the world’s economies. To see why, we need to go back to Coase’s work, but not stop there. Instead, we need to understand subsequent insights from transaction cost economics (TCE), the discipline he was instrumental in founding. The Latest Thinking on Why Companies Are So Common TCE deals with the very basic question of why economic activity is organized the way it is—why, for example, we see markets and companies in the mix that we do. Often called the theory of the firm, TCE is a branch of economics important enough to have merited three Nobel prizes: the first in 1991 to Coase; the second in 2009 to his student Oliver Williamson, who was recognized along with Elinor Ostrom;†† and most recently a third, to Oliver Hart and Bengt Holm-ström, who were recognized in 2016.


pages: 389 words: 109,207

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Albert Einstein, anti-communist, asset allocation, Bear Stearns, beat the dealer, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bletchley Park, Brownian motion, buy and hold, buy low sell high, capital asset pricing model, Claude Shannon: information theory, computer age, correlation coefficient, diversified portfolio, Edward Thorp, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, Henry Singleton, high net worth, index fund, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, John Meriwether, John von Neumann, junk bonds, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Michael Milken, Myron Scholes, New Journalism, Norbert Wiener, offshore financial centre, Paul Samuelson, publish or perish, quantitative trading / quantitative finance, random walk, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Ronald Reagan, Rubik’s Cube, short selling, speech recognition, statistical arbitrage, Teledyne, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, traveling salesman, value at risk, zero-coupon bond, zero-sum game

Some economists hold that even though some people do have an informational edge, they are unable to profit from it. Transaction costs are often mentioned as a reason. The gains from inside information may be smaller than the commissions. It may also be that the arbitrageur is taking unacknowledged risks. What he believes to be a “sure thing” is not. The usual small profit comes at the expense of accepting a small risk of a catastrophic loss. And one way or another, no one beats the market in the long run. Kelly’s analysis raises doubts about this tidy conclusion. If the only limit to profit is the information rate of the private wire, then it is hard to see why transaction costs must always be larger than profits.

Shannon wondered about the statistical structure of the market’s random walk and whether information theory could provide useful insights. He mentions such diverse names as Bachelier, (Benjamin) Graham and (David) Dodd, (John) Magee, A. W. Jones, (Oskar) Morgenstern, and (Benoit) Mandelbrot. He considered margin trading and short-selling; stop-loss orders and the effects of market panics; capital gains taxes and transaction costs. Shannon graphs short interest in Litton Industries (shorted shares vs. price: the values jump all over with no evident pattern). He notes such success stories as Bernard Baruch, the Lone Wolf, who ran about $10,000 into a million in about ten years, and Hetty Green, the Witch of Wall Street, who ran a million into a hundred million in thirty years.

It would be alarming to visit a great stock exchange and find the floor littered with worthless stock certificates. Try visiting a racetrack. Most wager tickets become worthless within minutes. It is folly to bet everything on a favorite (horse or stock). The only way to survive is through diversification. Someone who bets on every horse—or buys an index fund—will at least enjoy average returns, minus transaction costs. “Average” isn’t so hot at the racetrack, given those steep track takes. “Average” is pretty decent for stocks, something like 6 percent above the inflation rate. For a buy-and-hold investor, commissions and taxes are small. Shannon was more interested in above average returns. The only way to beat the market (of stocks or horse wagers) is by knowing something that other people don’t.


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

affirmative action, Affordable Care Act / Obamacare, airline deregulation, Alan Greenspan, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, behavioural economics, Berlin Wall, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, electricity market, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, Glass-Steagall Act, Great Leap Forward, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Bogle, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, London Interbank Offered Rate, lone genius, low interest rates, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, Paul Volcker talking about ATMs, payday loans, Phillips curve, price stability, profit maximization, profit motive, public intellectual, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, search costs, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, stock buybacks, subprime mortgage crisis, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, Tragedy of the Commons, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game

But even before the crisis, it should have been obvious that privatization was a bad deal for most Americans. We noted before that Social Security is more efficient than private providers of annuities. Private insurance companies have much higher transactions costs. In fact, that was the whole point of privatization: for the elderly, transactions costs are a bad thing; but for the financial sector, they are a good thing. That’s their income. That’s what they live off of. Their hope was to get a slice of the hundreds of billions of dollars65 that people put every year into their Social Security accounts.66 Liberalization/deregulation initiatives have had as mixed a record as those of privatization—with the most notorious being financial sector deregulation and capital market liberalization.

One role of government is to rebalance the scales of justice—and in the case of the BP disaster, it did, but very gently, and in the end, it became clear that many of the victims were likely to receive compensation that was but a fraction of what they suffered.4 Ronald Coase, a Chicago Nobel Prize–winning economist, explained how different ways of assigning property rights were equally efficient for addressing externalities, or at least would be in a hypothetical world with no transactions costs.5 In a room with smokers and nonsmokers, one could assign the “air rights” to the smokers, and if the nonsmokers valued clean air more than the smokers valued smoking, they could bribe the smokers not to smoke. But one could alternatively assign the air rights to the nonsmokers. In that case, smokers could bribe the nonsmokers to allow them to smoke so long as they valued the right to smoke more than the nonsmokers valued clean air. In a world of transactions costs—the real world, where, for instance, it costs money to collect money from one group to pay another—one assignment can be much more efficient than the other.6 But more to the point, there can be large distributive consequences of alternative assignments.

Privatization, of course, is based on yet another myth: that government-run programs must be inefficient, and privatization accordingly must be better. In fact, as we noted in chapter 6, the transaction costs of Social Security and Medicare are much, much lower than those of private-sector firms providing comparable services. This should not come as a surprise. The objective of the private sector is to make profits—for private companies, transactions costs are a good thing; the difference between what they take in and what they pay out is what they want to maximize.31 The gap between revenues and expenditures for public programs does create problems over the long run.


pages: 330 words: 91,805

Peers Inc: How People and Platforms Are Inventing the Collaborative Economy and Reinventing Capitalism by Robin Chase

Airbnb, Amazon Web Services, Andy Kessler, Anthropocene, Apollo 13, banking crisis, barriers to entry, basic income, Benevolent Dictator For Life (BDFL), bike sharing, bitcoin, blockchain, Burning Man, business climate, call centre, car-free, carbon tax, circular economy, cloud computing, collaborative consumption, collaborative economy, collective bargaining, commoditize, congestion charging, creative destruction, crowdsourcing, cryptocurrency, data science, deal flow, decarbonisation, different worldview, do-ocracy, don't be evil, Donald Shoup, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, Eyjafjallajökull, Ferguson, Missouri, Firefox, Free Software Foundation, frictionless, Gini coefficient, GPS: selective availability, high-speed rail, hive mind, income inequality, independent contractor, index fund, informal economy, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Jane Jacobs, Jeff Bezos, jimmy wales, job satisfaction, Kickstarter, Kinder Surprise, language acquisition, Larry Ellison, Lean Startup, low interest rates, Lyft, machine readable, means of production, megacity, Minecraft, minimum viable product, Network effects, new economy, Oculus Rift, off-the-grid, openstreetmap, optical character recognition, pattern recognition, peer-to-peer, peer-to-peer lending, peer-to-peer model, Post-Keynesian economics, Richard Stallman, ride hailing / ride sharing, Ronald Coase, Ronald Reagan, Salesforce, Satoshi Nakamoto, Search for Extraterrestrial Intelligence, self-driving car, shareholder value, sharing economy, Silicon Valley, six sigma, Skype, smart cities, smart grid, Snapchat, sovereign wealth fund, Steve Crocker, Steve Jobs, Steven Levy, TaskRabbit, The Death and Life of Great American Cities, The Future of Employment, the long tail, The Nature of the Firm, Tragedy of the Commons, transaction costs, Turing test, turn-by-turn navigation, Uber and Lyft, uber lyft, vertical integration, Zipcar

The logic for a very low transaction effort (and cost) was compelling from our business perspective as well: For Zipcar to work, we needed to be indifferent between eight 1-hour rentals and one 8-hour rental. Getting our transaction costs as close to zero as we could was absolutely necessary. When our fleet grew and I needed to hire a VP of operations with big-fleet experience, the candidates from the car rental industry would ask me, “So what’s Zipcar’s transaction cost?” At that time, almost all of our hard-won investment dollars were being poured into technology. Our development costs were huge. But the result was zero marginal cost for each transaction. “What is your transaction cost?” I’d prompt. I learned that in the rental industry the cost was between $8 and $12 per transaction!

I learned that in the rental industry the cost was between $8 and $12 per transaction! Yikes. No wonder they required a one-day minimum for every rental and extension. What was good for us was also exactly what the customer wanted. To make the transaction cost zero, to make sharing effortless, we needed technology that had several parts: 1. Customer-facing software. Initially customers used the website to join Zipcar, reserve cars, pay their bills, and manage accounts (smartphones didn’t exist yet). 2. Back office: The web pages—that only we could see—allowed us to manage customers, cars, and parking locations. 3. In-vehicle hardware. The Zipcard reader under the windshield allowed customers to walk up and unlock the car they had reserved.

In 1937, in the influential essay “The Nature of the Firm,” British economist Ronald Coase wrote that the corporation was invented to do things that individuals and small companies couldn’t do. In particular, small companies would choose to become larger companies whenever it was cheaper to hire than to outsource. What would make hiring cheaper than outsourcing? Transaction costs (a term Coase invented). Finding, monitoring the quality of, and managing many discrete individuals was expensive. It was cheaper to hire them. But now the Internet has transformed that equation. Today, we see that the smartest companies and governments are using the Internet’s ability to facilitate collaboration by leveraging expertise, assets, and resources outside their sphere of control.


pages: 336 words: 90,749

How to Fix Copyright by William Patry

A Declaration of the Independence of Cyberspace, barriers to entry, big-box store, borderless world, bread and circuses, business cycle, business intelligence, citizen journalism, cloud computing, commoditize, content marketing, creative destruction, crowdsourcing, death of newspapers, digital divide, en.wikipedia.org, facts on the ground, Frederick Winslow Taylor, George Akerlof, Glass-Steagall Act, Gordon Gekko, haute cuisine, informal economy, invisible hand, John Perry Barlow, Joseph Schumpeter, Kickstarter, knowledge economy, lone genius, means of production, moral panic, new economy, road to serfdom, Ronald Coase, Ronald Reagan, search costs, semantic web, shareholder value, Silicon Valley, The Chicago School, The Wealth of Nations by Adam Smith, trade route, transaction costs, trickle-down economics, Twitter Arab Spring, Tyler Cowen, vertical integration, winner-take-all economy, zero-sum game

One-to-one negotiations will always be necessary for situations where we want copyright owners to control the individual use of their work, such as licensing the use of a novel or musical composition in a movie for “grand rights” (theater), or for use in advertisements. Statutory licensing is appropriate where we do not want users to bargain over the licensee fee (usually because the transaction costs are high relative to the license fee) but we do want them to pay. Collective administration is appropriate where, due to large transaction costs and the potential inequality of bargaining leverage by individual copyright owners, we want users to have to negotiate fees. The usual theoretical model today remains the exclusive rights. This model is becoming less useful given the large-scale, global nature of the Internet.

For sound recordings, however, the court held there is no de minimis threshold; the copying of any amount is infringing.51 The result of this terrible decision has been an unwillingness of record companies to put out albums52 unless each and every sample is cleared. Producers of records must certify that all samples have been licensed when delivering the masters. Since previous hip-hop albums used hundreds (and sometimes thousands) of samples, licensing that number of samples is out of the question due to financial and transactional cost reasons. As a result, the creative process of hip-hop has changed.53 Here is an explanation by Public Enemy’s Chuck D and Hank Shocklee in interviews with Stay Free! Magazine: Stay Free!: When you were sampling from many different sources during the making of “It Takes a Nation,” were you at all worried about copyright clearance?

With collective licensing, copyright owners pool their copyrights together with a private organization, which then licenses use of the entire repertoire to others, takes an administrative cut of license fees received, and pays the amount left over to the copyright owners.8 There are numerous benefits to this, especially reducing transaction costs and enabling copyright owners to receive income for many small uses that would otherwise be economically impossible to negotiate one-to-one. Licensees can have available a vast repertoire without the high costs of clearing individual uses, as well as, usually, protection in the form of a government appeal over license fees.


pages: 280 words: 73,420

Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market Into a Casino by Jim McTague

Alan Greenspan, algorithmic trading, automated trading system, Bear Stearns, Bernie Madoff, Bernie Sanders, Black Monday: stock market crash in 1987, Bretton Woods, buttonwood tree, buy and hold, computerized trading, corporate raider, creative destruction, credit crunch, Credit Default Swap, financial innovation, fixed income, Flash crash, High speed trading, housing crisis, index arbitrage, junk bonds, locking in a profit, Long Term Capital Management, machine readable, margin call, market bubble, market fragmentation, market fundamentalism, Myron Scholes, naked short selling, Nixon triggered the end of the Bretton Woods system, pattern recognition, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, Renaissance Technologies, Ronald Reagan, Sergey Aleynikov, short selling, Small Order Execution System, statistical arbitrage, technology bubble, transaction costs, uptick rule, Vanguard fund, Y2K

There was a spirited debate whether or not to impose obligations on HFT firms in return for letting them charge investors slightly wider spreads. Transaction costs would rise, but investors would get a more orderly market. Theodore Weisberg, the president of Seaport Securities and someone who had been trading for more than 41 years, told Bloomberg television that trading in nickel increments instead of penny increments would be enough to attract dealers back to the equities markets. As a result, investor transaction costs would rise, but they’d be getting more stable markets in return, which was what long-term investors preferred.

Reacting to the news, Kaufman wrote to Schapiro, “There are at least two questions that must be posed—questions we must look to the markets’ regulators to answer. First, had these opaque, complex, increasingly sophisticated trading mechanisms been beneficial for retail investors, helping them to buy at the lowest possible price and sell at the highest praise with the lowest possible transaction costs, or have they left them as second-class investors, pushed aside by powerful trading companies able to take advantage of small but statistically and financially significant advantages? And second, do these high-tech practices and their ballooning daily volumes pose a systemic risk? To take just one example, is anyone examining the leverage these traders use in committing their capital in such huge daily volumes?

That meant that the spreads they had charged would be squeezed from the old high of 12.5 cents to as low as a penny per share on the most heavily traded stock issues. It pushed many hangers on out of business. But the change was a bonanza for investors, big and small. By 2002, retail traders were reporting a 50% reduction in their transactions costs. Specialists at the NYSE remained a thorn in the side of many traders. The 1975 “Trade-Through Rule” remained in effect. The rule that required an exchange to send a customer’s order to a competing exchange if the competing exchange was posting had a better bid or asked price. The specialists at the NYSE and at the American Stock Exchange (AMEX) often posted better prices, especially for exchange-traded funds (ETFs), which were growing in popularity.


pages: 238 words: 73,824

Makers by Chris Anderson

3D printing, Airbnb, Any sufficiently advanced technology is indistinguishable from magic, Apple II, autonomous vehicles, barriers to entry, Buckminster Fuller, Build a better mousetrap, business process, carbon tax, commoditize, company town, Computer Numeric Control, crowdsourcing, dark matter, David Ricardo: comparative advantage, deal flow, death of newspapers, dematerialisation, digital capitalism, DIY culture, drop ship, Elon Musk, factory automation, Firefox, Ford Model T, future of work, global supply chain, global village, hockey-stick growth, hype cycle, IKEA effect, industrial robot, interchangeable parts, Internet of things, inventory management, James Hargreaves, James Watt: steam engine, Jeff Bezos, job automation, Joseph Schumpeter, Kickstarter, Lean Startup, manufacturing employment, Mark Zuckerberg, means of production, Menlo Park, Neal Stephenson, Network effects, planned obsolescence, private spaceflight, profit maximization, QR code, race to the bottom, Richard Feynman, Ronald Coase, Rubik’s Cube, Scaled Composites, self-driving car, Sheryl Sandberg, side project, Silicon Valley, Silicon Valley startup, Skype, slashdot, South of Market, San Francisco, SpaceShipOne, spinning jenny, Startup school, stem cell, Steve Jobs, Steve Wozniak, Steven Levy, Stewart Brand, supply-chain management, the long tail, The Nature of the Firm, The Wealth of Nations by Adam Smith, TikTok, Tragedy of the Commons, transaction costs, trickle-down economics, vertical integration, Virgin Galactic, Whole Earth Catalog, X Prize, Y Combinator

In short, because we don’t operate the company in a Coaseian model, we’ve got more and smarter people working for us. We minimize transaction costs with technology, not proximity. A social network is our common roof. Skype is the “next cubicle.” Our shared purpose is really shared, not dictated. Joy wins: The open-manufacturing model Joy’s Law and the new breed of companies and communities built on open-access Web principles turned Coase’s Law upside down. Now, working within a traditional monolithic company of the sort Coase had in mind often imposes higher transaction costs than running a project online. Why turn to the person who happens to be in the next office, who may or may not be the best person for the job, when it’s just as easy to turn to an online community member from a global marketplace of talent?

In the mid-1930s, Ronald Coase, then a recent London School of Economics graduate, was musing over what to many people might have seemed a silly question: Why do companies exist? Why do we pledge our allegiance to an institution and gather in the same building to get things done? His eventual answer, which he published in his landmark 1937 article “The Nature of the Firm,”33 was this: companies exist to minimize “transaction costs”—time, hassle, confusion, mistakes. When people share a purpose and have established roles, responsibilities, and modes of communication, it’s easy to make things happen. You simply turn to the person in the next cubicle and ask that individual to do his or her job. But in a passing comment in a 1990 interview, Bill Joy, one of the cofounders of Sun Microsystems, revealed a flaw in Coase’s model.

But in a passing comment in a 1990 interview, Bill Joy, one of the cofounders of Sun Microsystems, revealed a flaw in Coase’s model. “No matter who you are, most of the smartest people work for someone else,” he observed, stating what has now come to be known as “Joy’s Law.” His implication: for the sake of minimizing transaction costs, we don’t work with the best people. Instead, we work with whomever our company was able to hire. Even for the best companies, that’s a woefully inefficient process. In a sense, Joy’s quip was simply a modern reflection of the work of a Coase contemporary, Friedrich Hayek. While Coase was explaining why centralized organizations exist, Hayek was arguing that they shouldn’t.


pages: 280 words: 79,029

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

Affordable Care Act / Obamacare, Alan Greenspan, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, bonus culture, break the buck, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, impact investing, implied volatility, income inequality, index fund, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, low interest rates, margin call, Mark Zuckerberg, McMansion, Minsky moment, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Savings and loan crisis, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, subprime mortgage crisis, tail risk, Thales of Miletus, the long tail, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

De la Vega’s subject is the Amsterdam Stock Exchange, and in it he paints not only a landscape of familiar products but also a gallery of familiar behaviors. He observes “herding,” in which investors copy the behavior of others; overconfidence; overtrading, which still ends up costing investors today because of the excessive transaction costs they incur; and the “disposition effect,” in which people hold on to losing investments for far too long. That’s just in normal times. Occasionally, people really lose their heads. In the 2000s, the mania was for property; in the 1990s, it was for dot-com companies; in the mid-nineteenth century, it was for railways.

Their investment decisions tend to be based not on fundamental analysis of a company’s prospects, but on short-term price trends. They may be fast, critics say, but they are thoughtless.22 Yet the academic consensus also broadly supports the contention that high-frequency traders have helped bring down transaction costs. The British government’s lengthy 2012 investigation of automated trading found that liquidity had improved, bid-ask spreads had narrowed, and markets had become more efficient. Testimony delivered to the Securities and Exchange Commission in 2010 by George Sauter of Vanguard, a big fund manager, concluded that “high-frequency traders provide liquidity and ‘knit’ together our increasingly fragmented marketplace, resulting in tighter spreads that benefit all investors.”23 (Critics riposte that narrower spreads are illusory if the prices quoted are not the ones at which trades are actually executed.)

Instead, they reckoned, a thought experiment—imagining what the world would look like without a particular innovation—might help.24 A world without HFTs is easy to imagine: the old world of “specialist” market makers and floor trading existed only a few years ago, so people remember it well. There is little obvious enthusiasm for returning to that model. Transaction costs were a lot higher. Big market makers used to charge 25–40 basis points to execute trades in a clunky process that involved an investor calling a broker, who got the stock ticker and went to a jobber on the floor to make the trade. Now the same thing is being done by an algorithm at 1–3 basis points.


pages: 462 words: 129,022

People, Power, and Profits: Progressive Capitalism for an Age of Discontent by Joseph E. Stiglitz

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, AlphaGo, antiwork, barriers to entry, basic income, battle of ideas, behavioural economics, Berlin Wall, Bernie Madoff, Bernie Sanders, Big Tech, business cycle, Cambridge Analytica, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, carried interest, central bank independence, clean water, collective bargaining, company town, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, crony capitalism, DeepMind, deglobalization, deindustrialization, disinformation, disintermediation, diversified portfolio, Donald Trump, driverless car, Edward Snowden, Elon Musk, Erik Brynjolfsson, fake news, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, Firefox, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, gig economy, Glass-Steagall Act, global macro, global supply chain, greed is good, green new deal, income inequality, information asymmetry, invisible hand, Isaac Newton, Jean Tirole, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John von Neumann, Joseph Schumpeter, labor-force participation, late fees, low interest rates, low skilled workers, Mark Zuckerberg, market fundamentalism, mass incarceration, meta-analysis, minimum wage unemployment, moral hazard, new economy, New Urbanism, obamacare, opioid epidemic / opioid crisis, patent troll, Paul Samuelson, pension reform, Peter Thiel, postindustrial economy, price discrimination, principal–agent problem, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, Richard Thaler, Robert Bork, Robert Gordon, Robert Mercer, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, search costs, secular stagnation, self-driving car, shareholder value, Shoshana Zuboff, Silicon Valley, Simon Kuznets, South China Sea, sovereign wealth fund, speech recognition, Steve Bannon, Steve Jobs, surveillance capitalism, TED Talk, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, two-sided market, universal basic income, Unsafe at Any Speed, Upton Sinclair, uranium enrichment, War on Poverty, working-age population, Yochai Benkler

The reason we have a variety of social insurance programs (from retirement annuities, to health care for the aged, to unemployment insurance) is simple: these are big risks that, accordingly, have large impacts on individual well-being, but before the government came along, the market either didn’t provide insurance against these risks, or did so only at very high prices with high transaction costs.6 Dynamic economies are always in transition, and markets don’t manage these transitions well on their own. We are now moving from a manufacturing economy to a globalized, urbanized, service and innovation economy, with marked changes in demography. So too, coordinating a large, complex economy is difficult.

Mass incarceration may have had many motives,5 but clearly one of its effects has been mass disenfranchisement: some 7.4 percent of African Americans—2.2 million in total—were unable to vote in the 2016 election because of these state laws preventing voting.6 In some Republican-dominated states,7 there is also an attempt to control the vote by making it more difficult for working people to register or to make it to the polling booth. Republicans can’t impose a poll tax, as states of the segregated South once did; but they can increase the transaction costs of registering and voting, and this can be just as effective a deterrent. Rather than making it as easy as possible to register—to exercise one’s basic right as a citizen—say, by registering as one gets one’s driver’s license, they make it as difficult as they can get away with. They can, for instance, demand hard-to-get identification papers.

Again, large risks like these and ones associated with unemployment, health, and retirement, are risks that markets do not handle well.16 In some cases, like unemployment and health insurance for the aged, markets simply do not provide insurance; in other cases, like retirement, they provide annuities only at high costs, and even then, without important provisions—such as adjustments for inflation. That is why almost all advanced countries provide social insurance to cover at least many of these risks. Governments have become fairly proficient in providing this insurance—transaction costs for the US Social Security system are a fraction of those associated with comparable private insurance. We need to recognize, however, that there are large gaps in our system of social insurance, with many important risks still not being covered either by markets or by government. Unemployment insurance One of the biggest gaps in our system of social protection is that our unemployment insurance program covers a relatively small risk—being unemployed for twenty-six weeks—but leaves the much more serious risk of long-term unemployment unaddressed.


pages: 920 words: 233,102

Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State by Paul Tucker

"Friedman doctrine" OR "shareholder theory", Alan Greenspan, Andrei Shleifer, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, Brexit referendum, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, conceptual framework, corporate governance, diversified portfolio, electricity market, Fall of the Berlin Wall, financial innovation, financial intermediation, financial repression, first-past-the-post, floating exchange rates, forensic accounting, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, Greenspan put, incomplete markets, inflation targeting, information asymmetry, invisible hand, iterative process, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, liberal capitalism, light touch regulation, Long Term Capital Management, low interest rates, means of production, Money creation, money market fund, Mont Pelerin Society, moral hazard, Northern Rock, operational security, Pareto efficiency, Paul Samuelson, price mechanism, price stability, principal–agent problem, profit maximization, public intellectual, quantitative easing, regulatory arbitrage, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, road to serfdom, Robert Bork, Ronald Coase, seigniorage, short selling, Social Responsibility of Business Is to Increase Its Profits, stochastic process, subprime mortgage crisis, tail risk, The Chicago School, The Great Moderation, The Market for Lemons, the payments system, too big to fail, transaction costs, Vilfredo Pareto, Washington Consensus, yield curve, zero-coupon bond, zero-sum game

Economists who opposed the regulatory state offered their own solution: address market failures by taking steps toward more complete markets. Coase versus Pigou: Property Rights and Transaction Costs In 1960 Ronald Coase, a British-born economist working in Chicago, explained how regulatory interventions were not warranted where, instead, property rights could be clarified (or created) and where the transaction costs of enforcing those rights were low (theoretically zero). Such legal rights could be traded and hedged via markets, opening up the option of the work of regulation being performed instead by the law of contract and of torts enforced via the courts: as typically put, private choice rather than public choice.

Rather, it was that the case for regulation turned on the existence of irremediable and material transaction costs standing in the way of efficiency. In other words, it was not sufficient simply to cite an externality to motivate regulatory intervention. There are three things to be said about this. Creating New Property Rights Can Entail Regulation First, even where governments choose to address externality problems via creating new property rights, they sometimes opt to regulate the new markets for trading those rights (e.g., pollution permits). Simply invoking “transaction costs” does not seem sufficient to explain or warrant the choice between judicial and regulatory oversight.29 Keeping Perspective: The Infeasibility of Committing to Compensate for Financial Instability Second, some transaction costs can be reduced; others cannot.

Simply invoking “transaction costs” does not seem sufficient to explain or warrant the choice between judicial and regulatory oversight.29 Keeping Perspective: The Infeasibility of Committing to Compensate for Financial Instability Second, some transaction costs can be reduced; others cannot. A classic example of the latter, vital to part IV’s exploration of postcrisis central banking, helps to motivate regulatory intervention to preserve the stability of the financial system. In the event of a massive banking collapse pushing the economy onto a persistently lower path of output and employment, the losers are never going to be able to recover their costs from the “financial polluters” because the banks and other intermediaries are bust.


Trading Risk: Enhanced Profitability Through Risk Control by Kenneth L. Grant

backtesting, business cycle, buy and hold, commodity trading advisor, correlation coefficient, correlation does not imply causation, delta neutral, diversification, diversified portfolio, financial engineering, fixed income, frictionless, frictionless market, George Santayana, global macro, implied volatility, interest rate swap, invisible hand, Isaac Newton, John Meriwether, Long Term Capital Management, managed futures, market design, Myron Scholes, performance metric, price mechanism, price stability, proprietary trading, risk free rate, risk tolerance, risk-adjusted returns, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, two-sided market, uptick rule, value at risk, volatility arbitrage, yield curve, zero-coupon bond

For example, you may find that your net market value might be negatively correlated to your holding periods, which might reinforce the notion that it is easier to hold for extended periods of time positions with small directional overhang and more difficult to retain position profiles that have large net market exposures. Similarly, correlation patterns between transaction size and capital usage might reveal interesting insights into factors such as liquidity, transaction costs, and other dynamics that will be pertinent to portfolio performance. Be creative. No matter what two factors you try to correlate against each other, I promise you that there have been sillier ones based on less intelligent premises. BABY’S ON FIRE It is very easy to take correlation analysis to extremes.

In a very meaningful (though imperfect) way, these positions have similar risk characteristics; and it becomes a relatively simple mathematical exercise to view your positions not just in terms of number of shares or contracts (bad), but in terms of dollar value invested (better) or units of expected volatility (better still). As we will discuss later in the book, the primary sets of circumstances under which these relationships break down are those involving large position sizes, where transaction costs begin to increase due to liquidity concerns. These concerns certainly arise with greater frequency in large institutional portfolios but should not deter anyone from understanding the volatility-adjusted exposures tied to the individual positions in their accounts. You can generate similar incremental benefits by introducing the concept of correlation into the mix, which will give you some insight as to how much diversification positions on the same side of the market are generating for your portfolio and how much direct exposure offset you are achieving with positions on opposite sides of the market.

Of course, day traders wishing to modify the amount of time they are willing to hold positions for the purpose of decreasing their market exposures have much less latitude. Any move to shorten holding periods that already fail to extend beyond one trading session is not likely to reduce the risk of loss in individual securities and may in fact increase it––due to such unavoidable market factors as commissions, bid/offer spreads, and other types of transactions costs. By contrast, those whose holding periods extend beyond one day have a better opportunity to use this variable as a means of targeting the appropriate exposure levels in their portfolios. Once again, a useful rule of thumb is that your exposure will increase and decrease as a function of the square root of the number of days you hold the position.


pages: 443 words: 112,800

The Third Industrial Revolution: How Lateral Power Is Transforming Energy, the Economy, and the World by Jeremy Rifkin

3D printing, additive manufacturing, Albert Einstein, American ideology, An Inconvenient Truth, barriers to entry, behavioural economics, bike sharing, borderless world, carbon footprint, centre right, clean tech, collaborative consumption, collaborative economy, Community Supported Agriculture, corporate governance, decarbonisation, deep learning, distributed generation, electricity market, en.wikipedia.org, energy security, energy transition, Ford Model T, global supply chain, Great Leap Forward, high-speed rail, hydrogen economy, income inequality, industrial cluster, informal economy, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, job automation, knowledge economy, manufacturing employment, marginal employment, Martin Wolf, Masdar, megacity, Mikhail Gorbachev, new economy, off grid, off-the-grid, oil shale / tar sands, oil shock, open borders, peak oil, Ponzi scheme, post-oil, purchasing power parity, Ray Kurzweil, rewilding, Robert Solow, Ronald Reagan, scientific management, scientific worldview, Silicon Valley, Simon Kuznets, Skype, smart grid, smart meter, Spread Networks laid a new fibre optics cable between New York and Chicago, supply-chain management, systems thinking, tech billionaire, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, transaction costs, trickle-down economics, urban planning, urban renewal, Yom Kippur War, Zipcar

Sharing is clean, crisp, urbane, postmodern: owning is dull, selfish, timid, backward.”27 What I am describing is a fundamental change in the way capitalism functions that is now unfolding across the traditional manufacturing and retail sectors and reshaping how companies conduct business. In conventional, capitalist markets, profit is made at the margins of transaction costs. That is, at every step of the conversion process along the value chain the seller is marking up the cost to the buyer to realize a profit. The final price of the good or service to the end user reflects the markups. But TIR information and communication technologies dramatically shrink transaction costs across the supply chain in every industry and sector, and distributed renewable energies will soon do so as well. The new, green energy industries are improving performance and reducing costs at an ever-accelerating rate.

And just as the generation and distribution of information is becoming nearly free, renewable energies will also. The sun and wind are available to everyone and are never used up. When the transaction costs for engaging in the new Third Industrial Revolution communications/energy system approach zero, it is no longer possible to maintain a margin, and the very notion of profit has to be re-thought. That’s already happening with the communications component of the Third Industrial Revolution. The shrinking of transaction costs in the music business and publishing field with the emergence of music downloads, ebooks, and news blogs is wreaking havoc on these traditional industries.

The shrinking of distances and the annihilation of time, resulting from the convergence of coal- and steam-powered technology with print communications, sped up commercial activity at every stage of the supply chain, from the extraction and transport of coal and other ores to the factories, to the hurried transport of finished goods to wholesalers, distributors, and retailers. The dramatic increase in the flow of commerce was matched by the equally impressive decrease in transaction costs. This was achieved, in large measure, by dint of the new vertical economies of scale. Mass-producing products in giant, centralized factories reduced the cost per unit of production, allowing manufacturers to pass the savings along the entire supply chain to the end user. The mass production of cheap goods encouraged more consumption, which allowed more factories to produce greater volumes of goods at ever cheaper prices.


pages: 289 words: 113,211

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber

affirmative action, Albert Einstein, asset allocation, backtesting, beat the dealer, behavioural economics, Black Swan, Black-Scholes formula, Bonfire of the Vanities, book value, butterfly effect, commoditize, commodity trading advisor, computer age, computerized trading, disintermediation, diversification, double entry bookkeeping, Edward Lorenz: Chaos theory, Edward Thorp, family office, financial engineering, financial innovation, fixed income, frictionless, frictionless market, Future Shock, George Akerlof, global macro, implied volatility, index arbitrage, intangible asset, Jeff Bezos, Jim Simons, John Meriwether, junk bonds, London Interbank Offered Rate, Long Term Capital Management, loose coupling, managed futures, margin call, market bubble, market design, Mary Meeker, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shock, Paul Samuelson, Pierre-Simon Laplace, proprietary trading, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk/return, Robert Shiller, Robert Solow, rolodex, Saturday Night Live, selection bias, shareholder value, short selling, Silicon Valley, statistical arbitrage, tail risk, The Market for Lemons, time value of money, too big to fail, transaction costs, tulip mania, uranium enrichment, UUNET, William Langewiesche, yield curve, zero-coupon bond, zero-sum game

We had adjusted our hedge gradually over the course of that Friday as we knew that a number of the largest portfolio insurance providers would be waiting until Monday to do so. This was in part for a technical reason—the models were only run once a day based on the market close—but could also be justified on efficiency grounds. Intraday adjustments can lead to unnecessary whipsawing and increase transaction costs as the market moves up and down. Even though Friday was not a normal day, many firms were locked into the next-day adjustment process and could not have made intraday adjustments, even though the market had declined by more than 70 points by midafternoon. We estimated that the overhang from LOR clients alone would be more than $5 billion, and while LOR was the market leader, the total overhang across all of the portfolio insurance purveyors could be double this amount.

THE AVALANCHE BURIES THE BUYERS Program traders and arbitrageurs take positions on the S&P contract trading in the futures pit while simultaneously taking opposite positions on the individual stocks that make up the S&P on the NYSE. When the S&P futures contract sells for less than the price of the basket of the individual stocks in the S&P, then the cash-futures arbitrageur buys the S&P and sends in orders to sell the individual stocks. If the price difference is greater than the transaction costs of doing this trade, then they make an almost certain profit. This trade effectively transfers the stock market activities of the futures pit to the individual stocks on the NYSE. That’s where things broke down in 1987, and broke down for a simple reason: Stocks are not as liquid as futures.

Prices were moving all over the place, swinging more violently minute by minute than they usually did in an entire day, and the spread required to buy or sell the S&P futures—still the most liquid instrument in the equity market—was a dollar or more, 20 times normal. I had to weigh the implications of holding off on a hedge adjustment on the one hand with the incredible transaction costs in executing in the market on the other. The huge volatility of the market broke down all but the most fundamental relationships between the market securities. The usual day-to-day world where investors cared about subtleties like corporate earnings or analyst forecasts dissolved as the energy of the market was turned up.


pages: 202 words: 58,823

Willful: How We Choose What We Do by Richard Robb

activist fund / activist shareholder / activist investor, Alvin Roth, Asian financial crisis, asset-backed security, Bear Stearns, behavioural economics, Bernie Madoff, Brexit referendum, capital asset pricing model, cognitive bias, collapse of Lehman Brothers, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, delayed gratification, diversification, diversified portfolio, effective altruism, endowment effect, Eratosthenes, experimental subject, family office, George Akerlof, index fund, information asymmetry, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, lake wobegon effect, loss aversion, market bubble, market clearing, money market fund, Paradox of Choice, Pareto efficiency, Paul Samuelson, Peter Singer: altruism, Philippa Foot, principal–agent problem, profit maximization, profit motive, Richard Thaler, search costs, Silicon Valley, sovereign wealth fund, survivorship bias, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, trolley problem, ultimatum game

Thaler points out the inconsistency of a man refusing to hire somebody to mow his lawn for eight dollars but then turning down the opportunity to mow a neighbor’s similarly sized lawn for twenty dollars. Thaler attributes this paradox to cognitive bias.3 Rational choice economists might point to different reasons for this behavior: if the man hired himself out as a mower, he could suffer diminished status among his neighbors or incur transaction costs in negotiating the terms of the job, as well as additional income tax. If he hired a mower, coordinating and monitoring would impose additional costs. But this is unconvincing: people would mow their own grass but not their neighbor’s for pay, even if they could work in disguise to uphold their status, income taxes were eliminated, and quality was easy to monitor.

My students are not alone in ignoring the precept that they can maximize return and minimize risk by holding a portfolio of assets that is diversified. Investors often diversify far less than the capital asset pricing model advises and overweight their portfolio toward their home country more than transaction costs alone can justify. This tendency is a notorious embarrassment to portfolio theory. But we need not resort to cognitive biases to account for it. The explanation lies in the importance of choice, whether or not that choice strictly maximizes profit. Suppose people are drawn to four or five investments, based on admiration of certain companies, tips from friends, or trends they believe will benefit certain businesses.

Since the 1960s, detractors of the efficient market hypothesis have identified potential anomalies in the data that a savvy trader could exploit, and defenders have counterattacked with one of three claims: (1) The detractors looked at hundreds of possible anomalies and only published one—even if markets are perfectly unpredictable, some patterns will appear by chance, (2) There’s a flaw in the detractors’ analysis (for instance, transaction costs would chew up apparent profit or the securities were not really available at the published price), or (3) Any above-market returns can be attributed to risk, since the payoff is positively correlated with other financial assets or human capital. In return, detractors point to alleged cognitive biases, such as loss aversion, as the reason that money-making opportunities persist.


pages: 317 words: 106,130

The New Science of Asset Allocation: Risk Management in a Multi-Asset World by Thomas Schneeweis, Garry B. Crowder, Hossein Kazemi

asset allocation, backtesting, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, book value, business cycle, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, diversified portfolio, financial engineering, fixed income, global macro, high net worth, implied volatility, index fund, interest rate swap, invisible hand, managed futures, market microstructure, merger arbitrage, moral hazard, Myron Scholes, passive investing, Richard Feynman, Richard Feynman: Challenger O-ring, risk free rate, risk tolerance, risk-adjusted returns, risk/return, search costs, selection bias, Sharpe ratio, short selling, statistical model, stocks for the long run, survivorship bias, systematic trading, technology bubble, the market place, Thomas Kuhn: the structure of scientific revolutions, transaction costs, value at risk, yield curve, zero-sum game

A quick historical example: Early on, equity derivatives were called more risky than the stocks they were based on because the futures contract reported higher historical volatility. The reason, we later discovered, was that individuals just traded in the derivatives markets because derivatives had lower transaction costs. Moreover, because of the lower transaction costs, the futures price would move even if the underlying stock index did not trade because of its higher transaction cost. No real difference in price, no difference in risk; it just looked so to the less educated observer. STOCK AND BOND INVESTMENT MEANS INVESTORS HAVE NO DERIVATIVES EXPOSURE Simply not true in today’s market.

Other markets and/or assets may require enlarged risk based factor models that capture an enlarged set of underlying risks and therefore expected returns. Small firms with few analysts following them, with less ability to raise capital, with a less diversified client base, limited legal support, and so on may be priced to reflect those risks. Many assets are simply not tradable or have high transaction costs (e.g., housing, commodities, employment contracts, or distressed debt). How they could or should be priced in a single-factor or even a multi-factor model framework was explored, but a solution was rarely found.9 Option Pricing Models and Growth of Futures Markets We have spent a great deal of time focusing on the equity markets.

Investment size restricts certain investors from taking advantage of more cost efficient asset A Brief History of Asset Allocation 15 classes (e.g., swaps may be the preferred form of accessing a particular asset class but many investors are limited to investing in exchange traded variants, which do not have the same statistical properties). As pointed out, the market is never efficient for everyone; that is, transaction costs differ, borrowing costs differ, taxation differs such that the actual after-tax return for individuals and institutions varies greatly. Finally, the ability to process and understand information and its consequences differs. The very unpredictable nature of risky asset pricing raises the issue of how best to manage that risk.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

accounting loophole / creative accounting, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bear Stearns, Bernie Madoff, book value, British Empire, buy and hold, central bank independence, collective bargaining, commodity trading advisor, compensation consultant, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, land bank, law of one price, light touch regulation, Long Term Capital Management, low interest rates, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, military-industrial complex, minimum wage unemployment, Money creation, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, Robert Solow, rolodex, Savings and loan crisis, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tragedy of the Commons, transaction costs, ultimatum game, union organizing, Vilfredo Pareto, working-age population, World Values Survey

For example, all consumers have identical tastes and preferences (i.e. are identical clones), each is perfectly selfish and rational (i.e. is a robot), and each has perfect knowledge of all possible future market prices (i.e. is substantially omniscient), while all firms produce identical goods and services and make zero profit, and there are no transportation or transaction costs. Perhaps coincidentally, much of how globalization has been implemented and justified by economists during the past decades seems to assume that just such a worldview is true. Even from purely within the perspective of economics, the SMD assumptions exclude the possibility of increasing returns to scale.

They have become so normal and ubiquitous that they seem without alternative, yet these practices brought about the latest financial crisis, and most of the other 124 systemic banking crises that economists of the IMF have counted between 1970 and 2007 (Laeven and Valencia 2008). According to one account, money creation by banks emerged as an aberration of deposit banking starting in the 1640s. Some English merchants deposited their gold with goldsmiths or other safe keepers. In order to economize on transaction costs, it was customary to transfer documents of possession rather than the physical gold. The deposit slips started to function as paper money, entirely backed by gold. Soon, the safe keepers had an idea – one that could be called either fraud or a smart invention. They could make money by multiplying the deposit slips they issued.

The employer and the worker trade units of labor at a price that is determined by the law of demand and supply. A unit of labor of a given quality is well defined, according to this view, just like a potato of given size and quality is well defined. Also the standard requirements for perfect competition need to hold: there can be no transaction costs, information must be complete and contracts can be perfectly enforced without cost. If these conditions are all met, the law of demand and supply will work beautifully (Kaufman 2009). There is no power in the neoclassical labor market. Everybody has plenty of alternatives and everybody is thus indifferent as to whether they are hired by a specific employer or not, and whether they are fired or retained.


pages: 7,371 words: 186,208

The Long Twentieth Century: Money, Power, and the Origins of Our Times by Giovanni Arrighi

anti-communist, Asian financial crisis, barriers to entry, Bretton Woods, British Empire, business climate, business logic, business process, classic study, colonial rule, commoditize, Corn Laws, creative destruction, cuban missile crisis, David Ricardo: comparative advantage, declining real wages, deindustrialization, double entry bookkeeping, European colonialism, Fairchild Semiconductor, financial independence, financial intermediation, floating exchange rates, gentrification, Glass-Steagall Act, Great Leap Forward, income inequality, informal economy, invisible hand, joint-stock company, Joseph Schumpeter, Kōnosuke Matsushita, late capitalism, London Interbank Offered Rate, means of production, Meghnad Desai, military-industrial complex, Money creation, money: store of value / unit of account / medium of exchange, new economy, offshore financial centre, oil shock, Peace of Westphalia, post-Fordism, profit maximization, Project for a New American Century, RAND corporation, reserve currency, scientific management, spice trade, Strategic Defense Initiative, Suez canal 1869, the market place, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, trade route, transaction costs, transatlantic slave trade, transcontinental railway, upwardly mobile, vertical integration, Yom Kippur War

Just as the Dutch regime had taken world-scale processes of capital accumulation one step further than the Genoese by internalizing protection costs, and the British regime had taken them a step further than the Dutch by internalizing production costs, so the US regime has done the same in relation to the British by internalizing transaction costs. The notion of an internalization of transaction costs as the distinguishing feature 0F the F0urth (US) systemic cycle 0F accumulation is derived from Richard Coase’s (1937) pioneering theoretical study 0F the competitive advantages of vertically integrated business organizations, from Oliver Williamson’s (1970) expansion 0F C0ase’s analysis, and from Alfred Chandler’s historical study 0F the emergence and swift expansion 0F modern US corporations in the late nineteenth and early twentieth centuries.

It was a continental military-industrial complex with sufficient power to provide a wide range of subordinate and allied governments with effective protection and to make credible threats of economic strangulation or military annihilation towards unfriendly governments anywhere in the world. Combined with the size, insularity, and natural wealth of its own territory, this power enabled the US capitalist class to “internalize” not just protection and production costs, as the British capitalist class had already done, but transaction costs as well, that is to say, the markets on which the self-expansion of its capital depended. This steady increase in the size, complexity, and power of the leading agencies of capitalist history is somewhat obscured by another feature of the temporal sequence sketched in figure 3.4. This is the double movement — forward and backward at the same time — that has characterized the sequential development of systemic cycles of accumulation.

Similarly, the internalization of production costs by the British regime in comparison with, and in relation to, the Dutch regime occurred through a revival in new, enlarged and more complex forms of the strategies and structures of Genoese cosmopolitan capitalism and Iberian global territorialism, the combination of which had been superseded by the Dutch regime. As anticipated in chapter 1 and argued further in chapter 4, the same pattern recurred with the rise and full expansion of the US regime, which internalized transaction costs by reviving in new, enlarged, and more complex forms the strategies and structures of Dutch corporate capitalism which had been superseded by the British regime. This recurrent revival of previously superseded strategies and structures of accumulation generates a pendulum-like movement back and forth between “cosmopolitan-imperial” and “corporate-national” organizational structures, the first being typical of “extensive” regimes, as the Genoese and the British were, and the second of “intensive” regimes, as the Dutch THE “ENDLESS” ACCUMULATION OF CAPITAL 225 and the US were.


pages: 130 words: 11,880

Optimization Methods in Finance by Gerard Cornuejols, Reha Tutuncu

asset allocation, call centre, constrained optimization, correlation coefficient, diversification, financial engineering, finite state, fixed income, frictionless, frictionless market, index fund, linear programming, Long Term Capital Management, passive investing, Sharpe ratio, transaction costs, value at risk

This is not a restrictive assumption either–we can always reformulate the problem in this way via a change of numeraire. We assume that proportional transaction costs are paid on asset purchases and sales and denote them with αil and βil for sales and purchases, respectively, for asset i and period l. We assume that αil ’s and βil ’s are all known at the beginning of period 0, although they can vary from period to period and from asset to asset. Transaction costs are paid from the investor’s cash account and therefore, we have the following balance equation for the cash account: xl0 = xl−1 + 0 n X (1 − αi )Pil sli − i=1 n X (1 + βi )Pil bli , l = 1, . . . , L.

Transaction costs are paid from the investor’s cash account and therefore, we have the following balance equation for the cash account: xl0 = xl−1 + 0 n X (1 − αi )Pil sli − i=1 n X (1 + βi )Pil bli , l = 1, . . . , L. i=1 This balance condition indicates that the cash available at the beginning of period l is the sum of last period’s cash holdings and the proceeds from sales (discounted by transaction costs) minus the cost of new purchases. For technical reasons, we will replace the equation above with an inequality, effectively allowing the investor “burn” some of her cash if she wishes to: xl0 ≤ xl−1 + 0 n X (1 − αi )Pil sli − i=1 n X (1 + βi )Pil bli , l = 1, . . . , L. i=1 The objective of the investor, as we mentioned above, is to maximize her total wealth at the end of period L.

Furthermore, the optimal solution is sensitive to perturbations in these input parameters—a small change in the estimate of the return or the variance may lead to a large change in the corresponding solution, see, for example, [8, 9]. This attribute is unfavorable since the modeler may want to periodically rebalance the portfolio based on new data and may incur significant transaction costs to do so. Furthermore, using point estimates of the expected return and covariance parameters do not respond to the needs of a conservative investor who does not necessarily trust these estimates and would be more comfortable choosing a portfolio that will perform well under a number of different scenarios.


pages: 179 words: 42,081

DeFi and the Future of Finance by Campbell R. Harvey, Ashwin Ramachandran, Joey Santoro, Vitalik Buterin, Fred Ehrsam

activist fund / activist shareholder / activist investor, bank run, barriers to entry, bitcoin, blockchain, collateralized debt obligation, crowdsourcing, cryptocurrency, David Graeber, Ethereum, ethereum blockchain, fault tolerance, fiat currency, fixed income, Future Shock, initial coin offering, Jane Street, margin call, money: store of value / unit of account / medium of exchange, Network effects, non-fungible token, passive income, peer-to-peer, prediction markets, rent-seeking, RFID, risk tolerance, Robinhood: mobile stock trading app, Satoshi Nakamoto, seigniorage, smart contracts, transaction costs, Vitalik Buterin, yield curve, zero-coupon bond

The bank might say: “Are you telling me we should invest in an electronic system that will cannibalize our business and largely eliminate a very important profit center?” However, even 20 years ago, banks realized that their largest customers were very unhappy with the current system. As globalization surged, these customers faced unnecessary forex transactions costs. An even earlier example was the rise of dark pool stock trading. In 1979, the U.S. Securities and Exchange Commission (SEC) instituted Rule 19c3, which allowed stocks listed on one exchange, such as the New York Stock Exchange (NYSE), to be traded off-exchange. Many large institutions moved their trading large blocks to these dark pools, where they traded peer to peer with far lower costs than traditional exchange-based trading.

., exchange hands) with the knowledge and security that if one of the conditions is not met, the contract terms reset as if the money never left the starting point. Remember that transactions have a gas fee, which varies based on the complexity of the transaction. When, for example, ETH is used to compensate a miner for including and executing a transaction, the gas fee is relatively low. Longer or more data-intensive transactions cost more gas. If a transaction reverts for any reason, or runs out of gas, the sender forfeits all gas used until that point. Forfeiture protects the miners who, without this provision, could fall prey to large volumes of failed transactions for which they would not receive payment. The gas price is determined by the market and effectively creates an auction for inclusion in the next Ethereum block.

Limited access: Obtaining loans is difficult for a large majority of the population. Open ability to take out DAI liquidity against an overcollateralized position in any supported ERC-20 token. Access to a competitive USD-denominated return in the DSR. Inefficiency: Acquiring a loan involves costs of time and money. Instant liquidity at the push of a button with minimal transaction costs. Lack of interoperability: Cannot trustlessly use USD or USD-collateralized token in smart contract agreements. Issuance of DAI, a permissionless USD-tracking stablecoin backed by cryptocurrency. DAI can be used in any smart contract or DeFi application. Opacity: Unclear collateralization of lending institutions.


pages: 571 words: 106,255

The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous

"World Economic Forum" Davos, Airbnb, Alan Greenspan, altcoin, bank run, banks create money, bitcoin, Black Swan, blockchain, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, Charles Babbage, conceptual framework, creative destruction, cryptocurrency, currency manipulation / currency intervention, currency peg, delayed gratification, disintermediation, distributed ledger, Elisha Otis, Ethereum, ethereum blockchain, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, George Gilder, Glass-Steagall Act, global reserve currency, high net worth, initial coin offering, invention of the telegraph, Isaac Newton, iterative process, jimmy wales, Joseph Schumpeter, low interest rates, market bubble, market clearing, means of production, military-industrial complex, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, Paul Samuelson, peer-to-peer, Peter Thiel, price mechanism, price stability, profit motive, QR code, quantum cryptography, ransomware, reserve currency, Richard Feynman, risk tolerance, Satoshi Nakamoto, scientific management, secular stagnation, smart contracts, special drawing rights, Stanford marshmallow experiment, The Nature of the Firm, the payments system, too big to fail, transaction costs, Walter Mischel, We are all Keynesians now, zero-sum game

While investment is also meant to produce income to be exchanged for other goods, it is distinct from money in three respects: first, it offers a return, which money does not offer; second, it always involves a risk of failure, whereas money is supposed to carry the least risk; third, investments are less liquid than money, necessitating significant transaction costs every time they are to be spent. This can help us understand why there will always be demand for money, and why holding investments can never entirely replace money. Human life is lived with uncertainty as a given, and humans cannot know for sure when they will need what amount of money.1 It is common sense, and age‐old wisdom in virtually all human cultures, for individuals to want to store some portion of their wealth in the form of money, because it is the most liquid holding possible, allowing the holder to quickly liquidate if she needs to, and because it involves less risk than any investment.

This means that the foreign exchange market is around 25 times as large as all the economic production that takes place in the entire planet.21 It's important to remember here that foreign exchange is not a productive process, which is why its volume isn't counted in GDP statistics; there is no economic value being created in transferring one currency to another; it is but a cost paid to overcome the large inconvenience of having different national currencies for different nations. What economist Hans‐Hermann Hoppe has termed “a global system of partial barter”22 across international borders is crippling the ability of global trade to benefit people, exacting a high amount of transaction costs to attempt to ameliorate its consequences. Not only is the world wasting large amounts of capital and labor attempting to overcome these barriers, businesses and individuals worldwide frequently incur significant losses through economic miscalculation caused by the quicksand of exchange rate volatility.

“An International Look at the Growth of Modern Finance,” Journal of Economic Perspectives, vol. 27, no. 2 (2013): 73–96. 28 The centralization of credit issuance can be viewed as a government intervention in the operation of Coase's Law, described by Coase in his essay: “The Nature of the Firm,” Economica, vol. 4, no. 16 (1937): 386–405. According to Coase, the reason firms exist is that the individual contracting of tasks can be more expensive because it involves transaction costs, such as search and information, bargaining, contracting, and enforcement costs. A firm will thus grow for as long as it can benefit from doing activities in‐house to overcome higher external contracting costs. In a world of depreciating currency and centrally allocated credit, achieving financing becomes one of the main cost advantages of growing in size.


pages: 257 words: 64,285

The End of Traffic and the Future of Transport: Second Edition by David Levinson, Kevin Krizek

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, American Society of Civil Engineers: Report Card, autonomous vehicles, barriers to entry, Bay Area Rapid Transit, big-box store, bike sharing, carbon tax, Chris Urmson, collaborative consumption, commoditize, congestion pricing, crowdsourcing, DARPA: Urban Challenge, dematerialisation, driverless car, Dutch auction, Elon Musk, en.wikipedia.org, Ford Model T, Google Hangouts, high-speed rail, Induced demand, intermodal, invention of the printing press, jitney, John Markoff, labor-force participation, Lewis Mumford, lifelogging, Lyft, means of production, megacity, Menlo Park, Network effects, Occam's razor, oil shock, place-making, pneumatic tube, post-work, printed gun, Ray Kurzweil, rent-seeking, ride hailing / ride sharing, Robert Gordon, self-driving car, sharing economy, Silicon Valley, Skype, smart cities, tacit knowledge, techno-determinism, technological singularity, Tesla Model S, the built environment, The future is already here, Thomas Kuhn: the structure of scientific revolutions, transaction costs, transportation-network company, Uber and Lyft, Uber for X, uber lyft, urban renewal, women in the workforce, working-age population, Yom Kippur War, zero-sum game, Zipcar

These may be private enterprises (new market opportunities will arise) or these resources may be provided in central locations. Libraries will continue to reinvent themselves away from the traditional reading-and-learning mission and transform into the digital age of providing a wider range of club goods that are under-provided to society thanks to transaction costs. Thus, libraries, together with community centers, might be the homes for community 3D printers. Mass customization will likely be a hallmark of these products but customized designs would shortly follow suit; altering designs will not require retooling, merely tweaking the code for the software.

This is where other services (taxi, transport network companies, transit) come in as backups. This is also where autonomous vehicles can be important. Nevertheless, people prefer not to think about every transaction. If they are charged per use, they use less. But they are less happy and more determined to get a car of their own to avoid transaction costs. Cars of course have costs of their own, but they are less frequent and less obvious. If the charges are invisible though, people may not think about them. Just as we went from terminals and mainframes to personal computers, and internet cafes to internet at home, we went from trains and transit to private transport once we could afford it.

Discussion The most widely discussed pricing system in the US is a mileage tax concept, sometimes employing GPS systems.324 There are a variety of potential technologies for assessing mileage taxes, most use GPS (or an equivalent such as cellphone triangulation) to identify location, since one of the advantages of these types of systems is the ability to charge different rates for different locations (city vs. country, freeway vs. local street, congested vs. uncongested road).325 Oregon is presently testing a voluntary mileage charge (1.5 cents per mile) for up to 5000 participants dubbed “OReGO."326 While road user charging remains an attractive prospect, its application may still be many years away due to a combination of privacy concerns, implementation and transaction cost issues, and technological development issues.327 Some of these concerns might be obviated under a different governance structure, where it was neither the legislative nor executive branch of government making these decisions. We argue here that congestion exists, governments should price roads to encourage use in the off-peak and discourage use in the peak.


pages: 457 words: 128,838

The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order by Paul Vigna, Michael J. Casey

Airbnb, Alan Greenspan, altcoin, Apple Newton, bank run, banking crisis, bitcoin, Bitcoin Ponzi scheme, blockchain, Bretton Woods, buy and hold, California gold rush, capital controls, carbon footprint, clean water, Cody Wilson, collaborative economy, collapse of Lehman Brothers, Columbine, Credit Default Swap, cross-border payments, cryptocurrency, David Graeber, decentralized internet, disinformation, disintermediation, Dogecoin, driverless car, Edward Snowden, Elon Musk, Ethereum, ethereum blockchain, fiat currency, financial engineering, financial innovation, Firefox, Flash crash, Ford Model T, Fractional reserve banking, Glass-Steagall Act, hacker house, Hacker News, Hernando de Soto, high net worth, informal economy, intangible asset, Internet of things, inventory management, Joi Ito, Julian Assange, Kickstarter, Kuwabatake Sanjuro: assassination market, litecoin, Long Term Capital Management, Lyft, M-Pesa, Marc Andreessen, Mark Zuckerberg, McMansion, means of production, Menlo Park, mobile money, Money creation, money: store of value / unit of account / medium of exchange, Nelson Mandela, Network effects, new economy, new new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, off-the-grid, offshore financial centre, payday loans, Pearl River Delta, peer-to-peer, peer-to-peer lending, pets.com, Ponzi scheme, prediction markets, price stability, printed gun, profit motive, QR code, RAND corporation, regulatory arbitrage, rent-seeking, reserve currency, Robert Shiller, Ross Ulbricht, Satoshi Nakamoto, seigniorage, shareholder value, sharing economy, short selling, Silicon Valley, Silicon Valley startup, Skype, smart contracts, special drawing rights, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, supply-chain management, Ted Nelson, The Great Moderation, the market place, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, Turing complete, Tyler Cowen, Tyler Cowen: Great Stagnation, Uber and Lyft, uber lyft, underbanked, Vitalik Buterin, WikiLeaks, Y Combinator, Y2K, zero-sum game, Zimmermann PGP

In this sense, she was lucky—for many women from her background male family members block them from access to their funds and treat the money as their own. Ahmadi’s luck would change in early 2014. The Film Annex’s New York–based founder, Francesco Rulli, aware of the difficulty faced by women like Ahmadi and frustrated by the transaction costs he incurred in sending relatively small amounts of money around the world, implemented a sweeping change to the Film Annex’s payment system. He would pay his bloggers in bitcoin, the digital currency that had seemed to come out of nowhere in 2013, with a small, fiercely dedicated band of tech-minded, libertarian-leaning digital utopians acting as its standard-bearers, and swearing to anybody who’d listen that it was going to change the world.

The race for an e-commerce fix would be won by the same payments model run by big banks like those with which Chaum was negotiating. In other words, they ended up having no use for him. With the aid of new Web-site security solutions and third-party ratings to give consumers confidence, the infrastructure of the credit-card payment networks, with the intermediaries and transaction costs that went with it, was just bolted onto that of the Internet. Some alternatives, such as PayPal, would create a bridge for those retailers with no means of accepting card payments, but over time most would simply migrate to cards. It would provide an enormous jolt of new business for the two big bank-issued card associations, Visa and MasterCard.

Also like bitcoin and other cryptocurrencies, Rosen’s project ran off a permanent ledger of transactions and allowed for the digital dollar to be cut into smaller pieces so that commerce could occur in whatever denomination was required. Citi’s e-cash was in this sense a disruptive, disintermediating, peer-to-peer currency. It wouldn’t need the extensive network of communications that underpins credit-card payments, so transaction costs would be kept low, providing gains for both consumers and businesses and making micropayments viable. But this is not to say Rosen wanted to cut banks out from the system as, say, Satoshi Nakamoto did. Far from it. Banks would sit at the heart of his system, reflecting a deep-felt view that he’d developed on the theory of money by reading the likes of Milton Friedman and the nineteenth-century financial journalist Walter Bagehot.


pages: 400 words: 88,647

Frugal Innovation: How to Do Better With Less by Jaideep Prabhu Navi Radjou

3D printing, additive manufacturing, Affordable Care Act / Obamacare, Airbnb, Albert Einstein, barriers to entry, Baxter: Rethink Robotics, behavioural economics, benefit corporation, Bretton Woods, business climate, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, circular economy, cloud computing, collaborative consumption, collaborative economy, Computer Numeric Control, connected car, corporate social responsibility, creative destruction, crowdsourcing, disruptive innovation, driverless car, Elon Musk, fail fast, financial exclusion, financial innovation, gamification, global supply chain, IKEA effect, income inequality, industrial robot, intangible asset, Internet of things, job satisfaction, Khan Academy, Kickstarter, late fees, Lean Startup, low cost airline, M-Pesa, Mahatma Gandhi, Marc Benioff, megacity, minimum viable product, more computing power than Apollo, new economy, payday loans, peer-to-peer lending, Peter H. Diamandis: Planetary Resources, planned obsolescence, precision agriculture, race to the bottom, reshoring, risk tolerance, Ronald Coase, Salesforce, scientific management, self-driving car, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, six sigma, smart grid, smart meter, software as a service, standardized shipping container, Steve Jobs, supply-chain management, tacit knowledge, TaskRabbit, TED Talk, The Fortune at the Bottom of the Pyramid, the long tail, The Nature of the Firm, Tony Fadell, transaction costs, Travis Kalanick, unbanked and underbanked, underbanked, value engineering, vertical integration, women in the workforce, work culture , X Prize, yield management, Zipcar

In a 1937 essay, Ronald Coase, a Nobel Prize-winning economist, argued that the reason Western economies are organised vertically – like a pyramid with a few large producers at the top and millions of passive consumers at the bottom – is because of transaction costs (the intangible costs associated with search, bargaining, decision-making and enforcement).5 But with the explosion of the internet, mobile technologies and social media – think of the 1.3 billion interconnected Facebook users – these transaction costs have all but disappeared in many sectors. This has allowed a horizontal economy to emerge in the US, western Europe and Japan. The foundations of a new, self-sustaining commercial system are now being laid.

The NISP has helped Michelin, a tyre manufacturer, reduce its landfill waste by 97% within just 3 years, 18 months ahead of schedule. It estimates that every tonne of carbon dioxide saved costs members merely around $1. This is a far more cost-effective approach than, say, carbon trading, with its high transaction cost. The OECD declared the NISP to be a game-changer in waste management. Its model is being replicated in 20 countries worldwide. Sharing waste is only half the story Companies can also share underused assets and resources. FLOOW2 is a business-to-business marketplace that enables companies to share and exchange under-utilised equipment, services, skills and knowledge.

Index 3D printers 18, 47–9, 50, 128, 132, 134, 152, 166 3D printing 9, 47–9, 50, 51, 52, 132, 151–2, 206 4D revolution 53–4 A Accor 172–6 Accountable Care Solutions 211 Active Health Management 211 adaptability 90, 154 additive manufacturing 47–9 ADEO Group 127, 128 advertising 24, 61–3, 71–2 aerosols 95, 96 Aetna 32, 208–13, 213, 215 Affinnova 31, 141 affordability 3, 82, 136, 153, 161, 172, 194, 216 in emerging markets 4, 56, 120, 198, 206 health-care innovations 202–3 and quality 1, 3, 9, 12, 75, 120–1, 198, 206 affordances 120–1 Africa 40, 56, 146, 161, 164, 197 financial services 198, 201 IBM in 200–2 innovation potential 200–2 as market 12, 169, 197–8, 199 ageing populations 109, 194 ageing workforce 13, 29, 49, 153 agility 26, 41, 69, 75, 143, 169–70 in innovation 21, 27, 33–4, 42–3, 72, 154, 167, 173, 176, 206 in manufacturing 44–5, 49, 52 Akerman, Dave 136 Air Liquide 205–7 air pollution 74, 78, 187, 200 Airbnb 10, 17, 85, 136, 140, 163, 173, 175 aircraft 68, 149 parts 48–9, 49, 121, 151–2 airlines 60, 121 Alteryx 32 Amazon 46, 60–1, 150 Amelio, Gil 68–9 AmEx (American Express) 161–2, 167, 215 Amgen 45 Anderson, Chris 18 Android operating system 130, 172 AOL 42 Apple 17, 24, 68–9, 71, 99, 150, 155, 172 Apple TV 62 apps 99, 106, 107, 108, 111–12, 124–5, 148 Arduino 135 Ariely, Dan 132 Arla Foods 37 artists 88, 93 ASDA 158–9, 159 Asia 161, 164, 200 aspirations 88–9, 119–20, 198 assets digitising 65–6 flexing see flexing assets reusing 92–3 sharing 159–61, 167 AT&T 21 ATMI 88 Auchan 13, 126, 128, 215 austerity 5, 6–7, 23 Australia 5, 62, 146, 200 Autodesk 48, 92, 132, 196–7 Automatic 131 automation 49–50 Avon 146 AXA 116 Ayed, Anne-Christine 75, 76 B B Corps (Benefit Corporations) 82 B2B (business-to-business) sectors 25–6, 34, 57, 142, 161, 175, 212 B2C (business-to-consumer) companies 25, 34, 212 Badrinath, Vivek 174 BAE Systems 48–9 Ban, Shigeru 93 Bangladesh 66 Bank of America 155 banking services 13, 17, 57, 161–2, 198 see also financial services Banner Health Network 210 Banzi, Massimo 135 Barber, Michael 181 Barclays 100, 115, 117, 215 Barry, Mike 183–4, 187 Bayer 66–7 Bazin, Sébastien 173 BBVA 125 Béhar, Yves 110 Belgium 103 Benefit Corporations (B Corps) 82 Benelux countries 7, 103 Benetton 67 Benoît, Paul 89 Berg 89 Bergh, Chip 122–3 Bertolini, Mark 208–9, 212, 213, 217 BHAGs (“big, hairy audacious” goals) 90–1, 158–9, 179, 191–2 Biasiotta, Bruno 123 big data 32–3, 117, 150 big-box retailers 9, 18, 137 “bigger is better” 2, 8, 14–15, 104 biomimetics (or biomimicry) 84 Birol, Jacques 163–4 BlaBlaCar 10, 85, 163 Blanchard, David 94, 96 Bloomberg, Michael 18, 79, 133 BMI (business model innovation) 192 BMW 47, 62–3, 86 BNP Paribas 168–9 Boeing 92, 144 Bolland, Marc 180–1, 186 Bontha, Ven 59 Booz & Company (now Strategy&) 6, 22, 23, 28, 171 Bosch 156 Boston Consulting Group 55, 64, 116, 145, 217 Botsman, Rachel 10 bottom-of-pyramid (BOP) customers 161, 203, 207 Bouygues Immobilier 90 BP 169 BPS (by-product synergy) 159 Brabeck-Letmathe, Peter 44, 78 brand ambassadors 143, 145 brand loyalty 46, 100, 204, 215 branding 15, 108, 119–20, 156 brands 1, 71, 139, 141, 143, 154, 165–6, 215 “conversations” with 129, 131–2 working together 154, 156–7 Braungart, Michael 82 Brazil 40, 74, 102, 146, 188, 199 emerging market 4, 12, 38, 146, 197, 199 Bretton Woods Conference (1944) 104 Brin, Sergey 63 BringBee 85 Bross, Matt 37–8, 171 Brown, Tim 121 Brusson, Nicolas 163 BT 37–8, 171 BTG (British Technology Group) 171 budgeting, personal 124–5 budgets 6–7, 36, 42 Buffett, Warren 138 buildings 196–7 bureaucracy 36, 63–4, 65, 70, 165, 169, 173, 182 business, primary purpose of 14 business model innovation (BMI) 192 business models 2, 34, 38, 80, 118, 205, 216, 217 changing 190–3, 213 business opportunities 36, 188–9, 190 business process re-engineering 192 business strategy 34 business-to-business see B2B business-to-consumer see B2C by-product synergy (BPS) 159 C C2C (cradle-to-cradle) design 75, 77, 82, 84, 97 Cacciotti, Jerry 22, 23 CAD (computer-aided design) 47, 65, 132, 165 California 79, 99 Calmes, Stéphane 127, 128 Camp, Garrett 163 Canada 5, 102 cannibalisation conundrum 15, 117–18 capital costs 45 car insurance 116 car sharing 10, 17, 85, 86, 108, 123, 163 car-related services 62–3, 116 Caravan Shop 89 carbon emissions 102, 103, 196 reducing 78–9, 106–7, 159, 160, 174 stabilising 184, 186 carbon footprint 94, 100, 102, 156, 184, 186 Carrefour 121–2, 157, 174 cars 89, 92, 116, 119–20, 144, 155, 156 electric 47, 86, 172 emissions 47, 106–7 fuel consumption 47, 106–7 fuel efficiency 8, 12, 24, 47, 78, 131, 197 low-cost 2–4 personalisation 129–30 related services 62–3 standards for 78–9 see also BMW; Ford; Nissan; Renault; Tesla; Toyota Caterpillar 31, 55 CellScope 110 Cemex 59 centralisation 9, 44, 51 CEOs 34, 40, 168, 203–5, 204 certification, sustainability 84 Chaparral Steel 159 chemical industry 33, 58, 66–7 chemical usage, reducing 79 Cheshire, Ian 185–6 Chesky, Brian 163 Chevron 170 China 44, 83, 102, 144, 213, 216 air pollution 187, 200 emerging market 4, 38, 169, 197, 205 innovation in 169, 200 mobile phones 198 R&D 40, 188, 206 selling into 187–8 shifting production from 55, 56 Christchurch (New Zealand) 93 Chrysler 166 circular economy 9, 76–7, 80–4, 159–60, 195–6 “Circular Economy 100” 76–7, 86 circular supply chains 193 Cisco 17, 29, 65, 110 CISL (University of Cambridge Institute for Sustainability Leadership) 158–9 cities 107, 153 Citigroup 161 climate change 8, 100 closed-loop products 86, 91, 185, 192–3 cloud computing 60, 61, 157, 169 CMF-A car platform 4–5, 198–9 CNC (computer numerical control) cutters 128, 134, 152 co-branding 143 co-creation 126–9, 202–3, 206–7 see also collaboration; horizontal economy; prosumers co-distribution 143 co-marketing 143 co-operation 64–5, 69, 70–1 co-opetition 158–9 Coase, Ronald 133 Coca-Cola 57, 62, 142, 154 “cold chains” 57 CoLearnr 114 Collaborating Centre on Sustainable Consumption and Production (CSCP) 193–4 collaboration 76, 114, 138–9, 176, 211, 217–18 cross-functional 36–8, 39, 71–2 see also hyper-collaboration; TechShop collaborative consumption see sharing economy collaborative manufacturing 50–1 collective buying platforms 137 Commonwealth Fund 110 communities of customers 129, 131, 132–3 local 52, 57, 146, 206–7 commuting 131 competition 22, 27, 102, 189 competitive advantage 15–16, 80, 195 competitors 19, 26, 148, 149–50, 172, 215 emerging markets 16, 205–6, 216 engaging 158–9, 167 frugal 16–18, 26, 216 complexity 24, 64 components 3, 67 computer numerical control see CNC computer-aided design (CAD) 47, 65, 132, 165 Comstock, Beth 40–1, 149, 150, 151, 170 concentration 96 Concept Lab 211 concept testing 25, 31, 72, 191 Cone, Carol 7 congestion 108, 201 constraints 4–5, 22, 34, 36, 42, 207, 217 consumer behaviour 3, 6, 97, 98–101 shaping xix, 99–101, 105–9, 125 Consumer Empowerment Index 103 consumer spending 103 consumers 8, 27, 37, 97, 105 developed-world 2, 7, 9, 102 dissatisfaction 130–1 empowerment 22, 105, 106 environmental awareness 101–2, 105 frugal 197–200 of the future 193–4 innovative ideas from 50–1 with particular needs 194–5 power 102–4, 139 social experience 139 and sustainability 95, 97, 101–4 trust of 143 young 16, 85, 86, 122, 124, 131 see also customers; prosumers consumption 85, 101–6, 115, 124, 193 continuous processing 44–5, 47, 50 Cook, Scott 19 core, focusing on 68–9 Cornillon, Paul 37 Corporate Home Exchange 175 corporate leaders 122–4, 180–1, 203–5 corporate social responsibility see CSR Cortese, Amy 138 cost effectiveness 12, 34, 149, 164, 172, 188, 190, 191 consumer energy use 53 customisation 67 health care 202 innovation 21, 173 micro-factories 52 Costco 18 costs 3D printers 48 capital costs 45 development costs 22, 36 distribution costs 54, 55, 96 electricity generation 104 energy costs 161, 190 environmental costs 11 fuel costs 121 of good-enough approach 27 health-care costs 13, 109 innovation costs 168, 171 inventory costs 54 life-cycle costs 12, 24, 196 maintenance costs 48–9, 66 manufacturing costs 47, 48, 52 operating costs 45, 215 production costs 9, 83 raw materials 153, 161, 190 reducing 11, 46, 47, 60, 84, 89, 160, 167, 200 resource costs 78, 203 shipping costs 55, 59 supply chain 58, 84 transaction costs 133 wage costs 48 Coughlin, Bill 167 Coursera 61, 112 Coye, Molly 202 cradle-to-cradle see C2C design creativity 88, 94, 128, 130, 135, 163–4, 199 in organisations 63–4, 70, 71 credit culture 115–16 CRM (customer relationship management) systems 59, 157 cross-functional collaboration 36–8, 39, 71–2 crowdfunding 17, 48, 132, 137–9, 152 crowdsourcing 28–9, 50–1, 126, 140, 143, 152, 202 platforms 142, 150–1, 151, 152 CSCP (Collaborating Centre on Sustainable Consumption and Production) 193–4 CSR (corporate social responsibility) 77, 82, 94, 161 culture, organisational see organisational culture “culture of simplification” 170 curiosity 153–4 customer behaviour see consumer behaviour customer experience, enhancing 75 customer feedback 31–2, 33, 72, 152, 170, 192 customer immersion labs 31–2 customer loyalty 28, 68, 77, 80, 124, 129, 131–2, 215 customer needs 37, 58, 90, 139–40, 170, 192, 206 changing 28, 38, 51, 127, 150, 168, 205 diversity 38, 46, 51 R&D disconnect from 26, 38 customer preferences 58, 67, 75 customer relationship management see CRM customer satisfaction 65, 128, 130–1 customer service 25–6, 127–8, 147 customer visits 18, 20, 128 customers 19, 27, 46, 76, 148, 205 alienating 24–6 behaviour see consumer behaviour bottom-of-pyramid 12–13, 161, 203, 207 communities of 129, 131, 132–3 cost-conscious 3, 6, 7, 22, 26, 156, 189, 215 dreams 140–1 eco-awareness 22, 26, 54, 75, 78, 93, 156, 195–6, 215 in emerging markets 200 engaging with 20–1, 24–6, 27–33, 34, 35, 38–9, 42–3, 115, 128, 170 as experts 146 focus on 19–21, 43, 62, 157–8, 204 goodwill of 84 motivation for change 117 multiple roles 143–6 needs see customer needs outsourcing to 143 participation 128–9 profligate 115–16 R&D and 27–8, 31–2, 38, 43 rewards for 147–8 shared 156–8 used to motivate employees 205–7 young 16, 85, 86, 122, 124, 131 see also consumers; prosumers customisation 9, 46, 47, 48, 51–2, 57–8, 67, 72 CVS Health 7 D D2D Fund 162 Dacia 2–4, 156, 179 Dannon 141 Danone 66, 141, 184, 186 Darchis, François 205–6, 207 DARPA (Defence Advanced Research Projects Agency) 49 Darukhanavala, P.P.


pages: 457 words: 125,329

Value of Everything: An Antidote to Chaos The by Mariana Mazzucato

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, bank run, banks create money, Basel III, behavioural economics, Berlin Wall, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, business cycle, butterfly effect, buy and hold, Buy land – they’re not making it any more, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, carried interest, clean tech, Corn Laws, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, European colonialism, Evgeny Morozov, fear of failure, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, full employment, G4S, George Akerlof, Glass-Steagall Act, Google Hangouts, Growth in a Time of Debt, high net worth, Hyman Minsky, income inequality, independent contractor, index fund, informal economy, interest rate derivative, Internet of things, invisible hand, John Bogle, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, laissez-faire capitalism, light touch regulation, liquidity trap, London Interbank Offered Rate, low interest rates, margin call, Mark Zuckerberg, market bubble, means of production, military-industrial complex, Minsky moment, Money creation, money market fund, negative equity, Network effects, new economy, Northern Rock, obamacare, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, peer-to-peer lending, Peter Thiel, Post-Keynesian economics, profit maximization, proprietary trading, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, rent control, rent-seeking, Robert Solow, Sand Hill Road, shareholder value, sharing economy, short selling, Silicon Valley, Simon Kuznets, smart meter, Social Responsibility of Business Is to Increase Its Profits, software patent, Solyndra, stem cell, Steve Jobs, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, transaction costs, two and twenty, two-sided market, very high income, Vilfredo Pareto, wealth creators, Works Progress Administration, you are the product, zero-sum game

Just as turnover has risen, so the volatility of funds has increased significantly from 0.84 to 1.11 over the same period. Second, there are transaction costs. Greater turnover - buying and selling more shares - keeps fees higher than they might have been, adding to transaction costs without adding to investors' capital gains given the zero-sum nature of the market. Crucially for the investor, additional fees reduce returns by increasing the cost of managing money. While transaction costs for each trade have fallen over the last thirty years, the frequency of trading has increased exponentially in recent years.

When Millennium declared bankruptcy the following year, a court indemnified TA and other shareholders (the firm's former managers) against any effort by creditors to claw back the dividend, even after it was revealed that the owners and their loan arrangers had not informed them that its biggest client, the US government, had successfully sued it for $256 million over fraudulent tests.25 HOW FINANCE EXTRACTS VALUE How does finance extract value? There are broadly three related answers: by inserting a wedge, in the form of transaction costs, between providers and receivers of finance; through monopoly power, especially in the case of banks; and with high charges relative to risks run, notably in fund management. In certain areas of the economy, such transaction costs are regarded as reducing efficiency and destroying value, not creating it. Governments are accused of inefficiency whenever they impose an income tax - which puts a wedge between what people receive for work and the value they place on leisure - or when they try to finance social security through a payroll tax, which disconnects wage costs from total labour costs.

The NHS is also among the cheapest healthcare systems in advanced economies: according to OECD figures from 2015,48 health expenditure relative to GDP in the UK was only 9.9 per cent, almost half of what the US has spent (16.9 per cent) on its far less efficient semi-private system. The NHS owes much of its past successes to its public mission and to its universality principle, translated into an efficient central provision of healthcare services aimed at reducing transaction costs. UK citizens have repeatedly recognized the importance of its public nature: currently, 84 per cent of them think that it should be run in the public sector.49 Even Prime Minister Thatcher stated: ‘The National Health Service is safe with us' during the 1982 Conservative Party conferences, temporarily discarding plans for outright privatization set out by the Central Policy Review Staff within the Cabinet Office.


pages: 426 words: 118,913

Green Philosophy: How to Think Seriously About the Planet by Roger Scruton

An Inconvenient Truth, barriers to entry, carbon credits, carbon footprint, carbon tax, Cass Sunstein, Climategate, Climatic Research Unit, corporate social responsibility, demand response, Easter island, edge city, endowment effect, energy security, Exxon Valdez, failed state, food miles, garden city movement, Garrett Hardin, ghettoisation, happiness index / gross national happiness, Herbert Marcuse, hobby farmer, Howard Zinn, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, joint-stock company, joint-stock limited liability company, Kenneth Arrow, knowledge economy, Lewis Mumford, market friction, Martin Wolf, moral hazard, Naomi Klein, New Urbanism, Peter Singer: altruism, phenotype, precautionary principle, rent-seeking, Robert Solow, Ronald Coase, Sam Peltzman, Silicon Valley, Simon Kuznets, tacit knowledge, the built environment, The Death and Life of Great American Cities, the market place, Thomas Malthus, Tragedy of the Commons, transaction costs, University of East Anglia, urban planning, urban sprawl, Vilfredo Pareto, women in the workforce, zero-sum game

In a striking ‘theorem’ Coase also argues that, when a commons is privatized, with property rights assigned to all those who might actively wish to make use of it, any preliminary assignment of private rights will lead, in the absence of transaction costs, to an optimal final distribution, by bargaining among the parties. So far so good, but Coase’s argument does not prove that regulation is unnecessary; only that it is unnecessary in certain special circumstances – where transaction costs are zero, and where the injured parties are identifiable. The situations discussed by Coase are like those researched by Ostrom: situations in which identifiable parties or local communities are being asked to bear the costs of a particular person’s economic activity.

The contrast with the nuclear disasters in the Soviet Union, in which the state neither assumed liability nor even admitted that the disasters had occurred, is striking. In a famous argument the economist Ronald Coase suggested that damages in tort and contract provide the feedback that, in the absence of transaction costs, overcomes of its own accord the problem posed by externalities.173 Coase was opposing the widely accepted view of Arthur Cecil Pigou, that state action is necessary to ensure that the costs of market transactions are internalized by those who create them.174 Pigou’s suggestion was that pollution and similar externalities should be taxed, so restoring the incentive to assume the costs of market transactions along with the benefits.

In a famous argument the economist Ronald Coase suggested that damages in tort and contract provide the feedback that, in the absence of transaction costs, overcomes of its own accord the problem posed by externalities.173 Coase was opposing the widely accepted view of Arthur Cecil Pigou, that state action is necessary to ensure that the costs of market transactions are internalized by those who create them.174 Pigou’s suggestion was that pollution and similar externalities should be taxed, so restoring the incentive to assume the costs of market transactions along with the benefits. The burden of Coase’s argument is that this misrepresents the underlying logic of the market, which is one of co-operation rather than antagonism. Thus if John’s use of his land causes $5 of damage to his neighbour Bill, but brings in a profit of $6, then – assuming no transaction costs – it is worth John compensating Bill, since he can do so and still make a profit, and Bill is no worse off than he would have been had John ceased his business. In general, rational choosers, in a regime of frictionless compensation, will ensure that costs are internalized, and distributed in a way acceptable to all.


pages: 313 words: 34,042

Tools for Computational Finance by Rüdiger Seydel

bioinformatics, Black-Scholes formula, Brownian motion, commoditize, continuous integration, discrete time, financial engineering, implied volatility, incomplete markets, interest rate swap, linear programming, London Interbank Offered Rate, mandelbrot fractal, martingale, random walk, risk free rate, stochastic process, stochastic volatility, transaction costs, value at risk, volatility smile, Wiener process, zero-coupon bond

The holder will exercise the call (buy 1.1 Options 3 the stock for the strike price K), when S > K. For then the holder can immediately sell the asset for the spot price S and makes a gain of S − K per share. In this situation the value of the option is V = S − K. (This reasoning ignores transaction costs.) In case S < K the holder will not exercise, since then the asset can be purchased on the market for the cheaper price S. In this case the option is worthless, V = 0. In summary, the value V (S, T ) of a call option at expiration date T is given by 0 in case ST ≤ K (option expires worthless) V (ST , T ) = ST − K in case ST > K (option is exercised) Hence V (ST , T ) = max{ST − K, 0}.

Intrinsic value of a put with exercise price K (payoff function) 4 Chapter 1 Modeling Tools for Financial Options The curves in the payoff diagrams of Figures 1.1, 1.2 show the option values from the perspective of the holder. The profit is not shown. For an illustration of the profit, the initial costs paid when buying the option at t = t0 must be subtracted. The initial costs basically consist of the premium and the transaction costs. Since both are paid upfront, they are multiplied by er(T −t0 ) to take account of the time value; r is the continuously compounded interest rate. Substracting this amount leads to shifting the curves in Figures 1.1, 1.2 down. The resulting profit diagram shows a negative profit for some range of S-values, which of course means a loss, see Figure 1.3.

Definition 1.1 (Black-Scholes equation) 1 ∂V ∂2V ∂V + σ 2 S 2 2 + rS − rV = 0 ∂t 2 ∂S ∂S (1.2) The equation (1.2) is a partial differential equation for the value function V (S, t) of options. This equation may serve as symbol of the market model. But what are the assumptions leading to the Black-Scholes equation? Assumptions 1.2 (model of the market) (a) The market is frictionless. This means that there are no transaction costs (fees or taxes), the interest rates for borrowing and lending money are equal, all parties have immediate access to any information, and all securities and credits are available at any time and in any size. Consequently, all variables are perfectly divisible —that is, may take any real number.


Mathematical Finance: Core Theory, Problems and Statistical Algorithms by Nikolai Dokuchaev

Black-Scholes formula, Brownian motion, buy and hold, buy low sell high, discrete time, electricity market, fixed income, implied volatility, incomplete markets, martingale, random walk, risk free rate, short selling, stochastic process, stochastic volatility, transaction costs, volatility smile, Wiener process, zero-coupon bond

Let a self-financing strategy be such that the number of stock shares at the initial time be γ0=1/2. Find γ1, X1, X2, βi, i=0, 1, 2 for the constantly rebalanced portfolio. Solve Problems 3.11 and 3.12. Problem 3.63 (Make your own model). Introduce a reasonable version of the discrete time market model that takes into account transaction costs (a brokerage fee), and derive the equation for the wealth evolution for self-financing strategy here. (Hint: transaction costs may be per transaction, or may be proportional to the size of transaction or may be of a mixed type.) Discrete time market: arbitrage and completeness Solve Problem 3.29. Problem 3.64 Prove that an equivalent risk-neutral probability measure does not exist for Problem 3.29.

Definition 3.2 We say that the strategy is self-financing if Xt+1−Xt=γt(St+1−St), t=0, 1,…. (3.2) It follows from (3.2) that (3.3) Here X0>0 is the initial wealth at time t=0. For example, for the trivial risk-free strategy, when γt≡0, the corresponding total wealth is Xt≡X0. © 2007 Nikolai Dokuchaev Discrete Time Market Models 25 Note that these definitions present a simplification of the real market situation, because transaction costs, bid and ask gap, possible taxes and dividends, interest rate for borrowing, etc., are not taken into account. 3.3 A discrete time bond-stock market model A more realistic model of the market with non-zero interest rate for borrowing can be described via the following bond—stock model. We introduce a model of a market, consisting of the risk-free bond or bank account with price Bt and the risky stock with the price St, t=0, 1, 2,….

Some special effects can be found for N→+∞ (such as strategies that converge to arbitrage). Note also that the most widely used results in practice for optimal portfolio selection are obtained for the case of single-period multi-stock markets, i.e., with T=1 and N>1 (Markowitz mean-variance setting). • Transaction costs (brokerage fees), bid-ask gap, gap between lending and borrowing rate, taxes, and dividends, can be included in the condition of self-investment. • Additional constraint can be imposed on the admissible strategies (for instance, we can consider only strategies without short positions, i.e., with γt≥0). • In fact, we addressed only the so-called ‘small investor’ setting, when the stock prices are not affected by any strategy.


American Secession: The Looming Threat of a National Breakup by F. H. Buckley

Affordable Care Act / Obamacare, Andrei Shleifer, belling the cat, Bernie Sanders, British Empire, Cass Sunstein, colonial rule, crony capitalism, desegregation, diversified portfolio, Donald Trump, Francis Fukuyama: the end of history, guns versus butter model, hindsight bias, illegal immigration, immigration reform, income inequality, low interest rates, Michael Milken, military-industrial complex, old-boy network, Paris climate accords, race to the bottom, Republic of Letters, reserve currency, Ronald Coase, Stephen Fry, Suez crisis 1956, transaction costs, Washington Consensus, wealth creators

There are further economic arguments for a country to remain large rather than breaking up when we look at the costs of a secession option, even when it isn’t exercised: • The opt-out remedy of secession gives rise to underinvestment costs when the federal government declines to exploit valuable long-term projects whose financing would be threatened by secession. • A right to secession would encourage piggish post-constitutional opportunism, in the form of demands for unwarranted favors from states threatening to leave the Union. • Negotiations over secession would themselves impose transaction costs, by focusing attention on a constitutional crisis and diverting attention from things the government might otherwise usefully do. • The exit option of secession deprives those who remain of the useful contributions to the debate, or the voice, of those who secede. First we’ll examine the economic benefits of bigness, so we can weigh them against the advantages of smallness seen earlier.

Meanwhile a sterile game of threat and counterthreat had occupied Canada for forty years. With all the wasteful squabbling, it was like a painful marriage, not bad enough for everyone to call it quits but not very happy either. Ask a Canadian whether he likes the idea of secession rights, and he’ll probably say no. Transaction Costs Sometimes secession is like ripping off a Band-Aid: just do it quickly. Czechoslovakia’s breakup was like that, but I don’t think it’s what would happen in the United States. We’d have the precedent of the Civil War to get over, and the negotiations about the division of assets and debts would drag on for some time.

The issue is off the table for the moment, in large part because Canadians are good and sick of it. But it has diverted attention from other things the government might have been doing, and that’s a cost. The same kind of cost arises in private law bargaining, and the Nobel laureate Ronald Coase gave it a name: transaction costs. These are the costs, in both the direct expenses of bargaining and the distraction from other opportunities, incurred when the parties negotiate to reach an agreement. The costs are greater when more parties must be joined in the agreement, because there will generally be a few malcontents and holdouts when the number of parties exceeds five or six.


pages: 518 words: 147,036

The Fissured Workplace by David Weil

"Friedman doctrine" OR "shareholder theory", accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, banking crisis, barriers to entry, behavioural economics, business cycle, business process, buy and hold, call centre, Carmen Reinhart, Cass Sunstein, Clayton Christensen, clean water, collective bargaining, commoditize, company town, corporate governance, corporate raider, Corrections Corporation of America, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, declining real wages, employer provided health coverage, Frank Levy and Richard Murnane: The New Division of Labor, George Akerlof, global supply chain, global value chain, hiring and firing, income inequality, independent contractor, information asymmetry, intermodal, inventory management, Jane Jacobs, Kenneth Rogoff, law of one price, long term incentive plan, loss aversion, low skilled workers, minimum wage unemployment, moral hazard, Network effects, new economy, occupational segregation, Paul Samuelson, performance metric, pre–internet, price discrimination, principal–agent problem, Rana Plaza, Richard Florida, Richard Thaler, Ronald Coase, seminal paper, shareholder value, Silicon Valley, statistical model, Steve Jobs, supply-chain management, The Death and Life of Great American Cities, The Nature of the Firm, transaction costs, Triangle Shirtwaist Factory, ultimatum game, union organizing, vertical integration, women in the workforce, yield management

In a world where the costs of transactions between parties may be significant, many activities become located within the walls of a firm.6 A&P’s model of getting food from producers to a consumer’s kitchen lowered costs relative to a long chain of market transactions from producers to wholesale distributors to retail stores. Oliver Williamson built on the Coasian framework to develop a formal theory of transaction cost economics, viewing the primary purpose and impact of organizations as economizing on transaction costs in the course of producing complicated products and services. In the transaction cost framework pioneered by Williamson, business organizations that make up an industry are neither simply production processes combining capital, labor, and material to produce goods for the market (as traditional economics would lead one to believe) nor organizations untethered from economic forces and able to configure themselves as they wish (as often implied by popular business gurus or some management academics).

A&P’s size in fact led fretful congressional leaders to pass the Robinson-Patman Act of 1936, which prohibited chain stores from receiving better pricing than smaller retailers. 6. See Coase (1937). 7. Williamson notes, “I submit that the modern corporation is mainly to be understood as the product of a series of organizational innovations that have had the purpose and effect of economizing on transaction costs” (1985, 273). 8. One problem with the transaction cost approach is that such costs are not directly observed and are difficult to define, making it challenging to test the theory in practice. The property rights framework provides a more formal way of modeling the consequence of incomplete contracts on how markets and organizations solve coordination problems.

Over time, competitive forces acting on individual decision makers within organizations pursuing their own objectives lead some functions to end up being done internally, others through various types of relationships (partnerships, franchise agreements, other forms of contracting), and still others through market transactions.7 Property rights (or efficient contracts) theorists in the 1980s pushed Coase’s and Williamson’s questions on the drivers of firm boundaries by asking why parties could not undertake more activities via market relationships by writing contracts that would solve the types of problems that created high transaction costs.8 Market transactions would be sufficient if two parties could write a “complete contract” that captured the private benefits and costs of two parties (whether business/business, buyer/supplier, or employer/employee) covering all exigencies. But that is often not possible for a variety of reasons.


pages: 665 words: 146,542

Money: 5,000 Years of Debt and Power by Michel Aglietta

accelerated depreciation, Alan Greenspan, bank run, banking crisis, Basel III, Berlin Wall, bitcoin, blockchain, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, cashless society, central bank independence, circular economy, collapse of Lehman Brothers, collective bargaining, corporate governance, David Graeber, debt deflation, dematerialisation, Deng Xiaoping, double entry bookkeeping, energy transition, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, forward guidance, Francis Fukuyama: the end of history, full employment, German hyperinflation, income inequality, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, joint-stock company, Kenneth Arrow, Kickstarter, land bank, liquidity trap, low interest rates, margin call, means of production, Money creation, money market fund, moral hazard, Nash equilibrium, Network effects, Northern Rock, oil shock, planetary scale, plutocrats, precautionary principle, price stability, purchasing power parity, quantitative easing, race to the bottom, reserve currency, secular stagnation, seigniorage, shareholder value, special drawing rights, special economic zone, stochastic process, Suez crisis 1956, the payments system, the scientific method, tontine, too big to fail, trade route, transaction costs, transcontinental railway, Washington Consensus

In the 2000s, Chinese trade with the emerging world doubled from 15 to 30 percent of its total foreign trade. The dollar serves as a third currency for this type of exchange. It is only the chosen vehicle for the invoicing and settlement of exchanges if the transaction costs linked to using the dollar (which implies two conversions between the trade partners) are less than they would be if either of the two partners’ own currency were used. Transaction costs can indeed be lower when a vehicle currency is used: this question essentially depends on the market liquidity of the currency to which the partners have access. However, in 2008 dollar liquidity collapsed worldwide, and interbank credit suddenly dried up.

Despite the enormous mass of metal in its coffers, the Bank of Amsterdam was able to use its advantages to maintain a symmetrical regulation of the relative value of the units of account. On the one hand, making a deposit for foreign transactions implied having an account with the bank, in return for the guarantee that the funds deposited there were inviolable. On the other hand, as had been known since the invention of the bill of exchange, transaction costs for account payments were much lower than for transfers of metals. Since the Bank was considered totally able to reimburse deposits, the banco florin was at the centre of the European payment system throughout the seventeenth century. This owed also to its political autonomy, which was finally destroyed only in the upheavals of the American War of Independence and then the French Revolution.

Indeed, electronic wallets can be stored on computer hard disks, so that a transfer of value between two economic agents, A and B, can be realised through electronic transfer e without involving A and B’s bank accounts with their banks a and b.1 Contrary to what is often claimed, these transactions are not equivalent to cash. The transaction costs are, of course, much lower if transaction volumes are high. But these transactions require an electronic apparatus, with the possibility of counterparty recording, in contrast to the absolute anonymity of banknotes. Yet the need for absolute liquidity itself makes up part of the confidence in money in decentralised transaction mechanisms.


pages: 130 words: 32,279

Beyond the 4% Rule: The Science of Retirement Portfolios That Last a Lifetime by Abraham Okusanya

asset allocation, diversification, diversified portfolio, high net worth, longitudinal study, low interest rates, market design, mental accounting, Paul Samuelson, quantitative easing, risk tolerance, risk-adjusted returns, Robert Shiller, seminal paper, tail risk, The 4% rule, transaction costs, William Bengen

In the CFR, income is paid from the cash reserve and replenished if it dips below two months of income. The 60/40 portfolio is rebalanced annually, and the monthly income taken directly from the portfolio. Based on a 4% withdrawal rate, they found that ‘the fully invested portfolio is slightly superior to the cash reserve approach, assuming that there are no transaction costs and taxes.’ But when you take into account the transaction costs of selling down the portfolio monthly to pay income, the cash reserve approach produces a better outcome – around a 5% improvement in the success rate. So, the cash reserve method doesn’t help reduce the effects of sequence risk if there’s no cost and tax drag for selling down the portfolio.

An Independent Review of Retirement Income32 commissioned by the Labour Party and published in March 2016 by the Pension Institute’s Professor David Blake and Dr Debbie Harrison has some key recommendations on the use of deterministic projections. Specifically, the report recommends that: the use of deterministic projections of the returns on products should be banned they should be replaced with stochastic projections that take into account important real-world issues, such as sequence-of-returns risk, inflation, and transactions costs in dynamic investment strategies there should be a commonly agreed parameterisation for the stochastic projection model used, ie a standard model should be developed there should be a commonly agreed set of good practice principles for modelling the outcomes from retirement income products I don’t personally support an outright ban on using straight-line projections, but I see strong reasons to rethink how we use them.


pages: 701 words: 199,010

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini

affirmative action, Alan Greenspan, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black-Scholes formula, Bob Litterman, business cycle, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, Glass-Steagall Act, global macro, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, John Meriwether, Kickstarter, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, low skilled workers, managed futures, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, Mitch Kapor, money market fund, moral hazard, mortgage debt, Myron Scholes, National best bid and offer, negative equity, Northern Rock, Occupy movement, oil shock, price stability, proprietary trading, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Ronald Reagan, Sam Peltzman, Savings and loan crisis, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, survivorship bias, systematic trading, tail risk, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

A professional might use standard simple factors as well as factors for earnings revision, analyst sentiment, profitability, management impact, and proprietary factors.20 Even when quantitative managers use slightly different factors, there’s generally some overlap in the stocks they buy or sell. Quant managers crowd strategies for several reasons. They tend to use similar factors (also called alpha models). Traders quickly pick up on even proprietary factors. Their risk models are often similar, as are their transaction cost models. The optimization process traders use to create portfolios (which accounts for transaction costs) leads to professional quant portfolios that are concentrated in a few hundred similar stocks. Many of those stocks likely appear many times across many portfolios. These concentrated portfolios moved a lot in August. Hedge fund quant factors moved between 10 and 20 standard deviations from historical norms.21 Standard quant factors also moved by unusual amounts in August, two to three standard deviations from historical norms.

The hedge wasn’t a perfect one, because LTCM’s short position was on the whole index, and the basket was only a subset of Japanese stocks. So LTCM made a total return stock swap with another bank. The bank paid LTCM the return on the basket of the other stocks in the JASDAQ and LTCM paid the bank 30 basis points. The resulting trade had zero risk and essentially no profit or loss, apart from transaction costs and the 30 basis-point financing cost. Then LTCM borrowed the Japanese stocks from themselves and shorted them while also buying the associated cheap warrants. This innovative financing scheme let LTCM borrow nonborrowable stocks and take advantage of an arbitrage opportunity. They called it index art.

Hedge fund quant factors moved between 10 and 20 standard deviations from historical norms.21 Standard quant factors also moved by unusual amounts in August, two to three standard deviations from historical norms. Crowding among quants happens for several reasons, but the transaction costs model was of primary importance, as it caused us to trade similar securities at each point in time. —Mark Carhart interview, former co-CIO of Quantitative Strategies at GSAM and Founder of Kepos Capital, October 11, 2011 At the end of August, the quant factor aberration disappeared. That is, the factors returned to normal behavior and the funds that had held on to their positions didn’t lose much.


pages: 348 words: 83,490

More Than You Know: Finding Financial Wisdom in Unconventional Places (Updated and Expanded) by Michael J. Mauboussin

Alan Greenspan, Albert Einstein, Andrei Shleifer, Atul Gawande, availability heuristic, beat the dealer, behavioural economics, Benoit Mandelbrot, Black Swan, Brownian motion, butter production in bangladesh, buy and hold, capital asset pricing model, Clayton Christensen, clockwork universe, complexity theory, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, deliberate practice, demographic transition, discounted cash flows, disruptive innovation, diversification, diversified portfolio, dogs of the Dow, Drosophila, Edward Thorp, en.wikipedia.org, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, fixed income, framing effect, functional fixedness, hindsight bias, hiring and firing, Howard Rheingold, index fund, information asymmetry, intangible asset, invisible hand, Isaac Newton, Jeff Bezos, John Bogle, Kenneth Arrow, Laplace demon, Long Term Capital Management, loss aversion, mandelbrot fractal, margin call, market bubble, Menlo Park, mental accounting, Milgram experiment, Murray Gell-Mann, Nash equilibrium, new economy, Paul Samuelson, Performance of Mutual Funds in the Period, Pierre-Simon Laplace, power law, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Richard Florida, Richard Thaler, Robert Shiller, shareholder value, statistical model, Steven Pinker, stocks for the long run, Stuart Kauffman, survivorship bias, systems thinking, The Wisdom of Crowds, transaction costs, traveling salesman, value at risk, wealth creators, women in the workforce, zero-sum game

The data consistently show that the low-turnover funds (which imply two-year-plus investor holding periods) perform best over three-, five-, ten-, and fifteen-year time frames (see exhibit 8.2). We may be able to attribute this performance difference to lower costs—a reason in and of itself to reduce turnover for many portfolios—but we would note that transaction costs tend to represent only about one-third of total costs for the average mutual fund. Despite consistent evidence supporting the performance benefits of a buy-and-hold strategy, the average actively managed mutual fund has annual turnover nearly 90 percent. What gives? First off, an efficient stock market requires investor diversity—across styles and time horizons.

Three big drivers of price-earnings ratio nonstationarity are the role of taxes and inflation; changes in the composition of the economy; and shifts in the equity-risk premium. Why the Past May Not Be Prologue A bedrock concept in finance is that investors price assets to generate an appropriate return (adjusted by perceived risk) net of taxes, inflation, and transaction costs. Accordingly, changes in tax law and inflation rates have a material effect on the appropriate value of the market, and hence price-earnings ratios. The role of taxes is conceptually straightforward. Increases in dividend and capital gains taxes require investors to earn a higher pretax return to generate comparable returns.

See http://www.indexfunds.com/articles/20020221_boglespeech_com_gen_JS.htm. 11 Alice Lowenstein, “The Low Turnover Advantage,” Morningstar Research, September 7, 1997, http://news.morningstar.com/news/ms/FundFocus/lowturnover1.html. 12 Russ Wermers, “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transaction Costs, and Expenses,” Journal of Finance 55 (August 2000): 1655-1703. 13 Yahoo provides the risk classifications (above average, average, and below average) based on the standard deviation of portfolio performance. I quantified the three levels, allocating a value of 1 for funds with below-average risk, 2 for average-risk funds, and 3 for above-average-risk funds, in order to attain an average risk level for each turnover range.


pages: 274 words: 93,758

Phishing for Phools: The Economics of Manipulation and Deception by George A. Akerlof, Robert J. Shiller, Stanley B Resor Professor Of Economics Robert J Shiller

Andrei Shleifer, asset-backed security, Bear Stearns, behavioural economics, Bernie Madoff, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, collapse of Lehman Brothers, compensation consultant, corporate raider, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, desegregation, en.wikipedia.org, endowment effect, equity premium, financial intermediation, financial thriller, fixed income, full employment, George Akerlof, greed is good, income per capita, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, junk bonds, Kenneth Arrow, Kenneth Rogoff, late fees, loss aversion, market bubble, Menlo Park, mental accounting, Michael Milken, Milgram experiment, money market fund, moral hazard, new economy, Pareto efficiency, Paul Samuelson, payday loans, Ponzi scheme, profit motive, publication bias, Ralph Nader, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, short selling, Silicon Valley, stock buybacks, the new new thing, The Predators' Ball, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, too big to fail, transaction costs, Unsafe at Any Speed, Upton Sinclair, Vanguard fund, Vilfredo Pareto, wage slave

Yet most people do.19 One source of our angst about those bills comes from rip-offs: as consumers we are especially prone to pay too much when we step outside of our comfort zone to make the rare, expensive purchase.20 In some 30 percent of home sales to new buyers, total—buyer plus seller—transaction costs, remarkably, are more than half of the down payment that the buyer puts into the deal.21 Auto salesmen, as we shall see, have developed their own elaborate techniques to sell us more car than we really want; and also to get us to pay too much. Nobody wants to be ripped off. Yet we are, even in the most carefully considered purchases of our lives.

Once an offer has been accepted, the deadline to arrange the necessary financing is short: the seller is waiting anxiously for verification that the buyer can come up with the money, as promised. This makes the homebuyer, who is inexperienced, and whose focus also has previously been elsewhere, especially vulnerable to rip-off. Usually, when we think of the transaction costs for the transfer of a house, we think of the real estate fees. In one sample of home purchases (involving Federal Housing Administration mortgages), the standard 6 percent was still the modal fee: paid by 29 percent of sellers. Some 47 percent did pay less; but, remarkably, 24 percent somehow managed to pay more.12 Framed as 6 percent, these fees seem fairly small: it’s like the sales tax on a bottle of Tylenol at the local CVS.

We can’t say for sure, but note that these fees are much lower in other countries; and people there do not seem to be complaining about bad service.15 But those payments to the real estate dealer are not the end of the transaction fees. In a large sample of Federal Housing Administration loans, additional closing costs were on average approximately a further 4.4 percent of the value of the mortgage.16 Put together with the payments to the real estate agent, that means that the transaction costs, for those 10-percent-down first-time homebuyers, are about as large as all the money that they themselves are bringing to the table. Those additional fees for closing come in many different forms. The bulk of them are for two purposes: for exchange of title, and for initiating the mortgage.


pages: 408 words: 108,985

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity by Joseph E. Stiglitz

"World Economic Forum" Davos, accelerated depreciation, Airbnb, Alan Greenspan, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, basic income, behavioural economics, benefit corporation, Berlin Wall, bilateral investment treaty, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, deindustrialization, discovery of DNA, diversified portfolio, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial engineering, financial intermediation, Francis Fukuyama: the end of history, full employment, gender pay gap, George Akerlof, gig economy, Gini coefficient, Glass-Steagall Act, hiring and firing, housing crisis, Hyman Minsky, income inequality, independent contractor, inflation targeting, informal economy, information asymmetry, intangible asset, investor state dispute settlement, invisible hand, Isaac Newton, labor-force participation, liberal capitalism, low interest rates, low skilled workers, market fundamentalism, mini-job, moral hazard, non-tariff barriers, offshore financial centre, open economy, Paris climate accords, patent troll, pension reform, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Ronald Reagan, selection bias, shareholder value, Silicon Valley, sovereign wealth fund, TaskRabbit, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, tulip mania, universal basic income, unorthodox policies, vertical integration, zero-sum game

There are a few standard objections to FTTs that are now widely discredited. These typically invoke the impact on volume and market liquidity that would render prices more volatile. Yet, the marked lowering of transactions costs in recent years or even decades—acting exactly as would a reduction in an FTT—has not resulted in markedly more stable financial markets. Indeed, if anything, lower transactions costs are associated with just the opposite—for example, with the sudden, computer-driven crashes of the computerized age.36 Indeed, Tobin’s original argument (in line with a similar one put forward earlier by Keynes) was that sand in the wheels can actually help stabilize the economy.

Others, like British Rail, far less so, to the point that governments have discussed reversing their decisions. Some of the “privatizations” were, to say the least, peculiar, like Greece selling its airports to a consortium in which public bodies in Germany composed a major part. Administration and transaction costs for publicly provided annuities (pensions) are a fraction of those in the private sector. In general, Europe’s largely public health insurance system is far more efficient than the largely private system in the United States. 8. The Markets-Will-Provide Doctrine holds that we can rely on markets to not only be efficient, but to also take care of basic individual needs—from housing to pensions, health care to education.

* There are some who go so far as to contend that if only the government assigns property rights clearly, even problems of externalities can be addressed within the market. This is sometimes referred to as the Coase Conjecture, and is only true under unrealistic assumptions about information and transactions costs. In practice, regulation can be both fairer and more efficient, as the work of Nobel Prize–winner Eleanor Ostrom demonstrated. † Economic theory (in particular, theories of asymmetric information) has explained why the private sector often fails to provide insurance for important risks. PART I Achieving Full Employment, Rapid Growth, and Economic Stability Chapter 1 Employment, Not Austerity A meltdown in the financial sector in 2008, at first barely noticeable and then overwhelming, kicked off what became an economic and then a social crisis in Europe.


pages: 297 words: 108,353

Boom and Bust: A Global History of Financial Bubbles by William Quinn, John D. Turner

accounting loophole / creative accounting, Alan Greenspan, algorithmic trading, AOL-Time Warner, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, Big bang: deregulation of the City of London, bitcoin, blockchain, book value, Bretton Woods, business cycle, buy and hold, capital controls, Celtic Tiger, collapse of Lehman Brothers, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, debt deflation, deglobalization, Deng Xiaoping, different worldview, discounted cash flows, Donald Trump, equity risk premium, Ethereum, ethereum blockchain, eurozone crisis, fake news, financial deregulation, financial intermediation, Flash crash, Francis Fukuyama: the end of history, George Akerlof, government statistician, Greenspan put, high-speed rail, information asymmetry, initial coin offering, intangible asset, Irish property bubble, Isaac Newton, Japanese asset price bubble, joint-stock company, Joseph Schumpeter, junk bonds, land bank, light touch regulation, low interest rates, margin call, market bubble, market fundamentalism, Martin Wolf, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Network effects, new economy, Northern Rock, oil shock, Ponzi scheme, quantitative easing, quantitative trading / quantitative finance, railway mania, Right to Buy, Robert Shiller, Shenzhen special economic zone , short selling, short squeeze, Silicon Valley, smart contracts, South Sea Bubble, special economic zone, subprime mortgage crisis, technology bubble, the built environment, total factor productivity, transaction costs, tulip mania, urban planning

This benefited investors directly by making it harder for fraudsters to take advantage of them in financial markets, but it also benefited genuine companies, because it was easier to sell stocks and bonds to more confident investors.63 On secondary markets, transaction costs were remarkably low in the second half of the 1920s: the average one-way total transaction cost in 1929 was around 0.5 per cent, lower than any level on record before the 1980s.64 Traders also benefited from the expansion of communications technology: telephone use expanded by 70 per cent over the decade. By 1929 the New York Stock Exchange had installed 323 telephone lines connecting it to brokerage firms.65 As in previous bubbles, 127 BOOM AND BUST increasing marketability was, to an extent, self-perpetuating: higher marketability increased the volume of trades, which in turn made stocks even more liquid.

First, as a straightforward consequence of the increase in IPOs, firms which previously would have been privately owned could now be bought and sold on the stock market. Second, transaction costs fell substantially throughout the 1990s, partly as a result of new technology making it less costly to execute trades. The average commission charged by New York Stock Exchange brokers fell from 0.9 per cent in the mid-1970s to 0.1 per cent in 2000, while the bid-ask spread – the difference between the price at which brokers will buy a stock and the price at which they will sell it – fell from 0.6 per cent in 1990 to 0.2 per cent in 2000. Taking both of these trends into account, the average New York Stock Exchange transaction cost between 1990 and 2000 fell from around 0.5 per cent to around 0.2 per cent.41 Third, internet technology made stock trading much easier.

It had promised freedom from middlemen, but trading it without a third party was cumbersome unless the user was expert in cybersecurity. Its popularity exposed the inability of its system to process large numbers of transactions, resulting in long delays in transferring bitcoins and substantial transaction costs. The impossibility of reversing mistakes made it impractical, and its volatility made it useless as a store of value or unit of account. And its much-vaunted decentralisation meant that no one had the power to fix these considerable drawbacks. It was simply a speculative asset, and when investors began to cash out, bitcoin crashed.


pages: 607 words: 133,452

Against Intellectual Monopoly by Michele Boldrin, David K. Levine

accounting loophole / creative accounting, agricultural Revolution, barriers to entry, business cycle, classic study, cognitive bias, cotton gin, creative destruction, David Ricardo: comparative advantage, Dean Kamen, Donald Trump, double entry bookkeeping, en.wikipedia.org, endogenous growth, Ernest Rutherford, experimental economics, financial innovation, Great Leap Forward, Gregor Mendel, Helicobacter pylori, independent contractor, informal economy, interchangeable parts, invention of radio, invention of the printing press, invisible hand, James Watt: steam engine, Jean Tirole, John Harrison: Longitude, Joseph Schumpeter, Kenneth Arrow, linear programming, market bubble, market design, mutually assured destruction, Nash equilibrium, new economy, open economy, PalmPilot, peer-to-peer, pirate software, placebo effect, price discrimination, profit maximization, rent-seeking, Richard Stallman, Robert Solow, seminal paper, Silicon Valley, Skype, slashdot, software patent, the market place, total factor productivity, trade liberalization, Tragedy of the Commons, transaction costs, Y2K

For someone else to own our labor requires them to engage in intrusive and costly supervision of our personal behavior. Selling our labor is not tantamount to selling our house, which is why even renting it – that is, becoming an employee – is quite complicated and subject to a variety of regulations and transaction costs. The transaction costs implied by slavery are socially damaging, as they imply violation of privacy and of essential civil liberties. Hence, they are commonly rejected on economic, not just moral, grounds. Moreover, there is no economic reason to allow slavery. With well-functioning markets, renting labor is a good substitute for owning it.

If you and I, as owners of bakeries, get together and sign a contract agreeing to limit the number of loaves of bread we will sell, P1: PDX head margin: 1/2 gutter margin: 7/8 CUUS245-10 cuus245 978 0 521 87928 6 May 8, 2008 14:11 254 Against Intellectual Monopoly not only will the courts not enforce that contract, but we will be subject to criminal prosecution as well. The same is true if the same contract is entered into by a bakery and, say, a client restaurant or even a private citizen. Second, economists recognize the important element of transaction costs in determining which contracts should be enforced. “Possession is nine-tenths of the law” is a truth in economics as well as in common parlance. Take the case of slavery. Why should people not be allowed to sign private contracts binding them to slavery? In fact economists have consistently argued against slavery – during the nineteenth century David Ricardo and John Stuart Mill engaged in a heated public debate with literary luminaries such as Charles Dickens, with the economists opposing slavery and the literary giants arguing in favor.28 The fact is that our labor cannot be separated from ourselves.

With well-functioning markets, renting labor is a good substitute for owning it. And so we allow the rental of labor but not its permanent sale. For intellectual property, the reverse is the socially beneficial arrangement: allow the permanent sale but ban the rental. Again, this is efficient because it minimizes transaction costs. For, with intellectual property, possession belongs to the buyer and not to the seller. If you sell me a copy of an idea, I now have that idea embodied either in me or in an object I own. For you to control the idea requires intrusive and costly supervision of my private sphere – similarly, if you sell me a book, a CD, or a computer file.


pages: 272 words: 19,172

Hedge Fund Market Wizards by Jack D. Schwager

asset-backed security, backtesting, banking crisis, barriers to entry, Bear Stearns, beat the dealer, Bernie Madoff, Black-Scholes formula, book value, British Empire, business cycle, buy and hold, buy the rumour, sell the news, Claude Shannon: information theory, clean tech, cloud computing, collateralized debt obligation, commodity trading advisor, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, diversification, diversified portfolio, do what you love, Edward Thorp, family office, financial independence, fixed income, Flash crash, global macro, hindsight bias, implied volatility, index fund, intangible asset, James Dyson, Jones Act, legacy carrier, Long Term Capital Management, managed futures, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, merger arbitrage, Michael Milken, money market fund, oil shock, pattern recognition, pets.com, Ponzi scheme, private sector deleveraging, proprietary trading, quantitative easing, quantitative trading / quantitative finance, Reminiscences of a Stock Operator, Right to Buy, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Rubik’s Cube, Savings and loan crisis, Sharpe ratio, short selling, statistical arbitrage, Steve Jobs, systematic trading, technology bubble, transaction costs, value at risk, yield curve

That’s right, as long as there wasn’t a bearish shift in the fundamentals as well. Do you ever run into situations where size is an issue? No, because we make sure that we do not run into the problem of size being an issue. We know our transaction costs very well, and we know how long it takes for us to get in and out of positions. We will limit our position size to assure that we can get out reasonably quickly and to keep our transaction costs small relative to the expected alpha of the trades in that market. Is there a limitation as to how large you can allow the fund to grow? Yes, we have been closed for several years. But even if you are closed, in a year like 2010, your assets can grow dramatically just from profits.

There are two major differences between us and most other hedge funds. Most hedge funds trade fewer markets, and they trade much more actively. We trade virtually every liquid market in the world, so the amount we have committed to any single market is small relative to our total equity. We also change our positions slowly. As you know, transaction costs are a function of the amount you have to move in a given time frame. Therefore, we have considerably more capacity than managers who trade fewer markets and turn their positions over more quickly. What is your turnover rate per market, per year? It depends what you mean by turnover rate. If you are defining turnover as moving from net long to net short rather than changes in magnitude, then the average time length is about 12 to 18 months.

Yes, periods of poor performance are difficult. I generally handle it by focusing very hard on improving the trading system. How would you summarize the trading rules you live by? Look where others don’t. Adjust position sizes to overall risk to target a particular volatility. Pay careful attention to transaction costs. Any final words? When I was in my teens, my highly insightful father was somehow able to instill in me the discipline of objectively evaluating your own progress. That lesson, more than anything else, has been critical to my success. Woodriff’s views, confirmed by his long-term success, provide four important insights about trading systems: 1.


Small Change: Why Business Won't Save the World by Michael Edwards

"Friedman doctrine" OR "shareholder theory", Bernie Madoff, clean water, corporate governance, corporate social responsibility, different worldview, high net worth, invisible hand, knowledge economy, Larry Ellison, light touch regulation, Mahatma Gandhi, Mark Shuttleworth, market bubble, microcredit, Nelson Mandela, New Journalism, One Laptop per Child (OLPC), Ponzi scheme, profit motive, public intellectual, Robert Shiller, shareholder value, Silicon Valley, Silicon Valley startup, Social Responsibility of Business Is to Increase Its Profits, subprime mortgage crisis, The Fortune at the Bottom of the Pyramid, The Spirit Level, The Wealth of Nations by Adam Smith, transaction costs

According to journalist Joshua Weisberg, “Just as Microsoft wanted to avoid becoming IBM, the Gates Foundation — despite protests to the contrary — dreads turning into the Ford Foundation.”26 But this, I think, is changing. Having worked for an “old” foundation for the last nine 30 small change years, I am under no illusion about the fundamental changes that philanthropy requires. Timidity, lack of focus, poor learning, weak accountability, and high transaction costs are all real problems. But I doubt whether business and the market have all the answers to the questions we face, or even whether venture philanthropy is as innovative or effective as is claimed. “There’s nothing unusual about what we’re doing,” says Bill Gates Sr. “We may have more money to spend, but that doesn’t make us different in kind, just in size.”

“Power always thinks it has a great soul and vast views beyond the comprehension of the weak,” said John Quincy Adams, the sixth president of the United States. But this is almost never true, leading to a long history of failed projects that have ignored the voices of those they were supposed to help. Current trends in fund-raising may contribute to this problem, reducing the transaction costs of donating to good causes but failing to engage givers and receivers in any authentic collaboration outside of writing a check or clicking a mouse on Web sites like Kiva and GlobalGiving. A huge amount of publicity, and a small amount of additional money, has been generated by Kiva and the like, and that is always welcome, but they deemphasize community involvement and skew accountability to those who already have more power, so what are they actually transforming?

Additional tax breaks for small contributions, and for nonprofits that raise money from their members and from broad the difference that makes the difference 101 swaths of the population (not just from foundations, large donors, and fee-for-service payments), might encourage civil society groups to return to their roots and strengthen their democratic effects, in the same way that President Obama’s election campaign drew strength from large numbers of small donations, 90 percent of which were for $100 or less — but obviously directed at nonpartisan organizations and causes. Evidence suggests that this is also an effective way of linking philanthropy to civic and political activism (including higher rates of voting), rather than just writing checks and clicking on a Web site. Foundations could also reduce the transaction costs of getting support, especially for groups that are less well-resourced, by redesigning application procedures, increasing the length of grants, and finding better ways to distribute funds through multi-funder initiatives. The absence of grass-roots voices, community organizers, and labor representatives on the boards of major foundations is quite striking, populated as they are by business leaders, CEOs of large nonprofits, and the occasional academic or other public figure.


pages: 379 words: 113,656

Six Degrees: The Science of a Connected Age by Duncan J. Watts

AOL-Time Warner, Berlin Wall, Bretton Woods, business process, corporate governance, Drosophila, Erdős number, experimental subject, fixed income, Frank Gehry, Geoffrey West, Santa Fe Institute, independent contractor, industrial cluster, invisible hand, it's over 9,000, Long Term Capital Management, market bubble, Milgram experiment, MITM: man-in-the-middle, Murray Gell-Mann, Network effects, new economy, Norbert Wiener, PalmPilot, Paul Erdős, peer-to-peer, power law, public intellectual, rolodex, Ronald Coase, Savings and loan crisis, scientific worldview, Silicon Valley, social contagion, social distancing, Stuart Kauffman, supply-chain management, The Nature of the Firm, the strength of weak ties, The Wealth of Nations by Adam Smith, Toyota Production System, Tragedy of the Commons, transaction costs, transcontinental railway, vertical integration, Vilfredo Pareto, Y2K

Markets and Hierarchies The original text—and still one of the greatest—on industrial organization is Smith, A. The Wealth of Nations (University of Chicago Press, Chicago, 1976). A precursor to Coase’s theory of transaction costs was Frank Knight’s claim that firms exist to reduce uncertainty: Knight, F. H. Risk, Uncertainty, and Profit (London School of Economics and Political Science, London, 1933). And Ronald Coase’s original argument of transaction costs as the basis for the firm is explicated in Coase, R. The nature of the firm. Economica, n.s., 4 (November 1937). Several decades later, Coase is still trying to get his ideas accepted by mainstream economics.

To cut a (very) long story short, the most generally agreed-upon economic theory of industrial organization essentially divides the world between hierarchies and markets. Firms, it claims, exist because markets in the real world suffer from a set of imperfections that the Nobel Prize–winning economist Ronald Coase called transaction costs. If everyone could discover, draw up, and enforce market-based contracts with everyone else (if we could all be independent contractors, for example), then the immense flexibility of market forces would effectively eliminate the need for firms entirely. But in the real world, as we have already seen in a number of contexts, information is costly to discover and hard to process.

Although Coase himself never specified what this authority structure should look like, the consensus of subsequent economic theory is that it should be a hierarchy. Markets, meanwhile, continue to operate between firms, where the boundary between firm and market is a trade-off between the coordination cost of conducting a particular function within the firm and the transaction cost of striking an external contract. If the relationship between two firms ever becomes so specialized that one is effectively in a position to manipulate the other, the problem is assumed to be resolved by a merger or an acquisition. Hence, firms grow by the process of vertical integration: one hierarchy effectively gets absorbed into another, generating a larger, vertically integrated hierarchy.


pages: 407 words: 114,478

The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein

Alan Greenspan, asset allocation, behavioural economics, book value, Bretton Woods, British Empire, business cycle, butter production in bangladesh, buy and hold, buy low sell high, carried interest, corporate governance, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, diversification, diversified portfolio, Edmond Halley, equity premium, estate planning, Eugene Fama: efficient market hypothesis, financial engineering, financial independence, financial innovation, fixed income, George Santayana, German hyperinflation, Glass-Steagall Act, high net worth, hindsight bias, Hyman Minsky, index fund, invention of the telegraph, Isaac Newton, John Bogle, John Harrison: Longitude, junk bonds, Long Term Capital Management, loss aversion, low interest rates, market bubble, mental accounting, money market fund, mortgage debt, new economy, pattern recognition, Paul Samuelson, Performance of Mutual Funds in the Period, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Savings and loan crisis, South Sea Bubble, stock buybacks, stocks for the long run, stocks for the long term, survivorship bias, Teledyne, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

For example, for the years 1992–1994, this Fund ranked in the 13th percentile of the Morningstar small-cap category, and, for the three years ending August 2001, in the 29th percentile. If survivorship bias were taken into account, it would almost certainly have had even higher rankings. Even if it is possible for active managers to successfully pick small stocks, transactional costs in this arena are much higher than with large stocks, so any gains from stock picking will be more than offset by the costs of trading small stocks. • “Active managers do better than index funds in down markets.” This is flat-out wrong—they certainly do not. For example, from January 1973 to September 1974, according to Lipper Inc., the average domestic stock fund lost 47.9%, versus a loss of 42.6% for the S&P 500.

He tabulated the change in investor expectations as follows: The first thing that leaps out of this table is that the average investor thinks that he will best the market by about 2%. While some investors may accomplish this, it is, of course, mathematically impossible for the average investor to do so. As we’ve already discussed, the average investor must, of necessity, obtain the market return, minus expenses and transaction costs. Even the most casual observer of human nature should not be surprised by this paradox—people tend to be overconfident. Overconfidence likely has some survival advantage in a state of nature, but not in the world of finance. Consider the following: • In one study, 81% of new business owners thought that they had a good chance of succeeding, but that only 39% of their peers did

Don’t Become a Whale Wealthy investors should realize that they are the cash cows of the investment industry and that most of the exclusive investment vehicles available to them—separate accounts, hedge funds, limited partnerships, and the like—are designed to bleed them with commissions, transactional costs, and other fees. “Whales” are eagerly courted with impressive descriptions of sophisticated research, trading, and tax strategies. Don’t be fooled. Remember that the largest investment pools in the nation—the pension funds—are unable to beat the market, so it is unlikely that the investor with $10 million or even $1 billion will be able to do so.


pages: 396 words: 113,613

Chokepoint Capitalism by Rebecca Giblin, Cory Doctorow

Aaron Swartz, AltaVista, barriers to entry, Berlin Wall, Bernie Sanders, Big Tech, big-box store, Black Lives Matter, book value, collective bargaining, commoditize, coronavirus, corporate personhood, corporate raider, COVID-19, disintermediation, distributed generation, Fairchild Semiconductor, fake news, Filter Bubble, financial engineering, Firefox, forensic accounting, full employment, gender pay gap, George Akerlof, George Floyd, gig economy, Golden age of television, Google bus, greed is good, green new deal, high-speed rail, Hush-A-Phone, independent contractor, index fund, information asymmetry, Jeff Bezos, John Gruber, Kickstarter, laissez-faire capitalism, low interest rates, Lyft, Mark Zuckerberg, means of production, microplastics / micro fibres, Modern Monetary Theory, moral hazard, multi-sided market, Naomi Klein, Network effects, New Journalism, passive income, peak TV, Peter Thiel, precision agriculture, regulatory arbitrage, remote working, rent-seeking, ride hailing / ride sharing, Robert Bork, Saturday Night Live, shareholder value, sharing economy, Silicon Valley, SoftBank, sovereign wealth fund, Steve Jobs, Steven Levy, stock buybacks, surveillance capitalism, Susan Wojcicki, tech bro, tech worker, The Chicago School, The Wealth of Nations by Adam Smith, TikTok, time value of money, transaction costs, trickle-down economics, Turing complete, Uber and Lyft, uber lyft, union organizing, Vanguard fund, vertical integration, WeWork

As well as individually negotiating sound recording licenses with all major distributors, you’ll need to jump through all the hoops associated with clearing the mechanical rights for the underlying songs, in every country you wish to operate. Leading music industry lawyer Amanda Harcourt, outlining what’s involved in clearing just the composition rights to set up a streaming service in Europe, describes it as “dreary” and “unduly complex,” with high transaction costs making it especially difficult for small and medium-sized companies.18 In the early 2000s, unlicensed peer-to-peer software providers and streaming platforms abounded. Record sales plummeted and a panicked recording industry adopted a policy of scorched earth litigation, driving them out of the market.

Spotify CEO Daniel Ek describes these licensing complexities as one of the biggest limits on the platform’s growth.19 That’s undoubtedly true, but these mazes still work to its advantage. Sure, they force Spotify to grow more slowly, but they also stop rivals from ever starting up. That makes them crucial to Spotify’s own anticompetitive flywheel: paying these high transaction costs saves it from having to actually compete. On top of that, as we saw in a previous chapter, the major record labels routinely shake down new players as a condition of granting them the licenses they need to get started, adding further to the cost of entering the market. That explains why Spotify’s only rivals of any significance are deep-pocketed tech giants—they’re the only ones with the resources to do so.

Anyone who wants to set up a new music or video streaming platform would still need to negotiate access with the major rights holders in just the same way as now—with all the conflicts of interest caused by their market power and equity stakes in the dominant platforms. When you factor in the extra transaction costs a residual remuneration system could create, these markets might become even less attractive to new entrants. That would be truly disastrous to the broader project of dispersing control more fairly across creative ecosystems. A NEW WAY OF THINKING ABOUT STATUTORY LICENSES Rethinking the way we use statutory licenses is one way we might achieve the benefits of residual remuneration rights while putting a genuine floor under the prices paid for creative work and encouraging new entrants.


pages: 322 words: 87,181

Straight Talk on Trade: Ideas for a Sane World Economy by Dani Rodrik

3D printing, airline deregulation, Asian financial crisis, bank run, barriers to entry, behavioural economics, Berlin Wall, Bernie Sanders, blue-collar work, Bretton Woods, BRICs, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, carried interest, central bank independence, centre right, collective bargaining, conceptual framework, continuous integration, corporate governance, corporate social responsibility, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Donald Trump, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, export processing zone, failed state, financial deregulation, financial innovation, financial intermediation, financial repression, floating exchange rates, full employment, future of work, general purpose technology, George Akerlof, global value chain, income inequality, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Jean Tirole, Kenneth Rogoff, low interest rates, low skilled workers, manufacturing employment, market clearing, market fundamentalism, meta-analysis, moral hazard, Nelson Mandela, new economy, offshore financial centre, open borders, open economy, open immigration, Pareto efficiency, postindustrial economy, precautionary principle, price stability, public intellectual, pushing on a string, race to the bottom, randomized controlled trial, regulatory arbitrage, rent control, rent-seeking, Richard Thaler, Robert Gordon, Robert Shiller, Ronald Reagan, Sam Peltzman, Silicon Valley, Solyndra, special economic zone, spectrum auction, Steven Pinker, tacit knowledge, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, total factor productivity, trade liberalization, transaction costs, Tyler Cowen, unorthodox policies, Washington Consensus, World Values Survey, zero-sum game, éminence grise

This change creates the material basis for a new ethic that will serve the interests of all those who live on this planet in a way that, despite much rhetoric, no previous ethic has done.3 And Amartya Sen: There is something of a tyranny of ideas in seeing the political divisions of states (primarily, national states) as being, in some way, fundamental, and in seeing them not only as practical constraints to be addressed, but as divisions of basic significance in ethics and political philosophy.4 Sen and Singer think of national borders as a hindrance—a practical obstacle that can and should be overcome as the world becomes more interconnected through commerce and advances in communications. Meanwhile, economists deride the nation-state because it is the source of the transaction costs that block fuller global economic integration. This is so not just because governments impose import tariffs, capital controls, visas, and other restrictions at their borders, impeding the global circulation of goods, money, and people. More fundamentally, it is because the multiplicity of sovereigns creates jurisdictional discontinuities and associated transaction costs. Differences in currencies, legal regimes, and regulatory practices are today the chief obstacles to a unified global economy.

Differences in currencies, legal regimes, and regulatory practices are today the chief obstacles to a unified global economy. As overt trade barriers have come down, the relative importance of such transaction costs has grown. Import tariffs now constitute a tiny fraction of total trade costs. James Anderson and Eric van Wincoop estimated these costs to be a whopping 170 percent (in ad valorem terms) for advanced countries, an order of magnitude higher than import tariffs themselves.5 To an economist, this amount is equivalent to leaving $100 bills on the sidewalk. Remove the jurisdictional discontinuities, the argument goes, and the world economy would reap large gains from trade, similar to the multilateral tariff liberalization experienced over the postwar period.

Veer too much in the direction of the state, as in the 1930s, and we would forfeit the benefits of international commerce. From the 1980s on, the ideological balance took a decisive shift in favor of markets and against governments. The result internationally was an all-out push for what I have called “hyperglobalization”13—the attempt to eliminate all transaction costs that hinder trade and capital flows. The World Trade Organization was the crowning achievement of this effort in the trade arena. Trade rules were now extended to services, agriculture, subsidies, intellectual property rights, sanitary and phytosanitary standards, and other types of what were previously considered to be domestic policies.


pages: 318 words: 87,570

Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio by Sal Arnuk, Joseph Saluzzi

algorithmic trading, automated trading system, Bernie Madoff, buttonwood tree, buy and hold, commoditize, computerized trading, corporate governance, cuban missile crisis, financial engineering, financial innovation, Flash crash, Gordon Gekko, High speed trading, latency arbitrage, locking in a profit, machine readable, Mark Zuckerberg, market fragmentation, National best bid and offer, payment for order flow, Ponzi scheme, price discovery process, price mechanism, price stability, proprietary trading, Sergey Aleynikov, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, stocks for the long run, stocks for the long term, transaction costs, two-sided market, uptick rule, zero-sum game

It’s because their firm has a way to make money by disadvantaging your orders all day long. Our markets today are not about executing your trade and investment ideas in a way that is beneficial to you. It is about how dozens of HFT computers touch and manipulate your order so they can make money from your ideas—without you even knowing. Explicitly, your transaction costs may have come down. Your commissions have declined, and spreads have narrowed. You think you’re happy. Implicitly, you pay more for the stocks you buy or you receive less from those you sell. As a result, your assets, whether they are managed by you or by institutions, are slowly, but steadily, being whittled away.

In a June 2000 press release, Levitt said, “As the securities markets become more global, with many stocks traded in multiple jurisdictions, the U.S. securities markets must adopt the international convention of decimal pricing to remain competitive. The overall benefits of decimal pricing are likely to be significant. Investors may benefit from lower transaction costs due to narrower spreads, and prices will be easier to understand. It is time for the U.S. securities markets to make this change.”6 No doubt Levitt was trying to tilt the playing field toward the individual investor and away from the mutual fund industry. Even though mutual funds represent the retail investor, Levitt apparently thought they had too much power.

Many dark pools, however, are filled with predatory traders, who are electronically hiding out so that they can watch for institutional algo footprints, to take advantage of these orders. See Chapter 8, “Heart of Darkness,” for more about adverse selection issues with dark pools. Institutional investors may think they are lowering their transaction costs because their brokers are supplying algos at a commission rate of a fraction of a penny per share. The real cost of a trade, however, is what you don’t see. In our Instinet days, we referred to this as the transaction iceberg. Routers that have the goal to maximize economics due to the maker/taker model are a good reason why these implicit costs are so high.


pages: 467 words: 154,960

Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael W. Covel

Albert Einstein, Alvin Toffler, Atul Gawande, backtesting, Bear Stearns, beat the dealer, Bernie Madoff, Black Swan, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, Carl Icahn, Clayton Christensen, commodity trading advisor, computerized trading, correlation coefficient, Daniel Kahneman / Amos Tversky, delayed gratification, deliberate practice, diversification, diversified portfolio, Edward Thorp, Elliott wave, Emanuel Derman, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, fiat currency, fixed income, Future Shock, game design, global macro, hindsight bias, housing crisis, index fund, Isaac Newton, Jim Simons, John Bogle, John Meriwether, John Nash: game theory, linear programming, Long Term Capital Management, managed futures, mandelbrot fractal, margin call, market bubble, market fundamentalism, market microstructure, Market Wizards by Jack D. Schwager, mental accounting, money market fund, Myron Scholes, Nash equilibrium, new economy, Nick Leeson, Ponzi scheme, prediction markets, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Feynman, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, shareholder value, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, survivorship bias, systematic trading, Teledyne, the scientific method, Thomas L Friedman, too big to fail, transaction costs, upwardly mobile, value at risk, Vanguard fund, William of Occam, zero-sum game

Trading gamma rays, at around one cycle per 10–20 seconds, requires a lot of expensive instrumentation, whereas you can trade visible light ‘by eye.’ I don’t know of even one short-term trader, however, who claims to show a profit at these frequencies. In general, higher-frequency trading succumbs to declining profit potential against nondeclining transaction costs. You might consider trading a chart with a long enough time scale that transaction costs are a minor factor— something like a daily price chart, going back a year or two.” 375 C He’s barely rated a mention in the nation’s most important newspapers, but pay close attention to what Institutional Investor wrote about him… “Jim Simons [president of Renaissance Technologies and operator of the Medallion Fund] may very well be the best money manager on earth.”

The real question is: Do they make more money than they would investing in a blind index fund that mimics the performance of the market as a whole? Most academic financial experts believe in some form of the random-walk theory and consider technical analysis almost indistinguishable from a pseudoscience whose predictions are either worthless or, at best, so barely discernibly better than chance as to be unexploitable because of transaction costs.”12 Markets aren’t chaotic, just as the seasons follow a series of predictable trends, so does price action. Stocks are like everything else in the world: They move in trends, and trends tend to persist. Jonathan Hoenig Portfolio Manager, Capitalistpig Hedge Fund LLC This is the view of technical analysis held by most people who know of technical analysis—that it is some form of mysterious chart reading technique, such as astrology.

Just around the recent high in the Live Cattle market, the fundamental reasons included Chinese Buying, Mad Cow Disease, and The Atkins’ Diet.”5 Trend followers control what they know they can control. They know they can choose a certain level of risk. They know they can measure volatility. They understand the transaction costs associated with trading. However, there is still plenty they know they do not know, so in the face of uncertainty, what do they do? They swing the bat. Their ability to decide is core to their trading philosophy—that is their swinging the bat. Their decision-making skills might seem not worthy of much discussion, but the philosophical framework of their decision making is critical to understanding how they trade successfully.


pages: 542 words: 145,022

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest by Andrew W. Lo, Stephen R. Foerster

Alan Greenspan, Albert Einstein, AOL-Time Warner, asset allocation, backtesting, behavioural economics, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, Charles Babbage, Charles Lindbergh, compound rate of return, corporate governance, COVID-19, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, Edward Glaeser, equity premium, equity risk premium, estate planning, Eugene Fama: efficient market hypothesis, fake news, family office, fear index, fiat currency, financial engineering, financial innovation, financial intermediation, fixed income, hiring and firing, Hyman Minsky, implied volatility, index fund, interest rate swap, Internet Archive, invention of the wheel, Isaac Newton, Jim Simons, John Bogle, John Meriwether, John von Neumann, joint-stock company, junk bonds, Kenneth Arrow, linear programming, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, new economy, New Journalism, Own Your Own Home, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, prediction markets, price stability, profit maximization, quantitative trading / quantitative finance, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, selection bias, seminal paper, shareholder value, Sharpe ratio, short selling, South Sea Bubble, stochastic process, stocks for the long run, survivorship bias, tail risk, Thales and the olive presses, Thales of Miletus, The Myth of the Rational Market, The Wisdom of Crowds, Thomas Bayes, time value of money, transaction costs, transfer pricing, tulip mania, Vanguard fund, yield curve, zero-coupon bond, zero-sum game

The first message is the importance of the market portfolio as the one and only important risky asset. “The three principles in real estate are location, location, and location; in some ways in investments it’s diversify, diversify, diversify.”67 Investing in the market portfolio ensures the ultimate amount of diversification. The second message is to keep transaction costs low. “Regarding costs, quite frankly it’s sort of like the Lake Wobegon68 thesis: The average investor cannot beat the average investor before costs; and if you are trying to find hot stocks or the best new growth fund manager, or listening to Jim Cramer69 … you are going to end up bearing extra risk, on average not getting any reward for it, and spending a lot of money in the bargain.”70 The third message is about the uncertain compensation for assuming more risk.

And I must say, I must be a wonderful leader because I have yet to find my first follower.”70 The Cost Matters Hypothesis In 2003 in a CFA Magazine article,71 Bogle coined the phrase “cost matters hypothesis” (CMH), a play on words on the more famous efficient market hypothesis (EMH). In his article, he poked gentle fun at Samuelson’s original grand language about the EMH when he wrote “CMH posits a conclusion that is both trivially obvious and remarkably sweeping: The mathematical expectation of the speculator is a loss equal to the amount of transaction costs incurred.” In other words, “Whether markets are efficient or inefficient, investors as a group must fall short of the market return by the amount of the costs they incur.” As Bogle described the two hypotheses, “The one thing everybody knows—academics, brokers, investors—is the efficient markets hypothesis is often right, but it is not always right.

In addition to turnover costs in mutual funds, he also cautions against turnover in one’s personal portfolio. “Trading is your enemy, because it’s based on emotion.”76 More recently, Bogle quantified the “all-in costs” of actively managed funds compared to Vanguard’s index funds.77 Actively managed funds, according to the calculations, had an average expense ratio of 1.12 percent, transaction costs of 0.50 percent, a “cash drag” (since funds typically hold cash reserves) of 0.15 percent, and sales charges and fees of 0.50 percent, totaling 2.27 percent. Vanguard’s index funds, however, only had an expense ratio of 0.06 percent. Furthermore, actively managed funds had a tax inefficiency differential (resulting from realized capital gains that are taxed, compared with untaxed unrealized gains) of 0.45 percent compared to the index fund, resulting in a 2.66 percent differential.


pages: 179 words: 43,441

The Fourth Industrial Revolution by Klaus Schwab

"World Economic Forum" Davos, 3D printing, additive manufacturing, Airbnb, Amazon Mechanical Turk, Amazon Web Services, Anthropocene, augmented reality, autonomous vehicles, barriers to entry, Baxter: Rethink Robotics, bitcoin, blockchain, Buckminster Fuller, call centre, circular economy, clean water, collaborative consumption, commoditize, conceptual framework, continuous integration, CRISPR, cross-border payments, crowdsourcing, digital divide, digital twin, disintermediation, disruptive innovation, distributed ledger, driverless car, Edward Snowden, Elon Musk, epigenetics, Erik Brynjolfsson, future of work, global value chain, Google Glasses, hype cycle, income inequality, Internet Archive, Internet of things, invention of the steam engine, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, life extension, Lyft, Marc Benioff, mass immigration, megacity, meta-analysis, more computing power than Apollo, mutually assured destruction, Narrative Science, Network effects, Nicholas Carr, nuclear taboo, OpenAI, personalized medicine, precariat, precision agriculture, Productivity paradox, race to the bottom, randomized controlled trial, reshoring, RFID, rising living standards, Sam Altman, Second Machine Age, secular stagnation, self-driving car, sharing economy, Silicon Valley, smart cities, smart contracts, social contagion, software as a service, Stephen Hawking, Steve Jobs, Steven Levy, Stuxnet, supercomputer in your pocket, synthetic biology, TaskRabbit, The Future of Employment, The Spirit Level, total factor productivity, transaction costs, Uber and Lyft, uber lyft, Watson beat the top human players on Jeopardy!, Wayback Machine, WikiLeaks, winner-take-all economy, women in the workforce, working-age population, Y Combinator, Zipcar

In the investment business, new “robo-advisory” algorithms and their corresponding apps provide advisory services and portfolio tools at a fraction of the old transaction cost – 0.5% instead of the traditional 2%, thereby threatening a whole segment of the current financial industry. The industry is also aware that blockchain will soon revolutionize the way it operates because its possible applications in finance have the opportunity to reduce settlement and transaction costs by up to $20 billion and transform the way the industry works. The shared database technology can streamline such varied activities as the storage of clients’ accounts, cross-border payments, and the clearing and settling of trades, as well as products and services that do not exist yet, such as smart futures contracts that self-execute without a trader (e.g. a credit derivative that pays out automatically when a country or company defaults).

Shift 17: The Sharing Economy The tipping point: Globally more trips/journeys via car sharing than in private cars By 2025: 67% of respondents expected this tipping point to have occurred The common understanding of this phenomenon is the usually technology-enabled ability for entities (individuals or organizations) to share the use of a physical good/asset, or share/provide a service, at a level that was not nearly as efficient or perhaps even possible before. This sharing of goods or services is commonly possible through online marketplaces, mobile apps/location services or other technology-enabled platforms. These have reduced the transaction costs and friction in the system to a point where it is an economic gain for all involved, divided in much finer increments. Well-known examples of the sharing economy exist in the transportation sector. Zipcar provides one method for people to share use of a vehicle for shorter periods of time and more reasonably than traditional rental car companies.


pages: 825 words: 228,141

MONEY Master the Game: 7 Simple Steps to Financial Freedom by Tony Robbins

"World Economic Forum" Davos, 3D printing, active measures, activist fund / activist shareholder / activist investor, addicted to oil, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, backtesting, Bear Stearns, behavioural economics, bitcoin, Black Monday: stock market crash in 1987, buy and hold, Carl Icahn, clean water, cloud computing, corporate governance, corporate raider, correlation does not imply causation, Credit Default Swap, currency risk, Dean Kamen, declining real wages, diversification, diversified portfolio, Donald Trump, estate planning, fear of failure, fiat currency, financial independence, fixed income, forensic accounting, high net worth, index fund, Internet of things, invention of the wheel, it is difficult to get a man to understand something, when his salary depends on his not understanding it, Jeff Bezos, John Bogle, junk bonds, Kenneth Rogoff, lake wobegon effect, Lao Tzu, London Interbank Offered Rate, low interest rates, Marc Benioff, market bubble, Michael Milken, money market fund, mortgage debt, Neil Armstrong, new economy, obamacare, offshore financial centre, oil shock, optical character recognition, Own Your Own Home, passive investing, profit motive, Ralph Waldo Emerson, random walk, Ray Kurzweil, Richard Thaler, risk free rate, risk tolerance, riskless arbitrage, Robert Shiller, Salesforce, San Francisco homelessness, self-driving car, shareholder value, Silicon Valley, Skype, Snapchat, sovereign wealth fund, stem cell, Steve Jobs, subscription business, survivorship bias, tail risk, TED Talk, telerobotics, The 4% rule, The future is already here, the rule of 72, thinkpad, tontine, transaction costs, Upton Sinclair, Vanguard fund, World Values Survey, X Prize, Yogi Berra, young professional, zero-sum game

Many of the larger funds have realized that a 1% ballpark expense ratio is where they want to come in so that investors don’t flinch and brokers have a good story to sell—I mean, tell. 2. Transaction Costs. Transaction costs are a broad, sweeping category and can be broken down further into categories such as brokerage commissions, market impact costs (the cost of moving the market as mutual funds trade massive market-moving positions), and spread costs (the difference between the bid-and-ask or the buy-and-sell price of a stock). A 2006 study by business school professors Roger Edelen, Richard Evans, and Gregory Kadlec found that US stock mutual funds average 1.44% in transaction costs per year. This means that these transaction costs are perhaps the most expensive component of owning a mutual fund, but the industry has deemed it too tough to quantify, and thus it goes unreported in the brochures. 3.

By becoming an insider, you can put a stop to this thievery today. Fees this high are the equivalent of climbing Everest in flip-flops and a tank top. You were dead before you got started. ADD ’EM UP Nontaxable Account Taxable Account Expense ratio, 0.90% Expense ratio, 0.90% Transaction costs, 1.44% Transaction costs, 1.44% Cash drag, 0.83% Cash drag, 0.83% — Tax cost, 1.00% Total costs, 3.17% Total costs, 4.17% “The Real Cost of Owning a Mutual Fund,” Forbes, April 4, 2011 ESCAPE To escape the fee factories, you must lower your total annual fees and associated investment costs to 1.25% or less, on average.

That doesn’t sound like such a bad deal until you realize that you just bought the most expensive form of life insurance available. Earlier, in chapter 2.2, we outlined the laundry list of fees you will pay to own an actively managed mutual fund and how these fees can dramatically drag down your performance. To recap, the total of all the fees (expense ratio, transaction costs, soft-dollar costs, cash drag, sales charges) will average approximately 3.1% per year, according to Forbes (if held in a tax-deferred account such as a 401[k], IRA, or variable annuity). That’s $3,100 per year for every $100,000. But we ain’t done yet. When you buy a variable annuity, not only are you paying the fees listed above but also you have additional fees paid to the insurance company.


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Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, behavioural economics, Bernie Madoff, Black Swan, Bob Litterman, bond market vigilante , book value, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, carbon credits, Carmen Reinhart, central bank independence, classic study, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global macro, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, inverted yield curve, invisible hand, John Bogle, junk bonds, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, pension time bomb, performance metric, Phillips curve, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, savings glut, search costs, selection bias, seminal paper, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stock buybacks, stocks for the long run, survivorship bias, systematic trading, tail risk, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

Table 3.1 shows that, on paper, momentum strategies fared even better than value, and short-term reversal strategies did even better. It is no coincidence that we find the highest gross returns in small-cap stocks and in high-turnover strategies such as short-term reversal and medium-term momentum. Recall that the numbers here exclude transaction costs, which would be substantial for these strategies. Incorporating trading costs would eat seriously into these paper gains. Ghayur et al. (2010) estimate that—net of costs—value and momentum strategies earned similar long-run returns. Others estimate that the double-digit gross returns of the short-term reversal strategy would have been negative after costs.

I will not derive it formally here but show one traditional set of assumptions (that can later be relaxed):• one-period world (this implies a constant investment opportunity set and constant risk premia over time); • access to unlimited riskless borrowing/lending and tradable risky assets; • no taxes or transaction costs (i.e., frictionless markets); • investors are rational mean variance optimizers (only caring about means and covariances can be motivated by normally distributed asset returns or by a quadratic utility function); and • investors have homogeneous expectations (all agree about asset means and covariances; all investors see the same picture).

To compound the arbitrageurs’ problems when they are facing losses, creditors may make margin calls if leverage is employed, stop-loss rules or risk managers can require position reductions, and vanishing liquidity may reinforce the downward spiral. All these considerations push arbitrageurs toward short time horizons and constrain their position sizes. There are also transaction costs and model uncertainty to consider. Trading costs on leveraged strategies can be significant. Barring remarkable hubris, no arbitrageur can be completely confident that his model or view is correct. One important implication for long-horizon institutional investors is that when they delegate asset management, external managers may not inherit the ultimate investor’s long horizon.


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The Empathic Civilization: The Race to Global Consciousness in a World in Crisis by Jeremy Rifkin

Abraham Maslow, agricultural Revolution, Albert Einstein, animal electricity, back-to-the-land, British Empire, carbon footprint, classic study, collaborative economy, death of newspapers, delayed gratification, distributed generation, emotional labour, en.wikipedia.org, energy security, feminist movement, Ford Model T, global village, Great Leap Forward, hedonic treadmill, hydrogen economy, illegal immigration, income inequality, income per capita, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), Internet Archive, invention of movable type, invention of the steam engine, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, Lewis Mumford, Mahatma Gandhi, Marshall McLuhan, means of production, megacity, meta-analysis, Milgram experiment, mirror neurons, Nelson Mandela, new economy, New Urbanism, Norbert Wiener, off grid, off-the-grid, out of africa, Peace of Westphalia, peak oil, peer-to-peer, planetary scale, Recombinant DNA, scientific management, scientific worldview, Simon Kuznets, Skype, smart grid, smart meter, social intelligence, supply-chain management, surplus humans, systems thinking, the medium is the message, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Tragedy of the Commons, transaction costs, upwardly mobile, uranium enrichment, working poor, World Values Survey

In pure networks, providers and users replace sellers and buyers, and access to the use of goods in extended time segments substitutes for the physical exchange of the goods. Transaction costs and margins also come into play in the shift from market-exchange models to network models. In a market exchange economy, sellers make profit on their margins, and margins are dependent on transaction costs. But in most industries, margins are continuing to go down, mainly because of the introduction of new information, communications, and production technologies and new energy-saving technologies, as well as new methods of organization that are reducing their transaction costs. When transaction costs approach zero, margins virtually disappear, and market exchanges are no longer viable ways of conducting business.

From there it is shipped to a wholesaler and then to a retailer, where the customer pays for the product. At each stage of the process, the seller is marking up the cost to the buyer to reflect his or her transaction costs. Now an increasing number of publishers—especially of textbooks and research books, which require continuous updating—are bypassing all of the intermediate steps in publishing a physical book and the transaction costs involved at each stage of the process. While Encyclopaedia Britannica still charges $1,395 for its thirty-two-volume set of books, the company sells far fewer physical books. Instead, the company puts the book contents on the World Wide Web, where information can be updated and accessed continuously.

Users now pay a subscription fee to access the information over an extended period of time. Encyclopaedia Britannica eliminates virtually all of the remaining transaction costs of getting the information to its subscribers. The company has made the transition from selling a physical product to a buyer to providing the user access to a service over time. How does a physical book compete with an online book in the future when the latter has reduced the transaction costs so dramatically? The same process is at work across many industries. Buying an automobile, for most people, represents their baptism into an adult world of property relationships.


pages: 409 words: 125,611

The Great Divide: Unequal Societies and What We Can Do About Them by Joseph E. Stiglitz

"World Economic Forum" Davos, accelerated depreciation, accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Alan Greenspan, Asian financial crisis, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Branko Milanovic, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, carried interest, classic study, clean water, collapse of Lehman Brothers, collective bargaining, company town, computer age, corporate governance, credit crunch, Credit Default Swap, deindustrialization, Detroit bankruptcy, discovery of DNA, Doha Development Round, everywhere but in the productivity statistics, Fall of the Berlin Wall, financial deregulation, financial innovation, full employment, gentrification, George Akerlof, ghettoisation, Gini coefficient, glass ceiling, Glass-Steagall Act, global macro, global supply chain, Home mortgage interest deduction, housing crisis, income inequality, income per capita, information asymmetry, job automation, Kenneth Rogoff, Kickstarter, labor-force participation, light touch regulation, Long Term Capital Management, low interest rates, manufacturing employment, market fundamentalism, mass incarceration, moral hazard, mortgage debt, mortgage tax deduction, new economy, obamacare, offshore financial centre, oil shale / tar sands, Paul Samuelson, plutocrats, purchasing power parity, quantitative easing, race to the bottom, rent-seeking, rising living standards, Robert Solow, Ronald Reagan, Savings and loan crisis, school vouchers, secular stagnation, Silicon Valley, Simon Kuznets, subprime mortgage crisis, The Chicago School, the payments system, Tim Cook: Apple, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Turing machine, unpaid internship, upwardly mobile, urban renewal, urban sprawl, very high income, War on Poverty, Washington Consensus, We are the 99%, white flight, winner-take-all economy, working poor, working-age population

Home-equity loans, too, encouraged Americans to borrow against the equity in their homes, increasing the (total) loan-to-value ratios and thereby making the mortgages riskier. The mortgage originators didn’t focus on risk, but rather on transactions costs. But they weren’t trying to minimize transactions costs; they were trying to maximize them—devising ways that they could increase them, and thereby their revenues. Short-term loans that had to be refinanced—and left open the risk of not being able to be refinanced—were particularly useful in this respect. The transactions costs generated by writing mortgages provided a strong incentive to prey on innocent and inexperienced borrowers—for instance, by encouraging more short-term lending and borrowing, entailing repeated loan restructurings, which helped generate high transactions costs.

Let’s remember why these programs were started: The private sector left most elderly bereft of support, the market for annuities essentially didn’t exist, and the elderly couldn’t get health insurance. Even today, the private sector doesn’t provide the kind of security that Social Security provides—including protection against market volatility and inflation. And transaction costs of the Social Security Administration are markedly lower than those in the private sector—not a surprise, since their objective is to maximize these costs. Transaction costs are their profits. Second, many of those receiving benefits are our young—providing them education and healthcare (even if they or their parents don’t pay taxes) are investments in our future. America is the country with the least equality of opportunity of any of the advanced countries for which there is data.

The transactions costs generated by writing mortgages provided a strong incentive to prey on innocent and inexperienced borrowers—for instance, by encouraging more short-term lending and borrowing, entailing repeated loan restructurings, which helped generate high transactions costs. The regulators, too, were accomplices in crime. They should have recognized the inherent risks in the new products; they should have done their own risk assessments, rather than relying on self-regulation or on the credit-rating agencies. They should have realized the risks associated with high leverage, with over-the-counter derivatives, and especially the risks that were compounding as these were not netted out. The regulators deceived themselves into thinking that if only they ensured that each bank managed its own risk (which they had every incentive, presumably, to do), then the system would work.


pages: 400 words: 121,988

Trading at the Speed of Light: How Ultrafast Algorithms Are Transforming Financial Markets by Donald MacKenzie

algorithmic trading, automated trading system, banking crisis, barriers to entry, bitcoin, blockchain, Bonfire of the Vanities, Bretton Woods, Cambridge Analytica, centralized clearinghouse, Claude Shannon: information theory, coronavirus, COVID-19, cryptocurrency, disintermediation, diversification, en.wikipedia.org, Ethereum, ethereum blockchain, family office, financial intermediation, fixed income, Flash crash, Google Earth, Hacker Ethic, Hibernia Atlantic: Project Express, interest rate derivative, interest rate swap, inventory management, Jim Simons, level 1 cache, light touch regulation, linked data, lockdown, low earth orbit, machine readable, market design, market microstructure, Martin Wolf, proprietary trading, Renaissance Technologies, Satoshi Nakamoto, Small Order Execution System, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical arbitrage, statistical model, Steven Levy, The Great Moderation, transaction costs, UUNET, zero-sum game

In the case of US share trading, for example, competition among trading venues increased, fees fell considerably, and the reduction of the standard minimum increment of price from an eighth of dollar to a single cent made it possible for the new automated market-making firms to greatly reduce the previous generously wide spreads between the highest prices at which market-makers would buy shares and the lowest prices at which they would sell them. The changes—which took place in the late 1990s and early 2000s—almost certainly cut transaction costs; see, for example, the time series of estimated costs in Angel, Harris, and Spatt (2013: 23). What is much less clear, though, is the extent to which transaction costs have continued to fall. For example, in Angel, Harris, and Spatt’s data there is no consistent decline in costs after 2006. Perhaps, as Budish and his colleagues suggest, the increasing costs of HFT’s speed races have begun at least partially to cancel out cost savings resulting from continuing broader improvements in information technology (Budish et al. 2015: 1555 and 1593–4).

A useful 2016 review by Albert Menkveld of the evolving literature (to which readers can turn if they wish to explore this literature in more detail) finds that “HFT market-making reduces transaction cost[s],” but also suggests that “HFTs are able to predict” and profit from the flow of what are often called the child orders that are generated by the execution algorithms that break up large orders from institutional investors into small parts. To the extent that this is so, this profit making will increase these investors’ transaction costs (Menkveld 2016: 19 and 11–12). Three particular contributions to the financial-economics literature on HFT especially influenced my research.

A major early goal of this literature was to identify the effects on markets of the increased prevalence, especially in the US, of HFT and other forms of algorithmic trading. See, for example, the 2012 review (primarily based on this early literature) by the UK’s Foresight Programme, which painted a broadly positive picture of what it referred to as computer-based trading as having reduced transaction costs and improved efficiency and liquidity—albeit with what the review cautioned was perhaps “greater potential for periodic illiquidity”—and with “no direct evidence” that HFT increased market volatility (UK Government Office for Science 2012: 11–12). Some of the underlying studies (such as the widely cited Brogaard 2010) indeed suggested that the presence of HFT can actually reduce volatility.2 More recent research on algorithmic trading in financial economics both differentiates HFT more clearly from other forms of algorithmic trading and focuses more strongly on the central divide within HFT between market-making and liquidity-taking strategies.


pages: 296 words: 87,299

Portfolios of the poor: how the world's poor live on $2 a day by Daryl Collins, Jonathan Morduch, Stuart Rutherford

behavioural economics, Cass Sunstein, clean water, failed state, financial innovation, financial intermediation, income per capita, informal economy, job automation, M-Pesa, mental accounting, microcredit, moral hazard, profit motive, purchasing power parity, RAND corporation, randomized controlled trial, seminal paper, The Fortune at the Bottom of the Pyramid, transaction costs

Economic theory places price at the absolute center of financial decision-making. The cost of financial services is important for the poor, too, but it is more difficult to understand how these services are priced. Modern rich-country providers have made huge strides in reducing “transaction costs”—the costs of using an instrument other than the financial cost of the funds used. But transaction costs for poor people usually remain high. They may include the time taken to stand in a long queue, the emotional cost of having to deal with unhelpful, stone-faced tellers, the cost of the bus ride to reach the bank, or the sheer number of lenders who must be persuaded to part with their money before a usefully large sum can be amassed.

India, for example, had 35 micro health insurance schemes running in 2006, under this partner-agent model, with nearly 900,000 policyholders.23 The diaries show us why microfinance institutions are good at the retail end of this partnership. Their regular contact with clients in their own slums and villages allows them to break up the loan repayments into more manageable pieces. The installments then become small and frequent enough to suit the cash flows of poor households (while not driving transaction costs too high). The same principles apply to collecting insurance premiums. Given all of the other elements of designing a workable insurance product, it is easy to overlook the important role of a convenient payment plan. This chapter has demonstrated the importance of payment systems for the poor households we came to know.

While this structure can perhaps be viewed as a kind of distributive justice (profits are made from those with, rather than those without, the money available), it is one of the reasons why moneylenders remain restricted in scale and limited to poor and 152 THE PRICE OF MONEY high-risk markets: since they do not reward “good” clients who have capital, they are likely to attract “bad” and cash-strapped clients disproportionately. Third, most informal interest-bearing loans are troublesome to arrange, in spite of their price. So there is an additional transaction cost that is not reliably priced for every borrower or perhaps even for the same borrower over time. Poor households care about price, but they also care about convenience and flexibility and are willing to pay for those features. They are also happy to pay for reliability of the sort that Jyothi provides, and they are agreeably surprised when they find reliability combined with a relatively low price, as they do, increasingly, at microfinance institutions.


pages: 1,205 words: 308,891

Bourgeois Dignity: Why Economics Can't Explain the Modern World by Deirdre N. McCloskey

"Friedman doctrine" OR "shareholder theory", Airbnb, Akira Okazaki, antiwork, behavioural economics, big-box store, Black Swan, book scanning, British Empire, business cycle, buy low sell high, Capital in the Twenty-First Century by Thomas Piketty, classic study, clean water, Columbian Exchange, conceptual framework, correlation does not imply causation, Costa Concordia, creative destruction, critique of consumerism, crony capitalism, dark matter, Dava Sobel, David Graeber, David Ricardo: comparative advantage, deindustrialization, demographic transition, Deng Xiaoping, do well by doing good, Donald Trump, double entry bookkeeping, electricity market, en.wikipedia.org, epigenetics, Erik Brynjolfsson, experimental economics, Ferguson, Missouri, food desert, Ford Model T, fundamental attribution error, Garrett Hardin, Georg Cantor, George Akerlof, George Gilder, germ theory of disease, Gini coefficient, God and Mammon, Great Leap Forward, greed is good, Gunnar Myrdal, Hans Rosling, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Hernando de Soto, immigration reform, income inequality, interchangeable parts, invention of agriculture, invention of writing, invisible hand, Isaac Newton, Islamic Golden Age, James Watt: steam engine, Jane Jacobs, John Harrison: Longitude, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labor-force participation, lake wobegon effect, land reform, liberation theology, lone genius, Lyft, Mahatma Gandhi, Mark Zuckerberg, market fundamentalism, means of production, middle-income trap, military-industrial complex, Naomi Klein, new economy, Nick Bostrom, North Sea oil, Occupy movement, open economy, out of africa, Pareto efficiency, Paul Samuelson, Pax Mongolica, Peace of Westphalia, peak oil, Peter Singer: altruism, Philip Mirowski, Pier Paolo Pasolini, pink-collar, plutocrats, positional goods, profit maximization, profit motive, public intellectual, purchasing power parity, race to the bottom, refrigerator car, rent control, rent-seeking, Republic of Letters, road to serfdom, Robert Gordon, Robert Shiller, Ronald Coase, Scientific racism, Scramble for Africa, Second Machine Age, secular stagnation, seminal paper, Simon Kuznets, Social Responsibility of Business Is to Increase Its Profits, spinning jenny, stakhanovite, Steve Jobs, tacit knowledge, TED Talk, the Cathedral and the Bazaar, The Chicago School, The Market for Lemons, the rule of 72, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, total factor productivity, Toyota Production System, Tragedy of the Commons, transaction costs, transatlantic slave trade, Tyler Cowen, Tyler Cowen: Great Stagnation, uber lyft, union organizing, very high income, wage slave, Washington Consensus, working poor, Yogi Berra

In future days they will be more and more numerous. The result can be checked against other measures. Douglass North and John Wallis reckoned that 50 percent of American national income was Coasean transaction costs, the costs of persuasion being part of these. Expenditures to negotiate and enforce contracts—the Wallis-North definition of transaction costs—rose from a quarter of national income in 1870 to over half in 1970.10 Their measure is not precisely the one wanted here. Their transactions costs also include, for example, “protective services,” such as police and prisons, some of whose income (I am claiming three-quarters of it remaining after sweet talk) is “talk” only in an inappropriately extended and sometimes physically violent sense.

It was not the induced thriftiness in the individual businessperson that mattered (contrary again to Marx and Weber), but the admiration, or at any rate toleration, by the rest of the society for a bourgeois life of creating economic value. One “creates” economic value by buying low and selling high, that is, by moving coal and ideas from a place in which they are not highly valued to a place in which they are, if transport and transaction costs do not offset the gross profit. Weber’s error was to suppose that “accumulate, accumulate” enriched the modern world when what did so was a new and favorable rhetoric regarding business, which led to betterments, which led to profitable investment out of savings easily assembled. Weber’s secundum mobile of “worldly asceticism” leading to high rates of capital accumulation was not what made the Great Enrichment.

One way of backing the estimates from the detailed occupational categories would be to do in-depth interviews, probing in each job for sweet talk—as against mere information or coercion or physical activity—by riding along in squad cars and listening and watching. The managers likewise could be shadowed. It is what Ronald Coase, in economics, did during the 1930s to discover transaction costs and what Robyn Penrose, in fiction, did during the 1980s to discover managerial teaching. Coercion, as against persuasion, is in most rich places less prevalent now, in some ways, than it was in the same places in the eighteenth century. True, coercion in taxation is much higher—try persuading the IRS to make a special exception for you.


Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accelerated depreciation, accounting loophole / creative accounting, Airbus A320, Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bear Stearns, Bernie Madoff, big-box store, Black Monday: stock market crash in 1987, Black-Scholes formula, Boeing 747, book value, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, capital controls, Carl Icahn, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, cross-subsidies, currency risk, discounted cash flows, disintermediation, diversified portfolio, Dutch auction, equity premium, equity risk premium, eurozone crisis, fear index, financial engineering, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, James Webb Space Telescope, junk bonds, Kenneth Rogoff, Larry Ellison, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, PalmPilot, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk free rate, risk tolerance, risk/return, Robert Shiller, Scaled Composites, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, Skype, SpaceShipOne, Steve Jobs, subprime mortgage crisis, sunk-cost fallacy, systematic bias, Tax Reform Act of 1986, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, vertical integration, yield curve, zero-coupon bond, zero-sum game, Zipcar

If the cash were invested in securities, it would earn interest. On the other hand, you can’t use those securities to pay the firm’s bills. If you had to sell them every time you needed to pay a bill, you could incur heavy transactions costs. The financial manager must trade off the cost of keeping an inventory of cash (the lost interest) against the benefits (the saving on transactions costs). For small firms this trade-off can be important. But for very large firms the transactions costs of buying and selling securities become trivial compared with the opportunity cost of holding idle cash balances. Suppose that the interest rate is 5% a year, or roughly 5/365 = .0137% per day.

Unfortunately, the cost of capital is not easily measured and is a natural focus for argument in regulatory hearings. But when a utility buys electric power, the cost of capital is rolled into the contract price and treated as an operating cost. In this case the pass-through to the customer may be less controversial. 61Total transaction costs for infrastructure projects average 3% to 5% of the amount invested. See M. Klein, J. So, and B. Shin, “Transaction Costs in Private Infrastructure Projects—Are They Too High?” The World Bank Group, October 1996. 62Because the project is an independent company, it cannot drag down the parent company if something does go badly wrong with the project. Part 7 Debt Financing Leasing Most of us occasionally rent a car, bicycle, or boat.

If A and G were shareholders in the same enterprise, A would be happy for the firm to invest, while G would be clamoring for higher current dividends. No one believes unreservedly that capital markets function perfectly. Later in this book we discuss several cases in which differences in taxation, transaction costs, and other imperfections must be taken into account in financial decision making. However, we also discuss research indicating that, in general, capital markets function fairly well. In this case maximizing shareholder value is a sensible corporate objective. But for now, having glimpsed the problems of imperfect markets, we shall, like an economist in a shipwreck, simply assume our life jacket and swim safely to shore.


The Limits of the Market: The Pendulum Between Government and Market by Paul de Grauwe, Anna Asbury

Alan Greenspan, banking crisis, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, conceptual framework, crony capitalism, Easter island, Erik Brynjolfsson, eurozone crisis, Honoré de Balzac, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kitchen Debate, means of production, Money creation, moral hazard, Paul Samuelson, price discrimination, price mechanism, profit motive, Robert Gordon, Robert Solow, Ronald Coase, Simon Kuznets, The Nature of the Firm, The Rise and Fall of American Growth, too big to fail, transaction costs, trickle-down economics, ultimatum game, very high income

Why do we see so many cooperative relationships within companies? One answer is offered by British economist Ronald Coase, who won the Nobel Prize in Economics in . His answer was as follows. Market transactions lead to transaction costs. The buyers and sellers have to find and trust one another. Contracts must be drawn up and the quality of goods and services evaluated. If contractual terms are not met, action must be taken. All this creates transaction costs. A partnership within one and the same company can reduce or even eliminate a number of these costs.11 Thus companies are formed which arrange a number of transactions internally.

.  South Korea liberalization and material prosperity  real GDP per capita , f Soviet Union see Russia Spain eurozone and weakening of government – eurozone government bond spreads, ten-year f global financial crisis ()  government debt f,  gross domestic product (GDP) per capita f interest rate on ten-year government bonds f labour costs, gross hourly f liquidity crisis  Spartacus movement – specialization – stagnation ,  structural problems in currency union  supply and demand , f Sweden employer contribution and labour costs   INDEX labour costs, gross hourly f productivity, labour costs and public sector  total income, share of received by top % f, f system I intuitive, emotional behaviour –, b, , –b,  system II individuals’ rational, calculating capacities –, b, , b,  taxation  and environment , – external limits of governments  increase  progressive wealth tax  see also income tax technological optimism ,  technological pessimism  technological progress , –, – tipping points , ,  Tocqueville, A. de  too big to fail banks  top-down control mechanisms  top managers/CEOs and winner-takesall – transaction costs  trickle-down theory  Tuymans, L.  ultimatum game  unemployment , , , , – United Kingdom ,  Bank of England , , ,  capital, share of belonging to top % and top % t debt issuance in own currency  government control over currency  government debt f,  gross domestic product (GDP) in constant prices , f gross domestic product (GDP) per capita f income taxes f, , f,  interest rate on ten-year government bonds f labour costs, gross hourly f social security spending as percentage of government spending f total income received by top % f, f United States , ,  capital, share of belonging to top % and top % t consumption per capita  Federal Reserve (Fed) , , , n gross domestic product (GDP) in constant prices , f income, share of total received by top % f, f income taxes f, , f,  New Deal  productivity, annual growth in f,  social security spending as percentage of government spending f taxation policies capping top incomes  value added tax (VAT) –,  virtuous circle  wages –, ,  wealth inequalities ,  well-being ,  collective , , , ,  consumer ,  economic  individual , , ,  Western Europe ,  gross domestic product (GDP) per capita, average annual economic growth of , f, f,  growth  growth production per capita since industrial revolution , f labour costs, high and prosperity  social security  willingness to pay , , b, b winner-takes-all phenomenon – World Bank  World Economic Forum – world inequality, development of –b 


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Investing Demystified: How to Invest Without Speculation and Sleepless Nights by Lars Kroijer

Andrei Shleifer, asset allocation, asset-backed security, Bernie Madoff, bitcoin, Black Swan, BRICs, Carmen Reinhart, clean tech, compound rate of return, credit crunch, currency risk, diversification, diversified portfolio, equity premium, equity risk premium, estate planning, fixed income, high net worth, implied volatility, index fund, intangible asset, invisible hand, John Bogle, Kenneth Rogoff, low interest rates, market bubble, money market fund, passive investing, pattern recognition, prediction markets, risk tolerance, risk/return, Robert Shiller, selection bias, sovereign wealth fund, too big to fail, transaction costs, Vanguard fund, yield curve, zero-coupon bond

The first thing to note is that over the past century we would have done far better investing in US government bonds than in residential property. It is of course easy to criticise analysis like this for not correctly incorporating rental income (or the ownership benefit of not paying rent), maintenance and improvement costs, transaction costs, insurance costs, and transaction and on-going tax. Or not being international. I would agree that it is hard to claim that these things are an overly exact science, but this index questions the premise that property investments are necessarily a huge profit centre. Figure 9.1 Inflation adjusted Case-Shiller House Price index versus short-term US government debt However, we can also see why property was such a hot investment in the years before the sub-prime crisis (see Figure 9.2).

While there are certain indices that suggest that art has been a great investment,8 they suffer from a few shortcomings. For one, the studies often focus on segments of the art world that have been successful, suggesting selection bias, and are typically not easily replicable, so gaining exposure to them is not feasible. Also, many indices and the past performance of collectibles ignore the large transactional costs, insurance and storage costs. When you include all of these costs the return from collectibles is far less obvious, and you should not include them in the financial part of your portfolio. There are, of course, non-economic reasons for buying collectibles. On top of the hope for a financial return, investors in a painting could derive great value from looking at it or reading a first edition book.

For most people it is worth paying the cheap product providers’ small costs so that everything is taken care of for you. Trading is expensive and pulling the trigger can be nerve wracking Trading is expensive and one of the main reasons many investors underperform, but by changing allocations when you are trading securities you will be able to save money on transaction costs. Some product providers offer combined products with fixed weightings between bonds and equities. While they have the same issues outlined here they also have the huge advantage of large natural flows from customers and have lower costs as a result. If you find a product that suits your profile this added advantage is worth noting.


pages: 1,136 words: 73,489

Working in Public: The Making and Maintenance of Open Source Software by Nadia Eghbal

Amazon Web Services, Apollo 11, barriers to entry, Benevolent Dictator For Life (BDFL), Big Tech, bitcoin, Clayton Christensen, cloud computing, commoditize, commons-based peer production, context collapse, continuous integration, crowdsourcing, cryptocurrency, David Heinemeier Hansson, death of newspapers, Debian, disruptive innovation, Dunbar number, en.wikipedia.org, eternal september, Ethereum, Firefox, Free Software Foundation, Guido van Rossum, Hacker Ethic, Hacker News, Induced demand, informal economy, information security, Jane Jacobs, Jean Tirole, Kevin Kelly, Kickstarter, Kubernetes, leftpad, Mark Zuckerberg, Menlo Park, Neal Stephenson, Network effects, node package manager, Norbert Wiener, pirate software, pull request, RFC: Request For Comment, Richard Stallman, Ronald Coase, Ruby on Rails, side project, Silicon Valley, Snapchat, social graph, software as a service, Steve Jobs, Steve Wozniak, Steven Levy, Stewart Brand, tacit knowledge, the Cathedral and the Bazaar, The Death and Life of Great American Cities, The Nature of the Firm, TikTok, Tragedy of the Commons, transaction costs, two-sided market, urban planning, web application, wikimedia commons, Yochai Benkler, Zimmermann PGP

(New York: Anchor Books, 1990), 106. 360 Tim Ferriss, “Why I’m Stopping the Fan-Supported Podcast Experiment,” Tim Ferriss’s 4-Hour Workweek and Lifestyle Design Blog, July 11, 2019, https://tim.blog/2019/07/11/why-im-stopping-the-fan-supported-podcast-experiment/. 361 Taylor Wofford, “Fuck You and Die: An Oral History of Something Awful,” Vice, April 5, 2017, https://www.vice.com/amp/en_us/article/nzg4yw/fuck-you-and-die-an-oral-history-of-something-awful. 362 Nick Szabo, “Micropayments and Mental Transaction Costs,” Nakamoto Institute, n.d., https://nakamotoinstitute.org/static/docs/micropayments-and-mental-transaction-costs.pdf. 363 Tim Carmody, “Statement of Purpose,” Amazon Chronicles, January 27, 2019, https://amazonchronicles.substack.com/p/statement-of-purpose. 364 Tim Carmody, “Unlocking the Commons: Or, the Psychoeconomics of Patronage,” Kottke.org, December 15, 2017, https://kottke.org/17/12/unlocking-the-commons-or-the-psychoeconomics-of-patronage 365 Matthew Butterick, “To Pay or Not to Pay: How I Profited from Gentle Shame,” Butterick’s Practical Typography, August 5, 2016, https://practicaltypography.com/to-pay-or-not-to-pay.html. 366 Damon Kiesow, “Journalism’s Dunbar Number: Audience Scales, Community Does Not,” Local News Lab, March 4, 2019, https://localnewslab.org/2019/03/04/journalisms-dunbar-number-audience-scales-community-does-not/. 367 Alex Kantrowitz, “Paid Email Newsletters Are Proving Themselves as a Meaningful Revenue Generator for Writers,” BuzzFeed, April 29, 2019, https://www.buzzfeed.com/alexkantrowitz/writers-have-been-trying-to-support-online-themselves-for 368 Kevin Draper, “Why The Athletic Wants to Pillage Newspapers,” The New York Times, October 23, 2017, https://www.nytimes.com/2017/10/23/sports/the-athletic-newspapers.html. 369 David Bauder and David A.

Once companies started using open source for commercial purposes, and people realized that these “hobby projects” were able to compete with the software made by paid employees, scholars had to come up with a new framework to explain this behavior. Previously, our understanding of how and why people make things was modeled after Ronald Coase’s theory of the firm, which proposes that firms (i.e., companies, organizations, and other institutions with centralized resources) naturally emerge as a way to reduce transaction costs in the market.109 Coase would’ve told us that only companies make software because, from a coordination standpoint, managing the resources required to pull off such a feat would be most efficiently handled within the same organization. By contrast, the open source projects attracting attention in the late 1990s and early 2000s—the Linux kernel, which powers operating systems; Apache, an HTTP server; FreeBSD, an operating system; GNOME, a desktop environment—were produced by distributed groups of developers that transcended employer affiliations.

By contrast, the open source projects attracting attention in the late 1990s and early 2000s—the Linux kernel, which powers operating systems; Apache, an HTTP server; FreeBSD, an operating system; GNOME, a desktop environment—were produced by distributed groups of developers that transcended employer affiliations. Coase’s theory of the firm fails to explain why these developers would find one another and make software together, despite a lack of both formal contracts and financial compensation. In terms of transaction costs, collaborating on open source software with unaffiliated individuals should be too “expensive,” compared to writing software with one’s coworkers. But a few people noticed that these open source projects operated like communities, so they instead explained the projects’ behavior by describing them as a commons, meaning a resource that is owned, used, and managed by a community.


pages: 416 words: 39,022

Asset and Risk Management: Risk Oriented Finance by Louis Esch, Robert Kieffer, Thierry Lopez

asset allocation, Brownian motion, business continuity plan, business process, capital asset pricing model, computer age, corporate governance, discrete time, diversified portfolio, fixed income, implied volatility, index fund, interest rate derivative, iterative process, P = NP, p-value, random walk, risk free rate, risk/return, shareholder value, statistical model, stochastic process, transaction costs, value at risk, Wiener process, yield curve, zero-coupon bond

Even if this condition is satisfied, the proportions Xj will be dependent on t through the prices. If therefore one wishes to consider a portfolio that has identical proportions at two given different moments, the nj must be altered in consequence. This is very difficult to imagine in practice, because of transaction costs and other factors, and we will not take account of it in future. Instead, our reasoning shall be followed as though the proportions remained unchanged. As for an isolated security, when one considers a return estimated on the basis of several returns relating to the same duration but from different periods, one uses the arithmetical mean instead of the geometric mean, which gives: = 1 RP ,t 12 t=1 = 1 Xj Rj t 12 t=1 j =1 12 RP ,1 month N 12 = N Xj j =1 1 Rj t 12 t=1 12 Therefore, according to what was stated above:4 RP ,1 month = N Xj Rj,1 month .

The economic conditions that define an efficient market are: • The economic agents involved on the market behave rationally; they use the available information coherently and aim to maximise the expected utility of their wealth. • The information is available simultaneously to all investors and the reaction of the investors to the information is instantaneous. • The information is available free of charge. • There are no transaction costs or taxes on the market. • The market in question is completely liquid. It is obvious that these conditions can never be all strictly satisfied in a real market. This therefore raises the question of knowing whether the differences are significant and whether they will have the effect of invalidating the efficiency hypothesis.

Their origin may be: • Speculative bubbles, in which the rate of a security differs significantly and for a long time from its intrinsic value before eventually coming back to its intrinsic value, without movements of the market economic variables as an explanation for the difference. • Irrational behaviour by certain investors. These various elements, although removed from the efficiency hypothesis, do not, however, bring it into question. In addition, the profit to investors wishing to benefit from them will frequently be lost in transaction costs. 3.1.2.6 Conclusion We quote P. Gillet in conclusion of this analysis. Financial market efficiency appears to be all of the following: an intellectual abstraction, a myth and an objective. The intellectual abstraction. Revealed by researchers, the theory of financial market efficiency calls into question a number of practices currently used by the financial market professionals, such as technical analysis. (. . .)


pages: 319 words: 106,772

Irrational Exuberance: With a New Preface by the Author by Robert J. Shiller

Alan Greenspan, Andrei Shleifer, asset allocation, banking crisis, benefit corporation, Benoit Mandelbrot, book value, business cycle, buy and hold, computer age, correlation does not imply causation, Daniel Kahneman / Amos Tversky, demographic transition, diversification, diversified portfolio, equity premium, Everybody Ought to Be Rich, experimental subject, hindsight bias, income per capita, index fund, Intergovernmental Panel on Climate Change (IPCC), Joseph Schumpeter, Long Term Capital Management, loss aversion, Mahbub ul Haq, mandelbrot fractal, market bubble, market design, market fundamentalism, Mexican peso crisis / tequila crisis, Milgram experiment, money market fund, moral hazard, new economy, open economy, pattern recognition, Phillips curve, Ponzi scheme, price anchoring, random walk, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, Small Order Execution System, spice trade, statistical model, stocks for the long run, Suez crisis 1956, survivorship bias, the market place, Tobin tax, transaction costs, tulip mania, uptick rule, urban decay, Y2K

It is not clear whether the transaction tax would indeed encourage long-term investors over short-term speculators. We should recognize that some speculative trading is done infrequently, while some trading based on information about fundamentals is done frequently. Real estate markets, which are subject to much higher transaction costs than stock markets, nevertheless seem to be vulnerable to speculative bubbles and crashes. Moreover, it has been found that countries that impose higher transaction costs do not have lower stock market volatility.26 On balance, although I feel that there might be some merit in Tobin-style transaction taxes for 228 A C ALL TO AC TION reducing speculative volatility, I have not found the case strong enough to recommend any such action.

Another piece of evidence that has been offered in support of the efficient markets theory is that professional investors, institutional money managers, or securities analysts do not seem to have any reliable ability to outperform the market as a whole, and indeed they often seem to underperform the market once account is taken of transactions costs and management fees. This result may seem puzzling, since one would think that professional investors are more educated about investing, more systematic than individual E F F ICIE N T MARKE TS , RANDOM WALKS, AND BUBB LES 175 investors. But perhaps the result is not as puzzling as it at first seems.

See Womack, “Brokerage Analysts’ Recommendations”; and Brad Barber, Reuven Lehavy, Maureen McNichols, and Brett Trueman, “Can 258 NOTES TO PAGES 175–181 Investors Profit from the Prophets? Consensus Analyst Recommendations and Stock Returns,” unpublished paper, University of California at Davis, 1998. The latter argue that, despite transaction costs, “consensus recommendations remain valuable to investors who are otherwise considering buying or selling” (p. 25). 5. Judith Chevalier and Glenn Ellison, “Are Some Mutual Fund Managers Better Than Others? Cross-Sectional Patterns in Behavior and Performance,” Journal of Finance, 54(3) (1999): 875–99. 6.


pages: 368 words: 32,950

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile by Alexander Davidson

accounting loophole / creative accounting, algorithmic trading, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, Big bang: deregulation of the City of London, buy and hold, capital asset pricing model, central bank independence, corporate governance, Credit Default Swap, currency risk, dematerialisation, discounted cash flows, diversified portfolio, double entry bookkeeping, Edward Lloyd's coffeehouse, Elliott wave, equity risk premium, Exxon Valdez, foreign exchange controls, forensic accounting, Glass-Steagall Act, global reserve currency, high net worth, index fund, inflation targeting, information security, intangible asset, interest rate derivative, interest rate swap, inverted yield curve, John Meriwether, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market fundamentalism, Nick Leeson, North Sea oil, Northern Rock, pension reform, Piper Alpha, price stability, proprietary trading, purchasing power parity, Real Time Gross Settlement, reserve currency, Right to Buy, risk free rate, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond

On exchange fees, Furse noted that the average cost of buying a UK equity is around £6.50 per £1,000 traded, of which the exchange fee is 4 pence, or little more than half of 1 per cent of the total transaction cost. Clearing and settlement come to 2 pence, commissions an average of 85 pence, market impact approximately 60 pence and, unique to the UK, stamp duty is £5. Even if investors avoided stamp duty by trading contracts for difference (rather than the cash equities), the fee charged by the LSE was likely to be less than 3 per cent of total transaction cost, Furse told the convention. ‘So even if were to offer our services for free this would only reduce the cost of trading to the investor by 4 pence per thousand pounds traded.’

The beta measures the sensitivity of a share price to movements in the general stock market. The CAPM stipulates that the market does not reward investors for taking unsystematic (company-specific) risk because it can be eliminated through diversification. The model is theoretical and is based on various assumptions, including no taxes or transaction costs. Share buyers require a higher return than debt providers to compensate for the risk, and for the fact that the company must give priority to debt repayment over paying dividends. The cost of debt, the other part of WACC, is more transparent. It is commonly estimated as the redemption yield on the company’s bonds, and interest rates on loans and overdrafts.

These are factors used in the Black–Scholes model, which was developed in 1973 and is widely used in financial markets for valuing options. Other factors used in the model are volatility, the underlying stock price, and the risk-free rate of return. But Black–Scholes makes key assumptions that are not always tenable, including a constant risk-free interest rate, continuous trading and no transaction costs. Equity options tend to come in the standard contract size of 1,000 shares. To find the cost of an option contract, multiply the option price by 1,000. If a call option is priced at 70p, it will cost £700 per contract. The contract size may _______________________________ DERIVATIVES FOR RETAIL INVESTORS 71  vary if the underlying company is involved in a capital restructuring such as a rights issue.


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A Pelican Introduction Economics: A User's Guide by Ha-Joon Chang

"there is no alternative" (TINA), Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, antiwork, AOL-Time Warner, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, Charles Babbage, collateralized debt obligation, colonial rule, Corn Laws, corporate governance, corporate raider, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, discovery of the americas, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, falling living standards, financial deregulation, financial engineering, financial innovation, flying shuttle, Ford Model T, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, George Akerlof, Gini coefficient, Glass-Steagall Act, global value chain, Goldman Sachs: Vampire Squid, Gordon Gekko, Great Leap Forward, greed is good, Gunnar Myrdal, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, information asymmetry, intangible asset, interchangeable parts, interest rate swap, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, laissez-faire capitalism, land bank, land reform, liberation theology, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Neal Stephenson, Nelson Mandela, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, Pareto efficiency, Paul Samuelson, post-industrial society, precariat, principal–agent problem, profit maximization, profit motive, proprietary trading, purchasing power parity, quantitative easing, road to serfdom, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, scientific management, Scramble for Africa, search costs, shareholder value, Silicon Valley, Simon Kuznets, sovereign wealth fund, spinning jenny, structural adjustment programs, The Great Moderation, The Market for Lemons, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Vilfredo Pareto, Washington Consensus, working-age population, World Values Survey

However, by emphasizing the adjective new, this group clearly dissociated itself from the original Institutionalist school – now called the Old Institutional Economics (OIE). The main point of departure from the OIE was that the NIE analysed how institutions emerge out of deliberate choices by individuals.24 The key concept in the NIE is that of transaction cost. In Neoclassical economics, the only cost is the cost of production (costs of material, wages, etc.). However, the NIE emphasizes that there are also costs of organizing our economic activities. Some define transaction cost rather narrowly as the cost involved in market exchange itself – finding out about alternative products (‘shopping around’), spending time and money actually doing the shopping and sometimes bargaining for better prices.

Others define it more broadly as the ‘cost of running the economic system’, which includes the cost of conducting market exchange but also the cost involved in enforcing the contract after the exchange is over. So, in this broader definition, transaction cost includes the cost of policing against thefts, running the court system and even monitoring workers in factories so that they put in the maximum possible amount of labour service specified in their contract. Institutions are not just constraints: contributions and limitations of the New Institutional Economics Deploying the concept of transaction cost, the NIE has developed a wide range of interesting theories and case studies. One prominent example is the question as to why, in a supposedly ‘market’ economy, so many economic activities are conducted within firms.

Social institutions and the structure they create were everything; individuals were seen as being totally determined by the society they live in – ‘there is no such thing as an individual’, infamously declared Clarence Ayres, who dominated the (declining) Institutionalist school in the US in the early post-Second World War period. Transaction costs and institutions: the rise of the New Institutional Economics From the 1980s, a group of economists with Neoclassical and Austrian leanings – led by Douglass North, Ronald Coase and Oliver Williamson – started a new school of institutional economics, known as the New Institutional Economics (NIE).23 By calling themselves institutional economists, the New Institutionalist economists made it clear that they were not typical Neoclassical economists, who looked at only individuals but not the institutions that affect their behaviour.


pages: 290 words: 83,248

The Greed Merchants: How the Investment Banks Exploited the System by Philip Augar

Alan Greenspan, Andy Kessler, AOL-Time Warner, barriers to entry, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, business cycle, buttonwood tree, buy and hold, capital asset pricing model, Carl Icahn, commoditize, corporate governance, corporate raider, crony capitalism, cross-subsidies, deal flow, equity risk premium, financial deregulation, financial engineering, financial innovation, fixed income, Glass-Steagall Act, Gordon Gekko, high net worth, information retrieval, interest rate derivative, invisible hand, John Meriwether, junk bonds, Long Term Capital Management, low interest rates, Martin Wolf, Michael Milken, new economy, Nick Leeson, offshore financial centre, pensions crisis, proprietary trading, regulatory arbitrage, risk free rate, Sand Hill Road, shareholder value, short selling, Silicon Valley, South Sea Bubble, statistical model, systematic bias, Telecommunications Act of 1996, The Chicago School, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, tulip mania, value at risk, yield curve

The Securities Industry Association summarized the findings of a series of academic studies encompassing 500,000 recommendations made by analysts during the period 1985–2000: Although investors would have outperformed the market indexes following the consensus recommendations of analysts, to implement this trading strategy would require buying and selling stocks frequently – since so many analysts were included in the study and they changed their recommendations frequently – with turnover rates at times in excess of 400 per cent annually would produce significant transaction costs.* In other words analysts do a good job picking stocks but an investor following all their recommendations would incur commissions and other costs such as taxes that could reduce the investor’s performance to that of the market indices.9 In Britain an academic study of leading brokers’ recommendations in the mid nineties came up with a similar conclusion: ‘High trading levels are required to capture the excess returns generated by the strategies analysed, entailing substantial transaction costs and leading to abnormal returns for these strategies that are not reliably greater than zero.’10 The evidence from Britain and America is consistent in finding that the total returns from following analysts’ recommendations in these years were not sufficient to cover trading and other costs.

Federal funds rate for interest rates; US consumer price index for inflation. * The only time in recent history that US markets closed for any length of time was in the few days after the terrorist attacks on 11 September 2001. * Fund managers are known as the buy side, brokers as the sell side. * Transaction costs are commissions, taxes, financing and deal processing expenses. † Analysts mark the companies they follow on a five-point scale, from ‘strong buy’ at the top to ‘strong sell’ at the bottom, over two time periods, usually three months and two years. Companies often react badly to criticism from analysts and during the IPO boom of the 1990s an investment bank whose analyst had a negative rating on a stock could expect to be excluded from any capital markets business that was in the offing.

Rothschild 31–2 narcissism, organizational 198 NASDAQ index 12, 13 National Association of Securities Dealers (NASD) 185, 188, 201 National City Bank 6–7 Neuer Markt 73–4 New York Stock Exchange 187–8, 201, 205 Office of Federal Home Loan Oversight 80 Office of Risk Assessment 205 O’Kelly, Gene 200–201 oligopoly 102 O’Neal, Stanley 23, 61, 135–6 Ong, Belita 11–12 options, definition of 77 output of investment banks, evaluation of 63–5, 85, 100 over-the-counter derivatives 77–8, 81, 89 Paine Webber 45 Parmalat 84, 161 Partnoy, Frank 41, 181–2, 209 Paulson, Henry 197, 206 Pecora, Judge Ferdinand 85 Perella, Joseph 43 perfect competition 102 Pitt, Harvey 187 Plender, John 208 PNC Financial 81–2 political connections 181–4, 209 prices 86–7, 97–8, 100–101, 172 advisory work 90–91, 94–5, 96–7 basis point pricing 91–3 collusion 93–8, 100–103 derivatives 88–9 and fund managers 192 negotiation, lack of 176–8, 179 under oligopoly 102 pre-announcement movements, shares 122 share trading 87–8, 89 strategic pricing 94–5, 98 underwriting 89–90, 92, 94–6 prime brokerage 133 private equity 132 privatization, UK 181 product development 131–4 product range 33 profits 51–2, 61–2 and compensation 60, 99–100 diverting attention from 95 falling, implications of 209–10 identification of 192–3 outlook for 209–10 return on equity (ROE) 54–7, 58 source of 166–7 programme trades 87, 88 proprietary trading 114–19, 192, 206, 211–12 prospect theory 180 Prudential-Bache Securities 11 Prudential plc 82 Public Company Accounting Oversight Board 200 Purcell, Philip 14, 22, 23–4, 39, 138, 205–6 Quattrone, Frank 19–20, 137–8, 151 Qwest 82 Racketeer-Influenced Corrupt Organizations law (RICO) 10, 26 recession, post-2001 13–14 Reed, John 189 regulation 7–8, 20, 81, 183, 185–90, 199 and bundling 193 integrated structure, failure to reform 22, 23, 24 and lobbying 209 recent 19, 200–203, 205, 209–10 regulatory arbitrage 185 relationship banking, demise of 35–6, 152–3, 170 research 66–7, 68, 69, 140–41, 145, 146 independent 69, 201–2, 204 internal position of 196 see also analysts Restoring Trust: Investment in the Twenty-First Century 194 returns 49–51, 61–2, 99–100, 165–6 and analysts’ recommendations 67 compensation 58–60, 99–100, 165–6 and cost of equity capital 57–8 excess, source of 166–7 falling, implications of 209–10 margins 52–3, 88–9, 119 outlook for 209–10 profits 51–2 return on equity (ROE) 54–7, 58, 61 risk management 111–13, 125–31 risk premium 55, 56 Ritter, Professor Jay 71, 89–90, 94–5, 179 Rogers, John 68 Roosevelt, President Franklin D. 7 Roye, Paul 191 Rubin, Robert 42, 182–3 salaries see compensation Salomon Brothers 11, 34, 37, 41–2, 137, 148–9 cynicism, culture of 152, 153 losses, 1994 128 and WorldCom 121 Salomon Smith Barney 17, 41, 150–51, 195 Sanford Bernstein 32 Sants, Hector 170–71, 189 Sarbanes-Oxley Act (2002) 19, 200–201, 209 Sassoon, James 184 Saunders, Ernest 11 scandals see corruption/malpractice Schapiro, Mary 188 Schroders 42 Securities and Exchange Commission (SEC) 7, 19, 21, 23, 185–7, 205 Securities Industry Association 183 securitization 78 securitized bonds 46 settlements paid by investment banks 19, 20, 23, 24, 38, 39, 42, 43, 201, 207 share prices, pre-announcement movements 122 shareholder activism 203–4 shareholder value 8–9, 63, 169 shareholders, and corporate control 163–4, 203–4 Sherman Anti-Trust Act (1890) 5–6, 8 Smith, Adam 86, 171–2 Smith, David 171 Smith, Professor Roy 195 Smith Barney 40, 41 Southern Peru Copper Corp 91 special purpose entities/vehicles (SPEs/SPVs) 78, 82, 83 ‘specialists’ 115–16 ‘spinning’ 17–18, 43, 137, 160 Spitzer, Eliot 15, 65–6 inquiry headed by 15, 16–17, 21, 22, 24, 38, 200 whispering campaign against 23 status of investment banking 4–5, 12, 18 Stevenson, Lord 175 Stiglitz, Joseph 12, 64, 176, 182–3 stock exchanges, structural reform 212 stock markets bull market mentality 3–5, 12–13, 64, 65, 71–3 performance of 63–4 public interest in 12 stock options 176 new accounting rules 201, 209 Stonehill, Charles 147–8 structural reform 211–15 Sudarsanam, Professor Sudi 76 Summers, Lawrence 63 swaps 77, 132 Sykes, Sir Richard 210 taxation, 401K amendment 9 team ethos 124–5 Thain, John 188, 209 Time Warner 13, 14, 76–7 Tomlinson, Lindsay 194 transaction banking 152–3, 170 transaction costs 67 Travelers 41 treasurers (company), and derivatives 80 Treasury bond scandal 41–2 ‘Triple Play’ 121 Truman, President Harry S. 7 trustees, mutual/pension funds 191–2 UBS 31, 32, 37 underwriting fees 89–90, 92, 94–6 value-at-risk (VAR) 117, 129–31 volatility of markets, and performance of investment banks 24–5, 51–2, 57–8 Wall Street 9 Wall Street Crash 6–7 Walter, Professor Ingo 195 Wasserman, Ed 18 Wasserstein, Bruce 31, 43, 77 Weill, Sanford 195 Welch, Jack 45 Wertheim 147 Wheat, Allen 59, 137 WorldCom 17, 121, 150–51, 161 Zumwinkel, Klaus 178–9


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Exponential Organizations: Why New Organizations Are Ten Times Better, Faster, and Cheaper Than Yours (And What to Do About It) by Salim Ismail, Yuri van Geest

23andMe, 3D printing, Airbnb, Amazon Mechanical Turk, Amazon Web Services, anti-fragile, augmented reality, autonomous vehicles, Baxter: Rethink Robotics, behavioural economics, Ben Horowitz, bike sharing, bioinformatics, bitcoin, Black Swan, blockchain, Blue Ocean Strategy, book value, Burning Man, business intelligence, business process, call centre, chief data officer, Chris Wanstrath, circular economy, Clayton Christensen, clean water, cloud computing, cognitive bias, collaborative consumption, collaborative economy, commoditize, corporate social responsibility, cross-subsidies, crowdsourcing, cryptocurrency, dark matter, data science, Dean Kamen, deep learning, DeepMind, dematerialisation, discounted cash flows, disruptive innovation, distributed ledger, driverless car, Edward Snowden, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, fail fast, game design, gamification, Google Glasses, Google Hangouts, Google X / Alphabet X, gravity well, hiring and firing, holacracy, Hyperloop, industrial robot, Innovator's Dilemma, intangible asset, Internet of things, Iridium satellite, Isaac Newton, Jeff Bezos, Joi Ito, Kevin Kelly, Kickstarter, knowledge worker, Kodak vs Instagram, Law of Accelerating Returns, Lean Startup, life extension, lifelogging, loose coupling, loss aversion, low earth orbit, Lyft, Marc Andreessen, Mark Zuckerberg, market design, Max Levchin, means of production, Michael Milken, minimum viable product, natural language processing, Netflix Prize, NetJets, Network effects, new economy, Oculus Rift, offshore financial centre, PageRank, pattern recognition, Paul Graham, paypal mafia, peer-to-peer, peer-to-peer model, Peter H. Diamandis: Planetary Resources, Peter Thiel, Planet Labs, prediction markets, profit motive, publish or perish, radical decentralization, Ray Kurzweil, recommendation engine, RFID, ride hailing / ride sharing, risk tolerance, Ronald Coase, Rutger Bregman, Salesforce, Second Machine Age, self-driving car, sharing economy, Silicon Valley, skunkworks, Skype, smart contracts, Snapchat, social software, software is eating the world, SpaceShipOne, speech recognition, stealth mode startup, Stephen Hawking, Steve Jobs, Steve Jurvetson, subscription business, supply-chain management, synthetic biology, TaskRabbit, TED Talk, telepresence, telepresence robot, the long tail, Tony Hsieh, transaction costs, Travis Kalanick, Tyler Cowen, Tyler Cowen: Great Stagnation, uber lyft, urban planning, Virgin Galactic, WikiLeaks, winner-take-all economy, X Prize, Y Combinator, zero-sum game

We also believe they will operate with a balanced mix of open and protected data, encouraging constant and disruptive innovation at their edges. In the same way that Internet communications have seen costs drop to near zero, we expect to see internal organizational and transactions costs also fall to near zero as we increasingly information-enable and distribute our organizational structures. Ultimately, in the face of such low transaction costs, we anticipate what we’re calling a Cambrian Explosion in organizational design—everything from community-based structures to virtual organizations (see Ethereum) that will be small, nimble and extensible. It is also becoming increasingly clear that, like the Internet, the ExO paradigm is not just for business.

This shift will, of course, be quite challenging for large organizations, which rely on drawn-out projections and tracking for planning and control purposes. 6. Smaller Beats Bigger (aka Size Does Matter, Just not the Way You Think) Ronald Coase won the 1991 Nobel Prize in Economics for his theory that larger companies do better because they aggregate assets under one roof and, as a result, enjoy lower transaction costs. Two decades later, the reach delivered by the information revolution has negated the need to aggregate assets in the first place. For decades, scale and size have been desirable traits in an enterprise. A bigger company could do more, the argument went, because it could leverage economies of scale and negotiate from strength.

That’s one reason why, for generations, business schools and consulting firms have focused on the management and organization of extremely large companies. And Wall Street has gotten rich trading the stock of giant companies, which often merge to create even more gigantic organizations. All that is changing. In The Start-up of You, Reid Hoffman shows that transaction costs are no longer an advantage and that each individual can (and should) manage himself or herself as a business. Why? One reason is the unparalleled and unprecedented ability of a small team today to do big things—an ability that grows ever greater if the exponential technologies described in Chapter One are put to use.


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Arguing With Zombies: Economics, Politics, and the Fight for a Better Future by Paul Krugman

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Andrei Shleifer, antiwork, Asian financial crisis, bank run, banking crisis, basic income, behavioural economics, benefit corporation, Berlin Wall, Bernie Madoff, bitcoin, blockchain, bond market vigilante , Bonfire of the Vanities, business cycle, capital asset pricing model, carbon footprint, carbon tax, Carmen Reinhart, central bank independence, centre right, Climategate, cognitive dissonance, cryptocurrency, David Ricardo: comparative advantage, different worldview, Donald Trump, Edward Glaeser, employer provided health coverage, Eugene Fama: efficient market hypothesis, fake news, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, frictionless, frictionless market, fudge factor, full employment, green new deal, Growth in a Time of Debt, hiring and firing, illegal immigration, income inequality, index fund, indoor plumbing, invisible hand, it is difficult to get a man to understand something, when his salary depends on his not understanding it, job automation, John Snow's cholera map, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, large denomination, liquidity trap, London Whale, low interest rates, market bubble, market clearing, market fundamentalism, means of production, Modern Monetary Theory, New Urbanism, obamacare, oil shock, open borders, Paul Samuelson, plutocrats, Ponzi scheme, post-truth, price stability, public intellectual, quantitative easing, road to serfdom, Robert Gordon, Robert Shiller, Ronald Reagan, secular stagnation, Seymour Hersh, stock buybacks, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, universal basic income, very high income, We are all Keynesians now, working-age population

Truth and Virtue in the Age of Trump Conservatism’s Monstrous Endgame Manhood, Moola, McConnell, and Trumpism 17. ON THE MEDIA Essay: Beyond Fake News Bait-and-Switch Triumph of the Trivial Is There Any Point to Economic Analysis? The Year of Living Stupidly Hillary Clinton Gets Gored 18. ECONOMIC THOUGHTS Essay: The Dismal Science How I Work The Instability of Moderation Transaction Costs and Tethers: Why I’m a Crypto Skeptic Credits Index ARGUING with ZOMBIES INTRODUCTION The Good Fight Punditry was never part of the plan. When I finished graduate school in 1977, I envisioned a life devoted to teaching and research. If I ended up playing any role in public debate, I assumed it would be as a technocrat—someone dispassionately providing policymakers with information about what worked and what didn’t.

And by the time that big shock arrived, the descent into an intellectual Dark Age combined with the rejection of policy activism on political grounds had left us unable to agree on a wider response. In the end, then, the era of the Samuelsonian synthesis was, I fear, doomed to come to a nasty end. And the result is the wreckage we see all around us. TRANSACTION COSTS AND TETHERS: WHY I’M A CRYPTO SKEPTIC July 31, 2018 I’m still on vacation, hiking and biking in various parts of Europe. I’m keeping up with the news, more or less, but am only occasionally and unpredictably in a place and condition where I can actually write something and post it. But this is one of those times, and I thought I’d post some thoughts in advance of stuff I’ll be doing after I get back.

Specifically, in a couple of weeks I’m going to play Emmanuel Goldstein—the designated enemy—at a conference on blockchain and all that. Hey, if you only speak to friendly audiences, you’re not challenging yourself enough. So I thought it might be worth explaining why I’m a cryptocurrency skeptic. It comes down to two things: transaction costs and the absence of tethering. Let me explain. If you look at the broad sweep of monetary history, there has been a clear direction of change over time: namely, one of reducing the frictions of doing business and the amount of real resources required to deal with those frictions. First there were gold and silver coins, which were heavy, required lots of security, and consumed a lot of resources to produce.


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The Tyranny of Metrics by Jerry Z. Muller

Affordable Care Act / Obamacare, Atul Gawande, behavioural economics, Cass Sunstein, Checklist Manifesto, Chelsea Manning, collapse of Lehman Brothers, corporate governance, Credit Default Swap, crowdsourcing, delayed gratification, deskilling, Edward Snowden, Erik Brynjolfsson, financial engineering, Frederick Winslow Taylor, George Akerlof, Goodhart's law, Hyman Minsky, intangible asset, Jean Tirole, job satisfaction, joint-stock company, joint-stock limited liability company, Minsky moment, Moneyball by Michael Lewis explains big data, performance metric, price mechanism, RAND corporation, Salesforce, school choice, scientific management, Second Machine Age, selection bias, Steven Levy, tacit knowledge, TED Talk, total factor productivity, transaction costs, Tyler Cowen, WikiLeaks

Merton called “the imperious immediacy of interests … where the actor’s paramount concern with the foreseen immediate consequences excludes consideration of further or other consequences.”3 In short, advancing short-term goals at the expense of long-range considerations. Costs in employee time. To the debit side of the ledger must also be added the transactional costs of metrics: the expenditure of employee time by those tasked with compiling and processing the metrics—not to speak of the time required to actually read them. That is exacerbated by the “reporting imperative”—the perceived need to constantly generate information, even when nothing significant is going on.

., 12, 170 metric fixation, 4–9, 13; in business and finance, 137–51; cost disease and, 44; critique of the professions and apotheosis of choice in, 42–44; defined, 18; distortion of information with, 23–24; distrust of judgment leading to, 39–42; in higher education, 9–14, 67–87, 175–76; innovation and creativity stifled by, 20; key components of, 18; leadership and organizational complexity and, 44–47; lure of electronic spreadsheets in, 47; managerialism and, 34–37; in medicine, 2–5, 42–44, 103–23, 172, 176; by the military, 35–37, 131–35, 176; negative transformations of nature of work with, 19; pay for performance and, 19; in philanthropy and foreign aid, 153–56; in policing, 125–29, 175; predicting and avoiding negative consequences of, 169–73; recurrent flaws in, 23–25; relationship between measurement and improvement in, 17–19; in schools, 11, 24, 89, 175–76; Taylorism and, 31–34; theory of motivation and, 19–20; and transparency as enemy of performance, 159–65 metrics: checklist for when and how to use, 175–83; corruption or goal diversion in gathering and using, 182; costs of acquiring, 180; development of measures for, 181; diagnostic, 92–93, 103, 110, 123, 126, 176; diminishing utility of, 170; gaming the, 3, 23–24, 149–50; kind of information measured by, 177; media depictions of, 1–4; philosophical critiques of, 59–64; purposes of specific measurements and, 178–79; reasons leaders ask for, 180–81; recognition that not all problems are solvable by, 182–83; transactional costs of, 170; used to replace judgment, 6–7; usefulness of information from, 177–78 Michigan Keystone ICU Project, 109–10, 111–12, 176 Middle States Commission on Higher Education, 10–11 Milgrom, Paul, 52, 169 military, American, 35–37, 131–35, 176 Minsky, Hyman, 148 Mintzberg, Henry, 52 Mitchell, Ted, 82 Moneyball, 7 Morieux, Yves, 45, 170 mortgage backed securities, 146–47 motivation: extrinsic and intrinsic rewards and, 53–57, 119–20, 137–38, 144; theory of, 19–20 Muller, Jerry Z., 79 Mylan, 140–42, 143 National Alliance of Business, 90 National Assessment of Educational Progress (NAEP), 91, 97, 99 National Center for Educational Statistics, 97 National Center on Performance Incentives, 95–96 National Health Service, 104, 114, 116–17 National Security Agency, 163 Natsios, Andrew, 155–56 New Public Management, 51–53 Newsweek, 76 No Child Left Behind Act of 2001, 11, 24, 89, 100; problem addressed by, 89–91, 96; Race to the Top after, 94–95; unintended consequences of, 92–94.

., 161–62 Taylor, Frederick Winslow, 32 Taylorism, 31–34, 138 Thatcher, Margaret, 56–57, 62–63, 73 time loss, 10, 11, 62, 74, 180, 182; in bureaucratic organizations, 156; caused by executives under the spell of metric fixation, 45; in charitable organizations, 154; in colleges and universities, 83; in education, 173; by employees, 170; increased performance measures leading to more, 18; in medicine, 119 Times Higher Education Supplement, 76 Tirole, Jean, 54 Tollman, Peter, 45, 170 “Toxicity of Pay for Performance, The,” 119–20 transactional costs of metrics, 170. See also time loss transparency, 3–4, 17–18, 113; diplomacy and intelligence, 162–65; as enemy of performance, 159–65; in government, 160–62 “Twice-Revised Code, The,” 30 Tyco, 144 Uniform Crime Report, 127–28 unintended consequences of metric fixation: costs in employee time, 170; costs to productivity, 173; degradation of work, 172–73; diminishing utility, 170; discouraging cooperation and common purpose, 172; discouraging innovation, 140, 150–51, 171–72; discouraging risk-taking, 62, 117–18, 171; goals displacement, 169–70; by No Child Left Behind, 92–94; rewarding of luck, 171; rule cascades, 171; short-termism, 170 U.S.


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The fortune at the bottom of the pyramid by C. K. Prahalad

"World Economic Forum" Davos, barriers to entry, business cycle, business process, call centre, cashless society, clean water, collective bargaining, corporate social responsibility, deskilling, digital divide, disintermediation, do well by doing good, farmers can use mobile phones to check market prices, financial intermediation, Hernando de Soto, hiring and firing, income inequality, information asymmetry, late fees, Mahatma Gandhi, market fragmentation, microcredit, new economy, profit motive, purchasing power parity, rent-seeking, shareholder value, The Fortune at the Bottom of the Pyramid, time value of money, transaction costs, vertical integration, wealth creators, working poor

The farmers know the difference between the old system and the system introduced by the ITC eChoupal. It is more than just a win in terms of savings. It provides a social basis for becoming an insider. 3. The ICICI-supported SHGs take it one step further. They start with understanding the rationale for the contacting system: how and why it reduces transaction costs and therefore reduces the cost of capital as well as increases access to capital. Further, governance cannot be just between ICICI and the individual. By creating a collective commitment to accountability to contracting conditions, SHGs continually reinforce in the local community the benefits of being within the system.

Investors will seek the best opportunities. TGC is the capacity of a society to guarantee transparency in the process of economic transactions and the ability to enforce commercial contracts. This is about reducing uncertainty as to ownership and transfer of ownership. Transparency in the process reduces transaction costs. Clearly developed laws, transparent microregulations, social norms, and timely and uniform enforcement are all part of TGC. My argument is that TGC is more important than laws that are not enforced. BOP consumers live in a wide variety of countries with varying degrees of TGC. Consider the spectrum: 1.

The dependence on the informal sector was as high as 58% for households with assets lower than Rs. 5,000.”13 In other words, a majority of the extremely poor are reliant on extortionist money lenders for living capital. Yet formal financial intermediaries, such as commercial banks, typically do not serve poor households. The reasons include the high cost of small transactions, the lack of traditional collateral, geographic isolation, and simple social prejudice. “According to Mahajan,14 the transaction costs of savings in formal institutions were as high as 10% for the rural poor. This was because of the small average size of transactions and distance of the branches from the villages.” Even those institutions that provide financial services to the poor are limited in scale. With more than 400 million poor people and participation rates in formal institutions around 30%, demand far outstrips supply.


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Market Wizards: Interviews With Top Traders by Jack D. Schwager

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Alan Greenspan, Albert Einstein, asset allocation, backtesting, beat the dealer, Bretton Woods, business cycle, buy and hold, commodity trading advisor, computerized trading, conceptual framework, delta neutral, Edward Thorp, Elliott wave, fixed income, implied volatility, index card, junk bonds, locking in a profit, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, Michael Milken, money market fund, Nixon triggered the end of the Bretton Woods system, pattern recognition, Paul Samuelson, Ralph Nelson Elliott, random walk, Reminiscences of a Stock Operator, short selling, Teledyne, transaction costs, uptick rule, yield curve, zero-sum game

The undisciplined use of leverage is the single most important reason why most traders lose money in the futures markets. In general, futures prices are no more volatile than the underlying cash prices or, for that matter, many stocks. The high-risk reputation of futures is largely a consequence of the leverage factor. 5. Low transaction costs—Futures markets provide very low transaction costs. For example, it is far less expensive for a stock portfolio manager to reduce market exposure by selling the equivalent dollar amount of stock index futures contracts than by selling individual stocks. 6. Ease of offset—A futures position can be offset at any time during market hours, providing prices are not locked at limit-up or limit-down.

When you trade currencies, do you use the interbank market or the futures market? I only use the interbank market, unless I am doing an arbitrage trade against the IMM. [The International Monetary Market (IMM) is a subsidiary of the Chicago Mercantile Exchange and the world’s foremost currency futures exchange.] The liquidity is enormously better, the transaction costs are much lower, and it is a twenty-four-hour market, which is important to us because we literally trade twenty-four hours a day. What portion of your trading is in currencies? On average, about 50 to 60 percent of our profits come from currency trading. I assume you are also trading currencies beyond the five that are currently actively traded on the IMM.

If you can just learn discipline by using a trend-following system, even temporarily, it will increase your odds of being successful as a trader. Do you have an opinion about systems sold to the public? I looked at some of these systems a few years ago and found that they generally made too many trades. If a system trades too frequently, the transaction costs will be too high, a factor that will significantly reduce the probability of the system working. I think to be viable, a trend-following system has to be medium to longer term. The more sensitive systems just generate too much commission. Besides providing a training vehicle for learning good trading habits, do you feel that trend-following systems can provide an effective trading approach?


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Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo

Alan Greenspan, Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, bitcoin, Bob Litterman, Bonfire of the Vanities, bonus culture, break the buck, Brexit referendum, Brownian motion, business cycle, business process, butterfly effect, buy and hold, capital asset pricing model, Captain Sullenberger Hudson, carbon tax, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, confounding variable, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, democratizing finance, Diane Coyle, diversification, diversified portfolio, do well by doing good, double helix, easy for humans, difficult for computers, equity risk premium, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Glass-Steagall Act, global macro, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, information security, interest rate derivative, invention of the telegraph, Isaac Newton, it's over 9,000, James Watt: steam engine, Jeff Hawkins, Jim Simons, job satisfaction, John Bogle, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, language acquisition, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, megaproject, merger arbitrage, meta-analysis, Milgram experiment, mirror neurons, money market fund, moral hazard, Myron Scholes, Neil Armstrong, Nick Leeson, old-boy network, One Laptop per Child (OLPC), out of africa, p-value, PalmPilot, paper trading, passive investing, Paul Lévy, Paul Samuelson, Paul Volcker talking about ATMs, Phillips curve, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, proprietary trading, public intellectual, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Solow, Sam Peltzman, Savings and loan crisis, seminal paper, Shai Danziger, short selling, sovereign wealth fund, Stanford marshmallow experiment, Stanford prison experiment, statistical arbitrage, Steven Pinker, stochastic process, stocks for the long run, subprime mortgage crisis, survivorship bias, systematic bias, Thales and the olive presses, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, uptick rule, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

Our simulation assumes that the cash earns the yield on one-month U.S. Treasury bills, and that all changes in portfolio weights incur transactions costs of 0.05 percent, or 5 basis points (bps), of the trade size. This is on the high side for modern markets. For the S&P 500 index, implementing the dynamic index using the Chicago Mercantile Exchange’s E-Mini S&P 500 Futures contract would yield considerably lower transactions costs than 5 bps.14 We deduct the transaction costs in our calculations of the daily returns. Table 8.2 shows that an investor who stays in this cruise-controlled fund is rewarded.

“As we continued to discover new anomalies,” said Shaw, “we also benefited from a sort of a second-order effect: if the profit that could be gained from a given single effect was exceeded by the transaction cost that would be incurred to exploit it, it would be a mistake for anybody to bet on that effect in isolation. Once we’d identified a number of small inefficiencies, though, the aggregate profit opportunity was often sufficient to break through the transaction cost threshold. This allowed us to extract profits from market inefficiencies that were too small for most traders to exploit, creating a barrier to entry for potential competitors.”

For example, what might happen if cell phone coverage were extended further into the Indian Ocean, or if the fishing boats of Kerala were able to afford refrigeration for their catches? The history of hedge funds makes it clear that technology is a key component of the financial environment. Not only secrecy but also technology limited the concept of the hedge fund in Alfred Winslow Jones’s day. Transactions costs were too high, and transaction speed was too slow, for many later strategies to be successful. Even something as simple as rebalancing a portfolio could be an enormous and costly labor before technological advances in hardware, software, and telecommunications transformed the industry. It’s no coincidence that David Shaw was originally “the guy who did the technology” at Morgan Stanley.


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Machinery of Freedom: A Guide to Radical Capitalism by David Friedman

Apollo 11, back-to-the-land, Fractional reserve banking, hiring and firing, jitney, laissez-faire capitalism, Machinery of Freedom by David Friedman, means of production, Money creation, radical decentralization, rent control, road to serfdom, Ronald Coase, Ronald Reagan, Stewart Brand, Tax Reform Act of 1986, The Wealth of Nations by Adam Smith, transaction costs, urban renewal, Vernor Vinge, Whole Earth Catalog

This insight leads us to the Coase Theorem, named after Ronald Coase, the economist whose ideas are largely responsible for this part of the chapter. The Coase Theorem states that any initial definition of property rights will lead to an efficient outcome, provided that transaction costs are zero. The condition — zero transaction costs — is as important as the theorem. Suppose we start with a definition of property rights that forbids trespassing photons; anyone may forbid me from making a light that he can see. The right to decide whether or not I turn on the lights in my house is worth more to me than to my neighbors, so in principle I should be able to buy their permission.

Buying up most of the land affected by national defense might be less difficult than negotiating a unanimous contract among 200 million people, but hardly easy. The land must be purchased before sellers realize what is going on and increase their price. Raising enough money to buy the United States would be a hard project to keep secret. In addition, the transaction costs would be substantial — about $100 billion in realtor commissions for all the fixed property in the United States. There is one favorable factor to help offset these difficulties. The cost of a minimal national defense is only about $20 billion to $40 billion a year. The value to those protected is several hundred billion dollars a year.

The right to control the air a foot over a piece of land is worth more to the owner than to anyone else, so ownership of land usually includes ownership of the space immediately above it. The second is that, since the proper composition of bundles of rights will often be uncertain and may change over time, they should be defined in a way that makes it as easy as possible to trade rights. Property rights should be defined in a way that minimizes the transaction costs of likely transactions. One of the questions to be decided is how to bundle the rights; another and closely related question is what the rights are that we are bundling. Does my right to forbid intense lights and sounds from my property mean that I can forbid my neighbor from testing lasers and nuclear weapons — and holding loud parties — or only that I can collect damages afterwards?


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The Precariat: The New Dangerous Class by Guy Standing

8-hour work day, banking crisis, barriers to entry, basic income, behavioural economics, Bertrand Russell: In Praise of Idleness, bread and circuses, call centre, Cass Sunstein, centre right, collective bargaining, company town, corporate governance, crony capitalism, death from overwork, deindustrialization, deskilling, emotional labour, export processing zone, fear of failure, full employment, Herbert Marcuse, hiring and firing, Honoré de Balzac, housing crisis, illegal immigration, immigration reform, income inequality, independent contractor, information security, it's over 9,000, job polarisation, karōshi / gwarosa / guolaosi, labour market flexibility, labour mobility, land reform, libertarian paternalism, low skilled workers, lump of labour, marginal employment, Mark Zuckerberg, mass immigration, means of production, mini-job, moral hazard, Naomi Klein, nudge unit, old age dependency ratio, Panopticon Jeremy Bentham, pension time bomb, pensions crisis, placebo effect, post-industrial society, precariat, presumed consent, quantitative easing, remote working, rent-seeking, Richard Thaler, rising living standards, Ronald Coase, Ronald Reagan, science of happiness, shareholder value, Silicon Valley, technological determinism, The Market for Lemons, The Nature of the Firm, The Spirit Level, Tobin tax, transaction costs, universal basic income, unpaid internship, winner-take-all economy, working poor, working-age population, young professional

The owners could be out tomorrow, along with their management teams and the nods-andhandshakes that make up informal bargains about how labour is done, how payments should be honoured and how people are treated in moments of need. In 1937, Ronald Coase set out a theory that was to earn him a Nobel Prize in Economics. He argued that firms, with their hierarchies, were superior to atomised markets made up solely of individuals; they reduced the transaction costs of doing business, one reason being that they fostered long-term relationships based on trust. This reasoning has collapsed. Now that opportunistic buyers can amass vast funds and take over even well-run companies, there is less incentive to form trust relationships inside firms. Everything becomes contingent and open to re-negotiation. 30 THE PRECARIAT For years academic journals were full of articles on national ‘varieties of capitalism’.

It can be a full-time job being unemployed, and it involves flexibility, since people must be on call almost all the time. What politicians call idleness may be no more than being on the end of the phone, chewing nails nervously hoping for a call. The precarity trap A labour market based on precarious labour produces high transaction costs for those on the margins. These costs include the time it takes to apply for benefits if they become unemployed, the lack of income in that period, the time and costs associated with searching for jobs, the time and cost in learning new labour routines, and the time and cost involved in adjusting activities outside jobs to accommodate the demands of new temporary jobs.

But then suppose she is offered another temporary low-paying job. She hesitates. Some benefits might continue for a while, under rules to help ‘make work pay’ and reduce the WHY THE PRECARIAT IS GROWING 49 standard ‘poverty trap’. But she knows that when the job ends she will once again face daunting transaction costs. The reality is that she cannot afford to take the job because, in addition to the cost in lost benefits while the job lasts, there is the cost of getting back on benefits. That is the precarity trap. The precarity trap is intensified by the erosion of community support. While being in and out of temporary low-wage jobs does not build up entitlement to state or enterprise benefits, the person exhausts the ability to call on benefits provided by family and friends in times of need.


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Portfolio Design: A Modern Approach to Asset Allocation by R. Marston

asset allocation, Bob Litterman, book value, Bretton Woods, business cycle, capital asset pricing model, capital controls, carried interest, commodity trading advisor, correlation coefficient, currency risk, diversification, diversified portfolio, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, family office, financial engineering, financial innovation, fixed income, German hyperinflation, global macro, high net worth, hiring and firing, housing crisis, income per capita, index fund, inventory management, junk bonds, Long Term Capital Management, low interest rates, managed futures, mortgage debt, Nixon triggered the end of the Bretton Woods system, passive investing, purchasing power parity, risk free rate, risk-adjusted returns, Robert Shiller, Ronald Reagan, Sharpe ratio, Silicon Valley, stocks for the long run, superstar cities, survivorship bias, transaction costs, Vanguard fund

So it is the month of January which is the key to the small-cap premium. This January effect has also seemed to diminish more recently. Since 1981, the small cap premium in January has diminished from 5.27 percent per month to 1.74 percent per month. That’s still a hefty premium for a one month return, though transaction costs in the small-cap space may be large enough to prevent abnormal returns for investors seeking to exploit this premium. This chapter will not focus on the January effect per se since this is not a book about short-term trading strategies. Instead, we will ask whether the small-cap premium continues to exist and, if so, how this should influence P1: a/b c03 P2: c/d QC: e/f JWBT412-Marston T1: g December 8, 2010 17:27 Printer: Courier Westford Small-Cap Stocks 43 portfolio allocations.

In the long run, there is little profit or loss from selling currencies in the forward market (which an investor would do in order to hedge the currency risk). A policy of selling French francs to hedge the currency exposure on French stock investments, for example, made an average profit of minus 0.7 percent per year between 1979 and June 2009 ignoring transactions costs. The same policy applied to Deutschemarks made an average profit of only +0.5 percent per year.10 It should not be surprising that returns are so small, since consistently high profits would be soon eliminated by additional speculators joining in the game. A more surprising result is shown in Table 5.4.

Investors do not have to worry about foreign currency transactions and custody remains in the United States. To what extent is the American investor getting true foreign diversification by investing in ADRs? First, it’s important to recognize that arbitrage will ensure that the returns on ADRs and on the underlying foreign stocks are identical except for transactions costs. Second, there are now almost 3000 ADRs available in the U.S. market for firms from virtually every country that has an active stock market, so it’s possible to invest in a wide variety of foreign stocks through ADRs. To examine pricing of ADRs, consider first the case of liquid stocks that are widely traded by investors.


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To Save Everything, Click Here: The Folly of Technological Solutionism by Evgeny Morozov

"World Economic Forum" Davos, 3D printing, algorithmic bias, algorithmic trading, Amazon Mechanical Turk, An Inconvenient Truth, Andrew Keen, augmented reality, Automated Insights, behavioural economics, Berlin Wall, big data - Walmart - Pop Tarts, Buckminster Fuller, call centre, carbon footprint, Cass Sunstein, choice architecture, citizen journalism, classic study, cloud computing, cognitive bias, creative destruction, crowdsourcing, data acquisition, Dava Sobel, digital divide, disintermediation, Donald Shoup, driverless car, East Village, en.wikipedia.org, Evgeny Morozov, Fall of the Berlin Wall, Filter Bubble, Firefox, Francis Fukuyama: the end of history, frictionless, future of journalism, game design, gamification, Gary Taubes, Google Glasses, Ian Bogost, illegal immigration, income inequality, invention of the printing press, Jane Jacobs, Jean Tirole, Jeff Bezos, jimmy wales, Julian Assange, Kevin Kelly, Kickstarter, license plate recognition, lifelogging, lolcat, lone genius, Louis Pasteur, machine readable, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, moral panic, Narrative Science, Nelson Mandela, Nicholas Carr, packet switching, PageRank, Parag Khanna, Paul Graham, peer-to-peer, Peter Singer: altruism, Peter Thiel, pets.com, placebo effect, pre–internet, public intellectual, Ray Kurzweil, recommendation engine, Richard Thaler, Ronald Coase, Rosa Parks, self-driving car, Sheryl Sandberg, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Skype, Slavoj Žižek, smart meter, social graph, social web, stakhanovite, Steve Jobs, Steven Levy, Stuxnet, surveillance capitalism, systems thinking, technoutopianism, TED Talk, the built environment, The Chicago School, The Death and Life of Great American Cities, the medium is the message, The Nature of the Firm, the scientific method, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, transaction costs, Twitter Arab Spring, urban decay, urban planning, urban sprawl, Vannevar Bush, warehouse robotics, WikiLeaks, work culture , Yochai Benkler

Shirky’s veneration of Ronald Coase’s theory of the firm—and its accompanying discourse on transaction costs—may seem harder to dismiss, not least because Coase is a Nobel Prize–winning economist. References to Coase pop up regularly in the work of our Internet theorists; in addition to Clay Shirky, Yochai Benkler also draws heavily on Coase to discuss the open-source movement. There is nothing wrong with Coase’s theories per se; in the business context, they offer remarkably useful explanations and have even helped spawn a new branch of economics. But here is the problem: thinking of a Californian start-up in terms of transaction costs is much easier than pulling the same trick for, say, the Iranian society.

While it seems noncontroversial to conclude that cheaper digital technologies might indeed lower most so-called transaction costs in Iran, that insight doesn’t really say much, for unless we know something about Iran’s culture, history, and politics, we know nothing about the contexts in which all these costs have supposedly fallen. Who are the relevant actors? What are the relevant transactions? In the absence of such knowledge about Iran, the natural reflex is to opt for the simplest possible model: imagine a two-way split between the government and the dissidents and then think through how their own transaction costs may have fallen thanks to “the Internet.” This seems like a rather perfunctory way of talking about a rather complex subject.

For much of his theoretical apparatus, Shirky draws on two sources: Susanne Lohmann’s explanation of the 1989 protests in East Germany by means of rational-choice theory (from which Shirky borrows the notion of information cascades) and Ronald Coase’s theory of the firm (from which Shirky borrows the notion of transaction costs). Alas, neither of them is an unambiguously good or neutral guide to understanding digital technologies once we liberate ourselves from Internet-centrism. Like most scholars in the rational-choice tradition, Lohmann—whom Shirky misidentifies as a historian (she’s a political scientist)—doesn’t explain collective action of East Germany by attending to historical and cultural factors or tracing the emergence of new attitudes or ideologies.


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The Market for Force: The Consequences of Privatizing Security by Deborah D. Avant

barriers to entry, continuation of politics by other means, corporate social responsibility, failed state, Global Witness, hiring and firing, independent contractor, information asymmetry, interchangeable parts, Mikhail Gorbachev, military-industrial complex, Nelson Mandela, operational security, Peace of Westphalia, post-Fordism, principal–agent problem, private military company, profit motive, RAND corporation, rent-seeking, rolodex, Seymour Hersh, The Nature of the Firm, trade route, transaction costs

Though contemporary mercenaries attempt to distinguish themselves from the lawless “guns for hire” that ran riot over Africa during the Cold War, their consortium with arms manufacturers, mineral exploiters, and Africa’s authoritarian governments and warlords sustains the militarization of Africa.13 This poses “a mortal danger to 7 8 9 10 11 12 13 Oliver Williamson, “Public and Private Bureaucracies: a Transaction Cost Economic Perspective,” Journal of Law, Economics, and Organization Vol. 15, No. 1 (1999), p. 320. Abdel-Fatau Musah and J. Kayode Fayemi, “Introduction,” in Mercenaries: an African Security Dilemma (London: Pluto, 2000) p. 4. Communication from James Fennell, head of the Africa division of DSL, 29 November 2000.

Building on the Hobbesian supposition that life is “nasty, brutish, and short” in anarchy, economic institutionalists focus on the importance of the state for the control of violence. North, Levi, Olson and others suggest that state monopoly over violence is necessary to move out of anarchy and into a situation where productive activity can take place.18 Transaction cost economics further develops this logic, suggesting that a state can best control violence if it organizes internally to create public bureaucracies.19 Williamson argues that just as hierarchies are sometimes preferable to markets there are conditions under which public bureaucracies are preferable to private firms.

Only by contracting with a “specialist in violence” can people can move beyond the trade-off between peace and prosperity. If the specialists in violence become governments, coercion can be used in productive ways. Robert Bates, Avner Greif, and Smita Singh, “Organizing Violence,” Journal of Conflict Resolution Vol. 46, No. 5 (October 2002): 599–629. Oliver Williamson, “Public and Private Bureaucracies: A Transaction Cost Economics Perspective,” Journal of Law, Economics and Organization, Vol. 15, No. 1 (1999). See Oliver Williamson, Markets and Hierarchies: Analysis and Anti-Trust Implications (New York: Free Press, 1975). See also, R. H. Coase, “The Nature of the Firm,” Economica Vol. 4, No. 16 (November 1937); H.


Mastering Private Equity by Zeisberger, Claudia,Prahl, Michael,White, Bowen, Michael Prahl, Bowen White

Alan Greenspan, asset allocation, backtesting, barriers to entry, Basel III, Bear Stearns, book value, business process, buy low sell high, capital controls, carbon credits, carried interest, clean tech, commoditize, corporate governance, corporate raider, correlation coefficient, creative destruction, currency risk, deal flow, discounted cash flows, disintermediation, disruptive innovation, distributed generation, diversification, diversified portfolio, family office, fixed income, high net worth, impact investing, information asymmetry, intangible asset, junk bonds, Lean Startup, low interest rates, market clearing, Michael Milken, passive investing, pattern recognition, performance metric, price mechanism, profit maximization, proprietary trading, risk tolerance, risk-adjusted returns, risk/return, Savings and loan crisis, shareholder value, Sharpe ratio, Silicon Valley, sovereign wealth fund, statistical arbitrage, time value of money, transaction costs, two and twenty

In some jurisdictions new regulations have made the use of leverage beyond a certain point less economical. 4 Please refer to Chapter 7 Target Valuation for additional information on optimizing the funding structure in a buyout. 5 Debt has been found to make managers risk averse in the face of bankruptcy risk. 6 Please refer to Chapter 9 Deal Structuring and Chapter 10 Transaction Documentation for further details on bank financing and covenants. 7 Please refer to Chapter 12 Securing Management Teams for a detailed example of management incentive structures. 8 Please refer to Chapter 9 Deal Structuring for additional detail on LBO debt instruments. 9 Please refer to Chapter 13 Operational Value Creation for more on attributing operational value-add. 10 The simplified calculation does not include transaction cost on entry or exit. 11 This breakdown does not attribute any of the improvement in multiple and debt paydown to the underlying EBITDA growth. 12 In addition to the three main types of buyouts discussed in this section, various combinations of the three strategies can be employed. For example, in a ‘buy-in management buyout,’ the existing management team is bolstered by new team members and partners with the PE sponsor on an acquisition. 13 Family businesses often use buyouts as a viable succession option. 5 ALTERNATIVE STRATEGIES Funds that invest in venture capital, growth equity and buyout deals constitute the backbone of the private equity (PE) industry.

The SPA sometimes includes provisions that impose financial penalties on the party terminating the agreement, referred to as break-up or break fees in the case of termination by the seller or reverse break-up fees in the case of termination by the buyer. These fees are intended to cover the transaction costs of the party not terminating the transaction. DEBT COMMITMENT LETTERS: Debt commitment letters are typically addressed to a buyout fund’s acquisition vehicle by the lead arranger3 of a leveraged buyout (LBO)’s debt financing. Securing a debt commitment letter is often required before a seller will sign an SPA to provide funding certainty for the seller.

Only 3% of LPs surveyed decided to discontinue after having co-invested in the past (Exhibit 21.2). Exhibit 21.2 Breakdown of LPs by Current Co-investment Activiy Source: Preqin A range of attractions are cited by LPs engaging in co-investing. HIGHER NET RETURNS DUE TO LOWER FEES: Historically, LPs have paid no fees on co-investments (but naturally shared transaction costs pro rata with other equity investors). Yet with the number of co-investments rapidly increasing in recent years, some sort of compensation is often used to entice GPs into sharing deal flow or to stand out from other LPs. This can take the form of one-time equity arrangement fees (analogous to a lead bank arranging debt financing), management fees and even carried interest.


pages: 454 words: 134,482

Money Free and Unfree by George A. Selgin

Alan Greenspan, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, centralized clearinghouse, Charles Lindbergh, credit crunch, Credit Default Swap, crony capitalism, disintermediation, Dutch auction, fear of failure, fiat currency, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, foreign exchange controls, Fractional reserve banking, German hyperinflation, Glass-Steagall Act, Hyman Minsky, incomplete markets, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, large denomination, liquidity trap, Long Term Capital Management, low interest rates, market microstructure, Money creation, money market fund, moral hazard, Network effects, Northern Rock, oil shock, Paul Samuelson, Phillips curve, plutocrats, price stability, profit maximization, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, Robert Gordon, Robert Solow, Savings and loan crisis, savings glut, seigniorage, special drawing rights, The Great Moderation, the payments system, too big to fail, transaction costs, Tyler Cowen, unorthodox policies, vertical integration, Y2K

Bad money can also drive out good money in the absence of legal penalties. This occurs when prices happen (for reasons unrelated to legal sanctions) to be expressed in terms of bad money, and high transactions costs of nonpar exchange make it prohibitively costly to transact with good money. This variant of Gresham’s law may be called Rolnick and Weber’s law. More generally, Rolnick and Weber’s law asserts that, if there are high market-based transactions costs of nonpar exchange, par monies will drive nonpar monies out of circulation (Rolnick and Weber 1986). Was the survival of state bank notes after the passage of the national banking acts a manifestation of either Gresham’s law or Rolnick and Weber’s law?

If domestic money is being frequently debased, traders quoting prices in weight units would naturally favor more stable foreign coins—less frequently requiring weighing and assaying—as their medium of exchange. By contrast, traders who consider switching from a domestic to an alternative fiat currency as a medium of exchange find that there is no simple common metric. A network effect associated with using the common unit of account protects the incumbent currency by imposing high transactions costs on those who would switch first (Selgin 2003). Acceptance of an alternative currency in transactions presupposes familiarity with its exchange value, but until its acceptance is widespread, or at least until the domestic unit has become thoroughly unreliable as a unit of account (as in a high inflation), there is scant individual incentive to track the exchange rate between the incumbent and alternative currencies.

Therefore, freedom of note issue is necessary if market price signals are to be relied upon to stamp out a contagion. A secondary bank-note market is typically portrayed as involving professional non-bank-note “brokers” as well as bank-note “reporters”—weekly publications with information on note discounts. If brokers do not request any risk-related discount (beyond transaction costs) to redeem a bank’s notes, holders of those notes can rest assured that the bank is solvent and will not have any incentive to test its solvency by staging a run on it. On the other hand, holders of notes trading at a discount do not need to run, either, but can “walk” to a broker who charges them for assuming the risk that the notes’ issuers may fail.


pages: 295 words: 66,824

A Mathematician Plays the Stock Market by John Allen Paulos

Alan Greenspan, AOL-Time Warner, Benoit Mandelbrot, Black-Scholes formula, book value, Brownian motion, business climate, business cycle, butter production in bangladesh, butterfly effect, capital asset pricing model, confounding variable, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Donald Trump, double entry bookkeeping, Elliott wave, endowment effect, equity risk premium, Erdős number, Eugene Fama: efficient market hypothesis, four colour theorem, George Gilder, global village, greed is good, index fund, intangible asset, invisible hand, Isaac Newton, it's over 9,000, John Bogle, John Nash: game theory, Larry Ellison, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, mental accounting, Myron Scholes, Nash equilibrium, Network effects, passive investing, Paul Erdős, Paul Samuelson, Plato's cave, Ponzi scheme, power law, price anchoring, Ralph Nelson Elliott, random walk, Reminiscences of a Stock Operator, Richard Thaler, risk free rate, Robert Shiller, short selling, six sigma, Stephen Hawking, stocks for the long run, survivorship bias, transaction costs, two and twenty, ultimatum game, UUNET, Vanguard fund, Yogi Berra

Technical Strategies and Blackjack Most academic financial experts believe in some form of the random-walk theory and consider technical analysis almost indistinguishable from a pseudoscience whose predictions are either worthless or, at best, so barely discernibly better than chance as to be unexploitable because of transaction costs. I’ve always leaned toward this view, but I’ll reserve my more nuanced judgment for later in the book. In the meantime, I’d like to point out a parallel between market strategies such as technical analysis in one of its many forms and blackjack strategies. (There are, of course, great differences too.)

Opportunities to make an excess profit by utilizing technical rules or fundamental analyses, so the story continues, disappear before they can be fully exploited, and investors who pursue them will see their excess profits shrink to zero, especially after taking into account brokers’ fees and other transaction costs. Once again, it’s not that subscribers to technical or fundamental analysis won’t make money; they generally will. They just won’t make more than, say, the S&P 500. (That exploitable opportunities tend to gradually disappear is a general phenomenon that occurs throughout economics and in a variety of fields.

An expectation of a regression to the mean is not the whole story, of course, but there are dozens of studies suggesting that value investing, generally over a three-to-five year period, does result in better rates of return than, say, growth investing. It’s important to remember, however, that the size of the effect varies with the study (not surprisingly, some studies find zero or a negative effect), transaction costs can eat up some or all of it, and competing investors tend to shrink it over time. In chapter 6 I’ll consider the notion of risk in general, but there is a particular sort of risk that may be relevant to value stocks. Invoking the truism that higher risks bring greater returns even in an efficient market, some have argued that value companies are risky because they’re so colorless and easily ignored that their stock prices must be lower to compensate!


pages: 296 words: 66,815

The AI-First Company by Ash Fontana

23andMe, Amazon Mechanical Turk, Amazon Web Services, autonomous vehicles, barriers to entry, blockchain, business intelligence, business process, business process outsourcing, call centre, Charles Babbage, chief data officer, Clayton Christensen, cloud computing, combinatorial explosion, computer vision, crowdsourcing, data acquisition, data science, deep learning, DevOps, en.wikipedia.org, Geoffrey Hinton, independent contractor, industrial robot, inventory management, John Conway, knowledge economy, Kubernetes, Lean Startup, machine readable, minimum viable product, natural language processing, Network effects, optical character recognition, Pareto efficiency, performance metric, price discrimination, recommendation engine, Ronald Coase, Salesforce, single source of truth, software as a service, source of truth, speech recognition, the scientific method, transaction costs, vertical integration, yield management

AI-FIRST AGGREGATION* The large amount of data flowing freely around the world creates an opportunity: aggregate that data, curate it with intelligent systems, distribute it widely to generate more data, and so on. The opportunity to aggregate arises as we generate lots of data. The low transaction costs on the Internet mean it’s easier to start using products—just enter a credit card number online—so people adopt more products and generate more data. The low distribution costs afforded by the Internet—just download the app—make it easier to sell products, allowing broad appeal and the collation of more usage data.

For example, an AI-First application that gets tickets from the software program JIRA (developed by the Australian software company Atlassian Corporation) and learns how to route those tickets to the right engineers can both aggregate data and sell through the Atlassian marketplace. Incumbents, however, cannot piggyback so they have to spend money on sales and marketing to get their products to customers. Zero transaction costs. AI-First aggregators operate their systems on another vendor’s infrastructure. Incumbents are effectively the database from which the AI-First product pulls data. A good example is a software application that plugs into Salesforce, the cloud-based CRM. Applications can plug into and run within the Salesforce application, pulling data and processing functions on the computing infrastructure running Salesforce, effectively reducing the marginal cost of transacting data in the AI-First product to zero.

., 6 teams in proof of concept phase, 60 see also AI-First teams telecommunications industry, 250–51 telephones mobile, 113 iPhone, 253 networks, 23–25 templates, 171 temporal leverage, 3 threshold logic unit (TLU), 5 ticker data, 120–21 token-based incentives, 109–10 tools, 2–3, 93–97 training data, 199 transactional pricing, 237, 280 transaction costs, 243 transfer learning, 147–48 true and false, 204–6 Turing, Alan, 5 23andMe, 112 Twilio, 87 uncertainty sampling, 96 unit analysis, 213–14 United Nations, 250 unsupervised machine learning, 53, 147–48, 281 Upwork, 99 usability, 255–56 usage-based pricing, 237–38, 281 usage metrics, 209 user interface (UI), 89, 159, 281 utility of network effects, 42 of products, 35–36 validation data, 199 value chain, 18–19, 281 value proposition, 59 values, missing, 178 variable importance plots, 53, 281 variance reduction, 96 Veeva Systems, 212 vendors, 73, 161 data, prices charged by, 73 independent software, 161, 248, 276 lock-in and, 247–48 venture capital, 230 veracity of data, 75 versioning, 169–70, 281 vertical integration, 226–37, 239, 244, 252, 281 vertical products, 210–12, 282 VMWare, 248 waterfall charts, 282 Web crawlers, 115–16, 282 weights, 150, 281 workflow applications, 84–86, 253, 259, 282 workflow-first versus integrations-first companies, 88–89 yield management systems, 42 Zapier, 87 Zendesk, 233 zettabyte, 8, 282 Zetta Venture Partners, 8–9 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z ABOUT THE AUTHOR Ash Fontana became one of the most recognized startup investors in the world after launching online investing at AngelList.


pages: 326 words: 106,053

The Wisdom of Crowds by James Surowiecki

Alan Greenspan, AltaVista, Andrei Shleifer, Apollo 13, asset allocation, behavioural economics, Cass Sunstein, classic study, congestion pricing, coronavirus, Daniel Kahneman / Amos Tversky, experimental economics, Frederick Winslow Taylor, George Akerlof, Great Leap Forward, Gregor Mendel, Howard Rheingold, I think there is a world market for maybe five computers, interchangeable parts, Jeff Bezos, John Bogle, John Meriwether, Joseph Schumpeter, knowledge economy, lone genius, Long Term Capital Management, market bubble, market clearing, market design, Monkeys Reject Unequal Pay, moral hazard, Myron Scholes, new economy, offshore financial centre, Picturephone, prediction markets, profit maximization, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, Robert Shiller, Ronald Coase, Ronald Reagan, seminal paper, shareholder value, short selling, Silicon Valley, South Sea Bubble, tacit knowledge, The Nature of the Firm, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Toyota Production System, transaction costs, ultimatum game, vertical integration, world market for maybe five computers, Yogi Berra, zero-sum game

It takes work to find the right people, and to haggle with them over how much you’ll pay them. It takes work to ensure that everyone’s doing what they promised they would do. And it takes work to make sure, after everything’s done, that everyone gets what’s coming to them. These are all what Coase called “transaction costs,” which include “search and information costs, bargaining and decision costs, policing and enforcement costs.” A well-run company reduces these costs. If your e-mail goes on the fritz, it’s easier and faster to call the office tech guy instead of some outside company. And it’s often smarter for a company to hire full-time employees who are always available to work than it is to go hunting for talented people every time a new project arises.

But the company thinks its chances of publishing interesting books are better if it leaves the door open to lots of different writers, and so it’s willing to endure the hassle of having to sign each book on a case-by-case basis. (It’s also a hassle for writers, of course, who have to write and sell books on a case-by-case basis. One way publishers and authors try to reduce the hassle, which is to say, reduce transaction costs, is by signing multibook deals.) Although companies typically don’t think of it in this way, what they’re really wrestling with when they think about outsourcing is the costs and benefits of collective action. Doing things in-house means, in some sense, cutting themselves off from a host of diverse alternatives, any of which could help them do business better.

This model allows people to be handpicked for their diverse abilities (planning, safecracking, explosives, etc.), so that the group can have exactly what it needs for the job. And the one-off nature of the project ensures that everyone on the team has an incentive to perform well. The problems with this model, though, are precisely those that Ronald Coase had in mind when he talked about transaction costs. It takes a lot of work to put the group together. It’s difficult to ensure that people are working in the group’s interest and not their own. And when there’s a lack of trust between the members of the group (which isn’t surprising given that they don’t really know each other), considerable energy is wasted trying to determine each other’s bona fides.


pages: 519 words: 148,131

An Empire of Wealth: Rise of American Economy Power 1607-2000 by John Steele Gordon

accounting loophole / creative accounting, Alan Greenspan, bank run, banking crisis, Bretton Woods, British Empire, business cycle, buttonwood tree, California gold rush, Charles Babbage, clean water, collective bargaining, Corn Laws, Cornelius Vanderbilt, corporate governance, cotton gin, cuban missile crisis, disintermediation, double entry bookkeeping, failed state, Fairchild Semiconductor, financial independence, flying shuttle, Ford Model T, Frederick Winslow Taylor, full employment, Glass-Steagall Act, global village, Ida Tarbell, imperial preference, industrial research laboratory, informal economy, interchangeable parts, invisible hand, Isaac Newton, it's over 9,000, Jacquard loom, James Hargreaves, James Watt: steam engine, joint-stock company, joint-stock limited liability company, junk bonds, lone genius, Louis Pasteur, low interest rates, margin call, Marshall McLuhan, means of production, megaproject, Menlo Park, Mikhail Gorbachev, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, New Urbanism, postindustrial economy, price mechanism, Ralph Waldo Emerson, RAND corporation, rent control, rent-seeking, reserve currency, rolodex, Ronald Reagan, Savings and loan crisis, spinning jenny, Suez canal 1869, The Wealth of Nations by Adam Smith, three-masted sailing ship, trade route, transaction costs, transcontinental railway, undersea cable, vertical integration, Yom Kippur War

It had taken three weeks and cost $120 to send a ton of flour from Buffalo to New York City before the canal, triple the cost of the flour itself. Soon it cost only $6 and took eight days. Transportation is what economists call a “transaction cost,” one that adds to the cost of an item without adding to its intrinsic value. Advertising, sales, and packaging are all examples of transaction costs. The lower these transaction costs, obviously, the lower the final price, and thus the higher the demand. When a transaction cost is lowered as dramatically as the Erie Canal lowered the cost of the produce of the Middle West, delivered to New York City, the consequences will always be far-reaching.

The railroad business, in decline for most of the century, began to revive, and pointless inefficiencies—most trucks had to return to their place of origin empty, for instance—were quickly drained out of the transportation business. In 1980 transportation amounted to about 15 percent of GDP. By the 1990s it had dropped to 10 percent. Since transportation is what economists call a transaction cost—necessary expenses that do not add to the intrinsic value of the product, such as advertising and packaging—this was a pure gain for the economy as a whole. The most important deregulation of the 1970s was on Wall Street. The New York Stock Exchange had begun as an agreement among brokers to set minimum prices for stock trading, and commissions had been fixed ever since.


pages: 538 words: 145,243

Behemoth: A History of the Factory and the Making of the Modern World by Joshua B. Freeman

anti-communist, British Empire, Capital in the Twenty-First Century by Thomas Piketty, Charles Babbage, classic study, clean water, collective bargaining, company town, Corn Laws, corporate raider, cotton gin, deindustrialization, Deng Xiaoping, disruptive innovation, driverless car, en.wikipedia.org, factory automation, flying shuttle, Ford Model T, Ford paid five dollars a day, Frederick Winslow Taylor, global supply chain, Great Leap Forward, Herbert Marcuse, high-speed rail, household responsibility system, indoor plumbing, interchangeable parts, invisible hand, James Hargreaves, joint-stock company, knowledge worker, mass immigration, means of production, mittelstand, Naomi Klein, new economy, On the Economy of Machinery and Manufactures, Panopticon Jeremy Bentham, Pearl River Delta, post-industrial society, Ralph Waldo Emerson, rising living standards, Ronald Reagan, scientific management, Shenzhen special economic zone , Silicon Valley, special economic zone, spinning jenny, Steve Jobs, strikebreaker, techno-determinism, technoutopianism, the built environment, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tim Cook: Apple, transaction costs, union organizing, Upton Sinclair, urban planning, Vanguard fund, vertical integration, women in the workforce, working poor, Works Progress Administration, zero-sum game

Anthony Calladine, “Lombe’s Mill: An Exercise in Reconstruction,” Industrial Archeology Review XVI, 1 (Autumn 1993), 82, 86. 3.Calladine, “Lombe’s Mill,” 82, 89; William Henry Chaloner, People and Industries (London, Frank Cass and Co., Ltd., 1963), 14–15. An 1891 fire destroyed most of the building, which was reconstructed on a smaller scale. It now houses the Derby Silk Mill museum. 4.S. R. H. Jones, “Technology, Transaction Costs, and the Transition to Factory Production in the British Silk Industry, 1700–1870,” Journal of Economic History XLVII (1987), 75; Chaloner, People and Industries, 9–18; Calladine, “Lombe’s Mill,” 82, 87–88; R. B. Prosser and Susan Christian, “Lombe, Sir Thomas (1685–1739),” rev. Maxwell Craven, Susan Christian, Oxford Dictionary of National Biography (Oxford: Oxford University Press, 2004); online ed., Jan. 2008, http://www.oxforddnb.com/view/article/16956. 5.John Guardivaglio, one of the Italian workers who had come back with John Lombe, helped set up the mill near Manchester.

., Jan. 2008, http://www.oxforddnb.com/view/article/16956. 5.John Guardivaglio, one of the Italian workers who had come back with John Lombe, helped set up the mill near Manchester. Tram could be made from raw silk imported from Persia, easier to get than the higher-quality Italian or Chinese silk needed for organzine. Calladine, “Lombe’s Mill,” 87, 96–97; Berg, Age of Manufactures, 202–03; Jones, “Technology, Transaction Costs, and the Transition to Factory Production,” 77. 6.Daniel Defoe, A Tour Thro’ the Whole Island of Great Britain, 3rd. ed., vol. III (London: J. Osborn, 1742), 67; Charles Dickens, Hard Times for These Times ([1854] London: Oxford University Press, 1955), 7, 1. 7.James Boswell, The Life of Samuel Johnson, vol.

Chapman, “Financial Restraints on the Growth of Firms in the Cotton Industry, 1790–1850,” Textile History 5 (1974), 50–69; Berg, Age of Manufactures, 182. 18.Hills, “Hargreaves, Arkwright and Crompton,” 118–23; Berg, Age of Manufactures, 236; Fitton and Wadsworth, The Strutts and the Arkwrights, 61–68, 76–78, 94–97; Adam Menuge, “The Cotton Mills of the Derbyshire Derwent and Its Tributaries,” Industrial Archeology Review XVI (1) (Autumn 1993), 38. 19.Berg, Age of Manufactures, 236, 239, 244, 248, 258; George Unwin, Samuel Oldknow and the Arkwrights (Manchester: Manchester University Press, 1924), 30–32, 71, 124–25; Landes, Unbound Prometheus, 85; E. P. Thompson, The Making of the English Working Class ([1963] London: Pelican Books, 1968), 327, 335; Jones, “Technology, Transaction Costs, and the Transition to Factory Production,” 89–90. 20.Chaloner, People and Industries, 14–15; Fitton and Wadsworth, The Strutts and the Arkwrights, 98–99, 192–95, 224–25. 21.Small four-spindle, hand-powered spinning frames, built from Arkwright’s plans for a demonstration model, can be seen at the museums in Cromford and Belper.


pages: 524 words: 146,798

Anarchy State and Utopia by Robert Nozick

distributed generation, Herbert Marcuse, invisible hand, Jane Jacobs, Kenneth Arrow, laissez-faire capitalism, Machinery of Freedom by David Friedman, means of production, Menlo Park, moral hazard, night-watchman state, Norman Mailer, Pareto efficiency, price discrimination, prisoner's dilemma, rent control, risk tolerance, Ronald Coase, school vouchers, The Death and Life of Great American Cities, The Nature of the Firm, transaction costs, Yogi Berra

However, the process of actually carrying out the payments and ascertaining the precise risk imposed upon others and the appropriate compensation would seem to involve enormous transaction costs. Some efficiencies easily can be imagined (for example, keep central records for all, with net payments made every n months), but in the absence of some neat institutional device it remains enormously cumbersome. Because great transaction costs may make the fairest alternative impracticable, one may search for other alternatives, such as Fried’s risk pool. These alternatives will involve constant minor unfairness and classes of major ones.

But such reasons sometimes will hold, as well, where prior identification and communication, though possible, are more costly even than the great benefits of the act. Prohibiting such unconsented to acts would entail forgoing their benefits, as in the cases where negotiation is impossible. The most efficient policy forgoes the fewest net beneficial acts; it allows anyone to perform an unfeared action without prior agreement, provided the transaction costs of reaching a prior agreement are greater, even by a bit, than the costs of the posterior compensation process. (The party acted upon is compensated for his involvement in the process of compensation, as well as for the act itself.) But efficiency considerations are insufficient to justify unpenalized boundary crossings for marginal benefits, even if the compensation is more than full so that the benefits of exchange do not redound solely to the boundary crosser.

Recall the additional considerations against permitting boundary crossings with compensation mentioned earlier (p. 71). To say that such acts should be allowed if and only if their benefits are “great enough” is of little help in the absence of some social mechanism to decide this. The three considerations of fear, division of the benefits of exchange, and transaction costs delimit our area; but because we have not yet found a precise principle involving the last and the considerations mentioned earlier (p. 71), they do not yet triangulate a solution in all its detail. RISK We noted earlier that a risky action might present too low a probability of harm to any given person to cause him worry or fear.


pages: 565 words: 151,129

The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism by Jeremy Rifkin

3D printing, active measures, additive manufacturing, Airbnb, autonomous vehicles, back-to-the-land, benefit corporation, big-box store, bike sharing, bioinformatics, bitcoin, business logic, business process, Chris Urmson, circular economy, clean tech, clean water, cloud computing, collaborative consumption, collaborative economy, commons-based peer production, Community Supported Agriculture, Computer Numeric Control, computer vision, crowdsourcing, demographic transition, distributed generation, DIY culture, driverless car, Eben Moglen, electricity market, en.wikipedia.org, Frederick Winslow Taylor, Free Software Foundation, Garrett Hardin, general purpose technology, global supply chain, global village, Hacker Conference 1984, Hacker Ethic, industrial robot, informal economy, information security, Intergovernmental Panel on Climate Change (IPCC), intermodal, Internet of things, invisible hand, Isaac Newton, James Watt: steam engine, job automation, John Elkington, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Julian Assange, Kickstarter, knowledge worker, longitudinal study, low interest rates, machine translation, Mahatma Gandhi, manufacturing employment, Mark Zuckerberg, market design, mass immigration, means of production, meta-analysis, Michael Milken, mirror neurons, natural language processing, new economy, New Urbanism, nuclear winter, Occupy movement, off grid, off-the-grid, oil shale / tar sands, pattern recognition, peer-to-peer, peer-to-peer lending, personalized medicine, phenotype, planetary scale, price discrimination, profit motive, QR code, RAND corporation, randomized controlled trial, Ray Kurzweil, rewilding, RFID, Richard Stallman, risk/return, Robert Solow, Rochdale Principles, Ronald Coase, scientific management, search inside the book, self-driving car, shareholder value, sharing economy, Silicon Valley, Skype, smart cities, smart grid, smart meter, social web, software as a service, spectrum auction, Steve Jobs, Stewart Brand, the built environment, the Cathedral and the Bazaar, the long tail, The Nature of the Firm, The Structural Transformation of the Public Sphere, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, Tragedy of the Commons, transaction costs, urban planning, vertical integration, warehouse automation, Watson beat the top human players on Jeopardy!, web application, Whole Earth Catalog, Whole Earth Review, WikiLeaks, working poor, Yochai Benkler, zero-sum game, Zipcar

For example, as an author, I sell my intellectual work product to a publisher in return for an advance and future royalties on my book. The book then goes through several hands on the way to the end buyer, including an outside copyeditor, compositor, printer, as well as wholesalers, distributors, and retailers. Each party in this process is marking up the transaction costs to include a profit margin large enough to justify their participation. But what if the marginal cost of producing and distributing a book plummeted to near zero? In fact, it’s already happening. A growing number of authors are writing books and making them available at a very small price, or even for free, on the Internet—bypassing publishers, editors, printers, wholesalers, distributors, and retailers.

The fixed costs of bringing online a distributed IoT infrastructure, while considerable, are far less than those required to build out and maintain the more centralized technology platforms of the First and Second Industrial Revolutions. While fixed costs are less, the Internet of Things also brings down the marginal cost of communication, energy, and logistics in the production and distribution of goods and services. By eliminating virtually all of the remaining middlemen who mark up the transaction costs at every stage of the value chain, small- and medium-sized enterprises—especially cooperatives and other nonprofit businesses—and billions of prosumers can share their goods and services directly with one another on the Collaborative Commons—at near zero marginal cost. The reduction in both fixed and marginal costs dramatically reduces the entry costs of creating new businesses in distributed peer-to-peer networks.

The convergence of print and renewable energies had the effect of democratizing both literacy and power, posing a formidable challenge to the hierarchical organization of feudal life. The synergies created by the print revolution and wind and water power, along with steady improvements in road and river transport, sped up exchange and decreased transaction costs, making possible trade in larger regional markets. The new communication/energy matrix not only shortened distances and quickened time, bringing diverse people together in joint economic pursuits after centuries of isolation, but in so doing, also encouraged a new openness to others and the beginning of a more cosmopolitan frame of mind.


pages: 267 words: 72,552

Reinventing Capitalism in the Age of Big Data by Viktor Mayer-Schönberger, Thomas Ramge

accounting loophole / creative accounting, Air France Flight 447, Airbnb, Alvin Roth, Apollo 11, Atul Gawande, augmented reality, banking crisis, basic income, Bayesian statistics, Bear Stearns, behavioural economics, bitcoin, blockchain, book value, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, Cass Sunstein, centralized clearinghouse, Checklist Manifesto, cloud computing, cognitive bias, cognitive load, conceptual framework, creative destruction, Daniel Kahneman / Amos Tversky, data science, Didi Chuxing, disruptive innovation, Donald Trump, double entry bookkeeping, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Evgeny Morozov, flying shuttle, Ford Model T, Ford paid five dollars a day, Frederick Winslow Taylor, fundamental attribution error, George Akerlof, gig economy, Google Glasses, Higgs boson, information asymmetry, interchangeable parts, invention of the telegraph, inventory management, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, job satisfaction, joint-stock company, Joseph Schumpeter, Kickstarter, knowledge worker, labor-force participation, land reform, Large Hadron Collider, lone genius, low cost airline, low interest rates, Marc Andreessen, market bubble, market design, market fundamentalism, means of production, meta-analysis, Moneyball by Michael Lewis explains big data, multi-sided market, natural language processing, Neil Armstrong, Network effects, Nick Bostrom, Norbert Wiener, offshore financial centre, Parag Khanna, payday loans, peer-to-peer lending, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price mechanism, purchasing power parity, radical decentralization, random walk, recommendation engine, Richard Thaler, ride hailing / ride sharing, Robinhood: mobile stock trading app, Sam Altman, scientific management, Second Machine Age, self-driving car, Silicon Valley, Silicon Valley startup, six sigma, smart grid, smart meter, Snapchat, statistical model, Steve Jobs, subprime mortgage crisis, Suez canal 1869, tacit knowledge, technoutopianism, The Future of Employment, The Market for Lemons, The Nature of the Firm, transaction costs, universal basic income, vertical integration, William Langewiesche, Y Combinator

As more customers bank online and on mobile devices, banks no longer need a comprehensive branch network or as many bank clerks and tellers. Actions to reduce the cost per transaction, whether for investment management, lending, or payment follow. As discount brokerage Charles Schwab demonstrated in the 1970s and 1980s, if transaction costs are sufficiently low, money can still be made even with reduced fees. But in the twenty-first century, banks aren’t competing against Charles Schwab–type firms. Instead they face a new generation of start-ups that are relentlessly utilizing digital technology to extract insight from data and provide services at rock-bottom prices.

—Henning Kagermann, former CEO of SAP and president of Acatech at the National Academy of Science and Engineering “This refreshingly optimistic book, full of fascinating examples, shows how the digital age can lead to a future of data-rich markets that empower individuals and improve our lives in a diverse and inclusive society.” —Urs Gasser, professor and executive director, Berkman Klein Center for Internet & Society, Harvard University “For a generation, information technology has progressively driven down transaction-costs and displaced a universal tradeoff between richness and reach. This landmark book takes that logic to an entirely new plane, where the richness of data merges with the open and unbounded reach of markets. The possibility of data-rich markets is a vision that should challenge and inspire every corporate strategist and public policy maker.”

Critics of fair-value accounting: For a discussion and critical analysis about the pros and cons of the argument, see Christian Laux and Christian Leuz, “Did Fair-Value Accounting Contribute to the Financial Crisis?” Journal of Economic Perspectives 24 (2010), 93–118. shift in focus from collection to use: See, e.g., Fred H. Cate and Viktor Mayer-Schönberger, “Notice and Consent in a World of Big Data,” International Data Privacy Law 3 (2013), 67–73; Kirsten E. Martin, “Transaction Costs, Privacy, and Trust: The Laudable Goals and Ultimate Failure of Notice and Choice to Respect Privacy Online,” First Monday 18, no. 12-2 (2013), http://firstmonday.org/ojs/index.php/fm/article/view/4838/3802; Alessandro Mantelero, “The Future of Consumer Data Protection in the E.U. Rethinking the ‘Notice and Consent’ Paradigm in the New Era of Predictive Analytics,” Computer Law and Security Review 30 (2014), 643; Joel R.


pages: 193 words: 63,618

The Fair Trade Scandal: Marketing Poverty to Benefit the Rich by Ndongo Sylla

"there is no alternative" (TINA), British Empire, carbon footprint, corporate social responsibility, David Ricardo: comparative advantage, deglobalization, degrowth, Doha Development Round, Food sovereignty, global value chain, illegal immigration, income inequality, income per capita, invisible hand, Joseph Schumpeter, labour mobility, land reform, market fundamentalism, mass immigration, means of production, Mont Pelerin Society, Naomi Klein, non-tariff barriers, offshore financial centre, open economy, Philip Mirowski, plutocrats, price mechanism, purchasing power parity, Ronald Reagan, Scientific racism, selection bias, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, transatlantic slave trade, trickle-down economics, vertical integration, Washington Consensus, zero-sum game

However, the first assumption is not acceptable for a movement concerned with sustainable working conditions, whereas the second is simply a parameter beyond the scope of the movement. The second answer consists in reducing transaction costs. Here again there are macroeconomic and institutional considerations that curb the determination and the margin for manoeuvre of producer organisations. Indeed, the level of transaction costs is influenced by the economic development level reached by countries. Generally speaking, they are higher among poor countries than among rich ones (World Bank, 2010b and its Logistics Performance Index).

The notion of ‘efficiency’ enjoys such a status in the paradigm of ‘sustainable social economy’ in its FT version. Indeed, in the book written by the two co-founders of Fairtrade, numerous sections advocate in favour of the increased efficiency of producers in the South. For instance, one can read: Fair Trade should suggest a market structure that reduces transaction costs as much as possible. Inefficiency leads to higher costs, and therefore, loss of markets. (Roozen and van der Hoff, 2002: 245) Fair Trade does not encourage inefficient production by suggesting a protected market. (Roozen and van der Hoff, 2002: 247) Or again: Fair Trade is full-fledged trade and must therefore adapt to the key components of the market as a whole: efficiency and quality, financial 88 Sylla T02779 01 text 88 28/11/2013 13:04 the free market as a solution to poverty flexibility and the use of appropriate techniques are the guarantees of an environmentally sound production model and of long-term economic policy.


Where Does Money Come From?: A Guide to the UK Monetary & Banking System by Josh Ryan-Collins, Tony Greenham, Richard Werner, Andrew Jackson

bank run, banking crisis, banks create money, Basel III, Big bang: deregulation of the City of London, book value, Bretton Woods, business cycle, capital controls, cashless society, central bank independence, credit crunch, currency risk, double entry bookkeeping, en.wikipedia.org, eurozone crisis, fiat currency, financial innovation, fixed income, floating exchange rates, Fractional reserve banking, full employment, global reserve currency, Goodhart's law, Hyman Minsky, inflation targeting, interest rate derivative, interest rate swap, Joseph Schumpeter, low skilled workers, market clearing, market design, market friction, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Northern Rock, offshore financial centre, Post-Keynesian economics, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, Real Time Gross Settlement, reserve currency, Ronald Reagan, seigniorage, special drawing rights, the payments system, trade route, transaction costs

As cash became less and less important as a medium of payment in relation to demand deposits that could easily be moved around with the use of debit cards or electronic transfers, so the macro-economic importance of the banking system as the main creator of new money in the economy increased.112 As the European Central Bank stated in 2000: At the beginning of the 20th century almost the totality of retail payments were made in central bank money. Over time, this monopoly came to be shared with commercial banks, when deposits and their transfer via checks and giros became widely accepted. Banknotes and commercial bank money became fully interchangeable payment media that customers could use according to their needs. While transaction costs in commercial bank money were shrinking, cashless payment instruments became increasingly used, at the expense of banknotes.113 Today virtually all (most estimates are between 97 to 98 per cent) money in circulation is commercial bank money.114 As shown in Figure 7, its growth has been exponential.

As new kinds of financial institutions – secondary banks (see section 3.6.3) – began lending aggressively, the Bank decided that rather than try to regulate the quantity of credit provided by the banking system as a whole, it would attempt to influence the price of credit. The price or cost of credit is the interest rate charged on it when it is lent out. This makes sense in a world of perfect information, complete and competitive markets, flexible prices, zero transaction costs, and utility-maximising agents, which are the conditions required for markets to clear, or reach equilibrium. In such a world, higher interest rates should lead to a reduction in the demand for credit and vice versa, as the credit market, like all markets, would be in equilibrium. Every commercial bank may need to borrow reserves and cash from the central bank, so by changing the rate of interest charged on central bank reserves, the Bank of England can, in theory, influence the demand for loans from banks, as banks will pass on this change in interest rate to customers.

In 2008, the volume of WIR-denominated trade was 1.5 billion Swiss francs.43 Evaluation of the system suggests it has a stabilising, counter-cyclical effect on the Swiss economy, as businesses use it more during recessions.44 In such ‘mutual credit’ systems, credit is linked directly to the productive or spare capacity of the individuals or businesses involved as credits within the system are backed by delivery of goods and services by members. Developments in technology have significantly reduced the transaction costs involved in such complementary currencies. Some thinkers have suggested encouraging their development could increase the resilience of a financial system that has become overly dependent on the type of state-monopoly, debt-based money that has been described and analysed consistently throughout Where Does Money Come From?


pages: 424 words: 115,035

How Will Capitalism End? by Wolfgang Streeck

"there is no alternative" (TINA), accounting loophole / creative accounting, air traffic controllers' union, Airbnb, Alan Greenspan, basic income, behavioural economics, Ben Bernanke: helicopter money, billion-dollar mistake, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, Clayton Christensen, collective bargaining, conceptual framework, corporate governance, creative destruction, credit crunch, David Brooks, David Graeber, debt deflation, deglobalization, deindustrialization, disruptive innovation, en.wikipedia.org, eurozone crisis, failed state, financial deregulation, financial innovation, first-past-the-post, fixed income, full employment, Gini coefficient, global reserve currency, Google Glasses, haute cuisine, income inequality, information asymmetry, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, junk bonds, Kenneth Rogoff, labour market flexibility, labour mobility, late capitalism, liberal capitalism, low interest rates, market bubble, means of production, military-industrial complex, moral hazard, North Sea oil, offshore financial centre, open borders, pension reform, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, post-industrial society, private sector deleveraging, profit maximization, profit motive, quantitative easing, reserve currency, rising living standards, Robert Gordon, savings glut, secular stagnation, shareholder value, sharing economy, sovereign wealth fund, tacit knowledge, technological determinism, The Future of Employment, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transaction costs, Uber for X, upwardly mobile, Vilfredo Pareto, winner-take-all economy, Wolfgang Streeck

Moreover, rather than just consuming political decisions, citizens in a functioning democracy are invited and indeed obliged to participate in their production. In the process, they must subject their specific, collectively unexamined ‘raw’ wants to critical scrutiny in some sort of public dialogue. Getting their way may demand collective rather than individual action, requiring in turn considerable investment, making for high transaction costs without guarantee that the result will be to one’s personal liking. In fact the role of citizen requires a disciplined readiness to accept decisions that one had originally opposed, or that are contrary to one’s interests. Results are thus only rarely optimal from an individual’s perspective, so that lack of fit with what one would have preferred must be compensated by civic satisfaction about their having been achieved through a legitimate democratic procedure.

Money replaces direct exchange by indirect exchange, through the interpolation of a universally available, easily transportable, infinitely divisible and durable intermediate commodity (a process described by Marx as ‘simple circulation’, C–M–C). According to Smith, monetary systems develop from below, from the desire of market participants to extend and simplify their trade relations, which increase their efficiency by continually reducing their transaction costs. For Smith, money is a neutral symbol for the value of objects to be exchanged; it should be made as fit as possible for purpose, even if it has an objective value of its own, arising in theory from its production costs. The state makes an appearance only to the extent that it can be invited by market participants to increase the efficiency of money by ‘putting its stamp’ on it, thus making it seem more trustworthy.

In this version economic sociology would compete with standard economics on its turf and terms, by offering to add a ‘social factor’ to the economists’ account of economic affairs while accepting their definition of what is and is not ‘economic’. What this must amount to is, in essence, an extended efficiency theory with strong prescriptive implications: to make markets really work, you need to factor in networks and trust and the like as indispensable devices for reducing transaction costs, and generally to recognize the hidden efficiencies of particularistic as distinguished from universalistic social relations even in presumably impersonal and in this sense ‘rational’ markets and organizations. In a more ethnographic mode, this sort of economic sociology undertakes to produce thick descriptions of how the economy is ‘being done on the ground’: with intuition and tacit knowledge, following half-conscious rules of thumb, and of course deviating widely from the rationalistic homo economicus model of standard economic theory.


pages: 421 words: 110,406

Platform Revolution: How Networked Markets Are Transforming the Economy--And How to Make Them Work for You by Sangeet Paul Choudary, Marshall W. van Alstyne, Geoffrey G. Parker

3D printing, Affordable Care Act / Obamacare, Airbnb, Alvin Roth, Amazon Mechanical Turk, Amazon Web Services, Andrei Shleifer, Apple's 1984 Super Bowl advert, autonomous vehicles, barriers to entry, Benchmark Capital, big data - Walmart - Pop Tarts, bitcoin, blockchain, business cycle, business logic, business process, buy low sell high, chief data officer, Chuck Templeton: OpenTable:, clean water, cloud computing, connected car, corporate governance, crowdsourcing, data acquisition, data is the new oil, data science, digital map, discounted cash flows, disintermediation, driverless car, Edward Glaeser, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, financial innovation, Free Software Foundation, gigafactory, growth hacking, Haber-Bosch Process, High speed trading, independent contractor, information asymmetry, Internet of things, inventory management, invisible hand, Jean Tirole, Jeff Bezos, jimmy wales, John Markoff, Kevin Roose, Khan Academy, Kickstarter, Lean Startup, Lyft, Marc Andreessen, market design, Max Levchin, Metcalfe’s law, multi-sided market, Network effects, new economy, PalmPilot, payday loans, peer-to-peer lending, Peter Thiel, pets.com, pre–internet, price mechanism, recommendation engine, RFID, Richard Stallman, ride hailing / ride sharing, Robert Metcalfe, Ronald Coase, Salesforce, Satoshi Nakamoto, search costs, self-driving car, shareholder value, sharing economy, side project, Silicon Valley, Skype, smart contracts, smart grid, Snapchat, social bookmarking, social contagion, software is eating the world, Steve Jobs, TaskRabbit, The Chicago School, the long tail, the payments system, Tim Cook: Apple, transaction costs, Travis Kalanick, two-sided market, Uber and Lyft, Uber for X, uber lyft, vertical integration, winner-take-all economy, zero-sum game, Zipcar

This is because it would be difficult to trust that your home would be left in good shape (Airbnb), your car would be returned undamaged (RelayRides), or your lawnmower would come back (NeighborGoods). The effort necessary to individually verify credit- and trustworthiness is an example of the high transaction costs that used to prevent exchange. By providing default insurance contracts and reputation systems to encourage good behavior, platforms dramatically lower transaction costs and create new markets as new producers start producing for the first time. Platforms beat pipelines by using data-based tools to create community feedback loops. We’ve seen how the Kindle platform relies on reactions from the community of readers to determine which books will be widely read and which will not.

Are entrenched companies that operate familiar pipeline businesses doomed to capitulate as platforms reshape and ultimately take over their industries? Not necessarily. But if incumbents hope to fight the forces of platform disruption, they’ll need to reevaluate their existing business models. For example, they’ll need to scrutinize all their transaction costs—that is, the money they spend on processes such as marketing, sales, product delivery, and customer service—and imagine how those costs might be reduced or eliminated in a more seamlessly connected world. They’ll also need to examine the entire universe of individuals and organizations they currently interact with and envision new ways of networking them so as to create new forms of value.14 They’ll need to ask questions such as: • Which processes that we currently manage in-house can be delegated to outside partners, whether suppliers or customers?

Airbnb provides an infrastructure that allows guests and hosts to interact with each other using system resources, including the search capabilities and data services that allow guests to find attractive properties as well as the payment mechanisms necessary to conclude a transaction. In addition, Airbnb manages behind-the-scenes functions that reduce transaction costs for guests and hosts. For example, the platform provides default insurance contracts for both parties, protecting guests in the event of accident or crime and protecting hosts from negligent guest behavior (though, as we’ll discuss in chapter 11, this insurance coverage is not without its shortcomings).


Hacking Capitalism by Söderberg, Johan; Söderberg, Johan;

Abraham Maslow, air gap, Alvin Toffler, AOL-Time Warner, barriers to entry, Charles Babbage, collective bargaining, commoditize, computer age, corporate governance, creative destruction, Debian, deindustrialization, delayed gratification, Dennis Ritchie, deskilling, digital capitalism, digital divide, Donald Davies, Eben Moglen, Erik Brynjolfsson, Firefox, Free Software Foundation, frictionless, full employment, Garrett Hardin, Hacker Conference 1984, Hacker Ethic, Herbert Marcuse, Howard Rheingold, IBM and the Holocaust, informal economy, interchangeable parts, invention of radio, invention of the telephone, Jacquard loom, James Watt: steam engine, jimmy wales, John Markoff, John von Neumann, Joseph Schumpeter, Joseph-Marie Jacquard, Ken Thompson, knowledge economy, knowledge worker, labour market flexibility, late capitalism, Lewis Mumford, liberal capitalism, Marshall McLuhan, means of production, Mitch Kapor, mutually assured destruction, new economy, Norbert Wiener, On the Economy of Machinery and Manufactures, packet switching, patent troll, peer-to-peer, peer-to-peer model, planned obsolescence, post scarcity, post-Fordism, post-industrial society, price mechanism, Productivity paradox, profit motive, RFID, Richard Florida, Richard Stallman, Ronald Coase, safety bicycle, Search for Extraterrestrial Intelligence, SETI@home, Silicon Valley, Slavoj Žižek, software patent, Steven Levy, Stewart Brand, subscription business, tech worker, technological determinism, technoutopianism, the Cathedral and the Bazaar, The Nature of the Firm, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, Thomas Davenport, Thorstein Veblen, tragedy of the anticommons, Tragedy of the Commons, transaction costs, Whole Earth Catalog, Yochai Benkler

It runs counter to the assumption in economic theory that markets are prevalent because they are the most efficient method to organise economic interactions. Coase’s response was that firms emerge when the transaction cost from coordinating buyers and seller are higher than the cost of a hierarchic organisation.6 Benkler adds to Coase’s reasoning by saying that falling costs of communication technology have given rise to networks of volunteer developers. Transaction costs can at times be lower in the network than in both the market and in the firm. Furthermore, the strengths of the network model are accentuated in the creative economy.

The shortage of satellite images hindered researchers from taking long series of images over an extended period of time and discouraged them from double-checking data.9 The ineffectiveness of enclosing information can also be argued by pointing at the fact that capital itself, from within, is developing enclaves free from property claims. Patent pools and collective rights organisations are set up to reduce the transaction costs of intellectual property. Members aggregate their patents or copyrights in a common pool and enjoy the freedom to draw from it without asking for permission.10 At first sight it might appear as if the partial suspension of property rights is against the grain of the intellectual property regime.

The idea that networks is a novel mode of organising businesses and that it is distinct from markets has been in vogue since the 1990s. According to the argument, networks are supposed to be superior for sharing tacit know-how, in adapting to a volatile environment, and for perpetual learning processes.8 Unfortunately, Yochai Benkler’s decision to follow Ronald Coase and confine himself to an analysis of transaction costs puts a limitation on his thinking. The observations on networks ought instead to be framed in the debate about markets versus central planning that was waged between neoclassical and socialist economists in the first half of the twentieth century. In the 1930s, the great depression gave socialists wind in their sails when advocating the rationality of central planning against the anarchy of markets.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

"hyperreality Baudrillard"~20 OR "Baudrillard hyperreality", accounting loophole / creative accounting, bank run, banking crisis, banks create money, behavioural economics, Bernie Madoff, bitcoin, Bitcoin Ponzi scheme, blockchain, borderless world, Bretton Woods, BRICs, business cycle, capital controls, capitalist realism, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, currency risk, David Graeber, debt deflation, dematerialisation, disintermediation, Dogecoin, emotional labour, eurozone crisis, fiat currency, financial engineering, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, gentrification, German hyperinflation, Goldman Sachs: Vampire Squid, Herbert Marcuse, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kickstarter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, Minsky moment, mobile money, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, National Debt Clock, Neal Stephenson, negative equity, new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, post-Fordism, Post-Keynesian economics, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, risk free rate, Robert Shiller, Satoshi Nakamoto, scientific management, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

The problem, he argues, comes down to Menger’s adherence to an untenable methodological individualism, with each agent trying to reduce transaction costs in isolation, both from each other and, more importantly, an overarching institutional authority: “To state the sociologically obvious: the advantages of money for the individual presuppose the existence of money as an institution in which its ‘moneyness’ is established” (Ingham 2004b: 23, original italics). Orléan sees the issue slightly differently, arguing that whereas the emphasis on reducing transactions costs is an advantage of Menger’s model, “what the instrumentalist approach has never been able successfully to demonstrate is that money is an essential requirement for the existence of a market economy” (Orléan 2013: 51).

This method is meant to treat money as if it were a commodity: a creature of the market, not of sovereignty, law, or society. According to Goodhart, the euro’s design was informed by the theory of “optimal currency areas,” in which it is assumed—consistent with Menger’s theory—that money’s spatial domain can evolve on the basis of the progressive minimization of transaction costs (Goodhart 1998: 419). If Menger’s theory has been discredited by historical evidence that contradicts it, what explains its enduring appeal to economists? For one thing, the theory seems elegant and simple. As Goodhart notes, although the idea that money is a social or political artifact might be better supported by the empirical data, such a viewpoint “is somewhat woolly and socio-logical” (Goodhart 2008: 301), and does not lend itself easily to mathematical modeling.

As Harvey notes, the credit monies Marx refers to originated as private bills of exchange that had two key advantages: their supply adjusted quickly to changes in commodity production (unlike ordinary money, credit notes disappear from circulation once they are paid off), and they helped to reduce transaction costs (Harvey 2006: 245–46). 13 Gold, in turn, was the main constituent of international means of payment, or world money. When gold functions in this way, Marx said, money reverts to its “primitive” form (Marx 2009: 202). 14 Peter Schlemihl is the main character in Adelbert von Chamisso’s novel, Peter Schlemihls wundersame Geschichte (1814) (von Chamisso 2008), who sells his shadow to the devil in exchange for an endless supply of gold.


pages: 303 words: 84,023

Heads I Win, Tails I Win by Spencer Jakab

Alan Greenspan, Asian financial crisis, asset allocation, backtesting, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, book value, business cycle, buy and hold, collapse of Lehman Brothers, correlation coefficient, crowdsourcing, Daniel Kahneman / Amos Tversky, diversification, dividend-yielding stocks, dogs of the Dow, Elliott wave, equity risk premium, estate planning, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, fear index, fixed income, geopolitical risk, government statistician, index fund, Isaac Newton, John Bogle, John Meriwether, Long Term Capital Management, low interest rates, Market Wizards by Jack D. Schwager, Mexican peso crisis / tequila crisis, money market fund, Myron Scholes, PalmPilot, passive investing, Paul Samuelson, pets.com, price anchoring, proprietary trading, Ralph Nelson Elliott, random walk, Reminiscences of a Stock Operator, risk tolerance, risk-adjusted returns, Robert Shiller, robo advisor, Savings and loan crisis, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, subprime mortgage crisis, survivorship bias, technology bubble, transaction costs, two and twenty, VA Linux, Vanguard fund, zero-coupon bond, zero-sum game

Over the thirty years he had possession of the beginning and ending dates of the economic expansions and contractions, between the end of 1955 and 1985, he dutifully switched his portfolio to cash only during recessions and remained fully invested in the S&P 500 at other times. We’ll be generous to Biff and ignore capital gains taxes and transaction costs. By the end of 1985, he would have accumulated a portfolio worth nearly $122,000. That’s not too shabby—an 8.7 percent compound annualized return, which is far better than what most investors earn. But, shockingly, it’s less than the over $149,000, or 9.4 percent, that he would have netted by just staying invested in the S&P 500 throughout the entire thirty years, in good and bad economic times alike.

William Sharpe, a Nobel Prize–winning economist and the man behind the famous Sharpe ratio used to measure portfolio risk, recently tried to calculate the all-in costs of active funds. Some aren’t at all obvious. In 2013 the average expense ratio was 1.12 percent, but service charges also averaged 0.5 percent. Then there are the transaction costs within a fund—paying commissions to brokers to buy and sell stocks. That comes to another 0.5 percent. Finally, there is the fact that, unlike with an index fund, active managers usually have a little bit of cash on hand to meet redemptions or to be able to pounce on opportunities. Since the market usually is going up or at least paying dividends, having cash lying around that earns next to nothing adds another 0.15 percent.4 Add it all up and active funds’ 2.27 percentage points of total visible and invisible expenses is 2.21 points higher than the largest stock index fund.

But another finding by the same researchers genuinely surprised me. They looked at ten thousand investors at a large discount broker and the subsequent performance of stocks investors bought versus the ones they sold. The average difference between them was negative 3.3 percent annually, and that was before counting transaction costs. Many how-to books on trading or biographies of successful speculators advise you to “sell your losers and keep your winners.” Of course that only reflects those investments’ performance before the day you hit that button. Based on these figures, this old chestnut is precisely backwards. Any way you slice it, frequent trading is a loser’s game.


pages: 382 words: 120,064

Bank 3.0: Why Banking Is No Longer Somewhere You Go but Something You Do by Brett King

3D printing, Abraham Maslow, additive manufacturing, Airbus A320, Albert Einstein, Amazon Web Services, Any sufficiently advanced technology is indistinguishable from magic, Apollo 11, Apollo 13, Apollo Guidance Computer, asset-backed security, augmented reality, barriers to entry, behavioural economics, bitcoin, bounce rate, business intelligence, business process, business process outsourcing, call centre, capital controls, citizen journalism, Clayton Christensen, cloud computing, credit crunch, crowdsourcing, disintermediation, en.wikipedia.org, fixed income, George Gilder, Google Glasses, high net worth, I think there is a world market for maybe five computers, Infrastructure as a Service, invention of the printing press, Jeff Bezos, jimmy wales, Kickstarter, London Interbank Offered Rate, low interest rates, M-Pesa, Mark Zuckerberg, mass affluent, Metcalfe’s law, microcredit, mobile money, more computing power than Apollo, Northern Rock, Occupy movement, operational security, optical character recognition, peer-to-peer, performance metric, Pingit, platform as a service, QR code, QWERTY keyboard, Ray Kurzweil, recommendation engine, RFID, risk tolerance, Robert Metcalfe, self-driving car, Skype, speech recognition, stem cell, telepresence, the long tail, Tim Cook: Apple, transaction costs, underbanked, US Airways Flight 1549, web application, world market for maybe five computers

Without formal financial services, households rely on informal services that are associated with high transaction costs. Thus increasing access to formal financial services for the majority of households in developing countries remains an important policy goal for institutions such as the United Nations, the World Bank and IMF. It has also been recognised that even for those with bank accounts, physical distances to branches or points of financial service add significantly to transactions costs. Mainstream financial institutions generally shy away from developing economies because of the premise that low-income populations do not save and are bad borrowers.

Of course, HTML5 won’t be a silver bullet that eliminates all the downsides to native apps in a single stroke. Although HTML5 will reduce developers’ dependence on app stores, which typically take a commission of between 10 and 30 per cent, they will still incur some marketing, distribution and transaction costs. The benefits of cross-platform speed to market, along with lower distribution costs, mean that the likes of Facebook will be championing HTML5 as an alternative app experience. The restrictions will be around native mobile function and feature access. That will likely be solved by mobile browsers that have the native plug-ins.

But there are other competitors also, including the likes of iCarte, Erply, iMag, and others looking to enable NFC in the same way. Dwolla Unlike Square and PayPal, Dwolla works completely independently of the existing payment networks beyond cash-in and cash-out functionality. Dwolla’s main strategy is to attack the current transaction costs of moving money around. If a transaction is under $10, the transfer (or payment) is free, if over $10, there is a capped $0.25 fee. Dwolla has around 70,000 customers today (including 5000 merchants or retailers17) and it already processes around $1m a day through its network. Dwolla argues that its network is safer for consumers and merchants alike because it doesn’t send sensitive credit card details across the network—just a secure ID and the transaction details.


pages: 442 words: 39,064

Why Stock Markets Crash: Critical Events in Complex Financial Systems by Didier Sornette

Alan Greenspan, Asian financial crisis, asset allocation, behavioural economics, Berlin Wall, Black Monday: stock market crash in 1987, Bretton Woods, Brownian motion, business cycle, buy and hold, buy the rumour, sell the news, capital asset pricing model, capital controls, continuous double auction, currency peg, Deng Xiaoping, discrete time, diversified portfolio, Elliott wave, Erdős number, experimental economics, financial engineering, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, global village, implied volatility, index fund, information asymmetry, intangible asset, invisible hand, John von Neumann, joint-stock company, law of one price, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, market design, market fundamentalism, mental accounting, moral hazard, Network effects, new economy, oil shock, open economy, pattern recognition, Paul Erdős, Paul Samuelson, power law, quantitative trading / quantitative finance, random walk, risk/return, Ronald Reagan, Schrödinger's Cat, selection bias, short selling, Silicon Valley, South Sea Bubble, statistical model, stochastic process, stocks for the long run, Tacoma Narrows Bridge, technological singularity, The Coming Technological Singularity, The Wealth of Nations by Adam Smith, Tobin tax, total factor productivity, transaction costs, tulip mania, VA Linux, Y2K, yield curve

The point is that you don’t want to trade too much, otherwise you will have to pay for significant transaction costs. The average return over one correlation time that you will make using this strategy is of the order of the typical amplitude of the return over these five minutes, say 003% (to account for imperfections in the prediction skills, we take a somewhat more conservative measure than the scale of 004% over one minute used before). Over a day, this gives an average gain of 059%, which accrues to 435% per year when return is reinvested, or 150% without reinvestment! Such small correlations would lead to substantial profits if transaction costs and other friction phenomena like slippage did not exist (slippage refers to the fact that market orders are not always executed at the order price due to limited liquidity and finite human execution time).

Such small correlations would lead to substantial profits if transaction costs and other friction phenomena like slippage did not exist (slippage refers to the fact that market orders are not always executed at the order price due to limited liquidity and finite human execution time). It is clear that a transaction cost as small as 003%, or $3 per $10000 invested is enough to destroy the expected gain of this strategy. The conundrum is that you cannot trade at a slower rate in order to reduce the transaction costs because, if you do so, you lose your prediction skill based on correlations only present within a five minute time 38 chapter 2 horizon. We can conclude that the residual correlations are those little enough not to be profitable by strategies such as those described above due to “imperfect” market conditions.

In order to understand the specific manners with which this is attained would require a level of modeling not yet available at present and whose achievement is at the heart of a very active domain of research that we only glimpsed in chapter 4. As we pointed out in chapter 2, the existence of transaction costs and other imperfections of the market should not be used as an excuse for disregarding the no-arbitrage condition but rather should be constructively invoked to study its impacts on the models. In other words, these market imperfections are considered as second-order effects. Existence of Rational Agents Mainstream finance and economic modeling add a second overarching organizing principle, namely that investors and economic agents are rational.


Adam Smith: Father of Economics by Jesse Norman

active measures, Alan Greenspan, Andrei Shleifer, balance sheet recession, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Berlin Wall, Black Swan, Branko Milanovic, Bretton Woods, British Empire, Broken windows theory, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, centre right, cognitive dissonance, collateralized debt obligation, colonial exploitation, Corn Laws, Cornelius Vanderbilt, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, David Ricardo: comparative advantage, deindustrialization, electricity market, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Fellow of the Royal Society, financial engineering, financial intermediation, frictionless, frictionless market, future of work, George Akerlof, Glass-Steagall Act, Hyman Minsky, income inequality, incomplete markets, information asymmetry, intangible asset, invention of the telescope, invisible hand, Isaac Newton, Jean Tirole, John Nash: game theory, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, lateral thinking, loss aversion, low interest rates, market bubble, market fundamentalism, Martin Wolf, means of production, mirror neurons, money market fund, Mont Pelerin Society, moral hazard, moral panic, Naomi Klein, negative equity, Network effects, new economy, non-tariff barriers, Northern Rock, Pareto efficiency, Paul Samuelson, Peter Thiel, Philip Mirowski, price mechanism, principal–agent problem, profit maximization, public intellectual, purchasing power parity, random walk, rent-seeking, Richard Thaler, Robert Shiller, Robert Solow, Ronald Coase, scientific worldview, seigniorage, Socratic dialogue, South Sea Bubble, special economic zone, speech recognition, Steven Pinker, The Chicago School, The Myth of the Rational Market, The Nature of the Firm, The Rise and Fall of American Growth, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, time value of money, transaction costs, transfer pricing, Veblen good, Vilfredo Pareto, Washington Consensus, working poor, zero-sum game

In very rough chronological order, they include Marxism, focused on production, class conflict, capital accumulation, business cycles and technological change; Austrian economics, stressing limitations on human rationality, the importance of norms, spontaneous order, prices as signals, innovation and entrepreneurship; post-Keynesianism, emphasizing uncertainty and ‘animal spirits’, stagnation, unemployment and the scope for active government fiscal interventions; developmental economics, analysing the industrial linkages which hinder or assist improvements in productive capabilities, protection and the role of policy in nurturing infant industries; institutional economics, exploring how institutions shape individual and collective behaviour, and more recently the specific role of transaction costs; and monetarism, emphasizing the importance of the money supply and the influence of monetary factors on inflation, economic performance and national output. The boundaries are porous: many would argue, for example, that institutional economics or behavioural economics should now be considered part of the mainstream.

Much of the analysis has probed what the implications are, not of insisting on perfect information, perfect rationality and perfect liquidity, but of relaxing these very strong assumptions in different ways, through models focusing on imperfect or asymmetric information, bounded rationality and the impact of transaction costs. The best of this work has been rewarded with a hatful of Nobel Prizes. The career of Kenneth Arrow is again a case in point. For one thing, Arrow himself did a great deal of work to explore and explain the negative effects of asymmetric information in the US healthcare insurance market, and how that market might be made to function better.

As we have seen, markets often differ from each other in crucial ways, few more so than those for land, labour and capital. Moreover, economies are not just about markets, and laissez-faire is not the same thing as market competition. Many of the best economists around the world have spent the last few decades trying to think through the limitations of markets—imperfect information and rationality, transaction costs, preferences, linkages and the rest—and to understand how different markets, from housing to healthcare, actually work. As an ideology, neoliberalism is dead. But the debate we need to have, the debate about what markets are and should be for, about the limitations of the idea of ‘market failure’ and the need to ensure effective competition, and about norms and culture and the role of the state, has been left by the wayside.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

Abraham Wald, Alan Greenspan, Albert Einstein, An Inconvenient Truth, Andrei Shleifer, anti-communist, AOL-Time Warner, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black-Scholes formula, Blythe Masters, book value, Bretton Woods, British Empire, business cycle, capital asset pricing model, carbon tax, Carl Icahn, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, Garrett Hardin, George Akerlof, Glass-Steagall Act, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Nixon triggered the end of the Bretton Woods system, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, Ponzi scheme, precautionary principle, price discrimination, price stability, principal–agent problem, profit maximization, proprietary trading, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, subprime mortgage crisis, tail risk, Tax Reform Act of 1986, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, Tragedy of the Commons, transaction costs, Two Sigma, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

In his 1960 article, he acknowledged that when an activity inflicted harm on many different people, getting all the interested parties to agree on an efficient solution might be difficult and costly. Economists refer to the costs of negotiation as transaction costs: in his Nobel lecture, Coase acknowledged that the theorem named after him applied only when these were negligible. “I tend to regard the Coase Theorem as a stepping stone on the way to an analysis of an economy with positive transactions costs,” he said. And he went on: “[I]t does not imply, when transaction costs are positive, that government action . . . could not produce a better result than relying on negotiations between individuals in the market.

Such a simplistic mindset makes it impossible for people to discuss in a responsible way the relative merits of different tax systems. Instead, we Pigovians acknowledge: (1) There will be some government spending; (2) This spending will be funded with taxes; (3) Government should use the least bad taxes it has available. In fact, Pigovian taxes are not only least bad—they are good. They correct market failures when transaction costs are too high to expect the forces of the Coase theorem to fix the problem. An alternative method of dealing with global warming is for the government to impose a cap on total carbon emissions. A variant of this idea, which the Obama administration is pursuing, is to distribute a limited number of “emission rights,” which can be traded in a secondary market.


pages: 515 words: 142,354

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

"there is no alternative" (TINA), "World Economic Forum" Davos, Alan Greenspan, bank run, banking crisis, barriers to entry, battle of ideas, behavioural economics, Berlin Wall, Bretton Woods, business cycle, buy and hold, capital controls, carbon tax, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Great Leap Forward, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, low interest rates, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Shiller, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

There is, of course, a cost to this financial transaction (which can be viewed as a kind of insurance against exchange-rate fluctuations). In well-functioning markets, however, the cost of such insurance is relatively low. But these mechanisms do not work very well for long-term investments, partly because the necessary markets do not exist or have high transactions costs. There is an alternative way of managing such risks: diversifying production across the markets in which one transacts, in which one buys and sells. The American firm might set up part of its production process in Canada, and as it does so, America’s and Canada’s real economy becomes more integrated.

Exchanging currencies was a bother—and often expensive. The fact that it was expensive should have said something about the functioning of financial markets: the costs of exchanging currencies should be extremely small, if markets actually functioned efficiently, as hypothesized in the standard models. But while transactions costs are an annoyance for travelers today, they are not economically significant. Most transactions (both in numbers and value) are mediated electronically—through bank transfers and debit and credit cards. The costs for computers to move from one currency to another is negligible. (The prices charged by banks may be significantly larger, again testimony to market failures that are pervasive in the financial system.

(The prices charged by banks may be significantly larger, again testimony to market failures that are pervasive in the financial system. But the appropriate response is not to reconfigure entire currency arrangements but to regulate and reform the financial sector.) There is another kind of transaction cost that sharing a currency may reduce: the exchange-rate risk going forward of longer-term investments that we discussed earlier in the chapter. But these costs have had at best a second-order effect in major production and supply chain decisions. China, for instance, has become integrally incorporated into the global supply chain, in spite of exchange-rate risk as well as political and supply-side risks.


Concentrated Investing by Allen C. Benello

activist fund / activist shareholder / activist investor, asset allocation, barriers to entry, beat the dealer, Benoit Mandelbrot, Bob Noyce, Boeing 747, book value, business cycle, buy and hold, carried interest, Claude Shannon: information theory, corporate governance, corporate raider, delta neutral, discounted cash flows, diversification, diversified portfolio, Dutch auction, Edward Thorp, family office, fixed income, Henry Singleton, high net worth, index fund, John Bogle, John von Neumann, junk bonds, Louis Bachelier, margin call, merger arbitrage, Paul Samuelson, performance metric, prudent man rule, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, shareholder value, Sharpe ratio, short selling, survivorship bias, technology bubble, Teledyne, transaction costs, zero-sum game

Short‐term developments are too unpredictable. On the other hand, shares of quality companies run for the shareholders stand an excellent chance of providing above-average returns to investors over the long term. Furthermore, moving in and out of stocks frequently has two major disadvantages that will substantially diminish results: transaction costs and taxes. Capital will grow more rapidly if earnings compound with as few interruptions for commissions and tax bites as possible. 5. Do not diversify excessively. An investor is not likely to obtain superior results by buying a broad cross‐section of the market—the more diversification, the more performance is likely to be average, at best.

It was this “form of self‐deception” as Buffett described it, that nearly destroyed GEICO in the early 1970s.158 Simpson believes that, when considering active management, the base case for an investor must be a passive index fund, for example an S&P 500 index fund, a total market index fund, or a worldwide market index fund. That base case index fund allows an investor to obtain a market return very cheaply, so unless an active manager can add value over and above that index, the investor is better off in the index fund. For active managers as a whole, investing is a zero sum game, less fees and transaction costs, so most active managers won’t do as well as the market because they are the market. Academic studies tend to flatter the active managers due to survivorship bias, which means that because the worst drop out, they aren’t counted. How, then, does a manager add value over the market? In Simpson’s opinion, a “closet indexer”—an investor who closely follows index components to achieve returns in line with the index without disclosing that they are doing so—and who varies from the index “a little bit here and there and everywhere” won’t outperform.159 A broadly diversified portfolio will likely underperform the market after taking out fees.

In a notebook Shannon recorded a varied list of thinkers, including French mathematician Louis Bachelier, Benjamin 74 Concentrated Investing Graham, and Benoit Mandelbrot. He took notes about margin trading; short selling; stop‐loss orders; the effects of market panics; capital gains taxes and transaction costs. The only surviving document from Shannon’s research is a mimeographed handout from one of the lectures he delivered at MIT in the spring term of 1956, in a class called Seminar of Information Theory. According to the handout, the lecture, called The Portfolio Problem, covered The $64,000 Question, a wire service giving horse tips, and the Kelly Criterion.


Learn Algorithmic Trading by Sebastien Donadio

active measures, algorithmic trading, automated trading system, backtesting, Bayesian statistics, behavioural economics, buy and hold, buy low sell high, cryptocurrency, data science, deep learning, DevOps, en.wikipedia.org, fixed income, Flash crash, Guido van Rossum, latency arbitrage, locking in a profit, market fundamentalism, market microstructure, martingale, natural language processing, OpenAI, p-value, paper trading, performance metric, prediction markets, proprietary trading, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, Sharpe ratio, short selling, sorting algorithm, statistical arbitrage, statistical model, stochastic process, survivorship bias, transaction costs, type inference, WebSocket, zero-sum game

This may be the case with an average that could potentially be calculated within all the data; data that you shouldn't have since you calculate the average using just the prices you get before placing an order. Market change regime: Modeling stock distribution parameters are not constant in time because the market changes regime. Transaction costs: It is important to consider the transaction costs of your trading. This is very easy to forget and not to make money on the real market. Data quality/source: Since there are many financial data sources, data composition differs a lot. For instance, when you use OHLC data from Google Finance, it is an aggregation of many exchange feeds.

Complexity and the need for calculating power are very low. Therefore, execution does not take too long and it is quick to obtain results regarding the performance of the trading strategies. Disadvantages The main weakness of the for-loop backtester is accuracy in relation to the market. It neglects transactions costs, transaction time, the bid and offer price, and volume. The likelihood of making a mistake by reading a value ahead of time is pretty high (look-ahead bias). While the code of a for-loop backtester is easy to write, we should still use this type of backtester to eliminate low-performance strategies.


pages: 162 words: 50,108

The Little Book of Hedge Funds by Anthony Scaramucci

Alan Greenspan, Andrei Shleifer, asset allocation, Bear Stearns, Bernie Madoff, business process, carried interest, corporate raider, Credit Default Swap, diversification, diversified portfolio, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, financial engineering, fixed income, follow your passion, global macro, Gordon Gekko, high net worth, index fund, it's over 9,000, John Bogle, John Meriwether, Long Term Capital Management, mail merge, managed futures, margin call, mass immigration, merger arbitrage, Michael Milken, money market fund, Myron Scholes, NetJets, Ponzi scheme, profit motive, proprietary trading, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, risk/return, Ronald Reagan, Saturday Night Live, Sharpe ratio, short selling, short squeeze, Silicon Valley, tail risk, Thales and the olive presses, Thales of Miletus, the new new thing, too big to fail, transaction costs, two and twenty, uptick rule, Vanguard fund, Y2K, Yogi Berra, zero-sum game

In other words, an investor was akin to a monkey in a coin-flipping contest, who—despite the odds—kept getting heads over and over again. This investor’s successful stock selection is a fluke as we are fooled by randomness. Malkiel went on to say that since most money managers cannot outperform their respective benchmarks or indexes, they are adding no value; in fact, they may actually be detractors of value as they require transaction costs. In any case, there I was. Sitting in Baker Library. Waiting for my coveted Goldman Sachs interview. Reading about the efficient market theory. Thinking about its disconnects. And, as it turned out, so were many a more knowledgeable and experienced financial minds. Times, They Are a Changing In the late 1980s, Michael Jackson was the King of Pop, Reaganomics was infiltrating the U.S. economy, I was wearing a skinny yellow tie to my Goldman Sachs interview (I had to get that in there), communism was moments away from heading to the ash heap of history (unless, of course, you are Cuban or North Korean), and we were experiencing the great go-go stock market era, with the market doubling from 1982 to 1987.

A trader notices a difference between the price of HSBC on the New York Stock Exchange (NYSE) and Hong Kong Stock Exchange, where it is selling for $49.05 and $49.25, respectively. A skillful arbitrageur would quickly purchase HSBC on the NYSE and then sell it on the Hong Kong Exchange. After transaction costs of a penny each way, there is a risk-free profit of 18 cents. People become billionaires from this sort of stuff; however, as more people enter the market this strategy’s spreads start to narrow. (The decimalization of NASDAQ trading went a long way toward narrowing spreads.) Investors beware: In turbulent times, arbitrage strategies can be dangerous.


pages: 191 words: 51,242

Unsustainable Inequalities: Social Justice and the Environment by Lucas Chancel

"World Economic Forum" Davos, Anthropocene, behavioural economics, biodiversity loss, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, carbon tax, centre right, clean water, COVID-19, disinformation, Donald Trump, energy security, energy transition, financial deregulation, Francis Fukuyama: the end of history, Gini coefficient, green new deal, income inequality, Indoor air pollution, job satisfaction, low skilled workers, offshore financial centre, oil shock, price stability, purchasing power parity, Ronald Reagan, Simon Kuznets, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, trade liberalization, Tragedy of the Commons, transaction costs, urban planning, very high income, Washington Consensus

FINANCIAL GLOBALIZATION The other aspect of globalization, having to do with financial flows, makes it possible to explain in a rather convincing manner the rise in inequality at the very top end of the income distribution scale. The opening up of capital markets can have several effects. On the one hand, liberalization increases both their size and their yields, thanks to the economies of scale it permits (many transaction costs disappear as the volume of business increases, so the returns on invested capital are greater), and the gains are redistributed to a minority of top managers in the financial sector, in the form of higher salaries and related benefits (stock options and so forth), sometimes amounting to staggering rates of compensation.20 On the other hand, financial liberalization increases the returns on inherited wealth.

Standard economic theory provides us with the answer in this case: where a natural monopoly exists, introducing competition has the effect of increasing costs rather than reducing them (it would make no sense, for example, to build two parallel water-supply networks); furthermore, theories of property rights and transaction costs tell us that private management of a natural monopoly of this kind requires a high level of supervision on the part of public authorities, particularly in order to prevent the private operator from extracting monopoly rents, and that this supervision can prove to be very costly. As an empirical matter, it turns out that a good number of municipalities in the United States that opted for privatization in recent decades have since reverted to public management, because the quality of service under private management declined without the costs to consumers being lowered.5 The first victims were the least well-off, who could not afford preferable alternatives (buying mineral water, for example).


pages: 1,544 words: 391,691

Corporate Finance: Theory and Practice by Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann le Fur, Antonio Salvi

"Friedman doctrine" OR "shareholder theory", accelerated depreciation, accounting loophole / creative accounting, active measures, activist fund / activist shareholder / activist investor, AOL-Time Warner, ASML, asset light, bank run, barriers to entry, Basel III, Bear Stearns, Benoit Mandelbrot, bitcoin, Black Swan, Black-Scholes formula, blockchain, book value, business climate, business cycle, buy and hold, buy low sell high, capital asset pricing model, carried interest, collective bargaining, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, currency risk, delta neutral, dematerialisation, discounted cash flows, discrete time, disintermediation, diversification, diversified portfolio, Dutch auction, electricity market, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, fixed income, Flash crash, foreign exchange controls, German hyperinflation, Glass-Steagall Act, high net worth, impact investing, implied volatility, information asymmetry, intangible asset, interest rate swap, Internet of things, inventory management, invisible hand, joint-stock company, joint-stock limited liability company, junk bonds, Kickstarter, lateral thinking, London Interbank Offered Rate, low interest rates, mandelbrot fractal, margin call, means of production, money market fund, moral hazard, Myron Scholes, new economy, New Journalism, Northern Rock, performance metric, Potemkin village, quantitative trading / quantitative finance, random walk, Right to Buy, risk free rate, risk/return, shareholder value, short selling, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, stocks for the long run, supply-chain management, survivorship bias, The Myth of the Rational Market, time value of money, too big to fail, transaction costs, value at risk, vertical integration, volatility arbitrage, volatility smile, yield curve, zero-coupon bond, zero-sum game

Actual markets approach the theory of an efficient market when: participants have low-cost access to all information; transaction costs are low; the market is liquid; and investors are rational. Take the example of a stock whose price is expected to rise 10% tomorrow. In an efficient market, its price will rise today to a level consistent with the expected gain. “Tomorrow’s” price will be discounted to today. Today’s price becomes an estimate of the value of tomorrow’s price. In general, if we try to explain why financial markets have different degrees of efficiency, we could say that: The lower transaction costs are, the more efficient a market is. An efficient market must quickly allow equilibrium between supply and demand to be established.

An efficient market must quickly allow equilibrium between supply and demand to be established. Transaction costs are a key factor in enabling supply and demand for securities and capital to adjust. Brokerage fees have an impact on how quickly a market reaches equilibrium. In an efficient market, transactions have no costs associated with them, neither underwriting costs (when securities are issued) nor trading costs (when securities are bought and sold). When other transaction-related factors are introduced, such as the time required for approving and publishing information, they can slow down the achievement of market equilibrium.

Stocks seem to perform less well on Mondays than on other days of the week and provide higher returns in the month of January compared to other months of the year (in particular for small- and medium-sized enterprises). Nevertheless, these calendar anomalies are not material enough to allow for systematic and profitable arbitrage given transaction costs. For each of these observations, some justifications consistent with the rationality of investor behaviour can be put forward. Meteorological anomalies. There is consistent observation that stock prices perform better when the sun shines than when it rains. There again, although statistically significant, these anomalies are not material enough to generate arbitrage opportunities.


pages: 370 words: 102,823

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

Alan Greenspan, balance sheet recession, banking crisis, basic income, Bear Stearns, Bernie Sanders, Bretton Woods, business climate, business cycle, carbon tax, Carmen Reinhart, central bank independence, circular economy, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, degrowth, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, Ford Model T, forward guidance, full employment, G4S, general purpose technology, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, low interest rates, low skilled workers, Martin Wolf, mass incarceration, military-industrial complex, Modern Monetary Theory, Money creation, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, ocean acidification, paradox of thrift, Paul Samuelson, planned obsolescence, Post-Keynesian economics, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Solyndra, Steve Jobs, stock buybacks, systems thinking, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, Tragedy of the Commons, transaction costs, trickle-down economics, universal basic income, vertical integration, very high income

., Evolutionary Economics: The Neo-Schumpeterian Challenge, Boston, MA, Kluwer, 1994, pp. 245–63; ‘Innovative enterprise and historical transformation’, Enterprise & Society, vol. 3, no. 1, 2002, pp. 35–54. 4 J. A. Schumpeter, Capitalism, Socialism, and Democracy, 3rd edn, New York, Harper, p. 106. 5 It is beyond the scope of this chapter to explore the relation between the theory of innovative enterprise and other theories of the firm such as those contained in transaction-cost theory, resource-based theory, agency theory, dynamic-capability theory and evolutionary theory. For consideration of these alternative theories, see W. Lazonick, Business Organisation and the Myth of the Market Economy, Cambridge, Cambridge University Press, 1991; ‘Integration of theory and history’; ‘Innovative enterprise and historical transformation’; ‘The Chandlerian corporation and the theory of innovative enterprise’, Industrial and Corporate Change, vol. 19, no. 2, 2010, pp. 317–49; ‘The theory of innovative enterprise: methodology, ideology, and institutions’, in J.

Mankiw, ‘Defending the one percent’, Journal of Economic Perspectives, vol. 27, no. 3, Summer 2013, pp. 21–34. 22 I recognised this early in my own work on information asymmetries, in a major controversy with Steven N. S. Cheung over whether the institution of sharecropping (which I argued could be explained by information asymmetries) mattered (see J. E. Stiglitz, ‘Incentives and risk sharing in sharecropping’, The Review of Economic Studies, vol. 41, no. 2, 1974, pp. 219–55 and S. Cheung, ‘Transaction costs, risk aversion and the choice of contractual arrangements’, Journal of Law and Economics, vol. 19, no. 1, 1969). North has perhaps done more to bring institutional analysis into the mainstream than anyone else: see D. C. North, Institutions, Institutional Change and Economic Performance, Cambridge, Cambridge University Press, 1990. 23 J.

In this way regulators hope to generate the mass of transactions that a true market needs, creating artificial differences between identical products in order to do so. Such a market brings gains to both (some) consumers and producers only if large numbers of consumers remain inelastic, paying the higher prices of supplies that are not part of introductory offers. Meanwhile, transaction costs rise: for consumers, who have to keep looking out for new introductory offers and making arrangements to change their suppliers; and for suppliers, who have to keep developing and marketing new introductory offers. This is the main way in which a neoliberal strategy can deal with the tendency for an oligopolistic sector to produce high prices.


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The Curse of Cash by Kenneth S Rogoff

Alan Greenspan, Andrei Shleifer, Asian financial crisis, bank run, Ben Bernanke: helicopter money, Berlin Wall, bitcoin, blockchain, Boris Johnson, Bretton Woods, business cycle, capital controls, Carmen Reinhart, cashless society, central bank independence, cryptocurrency, debt deflation, disruptive innovation, distributed ledger, Dr. Strangelove, Edward Snowden, Ethereum, ethereum blockchain, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial exclusion, financial intermediation, financial repression, forward guidance, frictionless, full employment, George Akerlof, German hyperinflation, government statistician, illegal immigration, inflation targeting, informal economy, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, low interest rates, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, moveable type in China, New Economic Geography, offshore financial centre, oil shock, open economy, payday loans, price stability, purchasing power parity, quantitative easing, RAND corporation, RFID, savings glut, secular stagnation, seigniorage, The Great Moderation, the payments system, The Rise and Fall of American Growth, transaction costs, unbanked and underbanked, unconventional monetary instruments, underbanked, unorthodox policies, Y2K, yield curve

Yes, especially as large notes are phased out, those engaged in corruption and other criminal activities will find other ways to do business, and there will be an even greater incentive for innovation. But other ways of making payments (gold, uncut diamonds, bitcoins) each have their problems, ranging from illiquidity and high transactions costs (uncut diamonds) to risks of ultimate tracing (bitcoins). As this book stresses repeatedly (because the point is so essential), of course criminals can use transaction technologies that circulate completely outside the legal economy. However, as long as the government blocks the doors into the legal economy, it can seriously undermine the liquidity of black market transaction media and dramatically increase the cost of using them compared to cash.

In the United States, more than 8% of households were un-banked in 2013, according to an FDIC survey.3 Another 20% were underbanked, meaning they also used alternative financial services outside the banking system, including prepaid cards, payday loans, pawn shops, and check-cashing services. More than 25% of adult Americans do not have a credit card. Unfortunately, the cost of not having bank access is high. Check-cashing services charge exorbitant fees; for immigrants and others who need to wire funds abroad and transfer money to relatives, the transaction costs can amount to 10–15% or more. Storing cash at home and carrying cash greatly increases the chance of theft.4 The risks of being subject to fraud are much higher outside the regulated financial sector. The poor may benefit from being able to use paper currency, but overall, financial exclusion implies large costs for basic services.

For example, a black market could develop for large-denomination euro notes on the darknet, effectively allowing a 100-, 200- or 500-euro note to be used multiple times before being smuggled out of the United States. I have addressed this basic point before in chapters 5 and 7, but repeat it here, because it is fundamental. Any bills that can be used only in the underground economy would sell at steep discounts, because they would be costly and difficult to use. For tax evaders and even criminals, high transactions costs and illiquidity would be significant impediments akin to the problems with uncut diamonds; they want to spend their money in retail stores and online, like everyone else. Last but not least, if the bills did retain high value, counterfeits would eventually intrude once innovation in the notes’ security features had stopped.


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Free culture: how big media uses technology and the law to lock down culture and control creativity by Lawrence Lessig

Brewster Kahle, Cass Sunstein, content marketing, creative destruction, digital divide, Free Software Foundation, future of journalism, George Akerlof, Innovator's Dilemma, Internet Archive, invention of the printing press, Joi Ito, Kenneth Arrow, Kevin Kelly, knowledge economy, Louis Daguerre, machine readable, new economy, prediction markets, prisoner's dilemma, profit motive, rent-seeking, Richard Florida, Richard Stallman, Ronald Coase, Ronald Reagan, Saturday Night Live, Silicon Valley, software patent, synthetic biology, transaction costs

If the friend recommending the album gains nothing from a bad recommendation, then one could expect that the recommendations will actually be quite good. The net effect of this sharing could increase the quantity of music purchased. C. There are many who use sharing networks to get access to copyrighted content that is no longer sold or that they would not have purchased because the transaction costs off the Net are too high. This use of sharing networks is among the most rewarding for many. Songs that were part of your childhood but have long vanished from the marketplace magically appear again on the network. (One friend told me that when she discovered Napster, she spent a solid weekend "recalling" old songs.

And leaders in our profession have lost an appreciation of the high costs that our profession imposes upon others. The inefficiency of the law is an embarrassment to our tradition. And while I believe our profession should therefore do everything it can to make the law more efficient, it should at least do everything it can to limit the reach of the law where the law is not doing any good. The transaction costs buried within a permission culture are enough to bury a wide range of creativity. Someone needs to do a lot of justifying to justify that result. The uncertainty of the law is one burden on innovation. There is a second burden that operates more directly. This is the effort by many in the content industry to use the law to directly regulate the technology of the Internet so that it better protects their content.

Yet just thirty years ago, the dominant scholar and practitioner in the field of copyright, Melville Nimmer, thought it obvious.[221] However, my criticism of the role that lawyers have played in this debate is not just about a professional bias. It is more importantly about our failure to actually reckon the costs of the law. Economists are supposed to be good at reckoning costs and benefits. But more often than not, economists, with no clue about how the legal system actually functions, simply assume that the transaction costs of the legal system are slight.[222] They see a system that has been around for hundreds of years, and they assume it works the way their elementary school civics class taught them it works. But the legal system doesn't work. Or more accurately, it doesn't work for anyone except those with the most resources.


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My Life as a Quant: Reflections on Physics and Finance by Emanuel Derman

Bear Stearns, Berlin Wall, bioinformatics, Black-Scholes formula, book value, Brownian motion, buy and hold, capital asset pricing model, Claude Shannon: information theory, Dennis Ritchie, Donald Knuth, Emanuel Derman, financial engineering, fixed income, Gödel, Escher, Bach, haute couture, hiring and firing, implied volatility, interest rate derivative, Jeff Bezos, John Meriwether, John von Neumann, Ken Thompson, law of one price, linked data, Long Term Capital Management, moral hazard, Murray Gell-Mann, Myron Scholes, PalmPilot, Paul Samuelson, pre–internet, proprietary trading, publish or perish, quantitative trading / quantitative finance, Sharpe ratio, statistical arbitrage, statistical model, Stephen Hawking, Steve Jobs, stochastic volatility, technology bubble, the new new thing, transaction costs, volatility smile, Y2K, yield curve, zero-coupon bond, zero-sum game

In late July of 1995, shortly before his death, in response to a question I sent him about these matters, he emailed me: "I view all our work on fixedincome models as resulting from the application of the capital asset pricing model to fixed-income markets" I had a touching glimpse of his love for this approach a few years before he died when, together with a few of my colleagues, I tried to assess the effect of transactions costs and hedging frequency on our trading desk's options prices. We built a Monte Carlo simulation program that dynamically replicated each option as the stock price changed, adding the assumed transactions costs as each rebalancing of the hedging portfolio took place. In the long run we intended to use the program to see how much this caused options prices to deviate from the Platonic Black-Scholes value; in this way we could estimate the actual cost of our hedging strategy rather than accept the value of the idealized value embodied in the Black-Scholes model.

In the long run we intended to use the program to see how much this caused options prices to deviate from the Platonic Black-Scholes value; in this way we could estimate the actual cost of our hedging strategy rather than accept the value of the idealized value embodied in the Black-Scholes model. Whenever you write a program to do something new, you should first make sure that it does the old things correctly. In testing the program written by one of my colleagues, we first ran it assuming that there were no transactions costs and that you could hedge continuously, in order to ensure that we obtained the exact Black-Scholes replication price. Of course, you cannot really hedge continuously in a computer simulation, so we rehedged very often, several times a day. To our amazement, we discovered that even for 10,000 rehedgings on a one-year option-that is, for more than thirty rebalancings in a day-we still couldn't obtain the exact Black-Scholes value.


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Rebooting India: Realizing a Billion Aspirations by Nandan Nilekani

Airbnb, Atul Gawande, autonomous vehicles, barriers to entry, bitcoin, call centre, carbon credits, cashless society, clean water, cloud computing, collaborative consumption, congestion charging, DARPA: Urban Challenge, data science, dematerialisation, demographic dividend, digital rights, driverless car, Edward Snowden, en.wikipedia.org, energy security, fail fast, financial exclusion, gamification, Google Hangouts, illegal immigration, informal economy, information security, Khan Academy, Kickstarter, knowledge economy, land reform, law of one price, M-Pesa, machine readable, Mahatma Gandhi, Marc Andreessen, Mark Zuckerberg, mobile money, Mohammed Bouazizi, more computing power than Apollo, Negawatt, Network effects, new economy, off-the-grid, offshore financial centre, price mechanism, price stability, rent-seeking, RFID, Ronald Coase, school choice, school vouchers, self-driving car, sharing economy, Silicon Valley, single source of truth, Skype, smart grid, smart meter, software is eating the world, source of truth, Steve Jobs, systems thinking, The future is already here, The Nature of the Firm, transaction costs, vertical integration, WikiLeaks, work culture

The ability of technology to deliver low-cost solutions is especially important in a developing country like ours, and this approach has already proven its worth many times over. For example, withdrawing money from a bank used to take anywhere from ten minutes to an hour, and cost the bank an estimated Rs 50 in processing fees; with the advent of ATMs, the same transaction can be completed under five minutes at a cost of only Rs 15. The money saved in transaction costs is enough to pay for the set-up and maintenance of ATM machines. The National Stock Exchange (NSE) and the National Securities Depository Limited (NSDL) have helped us make the switch to a fully electronic online stock-trading system, bringing down the costs of trading and storing securities to a fraction of what they were a decade ago.

As of August 2015, over 170 million bank accounts have been opened under this scheme.12 Breaking our addiction to cash: Why nations are going cashless India is the fourth largest user of cash in the world. What makes cash-based transactions such an attractive prospect for most Indians? For one, there are no extra transaction costs involved when you pay with cash, costs that often make it financially unviable for smaller merchants to switch to electronic payments. While the local supermarket may have enough transaction volume to simply accept these fees as the cost of doing business, the owner of a corner stall selling bananas, shampoo sachets and cigarettes by the stick certainly doesn’t have any incentive to allow customers to pay by card.

In a payment transaction, the party that benefits the most from that electronic payment typically bears the cost. In this case, the clear beneficiary was the government, which would profit from the high levels of transparency and accountability provided by the Aadhaar-linked microATM network. The savings generated by switching to this model were sufficient to cover the government’s transaction costs; while the official recommendation was 3.14 per cent, the government currently pays a transaction fee of 2 per cent. The operational model for microATMs is much like the public call office (PCO) model, where thousands of small entrepreneurs benefited from operating a pay-per-use phone. The only capital investment needed is Rs 15,000 to purchase a compact operating device, much like a payment card terminal.


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The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do About It by Ian Goldin, Mike Mariathasan

air freight, air traffic controllers' union, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, behavioural economics, Berlin Wall, biodiversity loss, Bretton Woods, BRICs, business cycle, butterfly effect, carbon tax, clean water, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, connected car, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, digital divide, discovery of penicillin, diversification, diversified portfolio, Douglas Engelbart, Douglas Engelbart, Edward Lorenz: Chaos theory, energy security, eurozone crisis, Eyjafjallajökull, failed state, Fairchild Semiconductor, Fellow of the Royal Society, financial deregulation, financial innovation, financial intermediation, fixed income, Gini coefficient, Glass-Steagall Act, global pandemic, global supply chain, global value chain, global village, high-speed rail, income inequality, information asymmetry, Jean Tirole, John Snow's cholera map, Kenneth Rogoff, light touch regulation, Long Term Capital Management, market bubble, mass immigration, megacity, moral hazard, Occupy movement, offshore financial centre, open economy, precautionary principle, profit maximization, purchasing power parity, race to the bottom, RAND corporation, regulatory arbitrage, reshoring, risk free rate, Robert Solow, scientific management, Silicon Valley, six sigma, social contagion, social distancing, Stuxnet, supply-chain management, systems thinking, tail risk, TED Talk, The Great Moderation, too big to fail, Toyota Production System, trade liberalization, Tragedy of the Commons, transaction costs, uranium enrichment, vertical integration

The current period of integration is revolutionary in that a larger set of changes have occurred with a pervasively wider influence than over any comparably short time in previous phases of globalization.3 We consider, in turn, two additional examples of global connectivity that we feel are unique and have significantly lowered the transaction costs of economic integration. The first is innovation and technological progress, particularly with respect to computing power and information technologies. In the late 1960s Douglas Engelbart, a computer scientist at the Stanford Research Institute, gave a demonstration of the new technological opportunities emerging with the advent of personal computing.

Haldane, at the Bank of England, has been doing groundbreaking work on complexity; the New York Fed has been undertaking novel network analysis; and within Europe there is a growing focus on interbank networks from the European Central Bank and a number of the national central banks. Although a growing chorus of economists cautioned against unchecked deregulation, the mainstream of the profession saw the lowering of transaction costs as economically sensible. These economists provided cover for those in government and business who were un willing to curtail the flow of cheap credit that was driving consumers’ confidence and sense of good fortune. It is never easy to turn off the music or take away the punch bowl while a party is in full swing.

In the interaction of politics and economics, new transport technologies played an important part. The most significant innovation, however, came not from new planes or cargo devices but from the Internet. As the standardization of container size and freight technology made international transport easier by substantially reducing transaction costs, the virtual world experienced a parallel standardization with the invention of the Internet Protocol Suite, which significantly simplified communication between disparate networks and across borders. World container traffic was almost seven times as high in 2008 as in 1988; in the intervening period, the Internet fundamentally transformed our commercial habits.


Lectures on Urban Economics by Jan K. Brueckner

accelerated depreciation, affirmative action, Andrei Shleifer, behavioural economics, company town, congestion charging, Edward Glaeser, invisible hand, market clearing, mortgage tax deduction, negative equity, New Economic Geography, profit maximization, race to the bottom, rent control, rent-seeking, Ronald Coase, The Nature of the Firm, transaction costs, urban sprawl

Related studies investigate whether educational outcomes (high school graduation, for example) are more favorable for children raised in owner-occupied dwellings. See Dietz and Haurin 2003 for a survey. Housing Demand and Tenure Choice 129 6.4.3 Some other factors affecting tenure choice A number of other factors not considered in the model may also affect tenure choice. Expected mobility Consumers incur substantial transaction costs in buying and selling houses, including closing costs and commissions for real-estate salespeople. Although these costs are worth bearing occasionally when changing residences, their burden becomes more significant with frequent moves. Therefore, homeownership may be the wrong choice for a consumer who expects to relocate relatively soon.

(d) Considering the social surplus from (a), (b), and (c), comment on the wisdom of using a common pollution standard. How does the standard compare with separate pollution standards, and with the case in which the government doesn’t intervene at all? Exercise 9.2 Suppose the marginal damage and marginal benefit curves in a polluted neighborhood are MD = P/3 and MB = 4 – P. Also, suppose that transactions costs are low, so that the neighborhood residents and the firm can bargain. We saw that in this case, the socially optimal level of pollution is achieved. Start by computing the socially optimal P. Then, for each of the following cases, compute the amount of money transferred through the bargaining process, and indicate who pays whom (i.e., whether consumers pay the firm, or vice versa).

Does peer ability affect student achievement? Journal of Applied Econometrics 18: 527–544. Harris, John R., and Michael P. Todaro. 1970. Migration, Unemployment and Development: A Two-Sector Analysis. American Economic Review 60: 126–142. Haurin, Donald R., and H. Leroy Gill. 2002. The Impact of Transaction Costs and the Expected Length of Stay on Homeownership. Journal of Urban Economics 51: 563–584. Henderson, J. Vernon. 1986. Efficiency of Resource Usage and City Size. Journal of Urban Economics 18: 47–70. Henderson, J. Vernon. 2003. Marshall’s Scale Economies. Journal of Urban Economics 53: 1–28. Hirsch, Werner Z. 1970.


Free Money for All: A Basic Income Guarantee Solution for the Twenty-First Century by Mark Walker

3D printing, 8-hour work day, additive manufacturing, Affordable Care Act / Obamacare, basic income, Baxter: Rethink Robotics, behavioural economics, Capital in the Twenty-First Century by Thomas Piketty, commoditize, confounding variable, driverless car, financial independence, full employment, guns versus butter model, happiness index / gross national happiness, industrial robot, intangible asset, invisible hand, Jeff Bezos, job automation, job satisfaction, John Markoff, Kevin Kelly, laissez-faire capitalism, late capitalism, longitudinal study, market clearing, means of production, military-industrial complex, new economy, obamacare, off grid, off-the-grid, plutocrats, precariat, printed gun, profit motive, Ray Kurzweil, rent control, RFID, Rodney Brooks, Rosa Parks, science of happiness, Silicon Valley, surplus humans, The Future of Employment, the market place, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, universal basic income, warehouse robotics, working poor

Indeed, as intimated, the envisioned future overcomes one of the inherent inefficiencies in a market economy: transaction costs. It takes time and effort to buy and sell goods. Suppose today I offer my neighbors free ice and ice chests. I try to sell the idea that they could get rid of their freezers and the associated costs of running them. An energy efficient fridge/freezer might cost $5 to $10 a month to run, so this would be a savings for my neighbors. However, there are certain transaction costs involved. They would have to come over and pick up the ice. Even if I offer free delivery, they would have to be 206 FREE MONEY FOR ALL home to receive the ice.

Even if I offer free delivery, they would have to be 206 FREE MONEY FOR ALL home to receive the ice. For most, this would not be worth the hassle to save a few dollars a month. As the price of electricity drops, even getting free ice from me would be a losing proposition: my neighbors could make ice virtually for free and have no transaction costs involved. It might be objected that there will still be a free market for “high forms” of intellectual labor. Consider, for example, the intellectual labor of writing a novel, writing a song, or making a movie. If robots and computers cannot emulate these forms of human labor, then there is still something that humans can offer the economy.


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Hustle and Gig: Struggling and Surviving in the Sharing Economy by Alexandrea J. Ravenelle

active transport: walking or cycling, Affordable Care Act / Obamacare, air traffic controllers' union, Airbnb, Amazon Mechanical Turk, barriers to entry, basic income, Broken windows theory, call centre, Capital in the Twenty-First Century by Thomas Piketty, cashless society, Clayton Christensen, clean water, collaborative consumption, collective bargaining, company town, creative destruction, crowdsourcing, digital divide, disruptive innovation, Downton Abbey, East Village, Erik Brynjolfsson, full employment, future of work, gentrification, gig economy, Howard Zinn, income inequality, independent contractor, informal economy, job automation, John Zimmer (Lyft cofounder), low skilled workers, Lyft, minimum wage unemployment, Mitch Kapor, Network effects, new economy, New Urbanism, obamacare, Panopticon Jeremy Bentham, passive income, peer-to-peer, peer-to-peer model, performance metric, precariat, rent control, rent stabilization, ride hailing / ride sharing, Ronald Reagan, scientific management, sharing economy, side hustle, Silicon Valley, strikebreaker, TaskRabbit, TED Talk, telemarketer, the payments system, The Theory of the Leisure Class by Thorstein Veblen, Tim Cook: Apple, transaction costs, Travis Kalanick, Triangle Shirtwaist Factory, Uber and Lyft, Uber for X, uber lyft, ubercab, universal basic income, Upton Sinclair, urban planning, vertical integration, very high income, white flight, working poor, Zipcar

As noted in the journal Contexts, “The sharing economy is a floating signifier for a diverse range of activities. Some are genuinely collaborative and communal, while others are hotly competitive and profit-driven.”8 Juliet Schor groups sharing economy activities into four broad categories: • Recirculation of goods. These services reduce transaction costs (such as consignment shop fees and the risk of financial loss) and provide reputational information on sellers to reduce the risks of financial transactions with strangers. • Increased utilization of durable assets. These services, such as Airbnb and its earlier, free predecessor, Couchsurfing.com, allow some people to earn additional money to supplement traditional incomes, while providing others with low-cost access to goods and space

See also entrepreneurial ethos errand jobs, 41 escrow services, 44, 57, 229n6 ethnicity, 49, 169, 171 Etsy, 39 E-Verify program, 11 EV Grieve (blog), 41 evictions, 41, 46 exchange of services, 27, 29 expenses: bathroom access and, 106–7; Black Car Fund fees, 76; booking fees, 74–75; cleaning fees, 109; consignment shop fees, 27; cost of miles driven, 184–85; fee-based services, 9; out-of-pocket expenses, 140–42, 229n6; platform service fees, 5, 55–56, 79–80, 224n2; rental car fees, 3, 5, 167; transactions costs, 27 expenses of consumption, 9 Facebook, 29, 30, 50, 55, 72, 107, 114, 170–71, 206 Factory Investigating Commission, 93 factory work: Dover, New Hampshire, 67; Lowell, Massachusetts, 66–67; Paterson, New Jersey, 65–66, 224n12; strikes in, 67; workers’ compensation and, 92–94 Fair Labor Standards Act (FLSA) of 1938, 70, 89, 189, 196, 225n23 Fair Labor Standards Amendments of 1966, 70, 89 Family and Medical Leave Act, 196 family issues: double income families, 37; family decay, 32; family leave protections, 94; split-attention parenting, 16 Farley, Lin, 119 fax machine analogy, 17 Federal Reserve Board reports, 9, 41, 175, 176, 220n16 Federal Trade Commission, 233n54 fellow servant rule, 92 Fenton, Anny, 33 54-hour bill, 93 Figure Eight, 38.

See also Airbnb repeat business: Kitchensurfing Tonight, 58; TaskRabbit, 56, 80 research methodology: case studies, 7; critical perspective and, 7–8; Hawthorne effect, 232n24; interview matrix, 216–17; participant recruitment and methodology, 21–22, 223n85, 225n34, 228n30, 229n5; service platforms, 7 response rates, 1, 78–79, 81–82, 160 retirement funds: access to, 190; as contributory plans, 37; decreases in, 9; productivity and, 190; sharing economy and, 94, 156; temporary workers lack of, 180; use of, 61 reviews, negative, 4 review systems: customer review sites, 26; employee monitoring and, 204–5; negative reviews, 4, 13, 91, 143; transfer between sites, 20 Rideshare Guy website, 76 ride-sharing, 223n75, 233n72 risks: overview, 22; mitigation of, 170; as transaction costs, 27 risk shifts: overview, 31, 36–38; advanced planning and, 97–100; assumption of risk, 92; dangers of driving for hire, 101–4; entrepreneurship and, 36–37; financial risks, 37; financial sustainability, 31; marketing of self, 181; risk reduction, 27 Robinson, Spottswood, 119 Rockefeller family, 68–69 Rodriguez, Ydanis, 51 Rogers, Jackie Krasas, 122 Roosevelt, Franklin D., 70 Russell, Mike, 189 safety issues: overview, 113; background screening mechanisms, 113–15; pedestrian dangers, 228n32; yellow taxicab standards, 227n16 Santander Bank, 3, 73 Sapone, Marcela, 187–89 Sasso, Anthony, 58 scams: overview, 23; overpayment scams, 148–49; platforms misuse and, 141–42 Scharf, Michael, 109, 189–90, 192 schedules: client response rates and, 84; computerized scheduling systems, 180; flexibility in, 207; just-in-time scheduling, 179, 180–81; long, 5 scheduling availability, 1, 62, 87 Schierenbeck, Warren, 58–59 Schoar, Antoinette, 38 Schor, Juliet, 16, 26, 27, 56, 100, 183, 194, 224n1 Schultz, Ken, 191 Schumpeter, Joseph A., 207 scientific management, 178 Scott, Marvin, 124 secondary labor market, defined, 37 secondhand economy companies, 27, 28fig. 2.


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The King of Oil: The Secret Lives of Marc Rich by Daniel Ammann

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", accounting loophole / creative accounting, anti-communist, Ayatollah Khomeini, banking crisis, Berlin Wall, Boeing 747, book value, Boycotts of Israel, business intelligence, buy low sell high, energy security, family office, Johann Wolfgang von Goethe, Michael Milken, Mikhail Gorbachev, Nelson Mandela, oil shock, peak oil, purchasing power parity, Ronald Reagan, subprime mortgage crisis, Suez crisis 1956, trade liberalization, transaction costs, transfer pricing, Upton Sinclair, Yom Kippur War

Rich and his partners put the very same theory into practice that economists have expounded for years. Skillful traders do well when the risk is high and the supply is threatened by crisis. Only then can they use their competitive advantage to the best effect. “Trading companies reduce search, negotiation, and transaction costs and seem likely to be employed at least initially when the risks of international trade are high,” says Geoffrey Jones, a professor of business history at Harvard Business School, who is a specialist in trading companies.6 Traders can help their customers by compensating for a lack of information and trust.

It is my belief that this long-term way of thinking is the most important secret of Rich’s success and can explain many of the strategies and courses of action he has followed over the years. Rich was always interested in obtaining long-term contracts with his clients. In economic terms, the development of new markets, making business contacts, and negotiating contracts cost a lot of money. Once a business relationship has been established, many of the so-called transaction costs no longer apply. The longer the relationship, the lower the marginal costs and the higher the potential profits. “We didn’t get into a new country to make a million dollars and then go home. We went to stay there,” said a trader who had opened African markets while working for Rich in the 1970s.

Moritz), 7–8 Sweet Pain of Love, 218 Swissair Flight 111, 113–14 Swiss Federal Act on International Mutual Assistance in Criminal Matters (IMAC), 126–27, 284n Swiss Office for Police Matters, 128–29 Swiss Penal Code, 115, 152–53 Swiss tax treaty, 120–21, 125–27 Switzerland, 76–78, 125–34 extradition of Marc Rich, 128–34, 149–50 flight of Marc Rich to, 109–11, 113–16, 125–26, 201–2 “Sympathy for the Devil” (song), 7 Syria, 54, 72, 202 Taba Summit, 259 Tachkemoni School, 28 Tanker trade, 84–85, 189–90 Tapies, Antony, 10 Tax evasion and fraud, 8–9, 116–17, 125–28, 136–37, 145–47, 167–71 Texaco, 55–57 Thomajan, Bob, 110 Time (magazine), 137 Tin, 41, 44, 227 Torre de Madrid, 49 Trade liberalization, 267 Trader principle, 180–81 Trafford, John, 75–76, 80, 83, 115 Transaction costs, 85, 176 Trans-Asiatic Oil Ltd., 65–66 “Transfer pricing,” 145 Trau, René, 34, 217 Trillin, Calvin, 33–34 Troland, John, 107, 119 Trust, 40, 78, 86–88 Trust (Fukuyama), 86–87 Tucholsky, Kurt, 25 Tunisia, 14, 53, 63 Turkey, 82 20th Century Fox, 108, 111, 122, 123 20/20 (TV program), 254 UNITA (National Union for the Total Independence of Angola), 183–85 United Nations Human Rights Commission, 199 United Nations Oil-for-Food Programme, 231–32 United Nations Security Council, 191 United States of America v.


Mastering Blockchain, Second Edition by Imran Bashir

3D printing, altcoin, augmented reality, autonomous vehicles, bitcoin, blockchain, business logic, business process, carbon footprint, centralized clearinghouse, cloud computing, connected car, cryptocurrency, data acquisition, Debian, disintermediation, disruptive innovation, distributed ledger, Dogecoin, domain-specific language, en.wikipedia.org, Ethereum, ethereum blockchain, fault tolerance, fiat currency, Firefox, full stack developer, general-purpose programming language, gravity well, information security, initial coin offering, interest rate swap, Internet of things, litecoin, loose coupling, machine readable, MITM: man-in-the-middle, MVC pattern, Network effects, new economy, node package manager, Oculus Rift, peer-to-peer, platform as a service, prediction markets, QR code, RAND corporation, Real Time Gross Settlement, reversible computing, RFC: Request For Comment, RFID, ride hailing / ride sharing, Satoshi Nakamoto, seminal paper, single page application, smart cities, smart contracts, smart grid, smart meter, supply-chain management, transaction costs, Turing complete, Turing machine, Vitalik Buterin, web application, x509 certificate

The general objectives are to satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitrations and enforcement costs, and other transaction costs." The original article written by Szabo is available at http://firstmonday.org/ojs/index.php/fm/article/view/548. This idea of smart contracts was implemented in a limited fashion in Bitcoin in 2009, where Bitcoin transactions using a limited scripting language can be used to transfer value between users, over a peer-to-peer network where users do not necessarily trust each other, and there is no need for a trusted intermediary.

Conversely, if the transaction that has an appropriate fee paid is included in the block by miners but has too many complex operations to perform, it can result in an out-of-gas exception if the gas cost is not enough. In this case, the transaction will fail but will still be made part of the block, and the transaction originator will not get any refund. Transaction cost can be estimated using the following formula: Total cost = gasUsed * gasPrice Here, gasUsed is the total gas that is supposed to be used by the transaction during the execution and gasPrice is specified by the transaction originator as an incentive to the miners to include the transaction in the next block.

After clicking on Create, two functions from the contract will be exposed, as shown in the following screenshot: Relevant costs and exposes two methods Functions isAlreadyHased (to check if the idea is already hashed) and SaveIdeaHash (to save the new idea string) can now be invoked as shown in the following example: Invoking the SaveIdeaHash function Now if we look at the logs produced in Remix IDE shown at the bottom of the IDE, we can see helpful details as shown in the following screenshot: Logs The log shown valuable information such as: status: This is 1 in the example, meaning that transaction has been mined and executed successfully. from: This is the address of the account from, which the contract was initiated. to: This is the address of the contract on the blockchain. gas: This shows how much gas is sent. transaction cost: This shows how much gas is consumed. hash: This is the hash of the contract. input: This is input in shown in hex. decoded input: This shows the decoded input. logs: This shows transaction logs. value: This shows the value in Wei in the contract. Similarly, isAlreadyHashed can be called.


pages: 164 words: 57,068

The Second Curve: Thoughts on Reinventing Society by Charles Handy

"Friedman doctrine" OR "shareholder theory", Abraham Maslow, Airbnb, Alan Greenspan, basic income, Bernie Madoff, bitcoin, bonus culture, British Empire, call centre, Clayton Christensen, corporate governance, delayed gratification, Diane Coyle, disruptive innovation, Edward Snowden, falling living standards, future of work, G4S, greed is good, independent contractor, informal economy, Internet of things, invisible hand, joint-stock company, joint-stock limited liability company, Kickstarter, Kodak vs Instagram, late capitalism, mass immigration, megacity, mittelstand, Occupy movement, payday loans, peer-to-peer lending, plutocrats, Ponzi scheme, Robert Solow, Ronald Coase, shareholder value, sharing economy, Skype, Social Responsibility of Business Is to Increase Its Profits, Stanford marshmallow experiment, Steve Jobs, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transaction costs, Veblen good, Walter Mischel

Keeping everything in-house, he suggested, lowered the transaction costs when compared with negotiating with separate outside businesses. Put simply, if you employed them you could tell them what to do. The result of applying the Coase argument was the integrated organisation, where everything connected with the output of the organisation was both owned and managed by it. Fifty years later he was awarded a Nobel Prize for his insight, just when new communication technologies were beginning to cast doubt on his thesis and more and more firms were starting to separate out many of their non-core activities. They found that any transaction costs were outweighed by the savings in overheads and fringe benefits that often go with membership of a large organisation.


pages: 207 words: 52,716

Capitalism 3.0: A Guide to Reclaiming the Commons by Peter Barnes

Albert Einstein, car-free, carbon tax, clean water, collective bargaining, corporate governance, corporate personhood, corporate raider, corporate social responsibility, cotton gin, dark matter, digital divide, diversified portfolio, do well by doing good, Easter island, en.wikipedia.org, Garrett Hardin, gentrification, hypertext link, Isaac Newton, James Watt: steam engine, jitney, junk bonds, Michael Milken, military-industrial complex, money market fund, new economy, patent troll, precautionary principle, profit maximization, Ronald Coase, telemarketer, The Wealth of Nations by Adam Smith, Tragedy of the Commons, transaction costs, War on Poverty, Yogi Berra

In fact, he argued, nature can be protected through property rights, provided they’re clearly defined and the cost of enforcing them is low. In Coase’s model, pollution is a two-sided problem involving a polluter and a pollutee. If one side has clear property rights (for instance, if the polluter has a right to emit, or the pollutee has a right not to be emitted upon), and transaction costs are low, the two sides will come to a deal that reduces pollution. How will this happen? Let’s say the pollutee has a right to clean air. He could, under common law, sue the polluter for damages. To avoid such potential losses, the polluter is willing to pay the pollutee a sum of money up front.

It lets us adjust old assumptions and see what might happen. And it lets us imagine things that don’t exist but could, and sometimes, because we imagined them, later do. Coase supposed that a single polluter or his neighboring pollutee possessed a right to pollute or not be polluted upon. He further supposed that the transaction costs involved in negotiations between the two neighbors were negligible. He made these suppositions half a century ago, at a time when aggregate pollution wasn’t planet-threatening, as it now is. Given today’s altered reality, it might be worth updating Coase’s suppositions to make them relevant to this aggregate problem.


pages: 201 words: 62,593

The Automatic Millionaire, Expanded and Updated: A Powerful One-Step Plan to Live and Finish Rich by David Bach

asset allocation, diversified portfolio, financial independence, index fund, job automation, late fees, money market fund, Own Your Own Home, risk tolerance, robo advisor, transaction costs, Vanguard fund

CHARLES SCHWAB 1-866-855-9102 www.​schwab.​com Charles Schwab is one of the largest full-service financial service firms in the country. They offer both “do-it-yourself” and sophisticated investors a robust platform that makes opening an IRA easy. (Their web site says it takes only about 10 minutes.) The minimum amount to open an IRA at Schwab is $1,000. They offer 3,000 no-load mutual funds and 200 ETFs with no transaction costs. If you prefer to work with an advisor face-to-face, Schwab has 325 branches around the country. At the same time, the firm has quickly taken a lead in the automated investment process, now referred to as “robo advisory.” Their robo advisory program is called Intelligent Portfolios and is available with an account minimum of $5,000.

When you visit the site, go to the investment area and check out the Fidelity Freedom Funds. These funds make investing simple by doing the asset allocation automatically for you based on your retirement date. Additionally, Fidelity offers over 3,400 mutual funds and 70 ETFs with no commissions or transaction costs. If you want to work directly face-to-face with an advisor, they have over 180 branches across the country. The section of the web site on retirement accounts is well laid out and easy to navigate, with a robust planning section. As I write this, Fidelity is beta testing their robo advisory offering called Fidelity Go, which will offer a completely automated investment service that helps you select and build a diversified retirement account and then automatically rebalances it for you.


Trend Commandments: Trading for Exceptional Returns by Michael W. Covel

Alan Greenspan, Albert Einstein, Alvin Toffler, behavioural economics, Bernie Madoff, Black Swan, business cycle, buy and hold, commodity trading advisor, correlation coefficient, delayed gratification, disinformation, diversified portfolio, en.wikipedia.org, Eugene Fama: efficient market hypothesis, family office, full employment, global macro, Jim Simons, Lao Tzu, Long Term Capital Management, managed futures, market bubble, market microstructure, Market Wizards by Jack D. Schwager, Mikhail Gorbachev, moral hazard, Myron Scholes, Nick Leeson, oil shock, Ponzi scheme, prediction markets, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Sharpe ratio, systematic trading, the scientific method, three-martini lunch, transaction costs, tulip mania, upwardly mobile, Y2K, zero-sum game

If you want to go for the really high-frequency stuff, you might try trading visible light, in the range of one cycle per 10-15 seconds. Trading gamma rays, at around one cycle per 10-20 seconds, requires a lot of expensive instrumentation, whereas you can trade visible light by eye. Higher-frequency trading succumbs to declining profit potential against nondeclining transaction costs. You might consider trading a chart with a long enough time scale that transaction costs are a minor factor—something like a daily price chart, going back a year or two.”2 All trends are historical. None are in the present. There is no way to determine a current trend, or even define what current trend might mean. You can only determine historical trends.


pages: 242 words: 60,595

Getting to Yes: Negotiating Agreement Without Giving In by Roger Fisher, Bruce Patton

book value, cognitive dissonance, collective bargaining, rent control, sealed-bid auction, transaction costs, zero-sum game

To sum up, in contrast to positional bargaining, the principled negotiation method of focusing on basic interests, mutually satisfying options, and fair standards typically results in a wise agreement. The method permits you to reach a gradual consensus on a joint decision efficiently without all the transactional costs of digging in to positions only to have to dig yourself out of them. And separating the people from the problem allows you to deal directly and empathetically with the other negotiator as a human being, thus making possible an amicable agreement. Each of the next four chapters expands on one of these four basic points.

This does not mean you should be less persistent in pursuing your interests, but it does suggest avoiding tactics such as threats or ultimatums that involve a high risk of damage to the relationship. Negotiation on the merits helps avoid a choice between giving in or angering the other side. In single-issue negotiations among strangers where the transaction costs of exploring interests would be high and where each side is protected by competitive opportunities, simple haggling over positions may work fine. But if the discussion starts to bog down, be prepared to change gears. Start clarifying the underlying interests. You should also consider the effect of this negotiation on your relationship with others.


The Permanent Portfolio by Craig Rowland, J. M. Lawson

Alan Greenspan, Andrei Shleifer, asset allocation, automated trading system, backtesting, bank run, banking crisis, Bear Stearns, Bernie Madoff, buy and hold, capital controls, correlation does not imply causation, Credit Default Swap, currency risk, diversification, diversified portfolio, en.wikipedia.org, fixed income, Flash crash, high net worth, High speed trading, index fund, inflation targeting, junk bonds, low interest rates, margin call, market bubble, money market fund, new economy, passive investing, Ponzi scheme, prediction markets, risk tolerance, stocks for the long run, survivorship bias, technology bubble, transaction costs, Vanguard fund

The commissions can be free for a limited number of trades a year, less than $10 at a discount broker, or be hundreds of dollars at a full-service brokerage for each trade. Costs vary. The problem is, if you are making many small trades then the ETF can get expensive. If you are, for instance, depositing $100 a month into your portfolio you may spend $10 just to purchase the ETF. In other words, 10 percent of your savings that month went into transaction costs! Not good. However, if you sent that same $100 into a mutual fund company they simply buy the fund without charging you a commission. Your $100 is used to buy the full $100 worth of mutual fund shares. You are able to buy more shares of the fund because you avoided the sales commission. That's much better.

ShareBuilder allows periodic automatic investing (e.g., every month) that will buy your specified ETF shares for $4 per transaction. The money is taken directly from your bank account. Just like Folio Investing, you can space out the buy-ins so that they only occur when you have accumulated a significant contribution in order to keep transaction costs under control. Portfolio Service Plus Physical Gold You can use the ETFs and other funds recommended in this chapter for the stocks, bonds, and cash and set an equal amount to each for the portfolio service. That way each month you will buy equally into all of them. Then use the remaining amount of your monthly savings to purchase physical gold.

This approach will minimize portfolio transactions, which will help to reduce the taxable capital gains generated by the portfolio. 2. During the rebalancing process, if more than one asset is above 25 percent, but not yet at the 35 percent upper band, you can simply leave it alone to save on taxes and transaction costs. In this case, use the proceeds from the asset that has hit 35 percent to buy the other lagging assets that are below 25 percent, but leave any assets above 25 percent alone. 3. When you have to do a sale, pick transaction lots you've owned the longest to get favorable long-term capital gains treatment. 4.


pages: 405 words: 109,114

Unfinished Business by Tamim Bayoumi

Alan Greenspan, algorithmic trading, Asian financial crisis, bank run, banking crisis, Basel III, battle of ideas, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, book value, Bretton Woods, British Empire, business cycle, buy and hold, capital controls, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, currency peg, Doha Development Round, facts on the ground, Fall of the Berlin Wall, financial deregulation, floating exchange rates, full employment, Glass-Steagall Act, Greenspan put, hiring and firing, housing crisis, inflation targeting, junk bonds, Just-in-time delivery, Kenneth Rogoff, liberal capitalism, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, oil shale / tar sands, oil shock, price stability, prisoner's dilemma, profit maximization, quantitative easing, race to the bottom, random walk, reserve currency, Robert Shiller, Rubik’s Cube, Savings and loan crisis, savings glut, technology bubble, The Great Moderation, The Myth of the Rational Market, the payments system, The Wisdom of Crowds, too big to fail, trade liberalization, transaction costs, value at risk

It specified that by the start of 1999 wholesale financial transactions would be carried out in a common currency and hence would not involve transaction costs (Euro notes and coins were introduced in 2002). Since the membership of the monetary union was not to be determined until 1998, there remained uncertainty as to which countries would be admitted and hence the group across which transaction costs would be eliminated. However, it was clear from the start that the currency union would incorporate a wide swathe of Europe, almost certainly including the northern core of Germany, France, the Netherlands, and Belgium. European bankers could confidently make plans on the assumption that transaction costs would be eliminated across a much of the continent by the end of the 1990s.


pages: 344 words: 104,077

Superminds: The Surprising Power of People and Computers Thinking Together by Thomas W. Malone

Abraham Maslow, agricultural Revolution, Airbnb, Albert Einstein, Alvin Toffler, Amazon Mechanical Turk, Apple's 1984 Super Bowl advert, Asperger Syndrome, Baxter: Rethink Robotics, bitcoin, blockchain, Boeing 747, business process, call centre, carbon tax, clean water, Computing Machinery and Intelligence, creative destruction, crowdsourcing, data science, deep learning, Donald Trump, Douglas Engelbart, Douglas Engelbart, driverless car, drone strike, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, experimental economics, Exxon Valdez, Ford Model T, future of work, Future Shock, Galaxy Zoo, Garrett Hardin, gig economy, happiness index / gross national happiness, independent contractor, industrial robot, Internet of things, invention of the telegraph, inventory management, invisible hand, Jeff Rulifson, jimmy wales, job automation, John Markoff, Joi Ito, Joseph Schumpeter, Kenneth Arrow, knowledge worker, longitudinal study, Lyft, machine translation, Marshall McLuhan, Nick Bostrom, Occupy movement, Pareto efficiency, pattern recognition, prediction markets, price mechanism, radical decentralization, Ray Kurzweil, Rodney Brooks, Ronald Coase, search costs, Second Machine Age, self-driving car, Silicon Valley, slashdot, social intelligence, Stephen Hawking, Steve Jobs, Steven Pinker, Stewart Brand, technological singularity, The Nature of the Firm, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Tim Cook: Apple, Tragedy of the Commons, transaction costs, Travis Kalanick, Uber for X, uber lyft, Vernor Vinge, Vilfredo Pareto, Watson beat the top human players on Jeopardy!

Even though markets are often cheaper to operate than hierarchies when many people and decisions are involved, they can be more expensive, too, especially in ever-changing situations that involve only a small number of potential trading partners. A number of Nobel Prize–winning economists, including Ronald Coase, Oliver Williamson, Oliver Hart, and Bengt Holmström, have analyzed the situations in which this is true.8 A key issue is that the transaction costs of making decisions in markets can sometimes be greater than those of hierarchies. For instance, say Ron promises to give Elizabeth a slice of deer meat in exchange for a bunch of grapes, but then he takes the grapes and never gives her the meat. That is a problem. A manager in a hierarchy can deal with problems like this by quickly punishing Ron, but markets require some mechanism outside the market itself.

A manager in a hierarchy can deal with problems like this by quickly punishing Ron, but markets require some mechanism outside the market itself. In the primitive world, this might be a community; in the modern world, it might be contracts and the legal system. In the modern world, another important kind of transaction cost arises when one party has the potential to “hold up” the other party in the future. For example, imagine that I make a significant investment in retooling my tire factory to make a special tire in a size that only fits the cars you make. For the first year, you buy all my tires, and everything is fine.

Comparing Markets to Communities Like hierarchies, markets can have either higher or lower decision-making costs than communities. The same price mechanism that often makes markets cheaper than hierarchies also makes them cheaper than communities when coordinating large numbers of people and decisions. On the other hand, communities, like hierarchies, are often better than markets at dealing with transaction costs arising from things like contract negotiations and hold-up problems. In a community, for example, people already have lots of reasons to go along with decisions that are dictated by community norms; if they violate these norms, they know that the community has many ways to punish them. But in a market, resolving issues that trading parties disagree about requires some extra effort that goes beyond the market itself.


The Future of Money by Bernard Lietaer

agricultural Revolution, Alan Greenspan, Alvin Toffler, banks create money, barriers to entry, billion-dollar mistake, Bretton Woods, business cycle, clean water, complexity theory, corporate raider, currency risk, dematerialisation, discounted cash flows, diversification, fiat currency, financial deregulation, financial innovation, floating exchange rates, full employment, geopolitical risk, George Gilder, German hyperinflation, global reserve currency, Golden Gate Park, Howard Rheingold, informal economy, invention of the telephone, invention of writing, John Perry Barlow, Lao Tzu, Lewis Mumford, low interest rates, Mahatma Gandhi, means of production, microcredit, Money creation, money: store of value / unit of account / medium of exchange, Norbert Wiener, North Sea oil, offshore financial centre, pattern recognition, post-industrial society, price stability, Recombinant DNA, reserve currency, risk free rate, Ronald Reagan, San Francisco homelessness, seigniorage, Silicon Valley, South Sea Bubble, The Future of Employment, the market place, the payments system, Thomas Davenport, trade route, transaction costs, trickle-down economics, two and twenty, working poor, world market for maybe five computers

This theory works from the assumption that all parties have all the information relevant to optimise a given purchase, that there are zero transaction costs and no barriers to entry for few suppliers. In 'real' world transactions, these conditions are rarely met. Interestingly, the cyber economy could become the first actual large-scale involves information, both of us have it. In buying this book, for instance, Government classifications, trade 'near-perfect market'. Information can definitely be more abundant and accessible to more people in cyberspace. The Net makes transaction costs lower than ever. And many of the usual barriers to entry, such as location, capital requirements, etc., are less applicable.

Some technical lessons from the 1930’s usable today One of the more interesting features successfully tested in hundreds of cases in the 1930s (including Worgl, described in Chapter 5) which has not been copied in the more recent systems is the idea of demurrage. This feature has nevertheless some very important and desirable effects. First of all, it would advantageously replace the transaction costs (which have the built-in incentive to discourage trading) necessary to fund overhead expenses. It could also be used to fund some collective project that the community agrees should be supported. One pragmatic disadvantage experienced in today's complementary currency systems is that they typically have to depend on continuous sales efforts by the originators of the system.


pages: 356 words: 105,533

Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market by Scott Patterson

Alan Greenspan, algorithmic trading, automated trading system, banking crisis, bash_history, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, butterfly effect, buttonwood tree, buy and hold, Chuck Templeton: OpenTable:, cloud computing, collapse of Lehman Brothers, computerized trading, creative destruction, Donald Trump, financial engineering, fixed income, Flash crash, Ford Model T, Francisco Pizarro, Gordon Gekko, Hibernia Atlantic: Project Express, High speed trading, information security, Jim Simons, Joseph Schumpeter, junk bonds, latency arbitrage, Long Term Capital Management, machine readable, Mark Zuckerberg, market design, market microstructure, Michael Milken, military-industrial complex, pattern recognition, payment for order flow, pets.com, Ponzi scheme, popular electronics, prediction markets, quantitative hedge fund, Ray Kurzweil, Renaissance Technologies, seminal paper, Sergey Aleynikov, Small Order Execution System, South China Sea, Spread Networks laid a new fibre optics cable between New York and Chicago, stealth mode startup, stochastic process, three-martini lunch, Tragedy of the Commons, transaction costs, uptick rule, Watson beat the top human players on Jeopardy!, zero-sum game

The human market makers and specialists it had had to deal with in the past could throw a wrench into its fine-tuned models, which required fast and flawless execution. It was the same problem that would help scuttle Haim Bodek’s efforts to build an AI trading system at Hull in Chicago. On Island, human middlemen weren’t a problem. What’s more, the high speeds and low transaction costs—as well as the reams of data Island spit out—blended perfectly with Nova’s strategies, which were driven by cutting-edge AI systems that went back to Mercer and Brown’s days developing AI-driven language-translation systems at IBM in the 1980s and early 1990s. Renaissance’s relationship with Island wasn’t perfect.

Eventually, despite Simons’s initial concerns, Renaissance became one of the most prolific users of Island. It was perfect timing. “We remain optimistic,” Simons wrote in a 1999 letter to Renaissance investors. “An inexorable trend towards electronic trading in … equities is having the effect of increasing liquidity and decreasing transaction costs.” The Bots were growing, flexing their muscles, and becoming increasingly powerful. Timber Hill and Renaissance, along with electronic traders such as ATD, were at the vanguard of the Algo Wars, designing programs that could trade automatically, with little or no human intervention. It was just the beginning.

But something had gone wrong. “I must confess to you that I was an ardent proponent of bringing technology to trading and brokerage. Unfortunately, I only saw the good sides. I saw how electronic trading and record-keeping could be used to force people to be more honest, to make the process more efficient, to lower transaction costs and to bring liquidity to the markets. I did not see the forces of fragmentation and the opportunity for people to use technology to keep to the letter but avoid the spirit of the rules—creating the current crisis.” He gazed out at his audience. Peterffy wasn’t shocked to see the stern faces, the shaking heads and averted eyes.


pages: 375 words: 105,586

A Small Farm Future: Making the Case for a Society Built Around Local Economies, Self-Provisioning, Agricultural Diversity and a Shared Earth by Chris Smaje

agricultural Revolution, Airbnb, Alfred Russel Wallace, back-to-the-land, barriers to entry, biodiversity loss, Black Lives Matter, Boris Johnson, carbon footprint, circular economy, clean water, climate change refugee, collaborative consumption, Corn Laws, COVID-19, David Ricardo: comparative advantage, decarbonisation, degrowth, deindustrialization, dematerialisation, demographic transition, Deng Xiaoping, Donald Trump, energy transition, European colonialism, Extinction Rebellion, failed state, fake news, financial deregulation, financial independence, Food sovereignty, Ford Model T, future of work, Gail Bradbrook, garden city movement, Garrett Hardin, gentrification, global pandemic, Great Leap Forward, green new deal, Hans Rosling, hive mind, intentional community, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jevons paradox, land reform, mass immigration, megacity, middle-income trap, Murray Bookchin, Naomi Klein, Peace of Westphalia, peak oil, post-industrial society, precariat, profit maximization, profit motive, rent-seeking, rewilding, Rutger Bregman, Silicon Valley, Silicon Valley billionaire, Steven Pinker, Stewart Brand, Ted Nordhaus, the scientific method, The Wealth of Nations by Adam Smith, Tragedy of the Commons, transaction costs, vertical integration, Washington Consensus, Wolfgang Streeck, zero-sum game

Some people dismiss it as a fallacy of the ‘captured garden’ whereby impoverished farmers unreasonably exploit their own labour in order to make ends meet. That does sometimes seem to be the case, but it can’t account for all instances of the inverse productivity relationship. In fact, no single explanation suffices, but the main factor seems to be the lower transaction costs of small farms employing their own labour and growing produce for their own consumption. Big farms, on the other hand, have lower transaction costs in obtaining finance or purchased farm equipment and selling their produce, which is why there isn’t usually an inverse productivity relationship in wealthy countries.41 Human attention and ingenuity always addresses itself most keenly to the key limiting factor it faces, and when you’re working to produce food for your household from a small area, rather than paying someone to produce it for a market, that limiting factor is usually the productivity of your land.

… which is usually geared to the use of extensive and irregularly yielding resources in situations where livelihoods depend on exploiting, but not over-exploiting, a local ecological base … These include things like seasonal pastures, wild game or firewood gleanings from surrounding forests, or aquatic resources such as fish or irrigation water. They rarely include intensive cropland (gardens, arable fields) which can be intensified through individual or household labour. This is a key point, implying there are transaction costs to maintaining commons, which are probably worth paying only when doing so is easier than the alternatives. It also implies that commons work best where people are reliant for their daily living on fundamentally local resources that are susceptible to over-exploitation. The main way this has worked historically in the northerly latitudes with which I’m most familiar is common pastures for livestock, enabling small-scale farmers lacking land for a commercial herd to keep animals for milk, manure and other default services that make the most of livestock’s ability to tap the local nutrient base.


Kanban in Action by Marcus Hammarberg, Joakim Sunden

Buckminster Fuller, business logic, call centre, continuous integration, en.wikipedia.org, fail fast, index card, Kaizen: continuous improvement, Kanban, Lean Startup, performance metric, place-making, systems thinking, the scientific method, Toyota Production System, transaction costs, Two Sigma

Transaction and coordination costs Transaction cost is a term from economics that represents the cost incurred in making an economic exchange, such as search and information costs, cost of drawing up and enforcing contracts, and so on. Applied to the world of software development, transaction costs mean setup and cleanup activities associated with the delivery of value, such as planning, estimation, budgeting, integration, and deployment. All these costs are really waste (see section 7.1) because the customer would prefer to get the value you deliver without having to pay any of these transaction costs. This doesn’t mean you should stop doing them; it’s just the cost of doing business.


pages: 432 words: 106,612

Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever by Robin Wigglesworth

Albert Einstein, algorithmic trading, asset allocation, Bear Stearns, behavioural economics, Benoit Mandelbrot, Big Tech, Black Monday: stock market crash in 1987, Blitzscaling, Brownian motion, buy and hold, California gold rush, capital asset pricing model, Carl Icahn, cloud computing, commoditize, coronavirus, corporate governance, corporate raider, COVID-19, data science, diversification, diversified portfolio, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, fear index, financial engineering, fixed income, Glass-Steagall Act, Henri Poincaré, index fund, industrial robot, invention of the wheel, Japanese asset price bubble, Jeff Bezos, Johannes Kepler, John Bogle, John von Neumann, Kenneth Arrow, lockdown, Louis Bachelier, machine readable, money market fund, Myron Scholes, New Journalism, passive investing, Paul Samuelson, Paul Volcker talking about ATMs, Performance of Mutual Funds in the Period, Peter Thiel, pre–internet, RAND corporation, random walk, risk-adjusted returns, road to serfdom, Robert Shiller, rolodex, seminal paper, Sharpe ratio, short selling, Silicon Valley, sovereign wealth fund, subprime mortgage crisis, the scientific method, transaction costs, uptick rule, Upton Sinclair, Vanguard fund

In the conclusion to his letter to the Post’s owner, Buffett therefore laid out his recommendations: Either stay the course with a bunch of big, mainstream professional fund managers and accept that the newspaper’s pension fund would likely do slightly worse than the market; find smaller, specialized investment managers who were more likely to be able to beat the market; or simply build a broad, diversified portfolio of stocks that mirrored the entire market. Buffett obliquely noted that “several funds have been established fairly recently to duplicate the averages, quite explicitly embodying the principle that no management is cheaper, and slightly better than average paid management after transaction costs.” At the time there was no real term for such a seemingly lazy investment strategy—at the time championed only by some oddballs working at third-tier, parochial banks in San Francisco, Chicago, and Boston—but today they are called index funds, and the approach is dubbed “passive investing.”

By December 1975, Vanguard had filed a registration in Delaware for the “First Index Investment Trust.” By April of the following year, Bogle, Twardowski, and Riepe had prepared a draft prospectus for FIIT, which projected that the cost of managing an index fund would be 0.3 percent annually in operating expenses, and 0.2 percent in transaction costs—roughly a tenth of the all-in cost of an actively managed fund.14 After they answered follow-up questions from the Vanguard board, the prospectus was formally filed with the SEC in May 1976. Vanguard signed a deal with Standard & Poor’s to be able to license their index for a nominal sum, reflecting how the company didn’t yet recognize its indices as a potential revenue stream.* The next step was to assemble a team of brokerage firms to manage the sale of shares to their clients, given that the fund needed some money to get started and Vanguard had no distribution itself.

Klotz and Booth quickly realized that DFA needed someone to beef up their trading systems, especially vital since smaller stocks were vastly more arduous to trade than the likes of Coca-Cola or General Motors. If they did a bad job, the fund would at best struggle to accurately mimic its underlying market, and at worst slowly bleed out through the constant churn of transaction costs. Rex Sinquefield told his colleagues he was “staying the hell out of it,” but encouraged the idea, knowing how useful she could be to DFA. Initially she spent long nights overhauling their trading system free of charge, but after a long period of incessant nagging, Jeanne Sinquefield joined DFA as its head of trading.


pages: 371 words: 107,141

You've Been Played: How Corporations, Governments, and Schools Use Games to Control Us All by Adrian Hon

"hyperreality Baudrillard"~20 OR "Baudrillard hyperreality", 4chan, Adam Curtis, Adrian Hon, Airbnb, Amazon Mechanical Turk, Amazon Web Services, Astronomia nova, augmented reality, barriers to entry, Bellingcat, Big Tech, bitcoin, bread and circuses, British Empire, buy and hold, call centre, computer vision, conceptual framework, contact tracing, coronavirus, corporate governance, COVID-19, crowdsourcing, cryptocurrency, David Graeber, David Sedaris, deep learning, delayed gratification, democratizing finance, deplatforming, disinformation, disintermediation, Dogecoin, electronic logging device, Elon Musk, en.wikipedia.org, Ethereum, fake news, fiat currency, Filter Bubble, Frederick Winslow Taylor, fulfillment center, Galaxy Zoo, game design, gamification, George Floyd, gig economy, GitHub removed activity streaks, Google Glasses, Hacker News, Hans Moravec, Ian Bogost, independent contractor, index fund, informal economy, Jeff Bezos, job automation, jobs below the API, Johannes Kepler, Kevin Kelly, Kevin Roose, Kickstarter, Kiva Systems, knowledge worker, Lewis Mumford, lifelogging, linked data, lockdown, longitudinal study, loss aversion, LuLaRoe, Lyft, Marshall McLuhan, megaproject, meme stock, meta-analysis, Minecraft, moral panic, multilevel marketing, non-fungible token, Ocado, Oculus Rift, One Laptop per Child (OLPC), orbital mechanics / astrodynamics, Parler "social media", passive income, payment for order flow, prisoner's dilemma, QAnon, QR code, quantitative trading / quantitative finance, r/findbostonbombers, replication crisis, ride hailing / ride sharing, Robinhood: mobile stock trading app, Ronald Coase, Rubik’s Cube, Salesforce, Satoshi Nakamoto, scientific management, shareholder value, sharing economy, short selling, short squeeze, Silicon Valley, SimCity, Skinner box, spinning jenny, Stanford marshmallow experiment, Steve Jobs, Stewart Brand, TED Talk, The Nature of the Firm, the scientific method, TikTok, Tragedy of the Commons, transaction costs, Twitter Arab Spring, Tyler Cowen, Uber and Lyft, uber lyft, urban planning, warehouse robotics, Whole Earth Catalog, why are manhole covers round?, workplace surveillance

His answer was that while using contractors would, in theory, be cheaper due to market competition driving the price of labour down, companies would suffer significant transaction costs if they took that route—everything from constantly arguing about costs and worrying about losing trade secrets to spending too much time looking for (and keeping) good workers. Companies that opted instead to employ workers might pay more for their labour but would avoid a lot of those transaction costs, so they’d come out on top in the long run. In the 1980s, management consultants argued Coase’s theory no longer applied, since computers—like those that now tell Amazon warehouse workers what to pick and where to walk—could magically reduce or even eliminate those transaction costs.

In the 1980s, management consultants argued Coase’s theory no longer applied, since computers—like those that now tell Amazon warehouse workers what to pick and where to walk—could magically reduce or even eliminate those transaction costs. Whether or not this was true, it was a great story, and in any case, dismembering big firms was a tried-and-tested way of boosting stock prices. And so in the first two decades of the 2000s, venture capitalists and investors eagerly poured billions into startups that were designed from the ground up to be powered by loose groups of independent, self-employed contractors. Those startups included Uber, Amazon, Airbnb, and innumerable other “sharing economy” and “gig economy” businesses which have no workers and own no property but instead use APIs to outsource all front-line functions that require a human.


pages: 144 words: 55,142

Interlibrary Loan Practices Handbook by Cherie L. Weible, Karen L. Janke

Firefox, information retrieval, Internet Archive, late fees, machine readable, Multics, optical character recognition, pull request, QR code, transaction costs, Wayback Machine, Works Progress Administration

This decision must be made carefully on a case-bycase basis and according to local policy (see “Section 107—Fair Use” later in this chapter). Borrower Responsibilities and Options The decision by a library about whether to subscribe to a journal is out of the scope of this chapter. However, acquisitions staff and ILL practitioners should work closely with one another to ensure that royalty fees, as well as the more hidden ILL transaction costs, do not exceed the price of a subscription and to ensure that collections are managed so that patrons’ needs are met. Once a subscription to a journal title is started, the library can begin to borrow recent articles freely from it. The Copyright Clearance Center (CCC; www.copyright.com) opened for business in 1978.

In addition to cost data, the studies provide us with the best practices of high-performing libraries that can be adopted by others. The first, a cost study, was done in 1992 as a joint project of ARL and the Research Libraries Group (RLG) and had seventy-six participants from the United States and Canada.3 Researchers learned that staff costs accounted for 77 percent of total transaction cost (combined borrowing and lending). The second study was conducted in 1996 with 119 participants—ninety-seven research libraries and twenty-two college libraries from the Oberlin Group.4 The results are broken out for the two library types for costs, fill rate, turnaround time, and user satisfaction.


pages: 274 words: 60,596

Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School by Andrew Hallam

Albert Einstein, asset allocation, Bernie Madoff, buy and hold, diversified portfolio, financial independence, George Gilder, index fund, John Bogle, junk bonds, Long Term Capital Management, low interest rates, Mary Meeker, new economy, passive investing, Paul Samuelson, Ponzi scheme, pre–internet, price stability, random walk, risk tolerance, Silicon Valley, South China Sea, stocks for the long run, survivorship bias, transaction costs, Vanguard fund, yield curve

They won’t want you stepping anywhere near the Whopper. And they certainly won’t want you paying attention to the leader of Harvard University’s Endowment Fund, Jack Meyer. When interviewed by William C. Symonds in 2004 for Bloomberg Businessweek, he said: “The investment business is a giant scam. It deletes billions of dollars every year in transaction costs and fees. . . Most people think they can find fund managers who can outperform, but most people are wrong. You should simply hold index funds. No doubt about it”13 Clearly, investing in index funds is a way to statistically ensure the highest odds of investment success. Doing so, however, means that you will need to stand your ground and perhaps take the road less traveled, while most people succumb to the impressive sales rhetoric that leads them toward—at the very least—investment mediocrity with actively managed mutual funds.

When you have found a business that you want to buy, analyze its price as if you were buying the entire business. The return you make can be highly dependent on the price you pay. But even with the best stock-picking tools, the odds are high that eventually most stock pickers will lose to market-tracking indexes, especially after factoring in transaction costs and taxes. It’s fun to fight the tide. But you should invest the bulk of your money intelligently with a diversified account of indexes. Notes 1. “Women Better Investors Than Men,” BBC News online, accessed April 16, 2011, http://news.bbc.co.uk/2/hi/business/4606631.stm. 2. Jason Zweig, “How Women Invest Differently Than Men,” The Wall Street Journal, May 12, 2009, accessed April 16, 2011, http://finance.yahoo.com/focus-retirement/article/107064/How-Women-Invest-Differently-Than-Men?


pages: 578 words: 168,350

Scale: The Universal Laws of Growth, Innovation, Sustainability, and the Pace of Life in Organisms, Cities, Economies, and Companies by Geoffrey West

"World Economic Forum" Davos, Alfred Russel Wallace, Anthropocene, Anton Chekhov, Benoit Mandelbrot, Black Swan, British Empire, butterfly effect, caloric restriction, caloric restriction, carbon footprint, Cesare Marchetti: Marchetti’s constant, clean water, coastline paradox / Richardson effect, complexity theory, computer age, conceptual framework, continuous integration, corporate social responsibility, correlation does not imply causation, cotton gin, creative destruction, dark matter, Deng Xiaoping, double helix, driverless car, Dunbar number, Edward Glaeser, endogenous growth, Ernest Rutherford, first square of the chessboard, first square of the chessboard / second half of the chessboard, Frank Gehry, Geoffrey West, Santa Fe Institute, Great Leap Forward, Guggenheim Bilbao, housing crisis, Index librorum prohibitorum, invention of agriculture, invention of the telephone, Isaac Newton, Jane Jacobs, Jeff Bezos, Johann Wolfgang von Goethe, John von Neumann, Kenneth Arrow, laissez-faire capitalism, Large Hadron Collider, Larry Ellison, Lewis Mumford, life extension, Mahatma Gandhi, mandelbrot fractal, Marc Benioff, Marchetti’s constant, Masdar, megacity, Murano, Venice glass, Murray Gell-Mann, New Urbanism, Oklahoma City bombing, Peter Thiel, power law, profit motive, publish or perish, Ray Kurzweil, Richard Feynman, Richard Florida, Salesforce, seminal paper, Silicon Valley, smart cities, Stephen Hawking, Steve Jobs, Stewart Brand, Suez canal 1869, systematic bias, systems thinking, technological singularity, The Coming Technological Singularity, The Death and Life of Great American Cities, the scientific method, the strength of weak ties, time dilation, too big to fail, transaction costs, urban planning, urban renewal, Vernor Vinge, Vilfredo Pareto, Von Neumann architecture, Whole Earth Catalog, Whole Earth Review, wikimedia commons, working poor

To varying degrees, all of these provide insights into the nature, dynamics, and structure of companies, but none brings a broad scientific perspective to the problem in the sense I have been using in this book.2 The mechanisms that have traditionally been suggested for understanding companies can be divided into three broad categories: transaction costs, organizational structure, and competition in the marketplace. Although these are interrelated they have very often been treated separately. In the language of the framework developed in previous chapters these can be expressed as follows: (1) Minimizing transaction costs reflects economies of scale driven by an optimization principle, such as maximizing profits. (2) Organizational structure is the network system within a company that conveys information, resources, and capital to support, sustain, and grow the enterprise. (3) Competition results in the evolutionary pressures and selection processes inherent in the ecology of the marketplace.

Much of the work is qualitative, often gathered through case studies of specific companies or business sectors, from which the general dynamical and organizational features of companies are intuited. Historically, companies have been viewed as the necessary agents that organize people to work collaboratively to take advantage of economies of scale, thereby reducing the transaction costs of production or services between the manufacturer or provider and the consumer. The drive to minimize costs so as to maximize profits and gain greater market share has been extraordinarily successful in creating the modern market economy by providing goods and services at affordable prices to vast numbers of people.

., 124, 403–4 Tesla, Nikola, 123–24 Texas, flow of transport, 292–94, 293 Thames Tunnel, 64 Theory of Everything (ToE), 429–30, 444 theory of relativity, 107–8, 115, 339, 422, 428, 429 thermodynamics, 14, 69, 71, 233, 236, 237 Thiel, Peter, 184 Thomas, Warren, 52–53 Thomas Edison Company, 123–24 Thompson, D’Arcy Wentworth, 86–88, 97, 111, 181 ¾ power scaling law, 25–27, 93, 155, 458n time dilation, 332 tipping points, 16, 24, 157–58, 382, 463n total market capitalization, 379, 389–90, 390 Tottenham Hotspur, 187 “Toward a Metabolic Theory of Ecology” (Brown, Savage, Allen, Gillooly), 174 “toy model,” 109 traffic flows, 292–94 traffic gridlock, 332–33 transaction costs, 380, 381 transportation time, 332–35 travel time, 329–30, 332–35, 346–47 treadmills, 328, 412, 418 Treatise on Man (Quetelet), 56 trees, 116–17, 121, 121–22, 172, 459–60n scaling exponents, 147, 150, 150–51 trial and error, 69–71, 74–75 Triumph of the City, The (Glaeser), 213 tumors, 6, 15, 27, 172 growth curves, 170, 171 turbulence, 72 Tusko (elephant), 53 Twitter, 296, 332, 340, 447 Two New Sciences (Galileo), 38–42 Tycho Brahe, 439 Tyrannosaurus rex, 159 UCLA School of Medicine, 205 Ultimate Resource, The (Simon), 232–33 United Nations Millennium Development Goals, 230–31 unit of length, 135–37 universality concept of, 76–77 magic number four and, 93–99 “universal laws of life,” 81, 87 universal time, 423–24 University of Modena, 249 University of New Mexico (UNM), 105, 106 urbanization, 6–7, 8–10, 214–15, 223–26 global sustainability and, 28–32, 213–15 life span and, 184–85, 191, 192–93 Urbanocene, 212, 214–15, 236, 262 urban overload, 303–4 urban planning and design, 253–58, 261–67, 290, 294–95 urban psychology, 302–4 urban renewal, 260, 261, 263 urban sociology, 266 Utzon, Jørn, 259 van der Leeuw, Sander, 249–50 van Gogh, Vincent, 189 variational principle, 115–16 Vasa (ship), 70, 459n Vinge, Vernor, 422 von Neumann, John, 424 wages in cities, 30, 275, 276, 278, 281, 285–86 Walford, Roy, 205–6, 207 walking pace, 334, 335–36, 336 Wallace, Alfred Russel, 89, 228 Walmart, 32, 388–89, 394 wars, mathematical analysis of, 132–35 washing machine, 152–53 Washington, D.C., 266–67 Washington Square (New York City), 260, 261 water supply, 360–63 Watson, James, 84, 437 watts (W), 457n Watts, Duncan, 297–98, 300–301 wave theory of light, 126 wealth creation and ranking of cities, 355–59 “wear and tear,” 15, 88, 199–200 decline of body functions with age, 195, 197, 201, 202 weight lifting, 48–51, 50, 352–53 Welwyn Garden City, 255 West, Jacqueline, 187, 317 West, Louis, 52–53 whales, 3, 5, 16, 27, 80, 90–91, 92, 155, 159–60.


pages: 403 words: 119,206

Toward Rational Exuberance: The Evolution of the Modern Stock Market by B. Mark Smith

Alan Greenspan, bank run, banking crisis, book value, business climate, business cycle, buy and hold, capital asset pricing model, compound rate of return, computerized trading, Cornelius Vanderbilt, credit crunch, cuban missile crisis, discounted cash flows, diversified portfolio, Donald Trump, equity risk premium, Eugene Fama: efficient market hypothesis, financial independence, financial innovation, fixed income, full employment, Glass-Steagall Act, income inequality, index arbitrage, index fund, joint-stock company, junk bonds, locking in a profit, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market clearing, merger arbitrage, Michael Milken, money market fund, Myron Scholes, Paul Samuelson, price stability, prudent man rule, random walk, Richard Thaler, risk free rate, risk tolerance, Robert Bork, Robert Shiller, Ronald Reagan, scientific management, shareholder value, short selling, stocks for the long run, the market place, transaction costs

Under relentless pressure from the government and its biggest customers, the Exchange was finally forced to agree to the elimination of fixed commission rates effective May 1, 1975 (to become known as May Day). Dire predictions emanated from affected brokers, who feared that the traditional means by which business was done would be destroyed. They were right. The brokerage industry would undergo severe dislocations in the years ahead. But at the same time, the reduction in transaction costs (first for institutions but eventually also for individuals) caused an explosion in trading volume. The active trading that can be seen today, both by institutions and by individuals (often transacting on the Internet for less than $10 per trade), would not have been possible without the May Day reforms.

Turnover on the New York Stock Exchange (defined as the annual Exchange trading volume divided by the total number of Exchange-listed shares outstanding), which had fallen to an all-time low of 12% in 1940, rebounded to exceed 80% by the mid-1980s. Professional portfolio managers tended to trade more frequently than individuals, particularly since the elimination of fixed commission rates on New York Stock Exchange stocks in 1975 greatly reduced transaction costs. In addition, new products (like stock index futures) enabled institutions to buy and sell large baskets of stock quickly and cheaply, further increasing the pace of trading activity. The total value of the U.S. stock market grew from roughly $1.4 trillion in 1980 to nearly $3 trillion by early 1987.

income taxation index arbitrage index funds Individual Retirement Accounts (IRAs) industrial revolution industrials inflation; Federal Reserve policies to control; growth investing and; OPEC oil price increases and Inland Steel insider trading; outlawed Institutional Investor institutional investors; and crash of 1962; Nifty Fifty and; portfolio insurance and; reduction in transaction costs for; see also mutual funds; pension funds insurance companies: investments by; stocks of Internal Revenue Service (IRS) International Business Machines (IBM) International Mercantile Marine Internet investment trusts Investors Overseas Services (IOS) ITT Izvestia Johnson, Edward Crosby, II Johnson, Lyndon B.


pages: 349 words: 114,038

Culture & Empire: Digital Revolution by Pieter Hintjens

4chan, Aaron Swartz, airport security, AltaVista, anti-communist, anti-pattern, barriers to entry, Bill Duvall, bitcoin, blockchain, Boeing 747, bread and circuses, business climate, business intelligence, business process, Chelsea Manning, clean water, commoditize, congestion charging, Corn Laws, correlation does not imply causation, cryptocurrency, Debian, decentralized internet, disinformation, Edward Snowden, failed state, financial independence, Firefox, full text search, gamification, German hyperinflation, global village, GnuPG, Google Chrome, greed is good, Hernando de Soto, hiring and firing, independent contractor, informal economy, intangible asset, invisible hand, it's over 9,000, James Watt: steam engine, Jeff Rulifson, Julian Assange, Kickstarter, Laura Poitras, M-Pesa, mass immigration, mass incarceration, mega-rich, military-industrial complex, MITM: man-in-the-middle, mutually assured destruction, Naomi Klein, national security letter, Nelson Mandela, new economy, New Urbanism, no silver bullet, Occupy movement, off-the-grid, offshore financial centre, packet switching, patent troll, peak oil, power law, pre–internet, private military company, race to the bottom, real-name policy, rent-seeking, reserve currency, RFC: Request For Comment, Richard Feynman, Richard Stallman, Ross Ulbricht, Russell Brand, Satoshi Nakamoto, security theater, selection bias, Skype, slashdot, software patent, spectrum auction, Steve Crocker, Steve Jobs, Steven Pinker, Stuxnet, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trade route, transaction costs, twin studies, union organizing, wealth creators, web application, WikiLeaks, Y2K, zero day, Zipf's Law

Similar natural monopolies are rail transport, electricity, phones, and the Internet Protocol. You want your toaster to plug into any power socket. You want your phone to reach anyone and be reachable by anyone. When a successful natural monopoly emerges thanks to luck, regulation, or market forces, it eliminates a lot of waste -- also called "friction costs," "transaction costs," or perhaps "excess profits." Natural monopolies can create huge value. Vendors (those selling stuff) have a corresponding incentive to try to capture that value, restoring profits that would be lost by too much of Adam Smith's invisible hand. The natural monopoly can benefit users by releasing value.

The PATRIOT Act makes it illegal to transmit funds from account to account without such a license. The loss of this license would effectively kill PayPal. Micropayment Systems As the Web boomed from 1995 to 1999, various groups developed micropayment systems that solved credit cards' high transaction costs. The theory at that time was that people would, for example, pay a few cents to read an on-line newspaper. These systems were developed, cast into official standards (the HTTP web protocol has an error code called "Payment Required"), and then quietly abandoned due to lack of interest. It turned out that advertising worked much better as a micropayment system, which brought us Google.

Typically, these are existing publishers whose subscribers already expect to pay. The focus however is on subscriptions, not micropayments. In 2002, the M-Pesa system formalized mobile phone micropayments in Kenya. Before that, users sent each other phone credit. Phone credit makes an extraordinarily good digital currency, as it is safe, portable, and has minimal transaction costs. Systems like M-Pesa succeeded in Africa mainly because there was no existing financial industry to lobby against it. Good luck trying to get a Visa card if you live in Lagos, Nigeria. Digital Currencies: From E-Gold to BitCoin The first digital currency was e-gold, founded in 1996. At its peak, e-gold had five million users and transactions of $2 billion a year.


pages: 354 words: 118,970

Transaction Man: The Rise of the Deal and the Decline of the American Dream by Nicholas Lemann

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, Abraham Maslow, Affordable Care Act / Obamacare, Airbnb, airline deregulation, Alan Greenspan, Albert Einstein, augmented reality, basic income, Bear Stearns, behavioural economics, Bernie Sanders, Black-Scholes formula, Blitzscaling, buy and hold, capital controls, Carl Icahn, computerized trading, Cornelius Vanderbilt, corporate governance, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, deal flow, dematerialisation, diversified portfolio, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, Fairchild Semiconductor, financial deregulation, financial innovation, fixed income, future of work, George Akerlof, gig economy, Glass-Steagall Act, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Ida Tarbell, index fund, information asymmetry, invisible hand, Irwin Jacobs, Joi Ito, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kickstarter, life extension, Long Term Capital Management, Mark Zuckerberg, Mary Meeker, mass immigration, means of production, Metcalfe’s law, Michael Milken, money market fund, Mont Pelerin Society, moral hazard, Myron Scholes, Neal Stephenson, new economy, Norman Mailer, obamacare, PalmPilot, Paul Samuelson, Performance of Mutual Funds in the Period, Peter Thiel, price mechanism, principal–agent problem, profit maximization, proprietary trading, prudent man rule, public intellectual, quantitative trading / quantitative finance, Ralph Nader, Richard Thaler, road to serfdom, Robert Bork, Robert Metcalfe, rolodex, Ronald Coase, Ronald Reagan, Sand Hill Road, Savings and loan crisis, shareholder value, short selling, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Snow Crash, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, TaskRabbit, TED Talk, The Nature of the Firm, the payments system, the strength of weak ties, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, too big to fail, transaction costs, universal basic income, War on Poverty, white flight, working poor

Coase then answered his own question, proposing a new way to think about what functions a corporation should assume and manage through its own organization by calculating which alternative—performing a function internally or purchasing it from another firm—carried lower “transaction costs.” At Alfred Sloan’s General Motors, for example, it made economic sense to own and operate factories and an auto-lending division, but not dealerships or iron mines—going outside GM for the former had high transaction costs, but not going outside for the latter. The real importance of his article was in reviving the classic economic idea that in a market system, society, rather than resting on an unshakable foundation of major institutions, “becomes not an organization but an organism.”

It implied, unsurprisingly, that the Economic Graph the company had been promoting was the key to growth: whether or not it was a direct case of cause and effect, cities with denser networks of LinkedIn connections produced more new jobs than cities with sparser networks. The perpetually exuberant intellectual culture of Silicon Valley had rediscovered Ronald Coase’s old essay “The Nature of the Firm”; the current read of it was that the Internet had reduced transaction costs so radically that conventional business organizations were becoming unnecessary (which of course meant that conventional benefits and pensions would be unnecessary too). Even the most complex projects could be executed by loose, temporary assemblages of talent. Important innovations would come from small new companies, not big old ones.


Financial Statement Analysis: A Practitioner's Guide by Martin S. Fridson, Fernando Alvarez

Bear Stearns, book value, business cycle, corporate governance, credit crunch, discounted cash flows, diversification, Donald Trump, double entry bookkeeping, Elon Musk, financial engineering, fixed income, information trail, intangible asset, interest rate derivative, interest rate swap, junk bonds, negative equity, new economy, offshore financial centre, postindustrial economy, profit maximization, profit motive, Richard Thaler, shareholder value, speech recognition, statistical model, stock buybacks, the long tail, time value of money, transaction costs, Y2K, zero-coupon bond

Cash and cash equivalents—Extinguishment of Dollar Thrifty's nonvehicle debt, payment of a special cash dividend to Dollar Thrifty shareholders prior to closing, reflection of the cash portion of the merger consideration, retention payments by Dollar Thrifty prior to closing, estimate of future merger-related transaction costs, additional borrowings under Hertz's senior asset-based lending facility, and reclassification of Dollar Thrifty's cash and cash equivalents, as Dollar Thrifty's required minimum balance would cease to be necessary upon extinguishment of the described debt. (The last item also results in an adjustment to cash and cash equivalents—required minimum balance.)

To adjust cash and cash equivalents, as follows: (In thousands) Extinguishment of DTG's non-vehicle debt prior to closing $ (153,125) Special Cash Dividend paid to DTG shareholders prior to closing (see Note 4(a)) (200,000) Cash portion of merger consideration (see Note 3) (1,071,933) Retention payments paid by DTG prior to closing(i) (see Note 4(a)) (3,880) Estimate of future merger-related transaction costs (49,165) Additional borrowings under Hertz's Senior ABL facility 515,000 Reclassification of DTG's cash and cash equivalents---required minimum balance(ii) 100,000 Total $ (863,103) (i)DTG has established a retention program with a pool of approximately $7,760,000 for DTG employees who are not executive officers, as to which DTG and Hertz have agreed that 50% of the approximately $7,760,000 charge is payable upon completion of the merger and 50% is payable upon completion of a six-month requisite service period following the merger.

To record the stock portion of the merger consideration, at fair value less par, and to eliminate DTG's additional paid-in-capital, as follows: (In thousands) Eliminate DTG's additional paid-in capital $ (937,093) Issuance of Hertz common stock and options 287,630 Total $ (649,463) p. To eliminate DTG's accumulated deficit, and to record estimated non-recurring costs of Hertz and DTG for advisory, legal, regulatory and valuation costs, as follows: (In thousands) Eliminate DTG's accumulated deficit $ 223,630 Estimated remaining merger related transaction costs assumed to be non-recurring (49,165) Total $ 174,465 q. To eliminate DTG's accumulated other comprehensive loss. r. To eliminate DTG's treasury stock. The unaudited pro forma condensed combined financial statements do not reflect Hertz's expected realization of annual cost savings of $180 million by 2013.


pages: 892 words: 91,000

Valuation: Measuring and Managing the Value of Companies by Tim Koller, McKinsey, Company Inc., Marc Goedhart, David Wessels, Barbara Schwimmer, Franziska Manoury

accelerated depreciation, activist fund / activist shareholder / activist investor, air freight, ASML, barriers to entry, Basel III, Black Monday: stock market crash in 1987, book value, BRICs, business climate, business cycle, business process, capital asset pricing model, capital controls, Chuck Templeton: OpenTable:, cloud computing, commoditize, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, currency risk, discounted cash flows, distributed generation, diversified portfolio, Dutch auction, energy security, equity premium, equity risk premium, financial engineering, fixed income, index fund, intangible asset, iterative process, Long Term Capital Management, low interest rates, market bubble, market friction, Myron Scholes, negative equity, new economy, p-value, performance metric, Ponzi scheme, price anchoring, proprietary trading, purchasing power parity, quantitative easing, risk free rate, risk/return, Robert Shiller, Savings and loan crisis, shareholder value, six sigma, sovereign wealth fund, speech recognition, stocks for the long run, survivorship bias, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, two and twenty, value at risk, yield curve, zero-coupon bond

If the company intends to use the asset for its remaining life (by renewing the lease as it expires), then it has created no value, even though the company appears to be less capital-intensive and to have lower debt. In fact, it has destroyed value because the cost of the lease is higher than the cost of borrowing. The company also incurs its own transaction costs and may have to pay taxes on any gain from the sale of the asset. What’s more, other creditors and rating agencies will often treat the lease as a debt equivalent anyway. The transaction may create value if the company wants the ability to stop using the asset before its remaining life expires and wants to eliminate the risk that the value of the asset will be lower when it decides to stop using the asset.

Informed investors develop a point of view about the intrinsic value of the company’s shares based on its underlying fundamentals, such as return on capital and growth. They base their buy and sell decisions on this informed point of view. They may not all agree on the intrinsic value. Some may believe the company’s shares are worth $40, others $50, and others $60. Because of transaction costs and uncertainty about the intrinsic value, they will trade only if the stock price deviates by more than 10 percent from their value estimates. The other type of investors in this market are the noise traders. These traders may be news oriented, trading on any event that they believe will move the share price in the near term, without having a point of view on the company’s intrinsic value.

Investors can diversify their investment portfolios at lower cost than companies can diversify their business portfolios, because they only have to buy and sell stocks, something they can do easily and relatively cheaply many times a year. In contrast, substantially changing the shape of a portfolio of real businesses involves a diversified company in considerable transaction costs and disruption, and it typically takes many years. Moreover, the business units of diversified companies often perform less well than those of more focused peers, partly because of added complexity and bureaucracy. Today, many executives and boards in developed markets realize how difficult it is to add value to businesses that aren’t connected to each other in some way.


pages: 237 words: 67,154

Ours to Hack and to Own: The Rise of Platform Cooperativism, a New Vision for the Future of Work and a Fairer Internet by Trebor Scholz, Nathan Schneider

1960s counterculture, activist fund / activist shareholder / activist investor, Airbnb, Amazon Mechanical Turk, Anthropocene, barriers to entry, basic income, benefit corporation, Big Tech, bitcoin, blockchain, Build a better mousetrap, Burning Man, business logic, capital controls, circular economy, citizen journalism, collaborative economy, collaborative editing, collective bargaining, commoditize, commons-based peer production, conceptual framework, content marketing, crowdsourcing, cryptocurrency, data science, Debian, decentralized internet, deskilling, disintermediation, distributed ledger, driverless car, emotional labour, end-to-end encryption, Ethereum, ethereum blockchain, food desert, future of work, gig economy, Google bus, hiring and firing, holacracy, income inequality, independent contractor, information asymmetry, Internet of things, Jacob Appelbaum, Jeff Bezos, job automation, Julian Assange, Kickstarter, lake wobegon effect, low skilled workers, Lyft, Mark Zuckerberg, means of production, minimum viable product, moral hazard, Network effects, new economy, offshore financial centre, openstreetmap, peer-to-peer, planned obsolescence, post-work, profit maximization, race to the bottom, radical decentralization, remunicipalization, ride hailing / ride sharing, Rochdale Principles, SETI@home, shareholder value, sharing economy, Shoshana Zuboff, Silicon Valley, smart cities, smart contracts, Snapchat, surveillance capitalism, TaskRabbit, technological solutionism, technoutopianism, transaction costs, Travis Kalanick, Tyler Cowen, Uber for X, uber lyft, union organizing, universal basic income, Vitalik Buterin, W. E. B. Du Bois, Whole Earth Catalog, WikiLeaks, women in the workforce, workplace surveillance , Yochai Benkler, Zipcar

Peer cooperativism shares these core governance and organizational patterns with commons-based peer production, but its defining feature, enabling workers to make a living from their cooperative work, presents distinct challenges that peer production has not had to face. Finally, networks have destabilized the model of the firm. Transaction costs associated with both market exchanges and social sharing have declined; interactions once preserved for firms that combined capital with contractual commitments for labor, materials, and distribution can now be done in a more distributed form. This technological fact has underwritten the rise of the on-demand economy, workforce management software that increases contingency, and outsourcing and offshoring no less than it underwrote FOSS, Wikipedia, or SETI@home.

Uber, for instance, does not own cars and doesn’t employ drivers; it regards its workers as independent contractors. In this way, the company externalizes most costs to workers, eliminating collective bargaining and implementing intrusive data-driven mechanisms of reputation and rankings to reduce transaction costs (for the company). The growth of the sharing economy has so far come with an increasing precarization of labor, and erosion of job security, social protection, and safety nets for workers, such as benefits related to healthcare, pensions, parenting, and so on. If you are European like myself, and you’re used to a functioning, social-democratic safety net, what is now promised by companies like Uber and Airbnb is not very appealing.


pages: 239 words: 69,496

The Wisdom of Finance: Discovering Humanity in the World of Risk and Return by Mihir Desai

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, AOL-Time Warner, assortative mating, Benoit Mandelbrot, book value, Brownian motion, capital asset pricing model, Carl Icahn, carried interest, Charles Lindbergh, collective bargaining, corporate governance, corporate raider, discounted cash flows, diversified portfolio, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, follow your passion, George Akerlof, Gordon Gekko, greed is good, housing crisis, income inequality, information asymmetry, Isaac Newton, Jony Ive, Kenneth Rogoff, longitudinal study, Louis Bachelier, low interest rates, Monty Hall problem, moral hazard, Myron Scholes, new economy, out of africa, Paul Samuelson, Pierre-Simon Laplace, principal–agent problem, Ralph Waldo Emerson, random walk, risk/return, Robert Shiller, Ronald Coase, short squeeze, Silicon Valley, Steve Jobs, Thales and the olive presses, Thales of Miletus, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, tontine, transaction costs, vertical integration, zero-sum game

Indeed, the Journal of Law and Economics dedicated a special issue to alternative accounts and interpretations of this merger—a remarkable fact given economists’ skepticism about anecdotes. While there are innumerable variants, there are two primary interpretations of this romance that progresses from spot market transaction to long-term contractual arrangements and then all the way to merger. Each of these interpretations—the transaction cost approach and the property rights approach—is associated with a Nobel Prize (Ronald Coase in 1991 and Oliver Hart and Bengt Holmström in 2016), so, by academic standards, this is a prize fight. The considerably less romantic interpretation is that GM merged with Fisher in 1926 because the ongoing costs of contracting with each other just became too high.

., 175–77 Socrates, 168 Stevens, Wallace, xi, 7, 32–34, 170 disorder and chaos, 33–34 insurance executive, 32–33 T talent, etymology of, 58–59, 74 “Tale of Beryn” (Chaucer), 74 Talmud, 52 Thales of Miletus, 7, 42–43, 162, 177 Tiger Moms, 95 Tolstoy, Leo, 9, 162–64 tontines, 28–30 Tontine Coffee House, 28 Tootsie Roll Industries, 78–80, 83–85 transaction cost approach to mergers, 115 Trilogy of Desire (Dreiser), 165 Trollope, Anthony, 7, 38, 175 Trump, Donald, 127, 152 Turner, Ted, 108 “Two Cultures” (Snow), 175 “Two Tramps in Mud Time” (Frost), xiii Tynan, Kenneth, 96 U Ulysses (Joyce), 91–92 V Vaillant, George, 138–39 value creation and valuation, 7, 59 accounting vs. finance, 64 alpha generation or getting paid for beta, 71–73 destruction of value, 63 discounted cash flows, 65 measuring value creation, 64–67 stewardship and, 61–63, 74 terminal values, 66–67 weighted average cost of capital, 65 value of education, 65–66 value of housing, 66 van Doetechum, Lucas, 58 (illus.), 59 van Eyck, Jan, 97 (illus.), 103 Vega, Joseph de la, 5–6, 43–44 venture capital, 73, 82 Vishny, Robert, 77 W Wall Street (film), 165, 166 Warhol, Andy, 129 Washington, George, 142–43, 145 Watson, Thomas, 138 Wealth of Nations, The (Smith), 121 Weaver, Sigourney, 97–98 Wells Fargo, 80 Wesley, John, 63 West, Kanye, 99 Wheel of Fortune (TV show), 17–18 White, Vanna, 18 Whitney Museum of Modern Art, 140 Wilder, Gene, 94 Wilson, E.


The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk by William J. Bernstein

asset allocation, backtesting, book value, buy and hold, capital asset pricing model, commoditize, computer age, correlation coefficient, currency risk, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, index arbitrage, index fund, intangible asset, John Bogle, junk bonds, Long Term Capital Management, p-value, passive investing, prediction markets, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, South Sea Bubble, stocks for the long run, survivorship bias, the rule of 72, the scientific method, time value of money, transaction costs, Vanguard fund, Wayback Machine, Yogi Berra, zero-coupon bond

He tabulated the change in investors’ return expectations as follows: Expected returns Next 12 months, own portfolio Next 12 months, market overall June 1998 15.20% 13.40% Sept. 1998 12.90% 10.50% 140 The Intelligent Asset Allocator The first thing that leaps out of this table is that the average investor thinks that he or she will best the market by about two percent. While it is possible that many investors may in fact beat the market by a few percent, it is of course mathematically impossible for the average investor to do so. In fact, as we’ve already discussed, the average investor must of necessity obtain the market return, minus expenses and transaction costs. Even the most casual observer of human nature should not be surprised by this paradox—folks tend to be overconfident Overconfidence likely has some survival advantage in a state of nature, but not in the world of finance. Consider the following: ■ In one study, 82% of U.S. drivers considered themselves in the top 30% of their group in terms of safety.

Vanguard European and Pacific Stock Index Funds. These funds have a low turnover and are suitable for taxable accounts. The Pacific Stock Index Fund is essentially a Japanese fund, with Japan comprising almost 80% of fund assets. 9. Vanguard Emerging Markets Stock Index Fund. Because of the very high spreads and transactional costs, there is a .5% purchase fee and a .5% redemption fee. It is uncertain how much in distrib- 148 The Intelligent Asset Allocator utions the fund will yield in the long term, and thus how suitable it will be for taxable accounts. However, Vanguard has a history of keeping fund transactions at a minimum, and it is sensitive to the high trading costs in this area. 10.


pages: 210 words: 65,833

This Is Not Normal: The Collapse of Liberal Britain by William Davies

Airbnb, basic income, Bernie Sanders, Big bang: deregulation of the City of London, Black Lives Matter, Boris Johnson, Cambridge Analytica, central bank independence, centre right, Chelsea Manning, coronavirus, corporate governance, COVID-19, credit crunch, data science, deindustrialization, disinformation, Dominic Cummings, Donald Trump, double entry bookkeeping, Edward Snowden, fake news, family office, Filter Bubble, Francis Fukuyama: the end of history, ghettoisation, gig economy, global pandemic, global village, illegal immigration, Internet of things, Jeremy Corbyn, late capitalism, Leo Hollis, liberal capitalism, loadsamoney, London Interbank Offered Rate, mass immigration, moral hazard, Neil Kinnock, Northern Rock, old-boy network, post-truth, postnationalism / post nation state, precariat, prediction markets, quantitative easing, recommendation engine, Robert Mercer, Ronald Reagan, sentiment analysis, sharing economy, Silicon Valley, Slavoj Žižek, statistical model, Steve Bannon, Steven Pinker, surveillance capitalism, technoutopianism, The Chicago School, Thorstein Veblen, transaction costs, universal basic income, W. E. B. Du Bois, web of trust, WikiLeaks, Yochai Benkler

From the perspective of a multinational corporation, far from overthrowing the ‘burden of red tape’ (as Brexiteers believe), Britain is now in the process of building a new wall of inefficiency around itself. In economic jargon, the ‘transaction costs’ of locating in and doing business with Britain will rise permanently as a result of Brexit. Regulatory inefficiencies benefit one class of business only: the intermediaries and consultants who sell services in managing these transaction costs (a ‘Brexit management industry’ is surely going to arise, just like a minister for Brexit).7 International capital will be greatly inconvenienced by Brexit, but that simply means that less of it will travel to or via Britain in the future.


pages: 52 words: 13,257

Bitcoin Internals: A Technical Guide to Bitcoin by Chris Clark

bitcoin, fiat currency, information security, peer-to-peer, Satoshi Nakamoto, transaction costs, Turing complete

Bitcoin Internals Chris Clark July 31, 2013 Contents 1 Introduction 2 Using Bitcoin 2.1 Wallets 2.2 Funding Your Wallet 2.3 Sending Payments 3 Cryptography 3.1 Cryptographic Hash Functions 3.2 Merkle Trees 3.3 Public Key Cryptography 3.4 Digital Signatures 4 Digital Currencies 4.1 Properties 4.2 Double-Spending 4.3 Types of Digital Payment Systems 5 Precursors 5.1 Triple Entry Accounting 5.2 Publicly Announced Transactions 5.3 Proof of Work 5.4 Proof of Work Chains 6 Technical Overview 6.1 Architecture 6.2 Ownership 6.3 Addresses 7 Transactions 7.1 Structure 7.2 Verification 7.3 Scripting 8 The Block Chain 8.1 The Byzantine Generals’ Problem 8.2 The Solution 8.3 Criticisms 9 Mining 9.1 Procedure 9.2 Proof of Work 9.3 Difficulty Targeting 9.4 Reward 9.5 Mining Pools 9.6 Mining Hardware Acknowledgements I would like to thank Lucy Fang, Vadim Graboys, Dan Gruttadaro, VikingCoder, and Sheldon Thomas for their assistance in the preparation of this book. Chapter 1 Introduction Bitcoin is the world’s first decentralized digital currency. Unlike most existing payment systems, it does not rely on trusted authorities such as governments and banks to mediate transactions or issue currency. With Bitcoin, Transaction costs can be reduced to pennies (in contrast to typical credit card fees of 2%). Electronic payments can be confirmed in about an hour without expensive wire transfer fees, even internationally. There is a low risk of monetary inflation1 since the production rate of bitcoins is algorithmically limited and there can never be more than 21 million bitcoins produced.


pages: 828 words: 232,188

Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy by Francis Fukuyama

Affordable Care Act / Obamacare, Andrei Shleifer, Asian financial crisis, Atahualpa, banking crisis, barriers to entry, Berlin Wall, blood diamond, British Empire, centre right, classic study, clean water, collapse of Lehman Brothers, colonial rule, conceptual framework, Cornelius Vanderbilt, cotton gin, crony capitalism, Day of the Dead, deindustrialization, Deng Xiaoping, disruptive innovation, double entry bookkeeping, Edward Snowden, Erik Brynjolfsson, European colonialism, facts on the ground, failed state, Fall of the Berlin Wall, first-past-the-post, Francis Fukuyama: the end of history, Francisco Pizarro, Frederick Winslow Taylor, full employment, Gini coefficient, Glass-Steagall Act, Great Leap Forward, Hernando de Soto, high-speed rail, Home mortgage interest deduction, household responsibility system, income inequality, information asymmetry, invention of the printing press, iterative process, Kickstarter, knowledge worker, labour management system, land reform, land tenure, life extension, low interest rates, low skilled workers, manufacturing employment, means of production, Menlo Park, Mohammed Bouazizi, Monroe Doctrine, moral hazard, Nelson Mandela, new economy, open economy, out of africa, Peace of Westphalia, Port of Oakland, post-industrial society, post-materialism, price discrimination, quantitative easing, RAND corporation, rent-seeking, road to serfdom, Ronald Reagan, scientific management, Scientific racism, Scramble for Africa, Second Machine Age, Silicon Valley, special economic zone, stem cell, subprime mortgage crisis, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, too big to fail, trade route, transaction costs, Twitter Arab Spring, Tyler Cowen, Tyler Cowen: Great Stagnation, Vilfredo Pareto, women in the workforce, work culture , World Values Survey, zero-sum game

If I live in a neighborhood with high rates of crime, I may have to walk around armed, or not go out at night, or put expensive locks and alarms on my door to supplement the private security guards I have to hire. In many poor countries, as we will see in Part II, families have to leave a member at home all day to prevent their neighbors from stealing from their garden or dispossessing them of their house altogether. All of these constitute what economists call transaction costs, which can be saved if one lives in a high-trust society. Moreover, many low-trust societies never realize the benefits of cooperation at all: businesses don’t form, neighbors don’t help one another, and the like. The same thing applies in citizens’ relationship to their government. People are much more likely to comply with a law if they see that other people around them are doing so as well.

Not only did direct costs of litigation soar; costs were incurred due to the increasing slowness of the process and uncertainties as to outcomes.5 Thus conflicts that in Sweden and Japan would be solved by quiet consultations between interested parties through the bureaucracy are fought out through formal litigation in the American court system. This has a number of unfortunate consequences for public administration, leading to a process characterized, in the words of Sean Farhang, by “Uncertainty, procedural complexity, redundancy, lack of finality, high transaction costs.” By keeping enforcement out of the bureaucracy, it also makes the system far less accountable.6 In a European parliamentary system, a new rule or regulation promulgated by a bureaucracy is subject to scrutiny and debate, and can be changed through political action at the next election. In the United States, policy is made piecemeal in a highly specialized and therefore nontransparent process by judges who are often unelected and serve with lifetime tenure.

The inflection point of the curve is shifted to the right, however, due to a general recognition that the dangers of excessive micromanagement are often greater than those posed by excessive autonomy. FIGURE 25. Bureaucratic Autonomy and the Quality of Government Capacity and autonomy interact with one another. One can control the behavior of an agent through either explicit formal rules and incentives or informal norms and habits. Of the two, the latter involves substantially lower transaction costs. Many highly skilled professionals are basically self-regulating, due to the fact that it is hard for people outside their profession to judge the quality of their work. The higher the capacity of a bureaucracy, then, the more autonomy one would want to grant it. In judging the quality of government, therefore, we want to know about both the capacity and the autonomy of the bureaucrats.


pages: 1,014 words: 237,531

Escape From Rome: The Failure of Empire and the Road to Prosperity by Walter Scheidel

agricultural Revolution, barriers to entry, British Empire, classic study, colonial rule, conceptual framework, creative destruction, currency manipulation / currency intervention, dark matter, disruptive innovation, Easter island, Eratosthenes, European colonialism, financial innovation, financial intermediation, flying shuttle, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Johann Wolfgang von Goethe, Johannes Kepler, joint-stock company, Joseph Schumpeter, knowledge economy, low interest rates, mandelbrot fractal, means of production, Multics, Network effects, out of africa, Peace of Westphalia, peer-to-peer lending, plutocrats, principal–agent problem, purchasing power parity, rent-seeking, Republic of Letters, secular stagnation, South China Sea, spinning jenny, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, trade route, transaction costs, vertical integration, zero-sum game

In the latter region, prebendal assets were never similarly well privatized or protected, and the advent of Turkic and Mamluk conquest regimes increased the odds of arbitrary confiscation.47 The impact of political fragmentation on trade varied. Even though one might reasonably suspect more intense polycentrism to have raised transaction costs, the opposite could also be the case. The presence of multiple autonomous polities along the same trade route did in fact harm exchange by prompting serial predation. At the same time, interroute fragmentation that enabled traders to choose among “multiple politically independent routes” lowered tariffs.

This shift also focused policy more expressly on growth of the manufacturing sector.94 As a further result of this trend, Parliament showed itself increasingly responsive to demands for acts that reorganized property rights. By modifying less-flexible archaic rights regimes and loosening constraints on investment by eroding customary rights in favor of those that responded to changing economic opportunities, legislation removed obstacles to economic development. Acts frequently aimed to lower transaction costs within society and displayed particular interest in transportation issues. Enclosure acts benefited capitalist farming. And as we will see in chapter 12, Parliament’s willingness to side with innovators against incumbents accelerated industrial development.95 All of this, to be sure, was very much a work in progress.

Two candidates stand out: Latin as a shared elite language that transcended political divisions, and—once again—Christianity, as the one commonly shared belief system, backed by a single transnational organization. Latin, followed later by exchange in the influential Romance languages of Italian and then French, facilitated communication among the educated. Christian norms are thought to have helped pacify the medieval lords and to have lowered transactions costs, most notably in interregional trade.26 The “idealist” school of thought regarding the underpinnings of modernity puts the greatest emphasis on the importance of cultural cohesion. If we follow those who ascribe a central role to the emergence of a European culture of knowledge and science and view it as being rooted in transnational exchange and competition, anything that assisted in this process would have been beneficial to transformative development.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

Admiral Zheng, Alan Greenspan, An Inconvenient Truth, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Bear Stearns, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, classic study, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, equity risk premium, financial engineering, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, Future Shock, German hyperinflation, Greenspan put, Herman Kahn, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, Nelson Mandela, Nick Bostrom, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, risk free rate, Robert Shiller, rolling blackouts, Ronald Reagan, Savings and loan crisis, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, subprime mortgage crisis, tail risk, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, tontine, too big to fail, transaction costs, two and twenty, undersea cable, value at risk, W. E. B. Du Bois, Washington Consensus, Yom Kippur War

In 1924 John Maynard Keynes famously dismissed the gold standard as a ‘barbarous relic’. But the liberation of bank-created money from a precious metal anchor happened slowly. The gold standard had its advantages, no doubt. Exchange rate stability made for predictable pricing in trade and reduced transaction costs, while the long-run stability of prices acted as an anchor for inflation expectations. Being on gold may also have reduced the costs of borrowing by committing governments to pursue prudent fiscal and monetary policies. The difficulty of pegging currencies to a single commodity based standard, or indeed to one another, is that policymakers are then forced to choose between free capital movements and an independent national monetary policy.

In turn, Indian textiles could be traded for pepper and spices from the Pacific islands, which could be used to purchase precious metals from the Middle East.31 Later, the Company provided financial services to other Europeans in Asia, not least Robert Clive, who transferred a large part of the fortune he had made from conquering Bengal back to London via Batavia and Amsterdam.32 As the world’s first big corporation, the VOC was able to combine economies of scale with reduced transaction costs and what economists call network externalities, the benefit of pooling information between multiple employees and agents.33 As was true of the English East India Company, the VOC’s biggest challenge was the principal-agent problem: the tendency of its men on the spot to trade on their own account, bungle transactions or simply defraud the company.

Stocks do not wear out and require new roofs; houses do. The second is liquidity. As assets, houses are a great deal more expensive to convert into cash than stocks. The third is volatility. Housing markets since the Second World War have been far less volatile than stock markets (not least because of the transactions costs associated with the real estate market). Yet that is not to say that house prices have never deviated from a steady upward path. In Britain between 1989 and 1995, for example, the average house price fell by 18 per cent or in real, inflation-adjusted terms by more than a third (37 per cent).


pages: 444 words: 124,631

Buy Now, Pay Later: The Extraordinary Story of Afterpay by Jonathan Shapiro, James Eyers

Airbnb, Alan Greenspan, Apple Newton, bank run, barriers to entry, Big Tech, Black Lives Matter, blockchain, book value, British Empire, clockwatching, cloud computing, collapse of Lehman Brothers, computer age, coronavirus, corporate governance, corporate raider, COVID-19, cryptocurrency, delayed gratification, diversification, Dogecoin, Donald Trump, Elon Musk, financial deregulation, George Floyd, greed is good, growth hacking, index fund, Jones Act, Kickstarter, late fees, light touch regulation, lockdown, low interest rates, managed futures, Max Levchin, meme stock, Mount Scopus, Network effects, new economy, passive investing, payday loans, paypal mafia, Peter Thiel, pre–internet, Rainbow capitalism, regulatory arbitrage, retail therapy, ride hailing / ride sharing, Robinhood: mobile stock trading app, rolodex, Salesforce, short selling, short squeeze, side hustle, Silicon Valley, Snapchat, SoftBank, sovereign wealth fund, tech bro, technology bubble, the payments system, TikTok, too big to fail, transaction costs, Vanguard fund

With household budgets squeezed, lenders have a responsibility to ensure that they’re not putting customers into financial jeopardy,’ Leigh said.20 He also raised concerns about merchant fees. Technology should be driving transaction costs down, and Leigh, an economist, said it was not optimal for society if 5 per cent of the costs of goods was being spent to facilitate the transactions. ‘The wedge between retailers and consumers should be as low as it can be, and new technology should be reducing transaction costs. I get worried when I see technology is increasing them,’ he said.21 In the United Kingdom, consumer advocates were also getting on Afterpay’s back. As the coronavirus and prolonged lockdowns amid Brexit confusion crippled the British economy, the Financial Conduct Authority said in September 2020 that its interim chief executive, Christopher Woolard—who had taken over from Andrew Bailey when he became governor of the Bank of England, replacing Mark Carney—would review the regulation of consumer credit.

Any move to stop Afterpay preventing merchants from surcharging could be catastrophic, striking its central claim that customers only pay more than the price tag on the goods if they are late making repayments. Consumers had signed up in droves, trusting the simplicity of Afterpay’s offer and that there were no hidden fees. Adding transaction costs now could fatally destroy that trust. To the payments wonks sitting in the RBA’s headquarters at the top of Martin Place, no-surcharge rules always rang alarm bells: the ability for merchants to pass on payments costs is the core mechanism by which downward pressure can be exerted on those costs.


Unknown Market Wizards by Jack D. Schwager

3D printing, algorithmic trading, automated trading system, backtesting, barriers to entry, Black Monday: stock market crash in 1987, Brexit referendum, buy and hold, commodity trading advisor, computerized trading, COVID-19, cryptocurrency, diversification, Donald Trump, eurozone crisis, family office, financial deregulation, fixed income, forward guidance, index fund, Jim Simons, litecoin, Long Term Capital Management, margin call, market bubble, Market Wizards by Jack D. Schwager, Nick Leeson, performance metric, placebo effect, proprietary trading, quantitative easing, Reminiscences of a Stock Operator, risk tolerance, risk-adjusted returns, Sharpe ratio, short squeeze, side project, systematic trading, tail risk, transaction costs

The undisciplined use of leverage is the single most important reason why most traders lose money in the futures markets. In general, futures prices are no more volatile than the underlying cash prices or, for that matter, most stocks. The high-risk reputation of futures is largely a consequence of the leverage factor. Low transaction costs—Futures markets provide very low transaction costs. For example, it is far less expensive for a stock portfolio manager to reduce market exposure by selling the equivalent dollar amount of stock index futures contracts than by selling individual stocks. Ease of offset—A futures position can be offset at any time during market hours, providing prices are not locked at limit-up or limit-down.

Based on multiple empirical tests I have conducted in the past, my own key conclusions about optimization, which I believe are also consistent with Parker’s views, can be summarized as follows:20 Any system—repeat, any system—can be made to be very profitable through optimization (that is in regards to past performance). If you ever find a system that can’t be optimized to show good profits in the past, congratulations, you have just discovered a money machine (by doing the opposite, unless transaction costs are excessive). Therefore, incredible past performance for a system that has been optimized may be nice to look at, but it doesn’t mean very much. Optimization will always, repeat always, overstate the potential future performance of a system—usually by a wide margin (say, three trailer trucks’ worth).


pages: 777 words: 186,993

Imagining India by Nandan Nilekani

"World Economic Forum" Davos, addicted to oil, affirmative action, Airbus A320, BRICs, British Empire, business process, business process outsourcing, call centre, carbon credits, carbon tax, clean water, colonial rule, corporate governance, cuban missile crisis, deindustrialization, demographic dividend, demographic transition, Deng Xiaoping, digital map, distributed generation, electricity market, farmers can use mobile phones to check market prices, flag carrier, full employment, ghettoisation, glass ceiling, global supply chain, Hernando de Soto, income inequality, informal economy, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), joint-stock company, knowledge economy, land reform, light touch regulation, LNG terminal, load shedding, low cost airline, Mahatma Gandhi, market fragmentation, mass immigration, Mikhail Gorbachev, Network effects, new economy, New Urbanism, open economy, Parag Khanna, pension reform, Potemkin village, price mechanism, public intellectual, race to the bottom, rent control, rolodex, Ronald Reagan, school vouchers, Silicon Valley, smart grid, special economic zone, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Tragedy of the Commons, transaction costs, trickle-down economics, unemployed young men, upwardly mobile, urban planning, urban renewal, women in the workforce, working poor, working-age population

The scheme would allow employees a choice of investments for their pension savings under an independent regulator and included strong IT support to drastically reduce transaction costs. OASIS, however, quickly found itself tugged in different directions—the ministry of labor eyed the EPFO as the potential designer of the scheme, which was obviously the last thing that the committee, which favored both defined contribution and low transaction costs, wanted. And politics being what it is, each proposal had its chances of succeeding; so Ajay, who was part of the expert committee, tells me that much of the next few months were spent in a blur of talking and persuading people.

And the MCX is playing a complementary role to the NCDEX in expanding the reach of our markets. “We have twenty thousand terminals across the country,” he tells me, “and we are now doing business worth ten thousand crore rupees in a day.” Across India’s IT innovations in banking, retail, education, telecom or commodities, we are seeing the spread of such “high-volume, low-transaction-cost” models. In India’s expanding mobile networks, 90 percent of all accounts are prepaid, and the cards are so ubiquitous that you can recharge the phone at a paanwalla’s. Rural India’s IT kiosks are a way for entire communities to access the Internet. Aravind Eye Hospital in Tamil Nadu and Narayana Hrudayalaya in Karnataka are building remote, low-cost health care networks that cover more than one million people in rural areas.

Over the last few decades, social security theory has evolved from the quick fixes of the depression era, and India has become a dream testing ground for talented economists and policy makers to address age-old problems with new ideas. Information technology, for instance, has become transformational here, and Ajay says that the IT systems implemented in the NSE-50 index he designed has had substantially lower “market impact costs” compared with any other in the world. Using IT intelligently can dramatically lower transaction costs in any social security system we implement. Additionally, now that India has some key institutions in place—in the shape of the NSDL and a strong regulatory system—we can build a pensions model that is unprecedented in efficiency and seamlessness. On pension approaches, the World Bank had outlined three “pillars” in 1994 that set out choices for a government.


pages: 238 words: 73,121

Does Capitalism Have a Future? by Immanuel Wallerstein, Randall Collins, Michael Mann, Georgi Derluguian, Craig Calhoun, Stephen Hoye, Audible Studios

affirmative action, blood diamond, Bretton Woods, BRICs, British Empire, business cycle, butterfly effect, company town, creative destruction, deindustrialization, demographic transition, Deng Xiaoping, discovery of the americas, distributed generation, Dr. Strangelove, eurozone crisis, fiat currency, financial engineering, full employment, gentrification, Gini coefficient, global village, hydraulic fracturing, income inequality, Isaac Newton, job automation, joint-stock company, Joseph Schumpeter, junk bonds, land tenure, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, loose coupling, low skilled workers, market bubble, market fundamentalism, mass immigration, means of production, mega-rich, Mikhail Gorbachev, military-industrial complex, mutually assured destruction, offshore financial centre, oil shale / tar sands, Ponzi scheme, postindustrial economy, reserve currency, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, Suez crisis 1956, too big to fail, transaction costs, vertical integration, Washington Consensus, WikiLeaks

The lowering of prices may be beneficial to the purchasers but it is of course negative for the sellers. What had been a profitable leading product has become a more competitive, much less profitable product on the world scene. What can the producers do? One alternative is to trade the advantage of low transaction costs for lower production costs. This usually involves the shifting of primary production locations from one or more “core” locations to other parts of the world-system where “historic” labor costs are lower. Persons in these new locations for production may perceive and hail this entry into the world production nexus as national “development.”

But that epoch also ushered in multiple crises flowing from the effects of the business cycle, the institutionalization of revolutionary and reform movements, and the competitive geopolitics of industrial imperialism that in 1914 nearly killed capitalism. The American hegemony of the twentieth century helped to tame these crises by adding another layer of complexity: the internalization of transaction costs. The acute need to stabilize the capitalist system against multiple dangers is what after 1945 determined the elaborate and imposing architecture of modern governments, economic corporations, and international organizations. Logically then, the epochal accomplishment remaining for the twenty-first century is the internalization of the costs of social and environmental reproduction to be achieved at a truly planetary level.


pages: 275 words: 82,640

Money Mischief: Episodes in Monetary History by Milton Friedman

Bretton Woods, British Empire, business cycle, classic study, currency peg, double entry bookkeeping, fiat currency, financial innovation, fixed income, floating exchange rates, foreign exchange controls, full employment, German hyperinflation, income per capita, law of one price, Money creation, money market fund, oil shock, price anchoring, price stability, Savings and loan crisis, systematic bias, Tax Reform Act of 1986, transaction costs

One dollar in New York is one dollar in San Francisco, one pound in Scotland is one pound in Wales, plus or minus perhaps the cost of shipping currency or arranging book transfers—just as under the late-nineteenth-century gold standard the rate of exchange between the dollar and the pound varied from $4.8865 only by the cost of shipping gold (yielding the so-called gold points). Similarly, 7.8 Hong Kong dollars is essentially just another name for 1 U.S. dollar, plus or minus a minor amount for transactions costs. It requires no financial operations by the Hong Kong currency board to keep it there, other than to live up to its obligation to give 7.8 Hong Kong dollars for 1 U.S. dollar, and conversely. And it can always do so because it holds a volume of U.S. dollar assets equal to the dollar value of the Hong Kong currency outstanding.

As an aside, a classic story illustrating British provincialism in the Victorian era has an American taking an English gentleman to task for the complexity of the British currency: "12 pence to the shilling, 20 shillings to the pound, 21 shillings to the guinea." Responds the English gentleman: "What are you Americans complaining about? Look at your awful dollar—4.8665 to the pound." [back] *** * In a private communication dated April 24, 1989, Angela Redish suggests that the widest plausible limits, allowing for mint costs and 1 percent transactions costs, were 15.3 and 15.89. The limits of the market ratio cited are imperfect estimates, and so are not seriously in conflict with her estimated range. [back] *** * Walker (1896b, chapters 4, 5, and 6) has an excellent discussion of this episode, as well as of prior French experience. [back] *** * Schumpeter makes it clear that the "monetary monomaniacs" he refers to are among "the silver men," not the "sponsors of gold."


pages: 275 words: 77,017

The End of Money: Counterfeiters, Preachers, Techies, Dreamers--And the Coming Cashless Society by David Wolman

addicted to oil, Bay Area Rapid Transit, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, bitcoin, Bretton Woods, carbon footprint, cashless society, central bank independence, collateralized debt obligation, corporate social responsibility, credit crunch, cross-subsidies, Diane Coyle, fiat currency, financial innovation, floating exchange rates, German hyperinflation, greed is good, Isaac Newton, Kickstarter, M-Pesa, Mahatma Gandhi, mental accounting, mobile money, Money creation, money: store of value / unit of account / medium of exchange, offshore financial centre, P = NP, Peter Thiel, place-making, placebo effect, Ponzi scheme, Ronald Reagan, seigniorage, Silicon Valley, special drawing rights, Steven Levy, the payments system, transaction costs, WikiLeaks

Precise numbers are hard to come by, perhaps not surprisingly considering the franchises at stake, but one estimate from 1994 is that the United States spent $60 billion on cash management. By 2005 that figure was estimated at $110 billion.26 Processing paper checks adds another $50 billion on to that bill.27 In 2007, Europe’s €360 billion in cash transactions cost around €50 billion ($70 billion). That expense is primarily borne by merchants, although it doesn’t take an economist to know that merchants pass those costs on to you and me in the form of higher prices. By some estimates, countries could save 1 percent of their annual GDP if they were to shift from a paper to a fully digital monetary system.28 For the United States, that would put the annual costs of cash in the ballpark of $150 billion, or about three times the annual budget of the U.S.

An American expat in Reykjavik told me he once saw a couple of local children selling homemade cookies on the street, much like American kids set up lemonade stands, except that the young Icelanders had debit-card readers on hand. This widespread adoption of a card-based system makes economic sense: analysts have found that using cash in Iceland has a per-transaction cost that is five times higher than using a card. If that sounds abstract, think about it this way: it’s expensive for businesses and governments to ensure that ATMs, cash registers, and banks in every remote fishing village have correct change, whereas all you need for electronic payment is electricity and a phone hookup.8 As Thorkelsdottir shows me some of her first pencil sketches for the banknotes redesign, I think of my conversation the previous day with an Icelandic economist, who reminded me that it was George Washington who said: “It is not a custom with me to keep money to look at.”


pages: 309 words: 78,361

Plenitude: The New Economics of True Wealth by Juliet B. Schor

Asian financial crisis, behavioural economics, big-box store, business climate, business cycle, carbon footprint, carbon tax, clean tech, Community Supported Agriculture, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, decarbonisation, degrowth, dematerialisation, demographic transition, deskilling, Edward Glaeser, en.wikipedia.org, Gini coefficient, global village, Herman Kahn, IKEA effect, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Jevons paradox, Joseph Schumpeter, Kenneth Arrow, knowledge economy, life extension, McMansion, new economy, ocean acidification, off-the-grid, peak oil, pink-collar, post-industrial society, prediction markets, purchasing power parity, radical decentralization, ride hailing / ride sharing, Robert Shiller, sharing economy, Simon Kuznets, single-payer health, smart grid, systematic bias, systems thinking, The Chicago School, Thomas L Friedman, Thomas Malthus, too big to fail, transaction costs, Yochai Benkler, Zipcar

No society in history has been rich—or reckless—enough to create so much overproduction. The silver lining of the materiality paradox is that we’ve racked up an enormous inventory of products that no longer have much value for their original owners. In response, economies of reuse and resale have expanded rapidly. The Web has drastically reduced the transaction costs of exchange and expanded the geographic scope of the market. In addition to well-known sites such as eBay and craigslist, there are specialized Web resellers for many items, from Harley-Davidson motorcycles to cloth diapers. Anecdotal evidence also suggests a rise in other secondary exchange practices, such as barter, regifting, and clothing, seed, plant, and craft supply swaps.

Its benefits are greatest when individuals don’t need the goods all the time, up-front costs are high, usage does not degrade or personalize the item, and costs of operation or depreciation can be allocated to individuals (as with cars). On the other side of the ledger, shared ownership increases what economists call transactions costs—the time and effort of creating rules, setting up scheduling, and policing problems (although the Internet has dramatically reduced these costs). When money is cheap, nature isn’t counted, and time is expensive, as in the BAU economy, where incentives favor private ownership. A shift toward plenitude, which economizes on materials and is rich in time, enhances the value of sharing.


pages: 209 words: 80,086

The Global Auction: The Broken Promises of Education, Jobs, and Incomes by Phillip Brown, Hugh Lauder, David Ashton

active measures, affirmative action, An Inconvenient Truth, barriers to entry, Branko Milanovic, BRICs, business process, business process outsourcing, call centre, classic study, collective bargaining, corporate governance, creative destruction, credit crunch, David Ricardo: comparative advantage, deindustrialization, deskilling, disruptive innovation, Dutch auction, Ford Model T, Frederick Winslow Taylor, full employment, future of work, glass ceiling, global supply chain, Great Leap Forward, immigration reform, income inequality, industrial cluster, industrial robot, intangible asset, job automation, Jon Ronson, Joseph Schumpeter, knowledge economy, knowledge worker, low skilled workers, manufacturing employment, market bubble, market design, meritocracy, neoliberal agenda, new economy, Paul Samuelson, pensions crisis, post-industrial society, profit maximization, purchasing power parity, QWERTY keyboard, race to the bottom, Richard Florida, Ronald Reagan, shared worldview, shareholder value, Silicon Valley, sovereign wealth fund, stem cell, tacit knowledge, tech worker, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, transaction costs, trickle-down economics, vertical integration, winner-take-all economy, working poor, zero-sum game

The emphasis was on building the company’s competitive capacity that required it to go beyond contract in its commitment to workers, suppliers, customers, and overseas operations. He observed how the company tried to engineer relationships likely to foster long-term commitment by developing trust relations throughout their global operations. In other words, he was acutely aware that cost reduction may come at the price of increasing what economists call transaction costs—that is, the cost of getting things done. Having said that, the imperative to reduce costs and prices remained, given a need to ensure that costs are compatible to the price level they were getting from the market. And although cutting costs and jobs in Germany was a politically sensitive issue even before the global recession, he observed that German consumers don’t pay his company a price premium because, like everywhere else, people want the best goods at the lowest price.

See also BRIC (Brazil, Russia, India, and China) nations rust belt, 99 property rights, 68 prosperity, 2–4, 16, 26–27, 64, 132–33, 146, 152, 154–58, 164, 185n4 protectionism, 13, 149–52 public sector workforce, 17–18, 115, 127 salaries, 55, 59, 71, 78, 85, 114, 117, 118, 118–19, 120, 123, 176n9 Salzman, Harold, 37 Samsung, 95 Samuelson, Paul, 152 Index Saez, Emmanuel, 116, 125 safety net, 12, 24 Saudi Arabia, 30 Savery, Thomas, 66 Saxenian, Anna Lee, 38 STEM (science, technology, engineering, or math) subjects, 36–40, 39, 45, 153, 155 Stembridge, Bob, 45 Schneider, Craig, 79 Schultz, Theodore, 16–17, 166n8 Schumpeter, Joseph, 113 scientific management, 8, 65–66, 69, 71–72, 76, 80–81, 160 Stimpson, Herbert, 69–71 stock options, 159, 162 Summers, Lawrence, 115, 126 supply chains, 40, 77, 104–5 supply side economics, 17 Scientific Office Management, 72 Scott, Robert, 108–9, 112 self-interest, 4, 24, 26, 40, 156 self-regulation, 13 surveillance, 74, 174n33 Sweden, 124–25 symbolic-analytic services, 15 self-reliance, 19 Sennett, Richard, 142 talented workers, 25–26 Tate, Jay, 65–66 Serco, 115 service industries, 50, 73–80, 109, 152, 170–71n2 tax policies, 125, 162 Taylor, Fredrick Winslow, 8, 65–66, 68–69, 71–72 Shanghai Nanotechnology Promotion Center, 44 technology, 166n3 technology transfer, 41 shareholders, 67, 98, 104, 106, 124–25, 159, 162 Shierholz, Heidi, 122, 180n25 shipping containers, 57–58 telecommunications industry, 53–54, 61–62, 107 Temesek Holdings, 42 Shukla, Rajesh, 130 Silicon Valley, 39, 163 Thatcher, Margaret, 4, 24, 125 time and motion studies, 69, 71 Simmel, Georg, 137 Singapore, 38, 42, 158 Singh, Manmohan, 33–34 Time magazine, 145 Times newspaper group, 95 trade barriers, 99 skilled workforce, 25, 47–50, 84–87, 90–92, 127, 166n3, 170n44. See also high-skill, trade unions, 110, 125, 160 transaction costs, 107 low-wage workforce Smith, Adam, 16, 67, 76, 81–82, 166n3 social amnesia, 163 transnational companies, 3, 36, 40–41, 49–50, 52, 87, 98–100, 107, 112 trickle down economics, 24 social capital, 134–35 social conflict, 146 trust relations, 107 Tulgan, Bruce, 177n25 social congestion, 135–36, 139, 146 social inequalities, 148, 162 social justice, 3, 17, 27, 64, 146, 148, 150, unemployment, 24, 31, 41, 47, 92, 114, 118, 119, 136–37, 163 152, 154, 160–64, 185n4 social mobility, 12, 17, 34 socialism, 187n31 soft currencies, 140 software, 72, 74, 77, 79–80, 100, 114–15, 175n38.


pages: 240 words: 78,436

Open for Business Harnessing the Power of Platform Ecosystems by Lauren Turner Claire, Laure Claire Reillier, Benoit Reillier

Airbnb, Amazon Mechanical Turk, Amazon Web Services, augmented reality, autonomous vehicles, barriers to entry, basic income, benefit corporation, Blitzscaling, blockchain, carbon footprint, Chuck Templeton: OpenTable:, cloud computing, collaborative consumption, commoditize, crowdsourcing, data science, deep learning, Diane Coyle, Didi Chuxing, disintermediation, distributed ledger, driverless car, fake news, fulfillment center, future of work, George Akerlof, independent contractor, intangible asset, Internet of things, Jean Tirole, Jeff Bezos, Kickstarter, knowledge worker, Lean Startup, Lyft, Mark Zuckerberg, market design, Metcalfe’s law, minimum viable product, multi-sided market, Network effects, Paradox of Choice, Paul Graham, peer-to-peer lending, performance metric, Peter Thiel, platform as a service, price discrimination, price elasticity of demand, profit motive, ride hailing / ride sharing, Sam Altman, search costs, self-driving car, seminal paper, shareholder value, sharing economy, Silicon Valley, Skype, smart contracts, Snapchat, software as a service, Steve Jobs, Steve Wozniak, TaskRabbit, the long tail, The Market for Lemons, Tim Cook: Apple, transaction costs, two-sided market, Uber and Lyft, uber lyft, universal basic income, Y Combinator

Niche/vertical focus: Niche players may try to cherry-pick the most profitable segments that are big enough to support a critical mass on their own (e.g. fashion marketplaces such as Farfetch, Videdressing, Vestiaire Collective and Vinted compete against eBay’s fashion vertical). 132 • • • Platform maturity: profitable growth Subsidized cost competitors: Platforms may copy your basic functionality but seek alternative monetization methods in order to offer low transaction costs to address the price-sensitive segments of the market. Classified sites such as Gumtree, leboncoin or OfferUp have been challenging incumbent marketplaces. ‘Me too’ imitators: Some firms may try to replicate your business model in other geographies before you can establish a footprint. You may then have to acquire them, decide not to enter in these international markets, or invest more to catch up at a later stage.

We agree with this maxim and believe that the single most dangerous pitfall for many established firms in the next decade would be a failure Competing against platforms 199 to grasp the underlying economic models that are disrupting so many markets. The key to competing against platforms – or becoming one – is to understand the way they operate and what it means for the industry and for the business – both in terms of opportunities and threats. At a macro level, industries characterized by relatively high transaction costs, asymmetry of information and regulatory protection are now ripe for disruption by innovative digital entrants. In many cases, these entrants have proven that customers can be more efficiently served and transactions better coordinated through a platform business model. Even if parts of an industry are not directly impacted (for example, car production), the firms operating in this industry may see that platforms are disrupting their market (for example, by undermining car ownership and therefore depressing demand).


pages: 261 words: 74,471

Good Profit: How Creating Value for Others Built One of the World's Most Successful Companies by Charles de Ganahl Koch

Abraham Maslow, Albert Einstein, big-box store, book value, British Empire, business process, commoditize, creative destruction, disruptive innovation, do well by doing good, Garrett Hardin, global supply chain, hiring and firing, income per capita, Internet of things, invisible hand, Isaac Newton, Joseph Schumpeter, low interest rates, oil shale / tar sands, personalized medicine, principal–agent problem, proprietary trading, Ralph Waldo Emerson, risk tolerance, Salesforce, Solyndra, tacit knowledge, The Wealth of Nations by Adam Smith, Tragedy of the Commons, transaction costs, transfer pricing

Imagine how productive business would be if everyone acted with complete integrity, with their word as their bond, never doing anything they wouldn’t want exposed to the whole world. There would be much less need for all the time and money spent on controls, contracts, litigation, and security, and the enormous drag of transaction costs would be greatly reduced. At Koch, integrity means firm adherence to a moral code, outlined in our Guiding Principles and Code of Conduct. It requires courage, because acting in harmony with our principles can cause discomfort and fear—especially when it involves challenging conventional wisdom.

As such it is most beneficial to companies with concentrated risk profiles, limited capital, significant debt obligations, or other needs for reduced earnings volatility. However, insurance is seldom a profitable long-term investment. In part, this is because insurance companies price insurance to cover their expected losses plus overhead, transaction costs, and profit margin. On average, we estimate that insurance premiums exceed the cost of losses by about 40 percent (a percentage that includes the fact that premiums are typically invested several years prior to a claim). So how did we at Koch apply MBM to make our approach to insurance consistent with our risk philosophy—turning something that could be viewed as a necessary evil into an excellent generator of good profit?


pages: 600 words: 72,502

When More Is Not Better: Overcoming America's Obsession With Economic Efficiency by Roger L. Martin

activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, autism spectrum disorder, banking crisis, Black Monday: stock market crash in 1987, butterfly effect, call centre, cloud computing, complexity theory, coronavirus, COVID-19, David Ricardo: comparative advantage, do what you love, Edward Lorenz: Chaos theory, financial engineering, Frederick Winslow Taylor, Glass-Steagall Act, High speed trading, income inequality, industrial cluster, inflation targeting, Internet of things, invisible hand, Lean Startup, low interest rates, Lyft, Mark Zuckerberg, means of production, Network effects, new economy, obamacare, open economy, Phillips curve, Pluto: dwarf planet, power law, Renaissance Technologies, Richard Florida, Ronald Reagan, scientific management, shareholder value, Silicon Valley, Snapchat, Spread Networks laid a new fibre optics cable between New York and Chicago, Tax Reform Act of 1986, The future is already here, the map is not the territory, The Wealth of Nations by Adam Smith, Tobin tax, Toyota Production System, transaction costs, trickle-down economics, two-sided market, uber lyft, very high income, Vilfredo Pareto, zero-sum game

We are currently connecting more and more things, in more and more tightly coupled ways.7 The internet of things (IoT) is the latest generation of enhanced connectedness. Untold billions of devices will be connected to provide real-time information, computer-to-computer. Systems everywhere are becoming tightly coupled. Lots about it is good, indeed very good. A connected world is more efficient. A connected world drives out transaction costs and unnecessary rework. Humans are already tightly connected at fractional costs; now machines will be too, and machines to humans, and vice versa. But tightly coupled systems can fail catastrophically. In 2003, the entire US Northeast (plus Central Canada) experienced a power blackout because a single power line in Ohio came in contact with a tree branch.

See educators teaching See also educators certainty, 170–173, 181, 185 integrative approach to, 174 reductionism, 173–178 technology, 65, 66, 88–89 tenure-based voting rights, 157–159 theorizing, 178–179 Third Congressional District of Maryland, 202, 203 third-party candidates, 201–202 3G Capital, 123–124, 126, 187 tightly coupled systems, 106–107 Tilly, Charles, 192, 194 time-and-motion studies, 42 time horizons, 155–159 Tobin, James, 92 Tobin tax, 92, 103 Tocqueville, Alexis de, 198–199 Ton, Zeynep, 124–126 total quality management, 43 Toyota Production System, 43 Toys “R” Us, 97–98, 99, 101 trade free, 41–42, 56, 63, 66, 150–152 productive friction in, 150–152 trade barriers, 150 trade policy, 56, 150, 151 Trader Joe’s, 125 trade wars, 41 trading technology, 88–91 training, 125 transaction costs, 106 trickle-down economics, 161 Troubled Asset Relief Program (TARP), 138, 144 two-sided markets, 152–153 Uber, 192 unemployment, 24 United States, metaphor for, 26 University of Chicago, 24 US Census Bureau, 4 US Constitution, 40 US economy achieving balance in, 97–114 efficiency in, 63 as efficient machine, 21–44, 94, 100, 210 gaming the system and, 84–94 growth of, 33–38 imbalances in, 1–17 models of, 22–25 as natural system, 77–94 of 1970s, 5–12, 24 proxies in, 45–57 sectors, 22 user-experience (UX) design, 180 value creation, 130 Verizon, 53–54 voter registration, 205–206, 207 voters, 201–206 Voters Not Politicians, 204 wage growth, 9, 10, 68 wages, 67–70, 125, 150 Wagner School, 180 Wallace, George, 201 Wallenstein Feed & Supply (WFS), 133–134 Washington Mutual, 137 Waste Management Inc.


pages: 328 words: 77,877

API Marketplace Engineering: Design, Build, and Run a Platform for External Developers by Rennay Dorasamy

Airbnb, Amazon Web Services, barriers to entry, business logic, business process, butterfly effect, continuous integration, DevOps, digital divide, disintermediation, fault tolerance, if you build it, they will come, information security, Infrastructure as a Service, Internet of things, Jeff Bezos, Kanban, Kubernetes, Lyft, market fragmentation, microservices, minimum viable product, MITM: man-in-the-middle, mobile money, optical character recognition, platform as a service, pull request, ride hailing / ride sharing, speech recognition, the payments system, transaction costs, two-pizza team, Uber and Lyft, uber lyft, underbanked, web application

Merchants can also grow their product offering and extend reach to markets that were previously difficult to access. An example could be the ability to make a payment from a transactional account which would allow access to customers without a credit card. Alternate payment methods could also result in lower card transaction costs. Open Banking has the potential to eliminate various fee elements of card transactions that are part of merchant service charges from the issuing banks, processors and schemes, which is also a benefit for customers. The payment system benefits from increased competition as the levelled playing field will potentially bring innovative payment solutions.

The dynamic nature of an API Marketplace is indeed one of its biggest advantages as its flexibility allows it to respond far faster than existing enterprise systems. In the next chapter, we consider monetization for API Marketplaces. The Consumption model has a significant impact on how the platform is monetized as the two are intrinsically linked. If the monetization model is high volume with low transaction costs, more developers are needed in the pipeline. If the strategy is lower volume, subscription-based revenue, then a smaller subset of established, loyal organizations willing and able to pay a subscription is the objective. © The Author(s), under exclusive license to APress Media, LLC, part of Springer Nature 2022 R.


pages: 675 words: 141,667

Open Standards and the Digital Age: History, Ideology, and Networks (Cambridge Studies in the Emergence of Global Enterprise) by Andrew L. Russell

Aaron Swartz, American ideology, animal electricity, barriers to entry, borderless world, Californian Ideology, Charles Babbage, Chelsea Manning, Compatible Time-Sharing System, computer age, Computer Lib, creative destruction, digital divide, disruptive innovation, Donald Davies, Dr. Strangelove, Edward Snowden, Evgeny Morozov, Frederick Winslow Taylor, Hacker Ethic, Herbert Marcuse, Howard Rheingold, Hush-A-Phone, interchangeable parts, invisible hand, Ivan Sutherland, John Markoff, John Perry Barlow, Joseph Schumpeter, Leonard Kleinrock, Lewis Mumford, means of production, Menlo Park, Network effects, new economy, Norbert Wiener, open economy, OSI model, packet switching, pre–internet, radical decentralization, RAND corporation, RFC: Request For Comment, Richard Stallman, Ronald Coase, Ronald Reagan, scientific management, Silicon Valley, Steve Crocker, Steven Levy, Stewart Brand, systems thinking, technological determinism, technoutopianism, Ted Nelson, The Nature of the Firm, Thomas L Friedman, Thorstein Veblen, transaction costs, vertical integration, web of trust, work culture

Boundary activities, as we have seen, are crucial sites where managers and engineers decide through managerial hierarchies what they can make or decide inside their firm, and what they need to do with respect to markets and organizations that exist outside the firm. In some cases, these decisions can be understood in terms of economic efficiency, using the economist Ronald Coase’s concept of transaction costs.7 The problem with the concept is that it tends to reduce – or ignore altogether – strategic, political, and cultural factors that are in many cases decisive. We deceive ourselves if we pretend that decisions to build from within or purchase from without are made solely on the grounds of economic efficiency.

Scott, Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed (New Haven, CT: Yale University Press, 1999); Timothy Schoechle, Standardization and Digital Enclosure: The Privatization of Standards, Knowledge, and Policy in the Age of Global Information Technology (Hershey, PA: IGI Global, 2009). 10 Ronald H. Coase, “The Nature of the Firm,” Economica New Series, 4 (1937): 386–405; Oliver E. Williamson, “Transaction Cost Economics: The Natural Progression,” in Karl Grandin, Les Prix Nobel (Stockholm: Nobel Foundation, 2010); Naomi R. Lamoreaux, Daniel M. G. Raff, and Peter Temin, “Beyond Markets and Hierarchies: Toward a New Synthesis of American Business History,” American Historical Review 108 (2003): 404–433; Naomi R.

See also specific topic Standards Committee (AIEE) 47–52 Standards Development Organization Advancement Act of 2004 277 Standards Engineering Society 276 Standards Planning and Requirements Committee (SPARC) 204–215 mission of 205 Study Group on Database Systems 205–206 Study Group on Distributed Systems (DISY) 206–208, 209–211, 212 three-schema design 205 Standards Policy for Information Infrastructure (Kahin and Branscomb) 261 Standards war 241–247 Stanford University 166 Stanford University Digital Systems Laboratory 170–171 Stanford University Research Institute 168 State Department 172 Stefferud, Einar 246–247 Steinmetz, Charles Proteus 44, 47, 48–49, 52, 57, 93 Stevenson, A.A. 78–80, 84 Stone, Harlan Fiske 83 Strassburg, Bernard 132, 138–139, 141–142, 158, 159–160, 181 Stratton, Samuel 84 Strowger, Almon 110–111 Strut, John William 38 Subcommittee 6 (ISO) 202–203 Subcommittee 16 (ISO) 203–204 see also Open Systems Interconnection (OSI) Sun Microsystems 15, 222 Sunshine, Carl 183 Sutherland, Ivan 166 Swartz, Aaron 3 System Network Architecture (IBM) 13, 23, 176, 219, 222 System Theory 10–11 Tanenbaum, Andrew 201 Taylor, Frederick Winslow 103 Taylor, Robert W. 166, 236 TCP/IP Interoperability Conference 240–241 TCP/IP networking protocols Arpanet and 237–238 background 232, 234 generally 225 momentum of 225 OSI versus 257, 258 UNIX operating system and 224, 257 voluntary consensus standards 19 Technical Committee 97 (TC 97) 147–148, 149, 150, 151 Technological determinism 3–4 Telegraph Act of 1866 30–31, 32 Telegraph industry argument for government control over 32–35 competition in 29 consolidation in 30–31 cooperation in 29–30 electrical measurement and 40 labor in 36–38 monopoly in 28–29, 31–32 Treaty of Six Nations 30 Western Union see (Western Union) and world politics 40 Telegraphy standards electrical measurement 38–41 labor and 36–38 Morse Code 35–36 overview 21–22, 25–27, 35, 56–57 Telenet 176, 179 Telephone Group 119–120 TELNET 238 Temin, Peter 265 The Terminator (film) 157 Thayer, Harry 106–107, 108, 123 Thompson, George K. 124–125, 126 Thomson, Elihu 39–40 Thomson, J.J. 38 Thomson, William (Lord Kelvin) 38, 39–40 Thurston, Robert 45, 57 Tomlinson, Ray 187 Tootill, Geoffrey 149 TP-4 protocol 238 Trade associations 82–84, 86, 267 Transaction costs 97 Transmission Control Program (TCP) 182–183, 188, 233, 236–237 see also TCP/IP networking protocols Transpac 176, 192, 193 Traub, Joe 151 Treasury Department 72–73 Treaty of Six Nations 30 Turner, Fred 157 The Two Sources of Morality and Religion (Bergson) 9 Tymnet 176 Underwriters’ Laboratories 74 UNESCO 148 United Kingdom, computer industry in 201–202 United Nations Standards Coordinating Committee 147 United States, decentralization of computer industry in 161–162, 201 United States of America Standards Institute (USASI) 63 University of California, Berkeley 166 University of California, Irvine 244–245 University of California, Los Angeles 168, 170–171 University of California, Santa Barbara 168 University of Michigan 66 University of Tokyo 187 University of Utah 168, 178 UNIX operating system 224, 226, 257, 260, 274 U.S.


pages: 385 words: 128,358

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market by Steven Drobny

Abraham Maslow, Alan Greenspan, Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, buy low sell high, capital controls, central bank independence, commoditize, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, currency risk, diversification, diversified portfolio, family office, financial engineering, fixed income, glass ceiling, Glass-Steagall Act, global macro, Greenspan put, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, inverted yield curve, John Meriwether, junk bonds, land bank, Long Term Capital Management, low interest rates, managed futures, margin call, market bubble, Market Wizards by Jack D. Schwager, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, Nixon triggered the end of the Bretton Woods system, oil shale / tar sands, oil shock, out of africa, panic early, paper trading, Paul Samuelson, Peter Thiel, price anchoring, proprietary trading, purchasing power parity, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, tail risk, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, Vision Fund, yield curve, zero-coupon bond, zero-sum game

Our job in our equity category is to find investments around the world that will make money on an absolute basis as well as outperform any global equity index. We use classic hedge fund risk management and cut the position if things start going against us. We’ll recognize that if we’re wrong, we’re wrong, and get out. Bid/offer spreads are not that big, so transactions costs are minimal. The next big asset category where we can be systematic, earn risk premia, and control our downside is fixed income. In Triumph of the Optimist (by Elroy Dimson, Paul Marsh, and Mike Staunton), a book about risk premia around the world, there is a whole section on bonds. Because bonds, on average, have paid a positive risk premium over time, you are supposed to be long fixed income.

It did in FX in the early 1990s, but as the regulatory regime got tighter and tighter, we got less and less information, to the point where we really got nothing. Also, it wasn’t like we were sitting there trying to catch the next 50 pips or big figure. Structurally, we were looking for 5 or 10 percent moves, so flows weren’t that useful for our style of trading. Do you worry about transaction costs or, because you are looking for such large moves, do you deem them inconsequential? I didn’t worry about it at GS because I took the high road. I was a partner at the firm and to increase camaraderie, we did all our trades internally. I didn’t worry about paying a pip or an extra tenth of a vol then because it was really just an accounting transfer.

., III, 34, 349 3-6-3 Rule, 138 370 Tiger Management, 8, 12, 21–22, 27–28, 31, 33, 93, 184, 206, 245, 247–256, 260, 262, 269 Timber, 280 Time decay, 79 Time horizon, 69, 113, 135, 165, 186, 211–212, 284, 294, 317, 334 Timing, significance of, 58, 193, 331–332 Top-down approach, xiii, 51, 346 Trading book/diary, 84–85, 115 Transaction costs, 61, 100. See also Management fees; Performance fees Transparency, 32, 304 Treasurer. See Porter, John, Dr. Treasury inflation-protected securities (TIPS), 196, 317–318 Trend reversals, 17 Triangle, 291 Triumph of the Optimist (Dimson/Marsh/Staunton), 61–62 Tudor Investment Corporation, 13, 253–254 Turkey/Turkish lira, 36, 45, 204, 223, 287, 305–306 Uganda, 237 UK Broad Country Equity Index, 5–6 Underperforming stocks, 69 Undervaluation, 151, 301 United Kingdom, 14, 17, 61, 73, 110, 126, 141, 163, 168–169, 174, 211, 275, 288, 320, 335 United Kingdom Gilts, 126–127, 136, 157, 285 United States, generally: deficit, 52, 350 dollar (USD), xii, 7, 18–20, 29, 105, 109, 122–124, 167, 179, 182, 193, 220–221, 223–225, 285, 296, 301–302, 317 Dollar Index, 118 government bonds, 17–18, 23, 225 Treasuries, 25, 118, 126–127, 146, 193–194, 225, 296, 302, 309, 320–321 unemployment rate, 27 yield curve, 319 Unsystematic money, 64, 67 INDEX Unsystematic trades, 68 Uptrends, 126 Uruguay, 289, 306 Valuation, 60, 174, 184, 190, 300 Value at risk (VAR), 28, 39, 74, 139, 148–149, 250, 316–317, 323 Vannerson, Frank, 9 Vega, 332–333 Venezuela, 296 Venezuelan bolivar, 39 Venture capital, 182, 194, 197, 280, 282 Vietnam, 261, 266 Volatility, impact of, 32, 46, 50, 55, 62–63, 86, 94–95, 99, 114, 135, 140–142, 148, 166–168, 186, 258–259, 280, 282, 292, 309, 311, 313, 319, 323, 329, 344 Wadhwani, Sushil, Dr., 32, 162–179 Wadhwani Asset Management, 162 Wall Street Journal, 231 Weak currencies, 18 Wealth creation, 178, 298 Weymar, Helmut, 9 When Genius Failed (Lowenstein), 159 Wilson, Robert, 269, 279 Windfalls, 12, 15 Winner’s curse, 330–331 Wisdom of Crowds,The (Suroweicki), 43 World Bank, 5, 135, 145, 153, 155 World economy, impact of, xii World Trade Center, terrorist attack on, 45–46, 87–89, 149–150, 207, 213, 297, 319 World War II, economic impact of, 6 Yahoo!


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

"Friedman doctrine" OR "shareholder theory", Abraham Wald, activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, Andrei Shleifer, AOL-Time Warner, asset allocation, asset-backed security, bank run, beat the dealer, behavioural economics, Benoit Mandelbrot, Big Tech, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, card file, Carl Icahn, Cass Sunstein, collateralized debt obligation, compensation consultant, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, democratizing finance, Dennis Tito, discovery of the americas, diversification, diversified portfolio, Dr. Strangelove, Edward Glaeser, Edward Thorp, endowment effect, equity risk premium, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Glass-Steagall Act, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Bogle, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, market bubble, market design, Michael Milken, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, power law, prediction markets, proprietary trading, prudent man rule, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, rolodex, Ronald Reagan, seminal paper, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, Skinner box, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, stocks for the long run, tech worker, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, Two Sigma, Tyler Cowen, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

Marveled Jensen: One must realize that these analysts are extremely well endowed. Moreover, they operate in the securities markets every day and have wide-ranging contacts and associations in both the business and the financial communities. Thus, the fact that they are apparently unable to forecast returns accurately enough to recover their research and transactions costs is a striking piece of evidence in favor of the strong form of the [efficient market] hypothesis.28 Following the precedent set by Fama a few years before, Jensen’s thesis was published in full in the pages of Chicago’s Journal of Business in 1969. Richard Roll did Jensen one better; his “Application of the Efficient Market Model to U.S.

These sharks were the arbitrageurs who could be relied upon to attack risk-free money-making opportunities and make them disappear. The predators who kept markets efficient did require a rarefied theoretical environment to thrive. Merton later dubbed it the “super-perfect market paradigm.” In it there were no transaction costs, no worries about moving prices with one’s buying or selling, and no market discontinuities—that is, markets were always open and prices only changed in small increments.23 Louis Bachelier had envisioned such a market, too, but he had been unwilling to look more than an “instant” into its future.

“They believe that ketchup transactions prices are the only hard data worth studying.” The research program of these ketchup economists consists largely of looking for—and not finding—ways to make excess profits in the ketchup market. Two-quart bottles of ketchup always sell for twice as much as one quart bottles “except for deviations traceable to transactions costs,” and you can’t get a bargain on ketchup by buying and combining the ingredients yourself. “Indeed,” he continued, “most ketchup economists regard the efficiency of the ketchup market as the best established fact in empirical economics.” Then Summers got serious for a moment: The parallels should be clear.


Commodity Trading Advisors: Risk, Performance Analysis, and Selection by Greg N. Gregoriou, Vassilios Karavas, François-Serge Lhabitant, Fabrice Douglas Rouah

Asian financial crisis, asset allocation, backtesting, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, compound rate of return, constrained optimization, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, discrete time, distributed generation, diversification, diversified portfolio, dividend-yielding stocks, financial engineering, fixed income, global macro, high net worth, implied volatility, index arbitrage, index fund, interest rate swap, iterative process, linear programming, London Interbank Offered Rate, Long Term Capital Management, managed futures, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, p-value, Pareto efficiency, Performance of Mutual Funds in the Period, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, stochastic process, survivorship bias, systematic trading, tail risk, technology bubble, transaction costs, value at risk, zero-sum game

Rather, they simply are seeking short-term gains from the expected fluctuation in futures prices. Most futures trading activity is, in fact, conducted by speculators, who use futures markets (as opposed to transacting directly in the commodity) because it allows them to take a significant position with reasonably low transaction costs and a high amount of leverage. Managed futures investors attempt to profit from sharp price movements. However, the main distinction is that a speculator trades directly while the managed futures investor employs a CTA to trade on his or her behalf. Managed futures investors can take the form of private commodity pools, public commodity funds, and, most recently, hedge funds.

Managers focusing on short-term trades try to capture rapid moves and are out of the market more than their intermediate and long-term counterparts. Because these managers base their activity on swift fluctuation in prices, their returns tend to be noncorrelated to long-term or general advisors or to each other. In addition, they are more sensitive to transaction costs and heavily rely on liquidity and high volatility for returns. Strong trending periods, which often exceed the short-term time frame, tend to hamper the returns of these advisors and favor those with a longer time horizon. When analyzing potential alternative investment opportunities, it is important not only to review past performance returns and variability of returns, but also to carefully analyze the degree of correlation of a particular strategy with other types of traditional and alternative investments.

In addition, a retail IMA will, in common with registered managed investment schemes, generally be prohibited from investing in managed futures funds and wholesale IMAs that have not been registered under Part 5C (ASIC 2003b, p. 32). The overriding rationale for these reforms seems to be the desire on the part of the regulator to lower the transaction costs associated with establishing retail IMAs (ASIC 2003b, p. 37). This commercial imperative aside, it is difficult to provide a coherent justification for the reforms. The reforms draw an artificial distinction between managed investment schemes (where the fund manager has the discretion to select investments for the scheme) and retail IMAs, which are deemed not to be managed investment schemes (even though it is the operator that has the discretion to select investments for the accounts).


Virtual Competition by Ariel Ezrachi, Maurice E. Stucke

"World Economic Forum" Davos, Airbnb, Alan Greenspan, Albert Einstein, algorithmic management, algorithmic trading, Arthur D. Levinson, barriers to entry, behavioural economics, cloud computing, collaborative economy, commoditize, confounding variable, corporate governance, crony capitalism, crowdsourcing, Daniel Kahneman / Amos Tversky, David Graeber, deep learning, demand response, Didi Chuxing, digital capitalism, disintermediation, disruptive innovation, double helix, Downton Abbey, driverless car, electricity market, Erik Brynjolfsson, Evgeny Morozov, experimental economics, Firefox, framing effect, Google Chrome, independent contractor, index arbitrage, information asymmetry, interest rate derivative, Internet of things, invisible hand, Jean Tirole, John Markoff, Joseph Schumpeter, Kenneth Arrow, light touch regulation, linked data, loss aversion, Lyft, Mark Zuckerberg, market clearing, market friction, Milgram experiment, multi-sided market, natural language processing, Network effects, new economy, nowcasting, offshore financial centre, pattern recognition, power law, prediction markets, price discrimination, price elasticity of demand, price stability, profit maximization, profit motive, race to the bottom, rent-seeking, Richard Thaler, ride hailing / ride sharing, road to serfdom, Robert Bork, Ronald Reagan, search costs, self-driving car, sharing economy, Silicon Valley, Skype, smart cities, smart meter, Snapchat, social graph, Steve Jobs, sunk-cost fallacy, supply-chain management, telemarketer, The Chicago School, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, Travis Kalanick, turn-by-turn navigation, two-sided market, Uber and Lyft, Uber for X, uber lyft, vertical integration, Watson beat the top human players on Jeopardy!, women in the workforce, yield management

These costs, which include segmenting consumers, identifying elasticities, and preventing resale, are significant in all industries. This, of course, is the reason not all firms enact this pricing strategy. The omission of Notes to Page 118 3. 4. 5. 6. 295 these transactions costs from existing theories of price discrimination is impor tant because, as Varian has pointed out: ‘A full welfare analysis of attempts to engage in [perfect] price discrimination cannot neglect the transactions costs involved in the negotiation itself.’ ” P. Papandropoulos, “How Should Price Discrimination Be Dealt with by Competition Authorities?” Revue des droits de la concurrence 3 (2007): 34–38, http://ec.europa.eu/dgs/competition/economist/concurrences _03 _ 2007.pdf.

As Professor Lynn Stout discussed, societal norms of fairness and prosocial behav ior are both common in and necessary for a market economy.47 Violations of social norms of fairness decrease trust and increase retaliation.48 How trusting can you be in a world where people will seek whenever possible to profit at your expense? The transaction costs in a world where greed runs amok would be astronomical. Many people in behavioral economic experiments are trusting. However, their willingness to trust and cooperate is conditional, depending on the actual or expected cooperation of others.49 For online markets to deliver their benefits, people must trust firms and their use of their data.


pages: 511 words: 132,682

Competition Overdose: How Free Market Mythology Transformed Us From Citizen Kings to Market Servants by Maurice E. Stucke, Ariel Ezrachi

"Friedman doctrine" OR "shareholder theory", affirmative action, Airbnb, Alan Greenspan, Albert Einstein, Andrei Shleifer, behavioural economics, Bernie Sanders, Boeing 737 MAX, Cambridge Analytica, Cass Sunstein, choice architecture, cloud computing, commoditize, corporate governance, Corrections Corporation of America, Credit Default Swap, crony capitalism, delayed gratification, disinformation, Donald Trump, en.wikipedia.org, fake news, Garrett Hardin, George Akerlof, gig economy, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Google Chrome, greed is good, hedonic treadmill, incognito mode, income inequality, income per capita, independent contractor, information asymmetry, invisible hand, job satisfaction, labor-force participation, late fees, loss aversion, low skilled workers, Lyft, mandatory minimum, Mark Zuckerberg, market fundamentalism, mass incarceration, Menlo Park, meta-analysis, Milgram experiment, military-industrial complex, mortgage debt, Network effects, out of africa, Paradox of Choice, payday loans, Ponzi scheme, precariat, price anchoring, price discrimination, profit maximization, profit motive, race to the bottom, Richard Thaler, ride hailing / ride sharing, Robert Bork, Robert Shiller, Ronald Reagan, search costs, shareholder value, Sheryl Sandberg, Shoshana Zuboff, Silicon Valley, Snapchat, Social Responsibility of Business Is to Increase Its Profits, Stanford prison experiment, Stephen Hawking, sunk-cost fallacy, surveillance capitalism, techlash, The Chicago School, The Market for Lemons, The Myth of the Rational Market, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Davenport, Thorstein Veblen, Tim Cook: Apple, too big to fail, Tragedy of the Commons, transaction costs, Uber and Lyft, uber lyft, ultimatum game, Vanguard fund, vertical integration, winner-take-all economy, Yochai Benkler

OkCupid even asks, “Would you ever sleep with a serial killer?”—a question that might not have occurred to you but might indeed help winnow down the field of potential dates. THIRD, online dating makes it easier to find people who share our interests, hobbies, and values. Online dating thus reduces our transaction costs. Rather than spend money on multiple dates to see if the person is right, we can quickly scan all the essential details. FOURTH, online dating platforms eliminate traditional barriers. As the Economist noted, “For most of human history, the choice of life partner was limited by class, location and parental diktat.”51 Now, the magazine notes, “There are services for Jews, Christians, Muslims, Trump supporters, people who self-select as intelligent and vegans.

The State’s Role in Promoting Healthy Competition As we’ve seen, many policy makers and government officials operate under the delusion of self-correcting markets, in which the collective self-interest of all the competitors is supposed to eliminate the need for regulation. However, few markets, if any, match this simplistic vision of perfect competition, where fully informed, self-interested buyers and sellers interact, with few, if any, transaction costs. As a result, nearly every market is regulated—either by the market participants themselves, a few powerful firms, or the government. For example, the closest thing we have to perfect competition—the stock market—is also one of the most heavily regulated, precisely because regulations are needed to provide guardrails to prevent competition from turning toxic.

., 252–53 Thaler, Richard, 237 Thatcher, Margaret, 187 Theory of Moral Sentiments, The (Smith), 236–37 Theory of the Leisure Class (Veblen), 248 time-limited offers, 82 Tinder.com, 108 Tiny Lab Productions, Lithuania, 194–95, 199, 202–3, 223 Toma, Catalina, 112–13 toxic competition overview, 40, 122, 227–28, 254, 255 and antitrust laws, 103 collegiate sports programs, 139–40 deregulation of the financial industry, 129–30 economic waste caused by, 23–25 escalation of problems, 9–10 factors that lead us to, 281–84 four conditions leading to, 49–65 Gamemakers, 192–93, 203, 206–7, 220–22, 223 incremental steps disguise the movement toward darkness, 282–83 lack of awareness and/or control, 6 misallocation of resources, 24 NHL pre-helmet law scenario, 4–5 of online dating services, 116 paying less and getting much less, ix–x, xii–xiii quality and integrity as cost of, 178–79 regaining your power to change it, 284–87 in school ranking systems, 7–9 sellers’ inability to limit customer choices, 102, 103 See also choice overload; competition machine; exploiting human weakness; race to the bottom tracking software of Gamemakers, 204–7, 217, 222 traditional barriers, 110 transaction costs, 110 transparency in online dating, 109–10 Travelers Group Inc., 128 Travel Troubleshooter blog, 79 Trimega Laboratories, United Kingdom, 181 Trinity School, New York, 32–33 Trump, Donald, 174, 263 Trump administration deregulating as much as possible, 159 First Step Act, 169 and FTC, 157 increasing private prisons, 175 and online gambling, 153 rolling back consumer financial protections, 268–69, 285–86 Trump International Hotel Las Vegas, 147, 149 Trump International Sonesta Beach Resort, 149–50, 176 Truth in Hotel Advertising Act (2016), 153–54 Tulane University, 12–14, 21, 22–23, 38 Tyrie, Andrew, 291 UAB (University of Alabama at Birmingham), 138–39, 140–41 UK Forensic Science Service (FSS), 177–80 UK National Health Service (NHS), 183–87 Ultimatum Game, 237–39, 240 unethical behavior as cost of zero-sum competition, 246–47 unions as anticompetitive, 232 United Kingdom competition machine explosion, 41–45, 44 fuel shortage incidents on airlines, 57 horsemeat scandal, xii, 41–42, 45–47 investigating drip pricing on hotel booking sites, 148 National Health Service and cream-skimming, 183 privatizing the UK Forensic Science Service, 177–83 privatizing water, 52–53, 58–59, 68, 162, 187 school ranking system effects, 7–8 self-regulation in food industry, 273–74 United Nations, 229–30, 271 United States bankruptcies and their causes, 270 deterioration of the American Dream, 231–32 job satisfaction levels, 227 kudzu-ing drip pricing, 148–53 oregano fraud, 52 school ranking system effects, 8–9 wealth inequality, 229–30 Universal Declaration of Human Rights, 271 universities race to woo and reject applicants, xii.


EuroTragedy: A Drama in Nine Acts by Ashoka Mody

Alan Greenspan, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, book scanning, book value, Bretton Woods, Brexit referendum, call centre, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, debt deflation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, fear index, financial intermediation, floating exchange rates, forward guidance, George Akerlof, German hyperinflation, global macro, global supply chain, global value chain, hiring and firing, Home mortgage interest deduction, income inequality, inflation targeting, Irish property bubble, Isaac Newton, job automation, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, Kickstarter, land bank, liberal capitalism, light touch regulation, liquidity trap, loadsamoney, London Interbank Offered Rate, Long Term Capital Management, low interest rates, low-wage service sector, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, mortgage tax deduction, neoliberal agenda, offshore financial centre, oil shock, open borders, pension reform, precautionary principle, premature optimization, price stability, public intellectual, purchasing power parity, quantitative easing, rent-seeking, Republic of Letters, Robert Gordon, Robert Shiller, Robert Solow, short selling, Silicon Valley, subprime mortgage crisis, The Great Moderation, The Rise and Fall of American Growth, too big to fail, total factor productivity, trade liberalization, transaction costs, urban renewal, working-age population, Yogi Berra

Thus, as the Fed official and monetary historian Robert Solomon has written, competitive devaluation ceased to be “a live issue.”195 Advanced economies outside Europe gradually “learned to float” without disrupting the global trading system.196 Much later, a new—​and longer-​lasting—​economic argument emerged in the European discourse to justify a monetary union. Since within a monetary union it would no longer be necessary to convert from one currency to another, costs of international transactions would be lowered, and the uncertainty arising from exchange-​rate fluctuations would be eliminated. The proposition was that lower transaction costs and reduced uncertainty about future exchange rates would promote trade among members of the monetary union, which, in turn, would increase economic prosperity. Because this reasoning for monetary union appeared only later, it is discussed in the next chapter. The final economic argument, which also appeared only much later, was based on the briefly popular “two poles” view.197 By then, floating exchange rates had become the global norm.

Leigh-​Pemberton later told European scholar kohl’s euro 69 Alasdair Blair, “most of us, when we signed the [Delors Committee] Report in May 1989 thought that we would not hear much about it.”23 But the Delors Committee’s report had more life than Pöhl or LeighPemberton had imagined. Although mainly a rewarmed version of the Werner Committee’s report, the Delors Report staked out a new economic claim. A single currency, it asserted, would bolster commerce within Europe, because it would “remove intra-​Community exchange rate uncertainties and reduce transactions costs.”24 Speaking to European parliamentarians in Strasbourg a few days before the release of the report, Delors said that the “inter-​dependence” of European economies and the development of a single market made a single currency “indispensable.”25 A French official commented that although not quite “indispensable,” a single currency would improve the “efficiency” of the single market.26 Some voices did protest.

In 1993, Barry Eichengreen—​economics professor at the University of California, Berkeley, and perhaps the most important chronicler of the EMU—​brusquely said, “I dispute the belief that a single currency is a technically necessary concomitant of a single market in capital, labor, and goods.” Eichengreen explained that the decline in transactions costs achieved through a single currency would be trivial and the dividends from reduced exchange rate uncertainty would be “quite small” (Eichengreen 1993, 1322). Just as Emminger had pointed out a decade earlier, Eichengreen said that “the existence of forward markets in foreign exchange permits traders to hedge currency risk at low cost” (1327).


pages: 1,042 words: 266,547

Security Analysis by Benjamin Graham, David Dodd

activist fund / activist shareholder / activist investor, asset-backed security, backtesting, barriers to entry, Bear Stearns, behavioural economics, book value, business cycle, buy and hold, capital asset pricing model, Carl Icahn, carried interest, collateralized debt obligation, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, diversified portfolio, fear of failure, financial engineering, financial innovation, fixed income, flag carrier, full employment, Greenspan put, index fund, intangible asset, invisible hand, Joseph Schumpeter, junk bonds, land bank, locking in a profit, Long Term Capital Management, low cost airline, low interest rates, Michael Milken, moral hazard, mortgage debt, Myron Scholes, prudent man rule, Right to Buy, risk free rate, risk-adjusted returns, risk/return, secular stagnation, shareholder value, stock buybacks, The Chicago School, the market place, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, two and twenty, zero-coupon bond

But by insisting that higher expected return comes only with greater risk, MPT effectively repudiates the entire value-investing philosophy and its long-term record of risk-adjusted investment outperformance. Value investors have no time for these theories and generally ignore them. The assumptions made by these theories—including continuous markets, perfect information, and low or no transaction costs—are unrealistic. Academics, broadly speaking, are so entrenched in their theories that they cannot accept that value investing works. Instead of launching a series of studies to understand the remarkable 50-year investment record of Warren Buffett, academics instead explain him away as an aberration.

Both during and immediately after World War I, no self-respecting NYSE member firm facilitated a client’s switch from Liberty bonds into potentially more lucrative, if less patriotic, alternatives. There was no law against such a business development overture. Rather, according to Graham, it just wasn’t done. A great many things weren’t done in the Wall Street of the 1930s. Newly empowered regulators were resistant to financial innovation, transaction costs were high, technology was (at least by today’s digital standards) primitive, and investors were demoralized. After the vicious bear market of 1937 to 1938, not a few decided they’d had enough. What was the point of it all? “In June 1939,” writes Graham in a note to a discussion about corporate finance in the second edition, “the S.E.C. set a salutary precedent by refusing to authorize the issuance of ‘Capital Income Debentures’ in the reorganization of the Griess-Pfleger Tanning Company, on the ground that the devising of new types of hybrid issues had gone far enough.”

With so much information available, there is a tendency to act too quickly to buy and sell in haste, and to substitute the views of others for the hard work necessary to come to one’s own conclusions. Perhaps this is why so many market participants can be described only as “traders” and “speculators,” unafraid of using debt to turbocharge returns. Their method requires frequent profitable trades, after transaction costs, and incurs far higher taxes than the long-term investor pays. They also pay a heavy price in terms of emotional wear and tear. It is easy to vacation or enjoy family if one owns great businesses—and it’s impossible if one is tracking a flock of trading positions about which one has little conviction.


pages: 287 words: 81,970

The Dollar Meltdown: Surviving the Coming Currency Crisis With Gold, Oil, and Other Unconventional Investments by Charles Goyette

Alan Greenspan, bank run, banking crisis, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bernie Madoff, Bretton Woods, British Empire, Buckminster Fuller, business cycle, buy and hold, California gold rush, currency manipulation / currency intervention, Deng Xiaoping, diversified portfolio, Elliott wave, fiat currency, fixed income, Fractional reserve banking, housing crisis, If something cannot go on forever, it will stop - Herbert Stein's Law, index fund, junk bonds, Lao Tzu, low interest rates, margin call, market bubble, McMansion, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, National Debt Clock, oil shock, peak oil, pushing on a string, reserve currency, rising living standards, road to serfdom, Ronald Reagan, Saturday Night Live, short selling, Silicon Valley, transaction costs

Some may be reluctant to hold U.S. dollars even for a short time and may wish to add gold and silver investments to their portfolio beyond their core physical holdings. From time to time people may wish to park their money in precious metals assets, to add to and withdraw money as need arises or for expected expenditures. Some will want to speculate. Can this be done with minimal transaction costs? It can. Exchange-Traded Funds Exchange-traded funds or ETFs are one of the most popular developments of the investment markets in recent times. ETFs are like mutual funds, but they trade throughout the day on a stock exchange. Among the reasons for the growing popularity of ETFs are their low expense ratios and certain tax efficiencies.

Demand for non-standard bars can be quite weak in a rising silver market, causing delays and difficulties when selling. The 1- and 10-ounce silver bars (again of the major hallmarks only) and 1-ounce silver coins such as the U.S. Silver Eagles and the Canadian Silver Maple Leaf coins have higher transaction costs but are suitable for smaller investments. Other Ways to Own Silver What the exchange-traded funds GLD and IAU do with gold, iShares Silver Trust (New York Stock Exchange symbol: SLV) does with silver. Created in 2006, SLV is off to a fast start with 268 million ounces of silver in trust, valued at $3.8 billion, in May 2009.


pages: 444 words: 86,565

Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum, Joshua Pearl, Joseph R. Perella

accelerated depreciation, asset allocation, asset-backed security, bank run, barriers to entry, Benchmark Capital, book value, business cycle, capital asset pricing model, collateralized debt obligation, corporate governance, credit crunch, discounted cash flows, diversification, equity risk premium, financial engineering, fixed income, impact investing, intangible asset, junk bonds, London Interbank Offered Rate, performance metric, risk free rate, shareholder value, sovereign wealth fund, stocks for the long run, subprime mortgage crisis, technology bubble, time value of money, transaction costs, yield curve

Mergers and Acquisitions Basics: The Key Steps of Acquisitions, Divestitures, and Investments. Hoboken, NJ: John Wiley & Sons, 2005. Gaughan, Patrick A. Mergers, Acquisitions, and Corporate Restructurings. 4th ed. Hoboken, NJ: John Wiley & Sons, 2007. Gaughan, Patrick A. Mergers: What Can Go Wrong and How to Prevent It. Hoboken, NJ: John Wiley & Sons, 2005. Gilson, Stuart. “Transactions Costs and Capital Structure Choice: Evidence from Financially Distressed Firms.” Journal of Finance 52 (1997): 161-196. Goetzmann, William N., and Roger G. Ibbotson. The Equity Risk Premium: Essays and Explorations. New York: Oxford University Press, 2006. Graham, John R. “How Big Are the Tax Benefits of Debt?”

Covenant-lite term loans in LBO financing structures were more typical when structured alongside an ABL facility because commercial banks would not agree to covenant-lite cash flow revolvers unless the revolver benefited from a super-priority security interest in the collateral. 169 Toggles may also be created to activate the 100% cash flow sweep, cash balance sweep, average interest expense option, or other deal-specific toggles. 170 The length of the projection period provided in a CIM (or through another medium) may vary depending on the situation. 171 The timing for the sharing of the Sponsor Model depends on the specifics of the particular deal and the investment bank’s relationship with the sponsor. 172 If the banker is analyzing a public company as a potential LBO candidate outside of (or prior to) an organized sale process, the latest balance sheet data from the company’s most recent 10-K or 10-Q is typically used. 173 The “free cash flow” term used in an LBO analysis differs from that used in a DCF analysis as it includes the effects of leverage. 174 As ValueCo is private, we entered a “2” in the toggle cell for public/private target (see Exhibit 5.12). 175 In this case, a “1” would be entered in the toggle cell for public/private target (see Exhibit 5.13). 176 In the event the target has debt being refinanced with associated breakage costs (e.g., call or tender premiums), those expenses are included in the uses of funds. 177 In accordance with FAS 141(R), M&A transaction costs are expensed as incurred. Debt financing fees, however, continue to be treated as deferred costs and amortized over the life of the associated debt instruments. 178 The allocation of the entire purchase price premium to goodwill is a simplifying assumption for the purposes of this analysis.


pages: 320 words: 86,372

Mythology of Work: How Capitalism Persists Despite Itself by Peter Fleming

"Friedman doctrine" OR "shareholder theory", 1960s counterculture, anti-work, antiwork, call centre, capitalist realism, carbon tax, clockwatching, commoditize, corporate social responsibility, creative destruction, David Graeber, death from overwork, Etonian, future of work, G4S, Goldman Sachs: Vampire Squid, illegal immigration, Kitchen Debate, late capitalism, Mark Zuckerberg, market bubble, market fundamentalism, means of production, neoliberal agenda, Parkinson's law, post-industrial society, post-work, profit maximization, profit motive, quantitative easing, Results Only Work Environment, scientific management, shareholder value, social intelligence, stock buybacks, The Chicago School, transaction costs, wealth creators, working poor

With only technocrats in the room, the cultural atmosphere becomes rather moribund and confusing, as managerial stances cancel each other out. The prototypical neoliberal manager requires social goods to attack – something to bite – even if this results in major organizational dysfunction. I believe there are four driving factors for this attraction to confrontation and conflict. Firstly, as the classic economic theory of ‘transaction cost analysis’ crept into almost every sphere of economic activity, including work, its underlying cynicism crafted a specific ideological view of the employee. In particular, the idea of ‘shirking’ became popular for understanding the presumed divergence between what a principal (the firm) hires the agent (worker) to do on its behalf and what the agent actually does.

capitalism ref1, ref2, ref3, ref4 General Motors plant (Michigan) ref1 Goffee, R. ref1 Goldman Sachs ref1 The Good Soldier Svejk (Hasek) ref1 Gordon, D. ref1 Gorz, A. ref1, ref2 Graeber, D. ref1 Groundhog Day (Ramis) ref1 Guattari, F. ref1, ref2, ref3 on criticism/criticality ref1 and de-subjectification ref1 language ref1, ref2 Gujarat NRE ref1 Gulf of Mexico oil spill (2010) ref1 Hamper, B. ref1 Hanlon, G. ref1 Hardt, M. ref1 Hart, A. ref1 Harvard Business Review (HBR) ref1 Harvey, D. ref1, ref2 Hayek, F. ref1, ref2, ref3 health and safety ref1, ref2 ‘Help to Buy’ support scheme ref1 Hirschhorn, N. ref1 Hodgkinson, T. ref1 holiday policy ref1 Houellebecq, Michel ref1, ref2, ref3 human capital ref1, ref2, ref3, ref4, ref5, ref6, ref7 human relations movement ref1 Human Resource Management (HRM) ref1, ref2, ref3, ref4, ref5, ref6 humour ref1 ‘I, Job’ function ref1, ref2, ref3, ref4, ref5, ref6 and biopower ref1, ref2 and death drive ref1, ref2 as escape into work ref1 and illness ref1, ref2, ref3 resisting ref1, ref2, ref3, ref4, ref5, ref6 see also escape; totality refusal see also work, as all-encompassing; working hours illegal immigrants, deportations ref1 illness ref1, ref2 collective ref1, ref2 see also Social Patients’ Collective as desirable experience ref1, ref2, ref3, ref4 of managers ref1, ref2 and productive power ref1, ref2 as weapon against capitalism ref1 ‘immersion room’ exercise ref1, ref2, ref3, ref4 imperceptibility ref1 see also invisibility incentivization ref1 indexation process ref1, ref2, ref3, ref4, ref5 informality and authoritarianism ref1, ref2 see also deformalization insecurity ref1 Institute of Leadership and Management (ILM) ref1, ref2, ref3 invisibility ref1, ref2 ‘Invisible Committee’ ref1, ref2 Italian autonomist thought ref1, ref2 Jameson, F. ref1 Jones, G. ref1 Junjie, Li ref1 Kamp, A. ref1 Kein Mensch ist illegal ref1 Kellaway, L. ref1 Key Performance Indicators (KPIs) ref1 Keynes, J.M. ref1, ref2 Khrushchev, Nikita ref1, ref2 Kim, Jonathan ref1 King, Stephen ref1 ‘Kitchen Debate’ ref1 Kramer, M. ref1, ref2 labour unions ref1 dissolution of ref1, ref2 language, evolution of ref1 Larkin, P. ref1 Latour, B. ref1, ref2 Laval, C. ref1, ref2 Lazzarato, M. ref1, ref2 leaders backgrounds ref1 remuneration and bonuses ref1, ref2, ref3, ref4, ref5 see also managers Lefebvre, H. ref1 Leidner, R. ref1 Lewin, D. ref1 liberation management ref1, ref2, ref3, ref4, ref5 life itself, enlisting ref1, ref2, ref3, ref4, ref5 lines of flight ref1, ref2 Lordon, F. ref1, ref2, ref3 Lucas, R. ref1, ref2 Lukács, G. ref1 Lynch, R. ref1 McChesney, R. ref1 McGregor, D. ref1 management ref1, ref2 and class function ref1, ref2 as co-ordination ref1 and inducement of willing obedience ref1, ref2 information deficit ref1 and power ref1, ref2 self-justification rituals ref1 as transferable skill ref1, ref2 managerialism ref1, ref2, ref3, ref4, ref5, ref6, ref7 and abandonment ideology ref1, ref2, ref3, ref4, ref5 and boundary management ref1 and conflict-seeking behaviour ref1 division between managers and managed ref1, ref2 general principles of ref1 and leadership ref1 profligate management function ref1 refusing ref1 and securitization ref1 as self-referential abstraction ref1 managers as abandonment enablers ref1, ref2 and deformalization ref1 and engagement of workers ref1, ref2 lack of practical experience ref1 overwork ref1, ref2 see also leaders Marcuse, H. ref1 Market Basket supermarket chain ref1 Marx, K. ref1, ref2, ref3, ref4, ref5, ref6 Maslow, A. ref1 Matten, D. ref1 meat consumption ref1 Meek, J. ref1 Meyerson, D. ref1 Michelli, J. ref1 Miller, W.I. ref1 Mitchell, David ref1 mobile technology ref1, ref2, ref3, ref4, ref5, ref6, ref7 Modafinil ref1, ref2 Monaghan, A. ref1 money ref1, ref2 see also accumulation Mooney, G. ref1 Moore, A.E. ref1 Moore, Michael ref1, ref2 music industry ref1 Naidoo, Kumi ref1 NASA ref1 Natali, Vincenzo ref1 Negri, A. ref1, ref2 neoliberal capitalism ref1, ref2, ref3, ref4, ref5, ref6, ref7 and bureaucracy ref1 and ideal worker ref1, ref2 and non-work time ref1, ref2 and paranoia ref1, ref2 resisting ref1, ref2 see also post-labour strategy and threat of abandonment ref1, ref2 and truth telling ref1, ref2, ref3 neoliberalism ref1, ref2, ref3, ref4, ref5, ref6 and class relations ref1, ref2, ref3 and disciplinary power ref1 and human-capital theory ref1 and impossibility ref1, ref2, ref3, ref4, ref5, ref6 and micro-fascism ref1 and reign of technocrats ref1 role of state ref1 and truth telling ref1, ref2 and worker engagement ref1, ref2, ref3 Nestlé ref1 New Public Management ref1, ref2 New Zealand, and capitalist deregulation ref1 New Zealand Oil and Gas (NZOG) ref1 Newman, Maurice ref1 Nietzsche, Friedrich ref1, ref2 Nixon, Richard ref1, ref2 Nyhan, B. ref1 obsession ref1, ref2, ref3, ref4, ref5, ref6, ref7, ref8 Onionhead program ref1 overcoding ref1, ref2, ref3, ref4, ref5, ref6, ref7 The Pain Journal (Flanagan) ref1, ref2, ref3 paranoia ref1, ref2, ref3, ref4 overwork/paranoia complex ref1, ref2 Paris Commune ref1, ref2 Parkinson’s Law ref1 Parnet, C. ref1 Parsons, T. ref1 Peep Show (TV comedy) ref1 pensions ref1, ref2 personnel management ref1 see also Human Resource Management Peters, T. ref1 Philip Morris ref1 Pike River Coal mine (New Zealand) ref1 Pollack, Sydney ref1 Pook, L. ref1 Porter, M. ref1, ref2 post-labour strategy, recommendations ref1 postmodernism ref1, ref2, ref3 power ref1, ref2, ref3, ref4, ref5 and truth telling ref1 Prasad, M. ref1 Price, S. ref1 private companies, transferring to public hands ref1 privatization ref1, ref2, ref3, ref4, ref5, ref6, ref7 profit maximization ref1, ref2, ref3, ref4, ref5 quantitative easing ref1 Rand, Ayn ref1 rationalization ref1, ref2, ref3 Reifler, J. ref1 reserve army of the unemployed ref1 Ressler, C. ref1 results-only work environment (ROWE) ref1, ref2, ref3 Rimbaud, A. ref1 Rio+20 Earth Summit (2012) ref1 ‘riot grrrl’ bands ref1 rituals of truth and reconciliation ref1 Roberts, J. ref1 Roger Award ref1 Roger and Me (Moore) ref1 Rosenblatt, R. ref1 Ross, A. ref1, ref2 Ross, K. ref1 Rudd, Kevin ref1 ruling class fear of work-free world ref1, ref2 and paranoia ref1, ref2 Sade, Marquis de ref1 Sallaz, J. ref1 Saurashtra Fuels ref1 Scarry, E. ref1 Securicor (G4S) ref1 Segarra, Carmen ref1 self-abnegation ref1 self-employment ref1 self-management ref1, ref2, ref3, ref4, ref5 self-preservation ref1, ref2, ref3, ref4 self-sufficiency ref1, ref2, ref3 shareholder capitalism ref1, ref2, ref3, ref4 shift work ref1, ref2 see also working hours Shragai, N. ref1 sleep and circadian rhythms ref1 as form of resistance ref1 working in ref1, ref2, ref3 smart drugs ref1, ref2 Smith, Roger ref1 smoking and addiction ref1 dangers of ref1, ref2 scientific research ref1 sociability ref1, ref2 ‘the social’ ref1, ref2 social factory ref1, ref2, ref3, ref4, ref5, ref6, ref7 and structure of work ref1 social media ref1 Social Mobility and Child Poverty Commission ref1 Social Patients’ Collective (SPK) ref1, ref2, ref3 social surplus (commons) ref1, ref2, ref3 socialism ref1, ref2, ref3, ref4 Sontag, S. ref1 Spicer, A. ref1 stakeholder management ref1, ref2 Starbucks ref1 state, theory of ref1 subcontracting ref1, ref2, ref3 subsidization ref1, ref2, ref3, ref4, ref5, ref6, ref7 suicide as act of refusal ref1 Freud’s definition ref1 work-related ref1, ref2, ref3, ref4, ref5 surplus labour ref1, ref2 surplus living wage ref1 ‘tagged’ employees ref1 ‘tagged’ prisoner ref1 Tally, Richard ref1 taxation ref1, ref2, ref3 Taylor, F.W. ref1 Taylor, S. ref1 Taylorism ref1 technological progress, and emancipation from labour ref1 Thatcher, Margaret ref1 Thatcherism ref1 They Shoot Horses Don’t They? (Pollack) ref1 Thikol ref1 Thompson, E.P. ref1 Thompson, J. ref1 time ref1, ref2, ref3, ref4 tobacco industry CSR as legitimation strategy ref1 and false truth telling ref1, ref2 lawsuits against ref1, ref2 totality refusal ref1, ref2, ref3 see also escape transaction cost analysis ref1 Under the Dome (King) ref1 unemployment ref1, ref2, ref3, ref4, ref5, ref6, ref7 United Health Programs of America ref1, ref2 universities management ref1, ref2 and paranoia ref1 US Equal Employment Opportunities Commission ref1 utopian thought ref1, ref2, ref3 Virno, P. ref1, ref2 Volkswagen ref1 wage theft ref1 waste (non-utility) ref1, ref2 water management ref1 Waterman, R.H. ref1 Webb, Robert ref1 Weber, M. ref1, ref2, ref3, ref4, ref5, ref6 Weil, D. ref1 Weiss, B. ref1 Williams, R. ref1 Williams-Grut, O. ref1 Willmott, H. ref1 Witthall, Peter ref1 work ref1, ref2 as all-encompassing ref1, ref2, ref3, ref4, ref5, ref6 see also ‘I, Job’ function and economic necessity ref1, ref2, ref3, ref4, ref5 fetishistic character of ref1, ref2 for it’s own sake ref1, ref2, ref3, ref4 as ‘open prison’ ref1, ref2 and refusal ref1, ref2, ref3, ref4, ref5 see also escape; totality refusal and ritual ref1, ref2, ref3, ref4, ref5 as social construction ref1, ref2, ref3, ref4 universalization of ref1, ref2, ref3, ref4, ref5, ref6, ref7, ref8 work and non-work boundaries blurred ref1, ref2, ref3, ref4, ref5, ref6, ref7, ref8 see also ‘I, Job’ function; working hours workers engagement and disengagement ref1, ref2, ref3 see also deformalization working hours prolonged ref1, ref2, ref3, ref4 three-day work week ref1 work-creep ref1 see also results-only work environment; shift work World Health Organization ref1 ‘XYZ Tobacco’ (pseudonym) ref1, ref2 zero-hour contracts ref1, ref2 Zheng, Li ref1 Žižek, S. ref1


pages: 270 words: 79,992

The End of Big: How the Internet Makes David the New Goliath by Nicco Mele

4chan, A Declaration of the Independence of Cyberspace, Airbnb, Amazon Web Services, Andy Carvin, Any sufficiently advanced technology is indistinguishable from magic, Apple's 1984 Super Bowl advert, barriers to entry, Berlin Wall, big-box store, bitcoin, bread and circuses, business climate, call centre, Cass Sunstein, centralized clearinghouse, Chelsea Manning, citizen journalism, cloud computing, collaborative consumption, collaborative editing, commoditize, Computer Lib, creative destruction, crony capitalism, cross-subsidies, crowdsourcing, David Brooks, death of newspapers, disruptive innovation, Donald Trump, Douglas Engelbart, Douglas Engelbart, en.wikipedia.org, Evgeny Morozov, Exxon Valdez, Fall of the Berlin Wall, Filter Bubble, Firefox, global supply chain, Google Chrome, Gordon Gekko, Hacker Ethic, Ian Bogost, Jaron Lanier, Jeff Bezos, jimmy wales, John Markoff, John Perry Barlow, Julian Assange, Kevin Kelly, Khan Academy, Kickstarter, Lean Startup, lolcat, machine readable, Mark Zuckerberg, military-industrial complex, minimum viable product, Mitch Kapor, Mohammed Bouazizi, Mother of all demos, Narrative Science, new economy, Occupy movement, off-the-grid, old-boy network, One Laptop per Child (OLPC), peer-to-peer, period drama, Peter Thiel, pirate software, public intellectual, publication bias, Robert Metcalfe, Ronald Reagan, Ronald Reagan: Tear down this wall, satellite internet, Seymour Hersh, sharing economy, Silicon Valley, Skype, social web, Steve Jobs, Steve Wozniak, Stewart Brand, Stuxnet, Ted Nelson, Ted Sorensen, Telecommunications Act of 1996, telemarketer, the Cathedral and the Bazaar, the long tail, The Wisdom of Crowds, transaction costs, uranium enrichment, Whole Earth Catalog, WikiLeaks, Zipcar

As it turned out, it didn’t really change any of our lives (so far at least).” Self-financing and hitting up friends is probably what bands have always done when they want to record something but don’t have a record deal; what has changed is that Kickstarter (like other Web resources) reduces the search and transaction costs for hitting up friends (and in some cases others who find out about it), including the cost of distributing the rewards that incentivize the donors or investors. And it’s hardly a unique story. Among the over 26,000 projects successfully funded on Kickstarter since its inception in 2008, a third have been music albums, another third film or video, and about a tenth writing and publishing projects.20 Not one of these projects needed a big studio, big record label, or big publisher to back them.21 Approximately one-tenth of the films premiering at Sundance Film Festival in 2012 were at least partially funded on Kickstarter, leading David Carr to remark in the New York Times that “at Sundance Kickstarter resembled a movie studio, but without the egos.”22 And Kickstarter is just one of several crowd-sourced funding sites.

Similarly, in consent of the networked, a technology platform’s power is derived from its users—arguably much more so than a government’s. When you move to a country, you explicitly agree to its laws and the shape and form of its government. Once you’re there, leaving it can entail a high transaction cost—even higher if the government doesn’t want you to leave. When you join an online community, you’re presented with the terms of service, an obtuse legal document frequently stretching on for pages. Facebook’s terms of service are close to ten pages long. Many digital companies (like Yahoo!) change their terms of service without notification.


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The Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power by Michael A. Cusumano, Annabelle Gawer, David B. Yoffie

activist fund / activist shareholder / activist investor, Airbnb, AltaVista, Amazon Web Services, AOL-Time Warner, asset light, augmented reality, autonomous vehicles, barriers to entry, bitcoin, blockchain, business logic, Cambridge Analytica, Chuck Templeton: OpenTable:, cloud computing, collective bargaining, commoditize, CRISPR, crowdsourcing, cryptocurrency, deep learning, Didi Chuxing, distributed ledger, Donald Trump, driverless car, en.wikipedia.org, fake news, Firefox, general purpose technology, gig economy, Google Chrome, GPS: selective availability, Greyball, independent contractor, Internet of things, Jeff Bezos, Jeff Hawkins, John Zimmer (Lyft cofounder), Kevin Roose, Lean Startup, Lyft, machine translation, Mark Zuckerberg, market fundamentalism, Metcalfe’s law, move fast and break things, multi-sided market, Network effects, pattern recognition, platform as a service, Ponzi scheme, recommendation engine, Richard Feynman, ride hailing / ride sharing, Robert Metcalfe, Salesforce, self-driving car, sharing economy, Silicon Valley, Skype, Snapchat, SoftBank, software as a service, sovereign wealth fund, speech recognition, stealth mode startup, Steve Ballmer, Steve Jobs, Steven Levy, subscription business, Susan Wojcicki, TaskRabbit, too big to fail, transaction costs, transport as a service, Travis Kalanick, two-sided market, Uber and Lyft, Uber for X, uber lyft, vertical integration, Vision Fund, web application, zero-sum game

In an earlier era, many software developers who worked on the Windows platform discovered that Microsoft would often copy and integrate third-party applications, effectively putting those players out of business.8 PHARMAPACKS ON AMAZON: LEVERAGE THE PLATFORM GIANT In some cases, belonging to someone else’s platform can be very profitable. A big successful platform such as Amazon can dramatically reduce search and transaction costs for customers. The challenge for firms using the platform is to learn how to exploit the advantages without being run over by the platform itself. The answer often exists in platform governance rules that allow participants to pick their spots.9 Many creative businesses have found ways to belong to a platform, while mitigating that platform’s inherent power.

The Mood Change Until recently, the dominant mood in the business press (and in many business books on platform companies) was unbridled enthusiasm for the efficiency of platforms and awe at the speed at which they introduced both innovation and disruption. We and other authors have shown that many platforms are indeed amazing: They can reduce search and transaction costs, and fundamentally restructure entire industries within a few short years. We have seen this dynamic in computers, online marketplaces, taxis, hotels, financial services, and many other fields. Nonetheless, the tide of public perception seems to have turned: Media coverage of platforms has become increasingly negative.


pages: 353 words: 148,895

Triumph of the Optimists: 101 Years of Global Investment Returns by Elroy Dimson, Paul Marsh, Mike Staunton

asset allocation, banking crisis, Berlin Wall, Black Monday: stock market crash in 1987, book value, Bretton Woods, British Empire, buy and hold, capital asset pricing model, capital controls, central bank independence, classic study, colonial rule, corporate governance, correlation coefficient, cuban missile crisis, currency risk, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, European colonialism, fixed income, floating exchange rates, German hyperinflation, index fund, information asymmetry, joint-stock company, junk bonds, negative equity, new economy, oil shock, passive investing, purchasing power parity, random walk, risk free rate, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, stocks for the long run, survivorship bias, Tax Reform Act of 1986, technology bubble, transaction costs, yield curve

., inflation) over the 101-year period from 1900 to 2000. It shows the wealth that would have accumulated at each year-end from 1900 through to 2000 from an initial investment of $1 in stocks, bonds, or bills at the end of 1899. It assumes that dividends and interest were reinvested, and that there were no taxes or transactions costs. Figure 4-1 also shows inflation, that is, the increase in consumer prices over time. For stocks, the investment strategy represented in Figure 4-1 is one of buying and holding the US equity market. Today, this would be most cheaply accomplished by investing in an index tracker fund. Back in 1900, some 70 years before tracker funds were launched, it would have meant investing in all NYSE securities in proportion to their market capitalizations.

A further factor that must surely have lowered required returns is that investors now have much more opportunity to diversify, both domestically and internationally, than they had a century ago. Diversification allows investors to lower their risk exposure without detriment to expected return. Transaction costs are also lower now than a century ago. Factors such as these, which led to a reduction in the required risk premium, have contributed further to the upward re-rating of stock prices. To convert from a pure historical estimate of the risk premium into a forward-looking projection, we need to reverse-engineer the factors that drove up stock markets over the last 101 years.

., xii, 239 Switzerland, 294–8 see also cross-country comparisons Taiwan, 12, 20, 133, 161 Tax-loss selling, 135–8 Tax management, 205–6 Taxes, 9, 44, 46, 85, 104, 122, 135–8, 140, 158–62, 193, 205–7, 209, 212, 214, 218, 219, 254, 301 Taylor, A.M., 97, 99 Taylor, B., xii Technological change, 23–4, 189, 223–4 Technology, 23, 25, 26, 28, 199 Term premium, 74, 84–7 Terrorism, 3, 4, 58, 168, 210, 213 Thaler, R., 176 Thomas, J., 188 Thomas, W.A., 259 Time-of-the-day effect, 135 Timmermann, A., xii, 244 Transactions costs, 46, 189, 207 Treasury bills, see bills Treasury inflationprotected securities (TIPS), 74, 84–7, 90, 212 Treynor, J.L., xi, 207, 208 Triangles, 227, 228 Triumph of the Optimists, xi, 176, 224 Turkey, 20, 21, 22 Turn-of-the-year effect, 135–9 339 Twenty-first century, 17, 118, 119, 158, 184, 190, 195, 210 United Kingdom, 23–32, 36–8, 48–50, 63–5, 78, 84–7, 95, 126–9, 135–8, 142–5, 149–53, 190–3, 198–9, 299–305 see also cross-country comparisons United States, 23–32, 45– 7, 54–61, 63–5, 68–70, 74–8, 81–2, 84–9, 95, 124–6, 135–8, 139–42, 149–53, 158–61, 163–6, 169–71, 186–7, 190–3, 196–7, 306–10 see also cross-country comparisons Uppal, R., 117 Urquhart, M.C., 239 Uruguay, 20 US economy, 3, 35, 62, 166, 222 Valbuena, S.F., xii, 284 Valuation, 18, 139, 149, 155, 161, 162, 177–9, 191, 211–7 Value investing, 139–48 Value-growth effect, 139– 48 Value-growth premium, 139–48 Value stocks, 8, 139–48 van Nieuwerburgh, S., 234 van Schaik, F., xii, 274 Vandellos, J.A., 284 Velioti, A.M., xii Venezuela, 20, 21 Vermaelen, T., 160, 161 Violi, R., 264 Vishny, R., 141 Vodafone, 18, 23, 28, 30, 31, 218 Volatility, 54–62, 77–83, 91–9, 105–8, 114, 123, 144, 152, 161, 163, 178– 84, 187, 195–210, 219, 221 see also risk Wada, K., xii, 269 Wall Street Crash, 22, 47, 58, 116, 122, 224 Warnock, F.E., 120, 121 Weekend effect., 135 Weights, 24, 40, 279, 311 Weil, P., 202 Weisbach, M.S., 159 Welch, I., 185–7, 188 Westerfield, R.W., 211, 212 Weston, F., 211 Whelan, S., 259 White, E.N., 19 Williams, J.B., 139 Wilshire Associates, 46, 58, 306 Wilshire 5000, 46, 58, 306 Wilson, J.W., xii, 35, 39, 46, 306 Window-dressing, 135–6, Woodward, G.T., 85 World Bank, 12, 15, 93 World Index, 7, 10, 39–40, 108–14, 119, 123, 166, 167, 168, 171–5, 184–5, 187, 192, 193, 202, 216, 219, 220, 223, 311–5 World ex-US index, 109– 11 World markets, 5, 11–4, 32, 50–1, 123, 138 World Trade Center, see September 11th 2001 World wars, 36, 37, 44, 47, 58, 69, 70, 71, 73, 75, 76, 79, 93, 94, 98, 116, 122, 123, 152, 153, 189, 195, 221, 224 see also First World War and Second World War Wright, S., 195 Wydler, D., xii, 294 Xu, Y., 42, 57, 118 Yield, see bond yield and dividend yield Yield curve, 81 Yugoslavia, 20 Ziemba, W.T., 199, 269 Zingales, L., 22


India's Long Road by Vijay Joshi

Affordable Care Act / Obamacare, barriers to entry, Basel III, basic income, blue-collar work, book value, Bretton Woods, business climate, capital controls, carbon tax, central bank independence, clean water, collapse of Lehman Brothers, collective bargaining, colonial rule, congestion charging, Cornelius Vanderbilt, corporate governance, creative destruction, crony capitalism, decarbonisation, deindustrialization, demographic dividend, demographic transition, Doha Development Round, eurozone crisis, facts on the ground, failed state, financial intermediation, financial repression, first-past-the-post, floating exchange rates, foreign exchange controls, full employment, germ theory of disease, Gini coefficient, global supply chain, global value chain, hiring and firing, income inequality, Indoor air pollution, Induced demand, inflation targeting, invisible hand, land reform, low interest rates, Mahatma Gandhi, manufacturing employment, Martin Wolf, means of production, microcredit, moral hazard, obamacare, Pareto efficiency, price elasticity of demand, price mechanism, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, race to the bottom, randomized controlled trial, rent-seeking, reserve currency, rising living standards, school choice, school vouchers, secular stagnation, Silicon Valley, smart cities, South China Sea, special drawing rights, The Future of Employment, The Market for Lemons, too big to fail, total factor productivity, trade liberalization, Tragedy of the Commons, transaction costs, universal basic income, urban sprawl, vertical integration, working-age population

Public finance and public production do not have to go together because production could be contracted out to the private sector though the government pays for it (see below). Technical note: External effects may, in principle, be internalized by voluntary bargaining (see Coase 1960) but the feasibility of such internalization depends on the fulfilment of various stringent conditions, such as absence of transactions costs. State intervention to internalize externalities presents its own difficulties, however. For example, it may not easy to determine the rate of tax at which social marginal benefit and social marginal cost would be equated. For example, negative externalities are very important in finance. The social costs of bank failures are much greater than the private costs to the managers of the banks that fail.

India’s labour laws hugely raise the cost of labour and were enacted without taking into account the reactions of employers and workers. The fact is that there is a strong disincentive to hire workers if they are impossible to fire. No doubt, employers can evade regulations, but only by incurring G r o w t h a n d t h e Em p l oy m e n t P r o b l e m  [ 79 ] 80 higher transactions costs, hassle, and uncertainty. So most companies quite rationally try and minimize the use of labour, remain small and uneconomic in scale, and expand in a capital-​intensive manner. It is thus no surprise that the organized sector is lacking in enterprises that employ large numbers of workers producing labour-​intensive products like garments, shoes, or toys for a mass market: employers would be reluctant to be stuck with a workforce that they could not trim in response to business conditions.

The FDI policy regime switched from a positive list to a negative list, thereby expanding the range of industries which could attract foreign money. Inward FDI steadily increased throughout the 1990s, and moved into a higher gear in the next decade (see Table 12.6).6 Now foreign investors can, in principle, invest in most sectors with minimal government policy barriers (though transactions costs on the ground still remain [ 250 ] Political Economy 251 Table 12.5 INDIA , CHINA , SOUTH KOREA: SHARES OF WORLD MERCHANDISE EXPORTS (PER CENT) India China South Korea 1950 2.0 1.3a 0.5a 1980 0.4 0.9 0.9 1990 0.5 1.8 2.0 2000 0.7 3.9 2.7 2007 1.1 8.9 2.7 2010 1.4 10.4 3.1 a Chinese and South Korean data refer to 1953.


pages: 554 words: 158,687

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, false flag, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, general purpose technology, Glass-Steagall Act, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low interest rates, low skilled workers, M-Pesa, market bubble, means of production, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, post-Fordism, Post-Keynesian economics, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Solow, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

In contrast, banknotes normally leave no trail of use, thus being suitable for illegal and ‘grey’ transactions.57 Banknote anonymity also protects users against the attentions of a prying state. The third is that access e-money has limited ability to deal with very small payments. The difficulties involved can be gauged from the internet where it has proven very difficult to introduce a reliable system of e-money ‘micro-payments’ (a fraction of the unit of account). There are transactions costs – including plain inconvenience – to using access e-money for tiny purchases, leading internet users simply to avoid the latter.58 Beyond the internet, coin appears to be superior to access e-money in dealing with very small payments: it is easy to carry; it can be readily supplied in sufficiently small denominations; there is negligible profit from counterfeiting it; the cost is generally small if it is lost; it is also relatively cheap to produce and to put in circulation.

Second, does it also follow that functioning capitalists would continually increase leverage, thus raising the rate of profit of enterprise? Both questions are directly related to the Modigliani–Miller theorem, the cornerstone of mainstream theory of finance.28 The theorem argues that, if capital markets are perfect and there are no transactions costs and taxes, the level of leverage of an enterprise is irrelevant to its stock market valuation and to the cost of financing its liabilities. What matters instead is the combination of real resources mobilized by the enterprise – labour power, raw materials, technology, and so on. By the same token, financial decisions are irrelevant to overall profitability, and can be disregarded by economic theory.

Thus, an independent central bank was established to support a homogeneous money market with the explicit mandate of keeping inflation low; the Stability and Growth Pact was introduced, aimed at fiscal discipline to keep inflation under control, even though compliance was left to each sovereign state; competitiveness in the internal market, meanwhile, came to depend on productivity growth and on the fluctuations of nominal unit labour costs in each country.46 The institutional mechanisms of the eurozone have further reflected hierarchical relations among its member states. Core countries – particularly Germany – have deployed the euro as a means of control over lesser states in the union.47 German industrial capital has gained competitive advantages from the lowering of transaction costs across the internal market, and from the opportunity to outsource productive capacity. For other member states the euro has implied loss of the weapon of currency depreciation in the face of German exporting prowess. German financial capital has, meanwhile, benefited from the homogeneity of the money market within the European Monetary Union and from the global role of the euro as reserve currency.


pages: 93 words: 24,584

Walk Away by Douglas E. French

Alan Greenspan, Bear Stearns, behavioural economics, business cycle, Elliott wave, forensic accounting, full employment, Home mortgage interest deduction, loss aversion, low interest rates, McMansion, mental accounting, mortgage debt, mortgage tax deduction, negative equity, New Journalism, Own Your Own Home, Richard Thaler, risk free rate, Robert Shiller, Savings and loan crisis, Tax Reform Act of 1986, the market place, transaction costs, unbiased observer, wealth creators

The ongoing strength in the housing market has raised concerns about the possible emergence of a bubble in home prices. However, the analogy often made to the building and bursting of a stock price bubble is imperfect. First, unlike in the stock market, sales in the real estate market incur substantial transactions costs and, when most homes are sold, the seller must physically move out. Doing so often entails significant financial and emotional costs and is an obvious impediment to stimulating a bubble through speculative trading in homes. Thus, while stock market turnover is more than 100 percent annually, the turnover of home ownership is less than 10 percent annually—scarcely tinder for speculative conflagration.


pages: 263 words: 89,368

925 Ideas to Help You Save Money, Get Out of Debt and Retire a Millionaire So You Can Leave Your Mark on the World by Devin D. Thorpe

asset allocation, buy and hold, call centre, diversification, estate planning, fixed income, Home mortgage interest deduction, index fund, junk bonds, knowledge economy, low interest rates, money market fund, mortgage tax deduction, payday loans, random walk, risk tolerance, Skype, Steve Jobs, transaction costs, women in the workforce, zero-sum game

On top of that, he’ll pay registration fees, sales tax on the difference and anything else the dealer and the state can think of to charge him while he’s got his checkbook out. When he leaves, Bob has an economically identical car to the one he drove in with, but he’s giving up 20 to 25% of the value in transaction costs to the dealer. (Bob wouldn’t do much if any better selling his car in the newspaper, on Craigslist, eBay, or parked on the corner.) Of course, Bob would never make this trade—he’d paint the car instead. But the hypothetical transaction helps to highlight a key point. The transaction of buying a car is very expensive.

Consider this example: If you bought $100 worth of shares each month on the first day of the month in a mutual fund initially trading at $20, you’d buy 5 shares on the first day. If the price moves up to $25 for the next month, you’d acquire only 4 shares. If the price drops to $16.67, the next month, you’d acquire 6 shares. Maintaining this discipline over time will generally increase your returns over buying in bigger lumps—if you can avoid transaction costs. The worst thing to do is to try to beat the system by timing your purchases. Consider the scenario above. Presume that you had the courage to monitor the price for three months before making a purchase of $300 all at $16.67. That sounds brilliant, right? Not so brilliant if the price drops to $10 the next month.


pages: 304 words: 91,566

Bitcoin Billionaires: A True Story of Genius, Betrayal, and Redemption by Ben Mezrich

airport security, Albert Einstein, bank run, Ben Horowitz, Big Tech, bitcoin, Bitcoin Ponzi scheme, blockchain, Burning Man, buttonwood tree, cryptocurrency, East Village, El Camino Real, Elon Musk, fake news, family office, fault tolerance, fiat currency, financial engineering, financial innovation, game design, information security, Isaac Newton, junk bonds, Marc Andreessen, Mark Zuckerberg, Max Levchin, Menlo Park, Metcalfe’s law, Michael Milken, new economy, offshore financial centre, paypal mafia, peer-to-peer, Peter Thiel, Ponzi scheme, proprietary trading, QR code, Ronald Reagan, Ross Ulbricht, Sand Hill Road, Satoshi Nakamoto, Savings and loan crisis, Schrödinger's Cat, self-driving car, Sheryl Sandberg, side hustle, side project, Silicon Valley, Skype, smart contracts, South of Market, San Francisco, Steve Jobs, Susan Wojcicki, transaction costs, Virgin Galactic, zero-sum game

.… The second character that attracted a second wave was anonymity—people who thought they could conceal their behavior behind Bitcoin. In the last year and a half a set of people were attracted to two other aspects—first, it’s freeish, dramatically reducing transaction costs. And it’s programmable. This changed the nature of the Bitcoin population.” And, Liew added, this was a very good thing for those, like him, who wanted to invest in the new economy. “The market of radical libertarians is not very big. The market of criminals is not very big. But offering free transaction costs—you have a market of everyone in the world.” It was a VC’s answer to the question. The big money wasn’t interested in backing something dirty or illegal—not for moral reasons, but because those things weren’t good for business.


pages: 348 words: 99,383

The Financial Crisis and the Free Market Cure: Why Pure Capitalism Is the World Economy's Only Hope by John A. Allison

Affordable Care Act / Obamacare, Alan Greenspan, American ideology, bank run, banking crisis, Bear Stearns, Bernie Madoff, business cycle, clean water, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, fiat currency, financial innovation, Fractional reserve banking, full employment, Greenspan put, high net worth, housing crisis, inverted yield curve, invisible hand, life extension, low skilled workers, market bubble, market clearing, minimum wage unemployment, money market fund, moral hazard, negative equity, obamacare, open immigration, Paul Samuelson, price mechanism, price stability, profit maximization, quantitative easing, race to the bottom, reserve currency, risk/return, Robert Shiller, subprime mortgage crisis, The Bell Curve by Richard Herrnstein and Charles Murray, too big to fail, transaction costs, Tyler Cowen, yield curve, zero-sum game

It appears more likely that the characteristics that cause people to be able to purchase a home, such as the self-discipline of savings, are the same positive characteristics that we observe in many responsible homeowners. It is certainly clear that home ownership is not necessarily economically efficient for everyone. For example, for young people who anticipate moving often, the transaction cost (which is material) of buying and selling houses may overwhelm the economic benefits of owning. Also, the risk of having to carry the cost of a house that one cannot sell for what one paid for it is significant for many young people. As all homeowners know, maintaining a home is expensive and time-consuming.

As an example of how this process works, suppose a real estate developer has plans to build a subdivision that will cost $6,000,000 and result in 100 building lots that can be sold over time at a current price of $80,000 per lot, or a total of $8,000,000 (100 lots × $80,000). He has saved $1,000,000 and therefore needs $5,000,000 more to develop the subdivision. Based on the expected development period and sales period, it will take a total of five years for this $5,000,000 to be repaid. Because of the relatively small size of this project, the transaction cost in the capital markets would be so high as to make the project unfeasible. In addition, it would be extremely difficult for capital market participants to underwrite the project without intimate knowledge of the local real estate market. While, in theory, the builder/developer could ask local individuals to finance the project, it could be very difficult to find “friends” who would want their savings locked into one investment for so long.


pages: 323 words: 90,868

The Wealth of Humans: Work, Power, and Status in the Twenty-First Century by Ryan Avent

3D printing, Airbnb, American energy revolution, assortative mating, autonomous vehicles, Bakken shale, barriers to entry, basic income, Bernie Sanders, Big Tech, BRICs, business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, Clayton Christensen, cloud computing, collective bargaining, computer age, creative destruction, currency risk, dark matter, David Ricardo: comparative advantage, deindustrialization, dematerialisation, Deng Xiaoping, deskilling, disruptive innovation, Dissolution of the Soviet Union, Donald Trump, Downton Abbey, driverless car, Edward Glaeser, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, falling living standards, financial engineering, first square of the chessboard, first square of the chessboard / second half of the chessboard, Ford paid five dollars a day, Francis Fukuyama: the end of history, future of work, general purpose technology, gig economy, global supply chain, global value chain, heat death of the universe, hydraulic fracturing, income inequality, independent contractor, indoor plumbing, industrial robot, intangible asset, interchangeable parts, Internet of things, inventory management, invisible hand, James Watt: steam engine, Jeff Bezos, Jeremy Corbyn, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph-Marie Jacquard, knowledge economy, low interest rates, low skilled workers, lump of labour, Lyft, machine translation, manufacturing employment, Marc Andreessen, mass immigration, means of production, new economy, performance metric, pets.com, post-work, price mechanism, quantitative easing, Ray Kurzweil, rent-seeking, reshoring, rising living standards, Robert Gordon, Robert Solow, Ronald Coase, savings glut, Second Machine Age, secular stagnation, self-driving car, sharing economy, Silicon Valley, single-payer health, software is eating the world, supply-chain management, supply-chain management software, tacit knowledge, TaskRabbit, tech billionaire, The Future of Employment, The Nature of the Firm, The Rise and Fall of American Growth, The Spirit Level, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, Tyler Cowen, Tyler Cowen: Great Stagnation, Uber and Lyft, Uber for X, uber lyft, very high income, warehouse robotics, working-age population

Within that hierarchy managers need not worry about rebidding a job each time they want to tweak an employee’s job responsibilities; instead, they can observe how staff assignments play out and adjust on the fly, safe in the knowledge that workers will do as instructed. A salary, then, is just as much a fee for the worker’s obedience as for their labour. Coase’s insight, though important, is incomplete. For one thing, creating a firm doesn’t magically eliminate transaction costs. Bosses are not all-knowing and all-powerful, and firms don’t suddenly gain the ability to monitor and influence a worker’s behaviour by making that person an employee of the firm rather than an independent contractor. Instead, firms have to build an internal incentive structure, which tells employees what behaviours will earn them promotions and bonuses (or get them sacked).

While workers already in the rich world would probably experience continued slow wage growth as a result of immigration, the migrants themselves should enjoy a substantial rise in income. Relocating a larger share of the world economy inside countries with strong political and economic institutions might generate other benefits as well, from reduced transaction costs to a reduced ability for large firms with market power to play economies off against each other in search of the most lenient possible tax and regulatory treatment. Yet the distributional concerns of those already living within rich countries would hardly be alleviated by this sort of plan.


pages: 293 words: 88,490

The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction by Richard Bookstaber

asset allocation, bank run, Bear Stearns, behavioural economics, bitcoin, business cycle, butterfly effect, buy and hold, capital asset pricing model, cellular automata, collateralized debt obligation, conceptual framework, constrained optimization, Craig Reynolds: boids flock, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, dark matter, data science, disintermediation, Edward Lorenz: Chaos theory, epigenetics, feminist movement, financial engineering, financial innovation, fixed income, Flash crash, geopolitical risk, Henri Poincaré, impact investing, information asymmetry, invisible hand, Isaac Newton, John Conway, John Meriwether, John von Neumann, Joseph Schumpeter, Long Term Capital Management, margin call, market clearing, market microstructure, money market fund, Paul Samuelson, Pierre-Simon Laplace, Piper Alpha, Ponzi scheme, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, Richard Feynman, risk/return, Robert Solow, Saturday Night Live, self-driving car, seminal paper, sovereign wealth fund, the map is not the territory, The Predators' Ball, the scientific method, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, tulip mania, Turing machine, Turing test, yield curve

The principal reason that prices vary, especially in the short term, is the demand for liquidity that results from our apparent fickleness. If you want to buy or sell a stock—or if you have to—you are a liquidity demander. And what you are demanding when you demand liquidity is to do this quickly, and with low transaction costs. It is in the froth of liquidity where most trading profits are made. Not only does the demand for liquidity move prices, but the breakdown of liquidity is one of the primary drivers of crashes, as well. I assign the dynamics of liquidity to three types of agents: liquidity demanders, liquidity suppliers, and market makers.

Stable, proportional relationships also broadly underlie the literature on liquidity measures ranging from standard measures such as turnover and bid/asked spreads to more sophisticated measures that seek to address relationships and common factors of liquidity across markets. Gabrielsen, Marzo, and Zagaglia (2011) classify many of these liquidity measures: volume-based, such as the turnover ratio; price variability–related, such as the variance ratio; and transaction costs–related, such as the bid/asked spread. 9. Bookstaber, Paddrik, and Tivnan (2014) present an agent-based model for fire sales that projects the dynamics of market shocks on the path of leverage, funding, and capital, tracing the cascades and propagation as the initial shock works its way through the system.


pages: 299 words: 92,782

The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing by Michael J. Mauboussin

Amazon Mechanical Turk, Atul Gawande, Benoit Mandelbrot, Black Swan, Boeing 747, Checklist Manifesto, Clayton Christensen, cognitive bias, commoditize, Daniel Kahneman / Amos Tversky, David Brooks, deliberate practice, disruptive innovation, Emanuel Derman, fundamental attribution error, Gary Kildall, Gini coefficient, hindsight bias, hiring and firing, income inequality, Innovator's Dilemma, John Bogle, Long Term Capital Management, loss aversion, Menlo Park, mental accounting, moral hazard, Network effects, power law, prisoner's dilemma, random walk, Richard Thaler, risk-adjusted returns, shareholder value, Simon Singh, six sigma, Steven Pinker, transaction costs, winner-take-all economy, zero-sum game, Zipf's Law

Financial Analysts Journal 54, no. 6 (November–December 1998): 6–14; and Stephen Jay Gould, Triumph and Tragedy in Mudville: A Lifelong Passion for Baseball (New York: W.W. Norton & Company, 2004). 28. Russ Wermers, “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses,” Journal of Finance 55, no. 4 (August 2000): 1655–1695; and Laurent Barras, Olivier Scaillet, and Russ Wermers, “False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas,” Journal of Finance 65, no. 1 (February 2010): 179–216. Chapter 5—The Arc of Skill 1.

Watts, Duncan J. Six Degrees: The Science of a Connected Age. New York: W.W. Norton & Company, 2003. Watts, Duncan J. Everything Is Obvious*: *Once You Know the Answer. New York: Crown Business, 2011. Wermers, Russ. “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses.” Journal of Finance 55, no. 4 (August 2000): 1655–1695. White, Hayden. Metahistory: The Historical Imagination in Nineteenth-Century Europe. Baltimore, MD: The Johns Hopkins University Press, 1973. Whitely, Peyton. “Computer Pioneer's Death Probed—Kildall Called Possible Victim of Homicide.”


pages: 561 words: 157,589

WTF?: What's the Future and Why It's Up to Us by Tim O'Reilly

"Friedman doctrine" OR "shareholder theory", 4chan, Affordable Care Act / Obamacare, Airbnb, AlphaGo, Alvin Roth, Amazon Mechanical Turk, Amazon Robotics, Amazon Web Services, AOL-Time Warner, artificial general intelligence, augmented reality, autonomous vehicles, barriers to entry, basic income, behavioural economics, benefit corporation, Bernie Madoff, Bernie Sanders, Bill Joy: nanobots, bitcoin, Blitzscaling, blockchain, book value, Bretton Woods, Brewster Kahle, British Empire, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, Captain Sullenberger Hudson, carbon tax, Carl Icahn, Chuck Templeton: OpenTable:, Clayton Christensen, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, computer vision, congestion pricing, corporate governance, corporate raider, creative destruction, CRISPR, crowdsourcing, Danny Hillis, data acquisition, data science, deep learning, DeepMind, Demis Hassabis, Dennis Ritchie, deskilling, DevOps, Didi Chuxing, digital capitalism, disinformation, do well by doing good, Donald Davies, Donald Trump, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, fake news, Filter Bubble, Firefox, Flash crash, Free Software Foundation, fulfillment center, full employment, future of work, George Akerlof, gig economy, glass ceiling, Glass-Steagall Act, Goodhart's law, Google Glasses, Gordon Gekko, gravity well, greed is good, Greyball, Guido van Rossum, High speed trading, hiring and firing, Home mortgage interest deduction, Hyperloop, income inequality, independent contractor, index fund, informal economy, information asymmetry, Internet Archive, Internet of things, invention of movable type, invisible hand, iterative process, Jaron Lanier, Jeff Bezos, jitney, job automation, job satisfaction, John Bogle, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, John Zimmer (Lyft cofounder), Kaizen: continuous improvement, Ken Thompson, Kevin Kelly, Khan Academy, Kickstarter, Kim Stanley Robinson, knowledge worker, Kodak vs Instagram, Lao Tzu, Larry Ellison, Larry Wall, Lean Startup, Leonard Kleinrock, Lyft, machine readable, machine translation, Marc Andreessen, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, McMansion, microbiome, microservices, minimum viable product, mortgage tax deduction, move fast and break things, Network effects, new economy, Nicholas Carr, Nick Bostrom, obamacare, Oculus Rift, OpenAI, OSI model, Overton Window, packet switching, PageRank, pattern recognition, Paul Buchheit, peer-to-peer, peer-to-peer model, Ponzi scheme, post-truth, race to the bottom, Ralph Nader, randomized controlled trial, RFC: Request For Comment, Richard Feynman, Richard Stallman, ride hailing / ride sharing, Robert Gordon, Robert Metcalfe, Ronald Coase, Rutger Bregman, Salesforce, Sam Altman, school choice, Second Machine Age, secular stagnation, self-driving car, SETI@home, shareholder value, Silicon Valley, Silicon Valley startup, skunkworks, Skype, smart contracts, Snapchat, Social Responsibility of Business Is to Increase Its Profits, social web, software as a service, software patent, spectrum auction, speech recognition, Stephen Hawking, Steve Ballmer, Steve Jobs, Steven Levy, Stewart Brand, stock buybacks, strong AI, synthetic biology, TaskRabbit, telepresence, the built environment, the Cathedral and the Bazaar, The future is already here, The Future of Employment, the map is not the territory, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Davenport, Tony Fadell, Tragedy of the Commons, transaction costs, transcontinental railway, transportation-network company, Travis Kalanick, trickle-down economics, two-pizza team, Uber and Lyft, Uber for X, uber lyft, ubercab, universal basic income, US Airways Flight 1549, VA Linux, warehouse automation, warehouse robotics, Watson beat the top human players on Jeopardy!, We are the 99%, web application, Whole Earth Catalog, winner-take-all economy, women in the workforce, Y Combinator, yellow journalism, zero-sum game, Zipcar

Kilpi reflects on economist Ronald Coase’s theory of twentieth-century business organization, which explores the question of when it makes sense to hire employees rather than simply contracting the work out to an individual or small company with specialized expertise. Coase’s answer is that it makes sense to put people into one business organization because of the transaction costs of finding, vetting, bargaining with, and supervising the work of external suppliers. But the Internet has changed that math, as Kilpi observes. “If the (transaction) costs of exchanging value in the society at large go down drastically as is happening today,” he writes, “the form and logic of economic and organizational entities necessarily need to change! The core firm should now be small and agile, with a large network.”

He adds: “Apps can do now what managers used to do.” As far back as 2002, Hal Varian predicted that the effect might be the opposite. “Maybe the Internet’s role is to provide the inexpensive communications that can support megacorporations,” he wrote. In a follow-up conversation, he said to me, “If transaction costs go down, coordination within firms becomes cheaper too. It’s not obvious what the outcome will be.” Of course, networks have always been a part of business. An automaker is not made up of just its industrial workers and its managers, but also of its network of parts suppliers and auto dealerships and ad agencies.


pages: 596 words: 163,682

The Third Pillar: How Markets and the State Leave the Community Behind by Raghuram Rajan

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, air traffic controllers' union, airline deregulation, Albert Einstein, Andrei Shleifer, banking crisis, barriers to entry, basic income, battle of ideas, Bernie Sanders, blockchain, borderless world, Bretton Woods, British Empire, Build a better mousetrap, business cycle, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, central bank independence, computer vision, conceptual framework, corporate governance, corporate raider, corporate social responsibility, creative destruction, crony capitalism, crowdsourcing, cryptocurrency, currency manipulation / currency intervention, data acquisition, David Brooks, Deng Xiaoping, desegregation, deskilling, disinformation, disruptive innovation, Donald Trump, driverless car, Edward Glaeser, facts on the ground, financial innovation, financial repression, full employment, future of work, Glass-Steagall Act, global supply chain, Great Leap Forward, high net worth, household responsibility system, housing crisis, Ida Tarbell, illegal immigration, income inequality, industrial cluster, intangible asset, invention of the steam engine, invisible hand, Jaron Lanier, job automation, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, labor-force participation, Les Trente Glorieuses, low interest rates, low skilled workers, manufacturing employment, market fundamentalism, Martin Wolf, means of production, Money creation, moral hazard, Network effects, new economy, Nicholas Carr, obamacare, opioid epidemic / opioid crisis, Productivity paradox, profit maximization, race to the bottom, Richard Thaler, Robert Bork, Robert Gordon, Ronald Reagan, Sam Peltzman, shareholder value, Silicon Valley, social distancing, Social Responsibility of Business Is to Increase Its Profits, SoftBank, South China Sea, South Sea Bubble, Stanford marshmallow experiment, Steve Jobs, superstar cities, The Future of Employment, The Wealth of Nations by Adam Smith, trade liberalization, trade route, transaction costs, transfer pricing, Travis Kalanick, Tyler Cowen, Tyler Cowen: Great Stagnation, universal basic income, Upton Sinclair, Walter Mischel, War on Poverty, women in the workforce, working-age population, World Values Survey, Yom Kippur War, zero-sum game

With little ability to verify when the cattle wondered off the ranch, or what the quality of their treatment was in the hands of the rancher who found them, lawsuits could proliferate. The system of implicit community responsibility and enforcement might be far more effective in protecting cattle and minimizing transactions costs than using explicit contracts and the legal system. Communities thus can be more than the sum of individuals who compose them. Finally, an important modern function of communities is to give the individual in large countries some political influence over the way they are governed, and thus a sense of control over their lives, as well as a sense of public responsibility.

So she also needs compensation for the risk of default. Finally, the lender’s use for money, as well as her ability to buy goods with it when she gets repaid, may be very different from today. This is another risk she bears. The economically defensible interest rate therefore includes the time value for money plus transactions costs for making the loan plus the compensation to the lender for the risks she takes. The final piece that is tacked on is the lender’s profit, based on how pressing the borrower’s need is and what the alternative sources of loans are. So why would the ancient Hebrews prevent lenders from getting what modern economists think is their legitimate due?

The benefits of a global competitive market are not just greater efficiency, but stronger and more independent private sectors in each country, and potentially stronger democracies. At the same time, we should be less eager to harmonize rules and regulations across countries unless absolutely necessary to avoid high transactions costs. The process of setting these rules at the international level is not transparent and is undemocratic. Furthermore, harmonization reduces variety and competition between jurisdictions. Binding international agreements reduce the sense people have of self-determination, and should be used sparingly—to secure low tariffs but rarely to force harmonization of other rules and regulations.


Digital Accounting: The Effects of the Internet and Erp on Accounting by Ashutosh Deshmukh

accounting loophole / creative accounting, AltaVista, book value, business continuity plan, business intelligence, business logic, business process, call centre, computer age, conceptual framework, corporate governance, currency risk, data acquisition, disinformation, dumpster diving, fixed income, hypertext link, information security, interest rate swap, inventory management, iterative process, late fees, machine readable, money market fund, new economy, New Journalism, optical character recognition, packet switching, performance metric, profit maximization, semantic web, shareholder value, six sigma, statistical model, supply chain finance, supply-chain management, supply-chain management software, telemarketer, transaction costs, value at risk, vertical integration, warehouse automation, web application, Y2K

Controls, Security, and Audit • Security Issues • Conceptual Framework • Standard Internal Controls • Anti-Intrusion Techniques • Automated Tools • Privacy and Assurance The costs and benefits of digital accounting decisions are intimately linked with targeted accounting processes, the information technology used and the knowledge needs for the proposed solution; as such, each decision is unique. For example, factors such as current document volume per period, percentage of digital documents, current cycle times and error rates, current transactions costs, security and control issues, and nature of accounting software or legacy systems all need to be considered in implementing new technologies and solutions. There is no silver bullet or a standard template for such decisions. Structure of the Book The changes and new developments in digital accounting are comprehensively covered in the coming chapters.

EDI in any format provides robust security features for validity of transactions, mutual authentication of identity, data integrity and confidentiality, non-repudiation of origins, auditability of transactions and backups. Benefits of EDI include improved customer service, increased data accuracy, decreased cycle time, decreased transaction costs and improvements in existing workflows. There are, of course, upfront costs such as hardware, software, changes in existing workflows, training costs and trading partner costs; and recurring costs, such as administration and maintenance costs. The estimates of upfront costs vary from tens of thousands to millions of dollars, depending on the intensity of the EDI project.

E-procurement began to facilitate the purchases of indirect materials, such as MRO items, office furniture, office supplies and machine parts; and services, such as janitorial, gardening and travel expenses. Costs associated with paperwork and approval procedures make these purchases very pricey. Generally, paper-based purchasing processes were not standardized, the number of suppliers could run in the thousands and approvals were time consuming, resulting in high transaction costs. SRM tools continue to provide the eprocurement functionality, which is also referred to as employee self-purchasing. The employee self-purchase process begins with identification of required items and then searching for those items in electronic catalogs. The catalogs developed by the suppliers can be hosted on the supplier portal and browsed from the desktop by users.


Analysis of Financial Time Series by Ruey S. Tsay

Asian financial crisis, asset allocation, backpropagation, Bayesian statistics, Black-Scholes formula, Brownian motion, business cycle, capital asset pricing model, compound rate of return, correlation coefficient, data acquisition, discrete time, financial engineering, frictionless, frictionless market, implied volatility, index arbitrage, inverted yield curve, Long Term Capital Management, market microstructure, martingale, p-value, pattern recognition, random walk, risk free rate, risk tolerance, short selling, statistical model, stochastic process, stochastic volatility, telemarketer, transaction costs, value at risk, volatility smile, Wiener process, yield curve

. • What is the average annual log return over the data span? • What is the annualized (average) simple return over the data span? • Consider an investment that invested one dollar on the Alcoa stock at the beginning of 1962. What was the value of the investment at the end of 1999? Assume that there were no transaction costs. 4. Repeat the same analysis as the prior problem for the monthly stock returns of American Express. 5. Obtain the histograms of daily simple and log returns of American Express stock from January 1990 to December 1999. Compare them with normal distributions that have the same mean and standard deviation. 6.

Its price on the Helsinki Stock Market must move in unison with the price of its American Depositary Receipts on the New York CO - INTEGRATION 331 Stock Exchange; otherwise there exists some arbitrage opportunity for investors. If the stock price has a unit root, then the two price series must be co-integrated. In practice, such a co-integration can exist after adjusting for transaction costs and exchange-rate risk. We discuss issues like this later in Section 8.6. 8.5.1 An Error-Correction Form Because there are more unit-root nonstationary components than the number of unit roots in a co-integrated system, differencing individual components to achieve stationarity results in overdifferencing.

Here an arbitrage trading consists of simultane- THRESHOLD CO - INTEGRATION 333 ously buying (short-selling) the security index and selling (buying) the index futures whenever the log prices diverge by more than the cost of carrying the index over time until maturity of the futures contract. Under the weak stationarity of z t∗ , for arbitrage to be profitable, z t∗ must exceed a certain value in modulus determined by transaction costs and other economic and risk factors. It is commonly believed that the f t, and st series of the S&P 500 index contain a unit root, but Eq. (8.32) indicates that they are co-integrated after adjusting for the effect of interest rate and dividend yield. The co-integrating vector is (1, −1) after the adjustment, and the co-integrated series is z t∗ .


Work Less, Live More: The Way to Semi-Retirement by Robert Clyatt

asset allocation, backtesting, buy and hold, currency risk, death from overwork, delayed gratification, diversification, diversified portfolio, do what you love, eat what you kill, employer provided health coverage, estate planning, Eugene Fama: efficient market hypothesis, financial independence, fixed income, future of work, independent contractor, index arbitrage, index fund, John Bogle, junk bonds, karōshi / gwarosa / guolaosi, lateral thinking, Mahatma Gandhi, McMansion, merger arbitrage, money market fund, mortgage tax deduction, passive income, rising living standards, risk/return, Silicon Valley, The 4% rule, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, transaction costs, unpaid internship, upwardly mobile, Vanguard fund, work culture , working poor, zero-sum game

American stocks and bonds do represent about 40% of the world’s financial assets, but now that investing overseas has become safe, inexpensive, and convenient, it is time for Americans to look further afield. The goal is to find low-correlation asset classes with liquid markets, quality securities, and reasonable transaction costs. While emerging markets and the chances for shenanigans still put those securities at the furthest limit of acceptable risk, well-documented scandals in major American companies don’t measure up to a gold standard of corporate probity, either. In any case, the global marketplace is fast growing up, and foreign companies offer great potential for returns at reasonable prices.

A Lipper and Wall Street Journal study explains and estimates the hidden trading costs incurred by mutual funds, cited in John Hechinger, “Deciphering Funds’ Hidden Costs,” Page D1, March 17, 2004. Appendix B | Resources | 349 Wermers. “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs and Expenses,” by Russ Wermers; The Journal of Finance, Vol. 55, No. 4, Papers and Proceedings of the Sixtieth Annual Meeting of the American Finance Association, Boston, Massachusetts, Jan. 7-9, 2000 (Aug., 2000). Safe Withdrawal Rates This section reviews the tools and resources that have attempted to quantify Safe Withdrawal Rates for retirees.


pages: 382 words: 100,127

The Road to Somewhere: The Populist Revolt and the Future of Politics by David Goodhart

Affordable Care Act / Obamacare, agricultural Revolution, assortative mating, Big bang: deregulation of the City of London, borderless world, Boris Johnson, Branko Milanovic, Bretton Woods, Brexit referendum, British Empire, call centre, capital controls, carbon footprint, central bank independence, centre right, coherent worldview, corporate governance, credit crunch, Crossrail, deglobalization, deindustrialization, Donald Trump, Downton Abbey, Edward Glaeser, en.wikipedia.org, Etonian, European colonialism, eurozone crisis, falling living standards, first-past-the-post, gender pay gap, gig economy, glass ceiling, global supply chain, global village, Great Leap Forward, illegal immigration, income inequality, informal economy, Jeremy Corbyn, job satisfaction, knowledge economy, labour market flexibility, low skilled workers, market friction, mass immigration, meritocracy, mittelstand, Neil Kinnock, New Urbanism, non-tariff barriers, North Sea oil, obamacare, old-boy network, open borders, open immigration, Peter Singer: altruism, post-industrial society, post-materialism, postnationalism / post nation state, race to the bottom, Richard Florida, Ronald Reagan, selection bias, shareholder value, Skype, Sloane Ranger, stem cell, the long tail, Thomas L Friedman, transaction costs, trickle-down economics, ultimatum game, upwardly mobile, wages for housework, white flight, women in the workforce, working poor, working-age population, World Values Survey

Indeed, when imports of textiles and clothing from low-cost countries threatened jobs in rich countries special controls were introduced. This regime came to be seen as inadequate in the 1980s and a big push was made for what Dani Rodrik has called ‘hyperglobalisation’—the attempt to eliminate all transaction costs that hinder trade and capital flows. Tariff barriers were only a small part of this, it was also about all the domestic market rules and regulations, from product standards to national currencies, that required elimination or harmonisation. ‘The World Trade Organisation was the crowning achievement of this effort in the trade arena.

But instead of the pause that Britain would have preferred, the early 1990s—partly as a result of German unification—saw a dramatic new integrationist surge, orchestrated by Delors, embodied in the Maastricht Treaty of 1992 with its flight path to the single currency (and its creation of the category of European citizen). There had been a long-standing interest in a single currency at the federalist margins, but German unification gave it a chance. A single currency linking economies at a similar level of development provides the obvious advantages of reduced transaction costs and greater predictability, especially in cross-border trade. Delors also believed Europe faced a particular problem that he thought a single currency would solve: he feared that the liberalisation of capital controls introduced by the single market would destabilise the ERM mechanism, which had since 1979 loosely linked EU currencies, which would in turn unravel the single market.


All About Asset Allocation, Second Edition by Richard Ferri

activist fund / activist shareholder / activist investor, Alan Greenspan, asset allocation, asset-backed security, barriers to entry, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, book value, buy and hold, capital controls, commoditize, commodity trading advisor, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, equity premium, equity risk premium, estate planning, financial independence, fixed income, full employment, high net worth, Home mortgage interest deduction, implied volatility, index fund, intangible asset, inverted yield curve, John Bogle, junk bonds, Long Term Capital Management, low interest rates, managed futures, Mason jar, money market fund, mortgage tax deduction, passive income, pattern recognition, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, selection bias, Sharpe ratio, stock buybacks, stocks for the long run, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve

Payable Date The date when dividends or capital gains are paid to shareholders. For mutual funds, the payable date is usually within two to four days of the record date. The payable date also refers to the date on which a declared stock dividend or bond interest payment is scheduled to be paid. Portfolio Transaction Costs The expenses associated with buying and selling securities, including commissions, purchase and redemption fees, exchange fees, and other miscellaneous costs. In a mutual fund prospectus, these expenses would be listed separately from the fund’s expense ratio. They do not include the bid-ask spread.

Income from Treasury securities is exempt from state and local taxes but not from federal income tax. Treasury securities include Treasury bills (T-bills; 1 year or less), Treasury notes (T-notes; 1 to 10 years), and Treasury bonds (T-bonds; over 10 years). Turnover Rate An indication of trading activity during the past year. Portfolios with high turnover rates incur higher transaction costs and are more likely to distribute capital gains (which are taxable to nonretirement accounts). Unit Investment Trust (UIT) An SEC-registered investment company that purchases a fixed, unmanaged portfolio of income-producing securities and then sells shares in the portfolio to investors, usually in units of at least $1,000.


Rockonomics: A Backstage Tour of What the Music Industry Can Teach Us About Economics and Life by Alan B. Krueger

"Friedman doctrine" OR "shareholder theory", accounting loophole / creative accounting, Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, autonomous vehicles, bank run, behavioural economics, Berlin Wall, bitcoin, Bob Geldof, butterfly effect, buy and hold, congestion pricing, creative destruction, crowdsourcing, digital rights, disintermediation, diversified portfolio, Donald Trump, endogenous growth, Gary Kildall, George Akerlof, gig economy, income inequality, independent contractor, index fund, invisible hand, Jeff Bezos, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kickstarter, Larry Ellison, Live Aid, Mark Zuckerberg, Moneyball by Michael Lewis explains big data, moral hazard, Multics, Network effects, obamacare, offshore financial centre, opioid epidemic / opioid crisis, Paul Samuelson, personalized medicine, power law, pre–internet, price discrimination, profit maximization, random walk, recommendation engine, rent-seeking, Richard Thaler, ride hailing / ride sharing, Saturday Night Live, Skype, Steve Jobs, the long tail, The Wealth of Nations by Adam Smith, TikTok, too big to fail, transaction costs, traumatic brain injury, Tyler Cowen, ultimatum game, winner-take-all economy, women in the workforce, Y Combinator, zero-sum game

Analyzing the ticket market is complicated because the behavior of buyers in the primary market is affected by the presence of resellers, and because resellers have multiple economic roles. If ticket brokers can swoop in and buy tickets that they anticipate they can resell at a higher price, it will be more difficult for fans to purchase tickets in the primary market. There are also substantial transaction costs associated with buying a ticket on the secondary market, as anyone who has paid the StubHub transaction fee can attest. Leslie and Sorensen built a sophisticated model of consumer and broker behavior to model the effect of resale markets on consumer welfare. They reached the provocative conclusion that while the opportunity to resell tickets on the secondary market does increase the allocative efficiency of ticket distribution (which is why Mankiw felt better off for being able to buy a ticket to Hamilton), this benefit is partly offset by increased competition for tickets in the primary market and by transaction costs in the secondary market.

They reached the provocative conclusion that while the opportunity to resell tickets on the secondary market does increase the allocative efficiency of ticket distribution (which is why Mankiw felt better off for being able to buy a ticket to Hamilton), this benefit is partly offset by increased competition for tickets in the primary market and by transaction costs in the secondary market. When the dust settles, the big winners are the professional ticket brokers. As a whole, fans are likely made worse off by the existence of the resale market. Leslie and Sorensen conclude, “If the narrow goal is to maximize the surplus of those who ultimately attend the event, then restrictions on resale may be warranted.”


pages: 304 words: 22,886

Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler, Cass R. Sunstein

Al Roth, Albert Einstein, asset allocation, availability heuristic, behavioural economics, call centre, carbon tax, Cass Sunstein, choice architecture, continuous integration, currency risk, Daniel Kahneman / Amos Tversky, desegregation, diversification, diversified portfolio, do well by doing good, endowment effect, equity premium, feminist movement, financial engineering, fixed income, framing effect, full employment, George Akerlof, index fund, invisible hand, late fees, libertarian paternalism, loss aversion, low interest rates, machine readable, Mahatma Gandhi, Mason jar, medical malpractice, medical residency, mental accounting, meta-analysis, Milgram experiment, money market fund, pension reform, presumed consent, price discrimination, profit maximization, rent-seeking, Richard Thaler, Right to Buy, risk tolerance, Robert Shiller, Saturday Night Live, school choice, school vouchers, systems thinking, Tragedy of the Commons, transaction costs, Vanguard fund, Zipcar

Funds cannot be withdrawn until a year later, when the total amount is redeemed, just in time for the Christmas shopping season. The usual interest rate on these accounts is close to zero. Think about the Christmas club in economic terms. This is an account with no liquidity (you can’t take your money out for a year), high transaction costs (you have to make deposits every week), and a near-zero rate of return. It is an easy homework exercise in an economics class to prove that such an institution cannot exist. Yet for many years Christmas clubs were widely used, with billions of dollars in investments. If we realize that we are dealing with Humans rather than Econs, it is not hard to explain why the clubs flourished.

Those who pollute (meaning all of us) do not pay the full costs that we impose on the environment, and those of us who are harmed by pollution (again, all of us) usually lack any feasible way to negotiate with polluters to get them to clean up their acts. People who celebrate freedom of choice are well aware that when “transaction costs” (the technical term for the costs of entering into voluntary agreements) are high, there may be no way to avoid some kind of government action. When people are not in a position to make voluntary agreements, most libertarians tend to agree that government might have to intervene. It helps to think about the environment as the outcome of a global choice architecture system in which decisions are made by all kinds of actors, from consumers to large companies to governments.


The Unusual Billionaires by Saurabh Mukherjea

Albert Einstein, asset light, Atul Gawande, backtesting, barriers to entry, Black-Scholes formula, book value, British Empire, business cycle, business intelligence, business process, buy and hold, call centre, Checklist Manifesto, commoditize, compound rate of return, corporate governance, dematerialisation, disintermediation, diversification, equity risk premium, financial innovation, forensic accounting, full employment, inventory management, low cost airline, low interest rates, Mahatma Gandhi, Peter Thiel, QR code, risk free rate, risk-adjusted returns, shareholder value, Silicon Valley, Steve Jobs, supply-chain management, The Wisdom of Crowds, transaction costs, upwardly mobile, Vilfredo Pareto, wealth creators, work culture

Thus, the positive contribution of the winners disproportionately outweighs the negative contribution of losers to eventually help the portfolio compound handsomely. Investing and holding for the long term is the most effective way of killing the noise that interferes with the investment process. As soon as you try to time that entry/exit, you run the risk of noise rather than fundamentals driving our investment decisions. With no churn, transaction costs are reduced which adds to the overall portfolio performance over the long term. A hypothetical portfolio started on 30 June 2005, with 50 per cent churn per annum for instance loses almost 1.2 per cent CAGR return when run for a ten-year period. Each of these four reasons is explained in more detail in Appendix 3.

As soon as you try to time that entry/exit, you run the risk of noise rather than fundamentals driving our investment decisions. Reason 4: No churning By holding a portfolio of stocks for over ten years, a fund manager resists the temptation to buy/sell in the short term. With no churn, this approach reduces transaction costs, adding to the overall portfolio performance over the long term. I illustrate this with an example: Assume that you invest US$100 million in a hypothetical portfolio on 30 June 2005. Assume further that you churn this portfolio by 50 per cent per annum (implying that a typical position is held for two years) and this portfolio compounds at the rate of Sensex index.


pages: 214 words: 31,751

Software Engineering at Google: Lessons Learned From Programming Over Time by Titus Winters, Tom Manshreck, Hyrum Wright

anti-pattern, computer vision, continuous integration, defense in depth, en.wikipedia.org, functional programming, Jevons paradox, job automation, loss aversion, microservices, reproducible builds, supply-chain attack, transaction costs, Turing complete

Whenever it is efficient to do so, we should be able to explain our work when deciding between the general costs for two engineering options. What do we mean by cost? We are not only talking about dollars here. “Cost” roughly translates to effort, and may involve any or all of the below: Financial Costs (e.g. money) Resource Costs (e.g. CPU time) Personnel Costs (e.g. engineering effort) Transaction Costs (e.g. what does it cost to take action?) Opportunity Costs (e.g. what does it cost to *not* take action?) Societal Costs (e.g. what impact will this choice have on society at large?) Historically, it’s been particularly easy to ignore the question of societal costs. However, Google and other large tech companies can now credibly deploy products with billions of users.


pages: 518 words: 107,836

How Not to Network a Nation: The Uneasy History of the Soviet Internet (Information Policy) by Benjamin Peters

Albert Einstein, American ideology, Andrei Shleifer, Anthropocene, Benoit Mandelbrot, bitcoin, Brownian motion, Charles Babbage, Claude Shannon: information theory, cloud computing, cognitive dissonance, commons-based peer production, computer age, conceptual framework, continuation of politics by other means, crony capitalism, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, disinformation, Dissolution of the Soviet Union, Donald Davies, double helix, Drosophila, Francis Fukuyama: the end of history, From Mathematics to the Technologies of Life and Death, Gabriella Coleman, hive mind, index card, informal economy, information asymmetry, invisible hand, Jacquard loom, John von Neumann, Kevin Kelly, knowledge economy, knowledge worker, Lewis Mumford, linear programming, mandelbrot fractal, Marshall McLuhan, means of production, megaproject, Menlo Park, Mikhail Gorbachev, military-industrial complex, mutually assured destruction, Network effects, Norbert Wiener, packet switching, Pareto efficiency, pattern recognition, Paul Erdős, Peter Thiel, Philip Mirowski, power law, RAND corporation, rent-seeking, road to serfdom, Ronald Coase, scientific mainstream, scientific management, Steve Jobs, Stewart Brand, stochastic process, surveillance capitalism, systems thinking, technoutopianism, the Cathedral and the Bazaar, the strength of weak ties, The Structural Transformation of the Public Sphere, transaction costs, Turing machine, work culture , Yochai Benkler

For the market to be the ideal organizational mode, some economists assume that rational actors will rank the order of their preferences linearly: if rational actors prefer option A over B as well as option B over C, they also will prefer option A over C. Yet this view of the market has been challenged in recent decades. Markets hide transaction costs and information asymmetries. Behavioral economists have demonstrated how under a number of conditions (such as fear, regret, the threat of loss, cognitive dissonance, or peer pressure) the rational homo economicus is a fiction: a person may prefer apples to bananas, bananas to cantaloupes, and cantaloupes to apples, and there is no guarantee that there exists a rational solution to voting systems or daily choices involving three or more actors.24 By contrast, the concept of hierarchy (from the Greek term ἱεραρχία, “rule by priests”) reaches back fifteen centuries to religious roots.

The history of the OGAS Project is akin to the history of a miscarried effort to perform an IT upgrade for the corrupt corporation that was the USSR itself. USSR, Inc., in other words, functioned as the world’s largest corporation, and its private interests were internal market capture, the avoidance of the transaction costs of the capitalist market, and the concentration of power to itself. The political need for the OGAS Project appears to represent the grander inability of the hierarchical state structure of socialist politics since Marx to build and sustain innovation and reform in the age of industrial and information capitalism that the Soviet Union straddled.


pages: 350 words: 103,270

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again by Nicholas Dunbar

Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Black Swan, Black-Scholes formula, bonus culture, book value, break the buck, buy and hold, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delayed gratification, diversification, Edmond Halley, facts on the ground, fear index, financial innovation, fixed income, George Akerlof, Glass-Steagall Act, Greenspan put, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, John Meriwether, junk bonds, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, money market fund, Myron Scholes, Nick Leeson, Northern Rock, offshore financial centre, Paul Samuelson, price mechanism, proprietary trading, regulatory arbitrage, rent-seeking, Richard Thaler, risk free rate, risk tolerance, risk/return, Ronald Reagan, Salesforce, Savings and loan crisis, seminal paper, shareholder value, short selling, statistical model, subprime mortgage crisis, The Chicago School, Thomas Bayes, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve, zero-sum game

When my sources first told me about the deal in May 2003, two years after it had been completed, the price seemed shockingly high—some €500 million in return for concealing several billions in debt. It was not an explicit price in the sense of a negotiated fee, but rather an implicit spread on top of the swap payments that Goldman had calculated as being necessary to balance out the off-market value of the swap. Given that the transaction costs for standard, market-priced cross-currency swaps were a hundredth of this amount, it was not surprising that people were shocked when I published a story exposing the deal, and that Goldman and its public relations machine were anxious not to see the €500 million number in print. From Goldman’s perspective, the CDS was necessary because, like the “wrong” exchange rate transaction offered by the mythical bureau de change, the swap with Greece amounted to a secret loan from Goldman.

A dapper man with a technocratic air, he started off sounding like a humble facilitator of basic services: “I’m a true overall service provider. I’ll give you perfect execution in swaps and bonds.”15 What he meant was that if a client wanted to use Barclays like an exchange, trading a standardized product with minimal transaction costs, then he would make that possible. Having thus established rapport with his client, Sartori then steered the pitch into more sophisticated territory. “But I also understand what you’re doing and what you’re trying to achieve.” While any successful salesperson must have empathy for the client, the derivatives masters like Sartori di Borgoricco, and his equivalents at J.P.


pages: 687 words: 189,243

A Culture of Growth: The Origins of the Modern Economy by Joel Mokyr

Andrei Shleifer, barriers to entry, Berlin Wall, business cycle, classic study, clockwork universe, cognitive dissonance, Copley Medal, creative destruction, David Ricardo: comparative advantage, delayed gratification, deliberate practice, Deng Xiaoping, Edmond Halley, Edward Jenner, epigenetics, Fellow of the Royal Society, financial independence, flying shuttle, framing effect, germ theory of disease, Haber-Bosch Process, Herbert Marcuse, hindsight bias, income inequality, information asymmetry, invention of movable type, invention of the printing press, invisible hand, Isaac Newton, Jacquard loom, Jacques de Vaucanson, James Watt: steam engine, Johannes Kepler, John Harrison: Longitude, Joseph Schumpeter, knowledge economy, labor-force participation, land tenure, law of one price, Menlo Park, moveable type in China, new economy, phenotype, price stability, principal–agent problem, rent-seeking, Republic of Letters, Robert Solow, Ronald Reagan, seminal paper, South Sea Bubble, statistical model, survivorship bias, tacit knowledge, the market place, the strength of weak ties, The Structural Transformation of the Public Sphere, The Wealth of Nations by Adam Smith, transaction costs, ultimatum game, World Values Survey, Wunderkammern

Some pathbreaking research on the economics of culture and how beliefs can affect economic performance has recently been carried out by theorists and empirical economists alike.14 One mechanism through which culture is believed to have affected economic performance is through the idea that higher trust and cooperation reduce transaction costs and thus facilitate exchange and emergence of well-functioning markets. Another is civic-mindedness. A spirit of public consciousness and willingness to abstain from free-riding behavior in collective actions supports a higher supply of public goods and investment in infrastructure than is otherwise possible.

As we have seen, culture can affect Smithian growth through the creation of an ideological environment (or, as some would prefer to call it, social capital) that is conducive to commerce and better-functioning markets. A Lockean belief in property rights, for example, or a belief that most people are trustworthy leads to the reduction of transactions costs and thus stimulates commerce. Related to trust is loyalty, which mitigates principal-agent problems. A belief in the virtuousness of loyalty to an employer or an organization saves monitoring costs and thus enhances both efficiency and trade. Public-mindedness (or asabiya in Ibn Khaldun’s famous formulation), is a third cultural element related to cooperation: the willingness to avoid free-riding and contribute to a collective good despite the incentive that each individual has to shirk.

Whether such literacy (and the numeracy that usually accompanied literacy when children were taught the three Rs as a package) actually had much of an impact on technology and innovation is anything but clear. It did, however, allow correspondence, written contracts, computations, and bookkeeping which reduced transactions costs and thus facilitated commerce. At a more advanced level, education could train individuals to enable markets and trade through the work of lawyers, notaries, judges, accountants and the like. Some recent research has argued that the founding of universities in Germany in the late Middle Ages and the training of legal expert stimulated economic development through this kind of mechanism, an example of upper-tail human capital affecting the economy at large (Cantoni and Yuchtman, 2014).


pages: 584 words: 187,436

More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Bear Stearns, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, book value, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, deal flow, do well by doing good, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, Jim Simons, John Bogle, John Meriwether, junk bonds, Kenneth Rogoff, Kickstarter, Long Term Capital Management, low interest rates, machine translation, margin call, market bubble, market clearing, market fundamentalism, Market Wizards by Jack D. Schwager, Mary Meeker, merger arbitrage, Michael Milken, money market fund, moral hazard, Myron Scholes, natural language processing, Network effects, new economy, Nikolai Kondratiev, operational security, pattern recognition, Paul Samuelson, pre–internet, proprietary trading, public intellectual, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Mercer, rolodex, Savings and loan crisis, Sharpe ratio, short selling, short squeeze, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, tail risk, technology bubble, The Great Moderation, The Myth of the Rational Market, the new new thing, too big to fail, transaction costs, two and twenty, uptick rule

But during the bond’s lifetime, the premium disappeared; the payout on a 30-year bond and a 29½-year bond were bound to come together by the time they hit their repayment dates. Meriwether’s team could simply sell the overpriced new bonds; buy the cheaper, older ones; and then wait patiently for the inevitable convergence. In ordinary times, admittedly, the profits from this strategy were barely enough to offset transaction costs. But when the market was panicky, the liquidity premium could balloon: Skittish traders wanted to own bonds they could sell in a hurry, and they were prepared to pay for the privilege. Meriwether’s lieutenants waited for these moments of panic, then put on the convergence trade. Larry Hilibrand, the LTCM partner who had campaigned against Salomon’s fancy catering unit, compared markets to Slinkies.

In one simple example, the brain trust discovered that fine morning weather in a city tended to predict an upward movement in its stock exchange. By buying on bright days at breakfast time and selling a bit later, Medallion could come out ahead—except that the effect was too small to overcome transaction costs, which is why Renaissance allowed this signal to be public. Many of the patterns that Renaissance discovered were individually modest; to a first approximation, after all, markets are efficient. But by discovering a large number of minor inefficiencies and blending them into a single trading program, Renaissance built a system that racked up profits year after year, especially during periods of turbulence.

Piergiorgio Alessandri and Andrew Haldane, “Banking on the State,” paper based on a presentation to the Federal Reserve Bank of Chicago, November 2009. 6. See Dean P. Foster and H. Peyton Young, “Hedge Fund Wizards,” The Berkeley Electronic Press, January 2008. 7. See for example Russ Wermers, “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses,” Journal of Finance 55, no. 4, August 2000. 8. Roger G. Ibbotson, Peng Chen, and Kevin Zhu, “The A, B, Cs of Hedge Funds: Alphas, Betas, and Costs” (Yale working paper, 2010). An earlier version of this paper showing similar findings appeared in 2006. 9. The three studies finding these returns for private equity are: Steven N.


pages: 197 words: 35,256

NumPy Cookbook by Ivan Idris

business intelligence, cloud computing, computer vision, data science, Debian, en.wikipedia.org, Eratosthenes, mandelbrot fractal, p-value, power law, sorting algorithm, statistical model, transaction costs, web application

To put it simply, there are not a lot of rich people, and there are even less billionaires; hence the one percent. Assume that there is a power law in the closing stock prices log returns. This is a big assumption, of course, but power law assumptions seem to pop up all over the place. We don't want to trade too often, because of involved transaction costs per trade. Let's say that we would prefer to buy and sell once a month based on a significant correction (in other words a big drop). The issue is to determine an appropriate signal given that we want to initiate a transaction every one out of about 20 days. How to do it... First, let's get historical end-of-day data for the past year from Yahoo Finance.


pages: 151 words: 38,153

With Liberty and Dividends for All: How to Save Our Middle Class When Jobs Don't Pay Enough by Peter Barnes

adjacent possible, Alfred Russel Wallace, banks create money, basic income, Buckminster Fuller, carbon tax, collective bargaining, computerized trading, creative destruction, David Ricardo: comparative advantage, declining real wages, deindustrialization, diversified portfolio, driverless car, en.wikipedia.org, Fractional reserve banking, full employment, Glass-Steagall Act, hydraulic fracturing, income inequality, It's morning again in America, Jaron Lanier, Jevons paradox, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, land reform, Mark Zuckerberg, Money creation, Network effects, oil shale / tar sands, Paul Samuelson, power law, profit maximization, quantitative easing, rent-seeking, Ronald Coase, Ronald Reagan, Silicon Valley, sovereign wealth fund, Stuart Kauffman, the map is not the territory, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Tyler Cowen, Tyler Cowen: Great Stagnation, Upton Sinclair, Vilfredo Pareto, wealth creators, winner-take-all economy

Philippe van Parijs calculates that an EU-wide dividend of about $3,250 per year would require an increase in EU VAT rates of about 20 percent. Social European Journal, July 3, 2013, http://www.social-europe.eu/author/philippe-van-parijs. 5. CLEAR Act text, http://www.cantwell.senate.gov/issues/Leg_Text.pdf. 6. Robert Pollin and James Heintz, Transaction Costs, Trading Elasticities, and the Revenue Potential of Financial Transaction Taxes for the United States, Political Economy Research Institute (Amherst, MA: University of Massachusetts/Amherst, 2011), http://www.peri.umass.edu/fileadmin/pdf/research_brief/PERI_FTT_Research_Brief.pdf. See 2012 update at http://www.peri.umass.edu/fileadmin/pdf/ftt/Pollin—Heintz—Memo_on_FTT_Rates_and_Revenue_Potential_w_references6-9-12.pdf. 7.


pages: 391 words: 117,984

The Blue Sweater: Bridging the Gap Between Rich and Poor in an Interconnected World by Jacqueline Novogratz

access to a mobile phone, Ayatollah Khomeini, behavioural economics, Berlin Wall, business process, business process outsourcing, clean water, disinformation, failed state, Fall of the Berlin Wall, half of the world's population has never made a phone call, Hernando de Soto, Kibera, Lao Tzu, low interest rates, market design, microcredit, Nelson Mandela, out of africa, Ronald Reagan, sensible shoes, side project, Silicon Valley, Skype, The Fortune at the Bottom of the Pyramid, tontine, transaction costs, zero-sum game

Because the commercial banks were writing off millions in bad debts to the richest sectors of society, they were in no mood to try lending to the poorest. I suggested to my boss that an experiment, even a small one, to lend to Brazil’s working class might actually provide better results than lending to the rich. He patted me on the head and reminded me of the poor’s lack of collateral, the high transaction costs of making small loans, and the culture of poverty, which would result in no one repaying—insinuating that I was naive and misguided. The conversation went from bad to worse. I disagreed with him on the culture of poverty and repeated my idea for an experiment. He told me the point was moot and that I should think about how and if I wanted to pursue my long-term career goals at Chase.

A friend told me about Grameen Bank in Bangladesh, founded by an economist named Muhammad Yunus in 1976, which lent poor women tiny amounts of money—sometimes as little as a dollar—to improve their businesses. Since they had no collateral, poor women would form groups of five and guarantee that all would pay. If one did not, then all five would lose the privilege of borrowing. To address the question of high transaction costs, Grameen Bank charged higher interest rates. And it enjoyed nearly a 100 percent repayment rate, a lot higher than we were seeing in our collateralized portfolio to the wealthy! Twenty years after I first heard of microenterprise, Yunus and Grameen Bank were awarded the Nobel Peace Prize after successfully loaning billions to the poor and starting a social movement around the world.


Super Thinking: The Big Book of Mental Models by Gabriel Weinberg, Lauren McCann

Abraham Maslow, Abraham Wald, affirmative action, Affordable Care Act / Obamacare, Airbnb, Albert Einstein, anti-pattern, Anton Chekhov, Apollo 13, Apple Newton, autonomous vehicles, bank run, barriers to entry, Bayesian statistics, Bernie Madoff, Bernie Sanders, Black Swan, Broken windows theory, business process, butterfly effect, Cal Newport, Clayton Christensen, cognitive dissonance, commoditize, correlation does not imply causation, crowdsourcing, Daniel Kahneman / Amos Tversky, dark pattern, David Attenborough, delayed gratification, deliberate practice, discounted cash flows, disruptive innovation, Donald Trump, Douglas Hofstadter, Dunning–Kruger effect, Edward Lorenz: Chaos theory, Edward Snowden, effective altruism, Elon Musk, en.wikipedia.org, experimental subject, fake news, fear of failure, feminist movement, Filter Bubble, framing effect, friendly fire, fundamental attribution error, Goodhart's law, Gödel, Escher, Bach, heat death of the universe, hindsight bias, housing crisis, if you see hoof prints, think horses—not zebras, Ignaz Semmelweis: hand washing, illegal immigration, imposter syndrome, incognito mode, income inequality, information asymmetry, Isaac Newton, Jeff Bezos, John Nash: game theory, karōshi / gwarosa / guolaosi, lateral thinking, loss aversion, Louis Pasteur, LuLaRoe, Lyft, mail merge, Mark Zuckerberg, meta-analysis, Metcalfe’s law, Milgram experiment, minimum viable product, moral hazard, mutually assured destruction, Nash equilibrium, Network effects, nocebo, nuclear winter, offshore financial centre, p-value, Paradox of Choice, Parkinson's law, Paul Graham, peak oil, Peter Thiel, phenotype, Pierre-Simon Laplace, placebo effect, Potemkin village, power law, precautionary principle, prediction markets, premature optimization, price anchoring, principal–agent problem, publication bias, recommendation engine, remote working, replication crisis, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, ride hailing / ride sharing, Robert Metcalfe, Ronald Coase, Ronald Reagan, Salesforce, school choice, Schrödinger's Cat, selection bias, Shai Danziger, side project, Silicon Valley, Silicon Valley startup, speech recognition, statistical model, Steve Jobs, Steve Wozniak, Steven Pinker, Streisand effect, sunk-cost fallacy, survivorship bias, systems thinking, The future is already here, The last Blockbuster video rental store is in Bend, Oregon, The Present Situation in Quantum Mechanics, the scientific method, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Tragedy of the Commons, transaction costs, uber lyft, ultimatum game, uranium enrichment, urban planning, vertical integration, Vilfredo Pareto, warehouse robotics, WarGames: Global Thermonuclear War, When a measure becomes a target, wikimedia commons

Coase showed that an externality can be internalized efficiently without further need for intervention (that is, without a government or other authority regulating the externality) if the following conditions are met: Well-defined property rights Rational actors Low transaction costs When these conditions are met, entities surrounding the externality will transact among themselves until the extra costs are internalized. If you recall the Boston Common example, the externality from overgrazing was internalized by setting a limit on the number of cows per farmer (regulation).

The government also sets a fixed number of total permits, which serves as the emission cap in the market, similar to the imposed limit on the number of cows that could graze on Boston Common. Then companies can trade permits on an open exchange. Such a system satisfies the conditions of the Coase theorem because property rights are well defined through the permitting process, companies act rationally to maximize their profits, and the open market provides low transaction costs. If you’re in charge of any system or policy, you want to think through the possible negative externalities ahead of time and devise ways to avoid them. What spillover effects could occur, and who would be affected by them? Is there a common resource that free riders could abuse or that could degrade into a tragedy of the commons?


pages: 397 words: 110,130

Smarter Than You Think: How Technology Is Changing Our Minds for the Better by Clive Thompson

4chan, A Declaration of the Independence of Cyberspace, Andy Carvin, augmented reality, barriers to entry, behavioural economics, Benjamin Mako Hill, butterfly effect, citizen journalism, Claude Shannon: information theory, compensation consultant, conceptual framework, context collapse, corporate governance, crowdsourcing, Deng Xiaoping, digital rights, discovery of penicillin, disruptive innovation, Douglas Engelbart, Douglas Engelbart, drone strike, Edward Glaeser, Edward Thorp, en.wikipedia.org, Evgeny Morozov, experimental subject, Filter Bubble, folksonomy, Freestyle chess, Galaxy Zoo, Google Earth, Google Glasses, Gunnar Myrdal, guns versus butter model, Henri Poincaré, hindsight bias, hive mind, Howard Rheingold, Ian Bogost, information retrieval, iterative process, James Bridle, jimmy wales, John Perry Barlow, Kevin Kelly, Khan Academy, knowledge worker, language acquisition, lifelogging, lolcat, Mark Zuckerberg, Marshall McLuhan, Menlo Park, Netflix Prize, Nicholas Carr, Panopticon Jeremy Bentham, patent troll, pattern recognition, pre–internet, public intellectual, Richard Feynman, Ronald Coase, Ronald Reagan, Rubik’s Cube, sentiment analysis, Silicon Valley, Skype, Snapchat, Socratic dialogue, spaced repetition, superconnector, telepresence, telepresence robot, The future is already here, The Nature of the Firm, the scientific method, the strength of weak ties, The Wisdom of Crowds, theory of mind, transaction costs, Twitter Arab Spring, Two Sigma, Vannevar Bush, Watson beat the top human players on Jeopardy!, WikiLeaks, X Prize, éminence grise

To organize a widespread group around a task in the pre-Internet period, you needed a central office, staff devoted to coordinating efforts, expensive forms of long-distance communication (telegraphs, phone lines, trains), somebody to buy pencils and paper clips and to manage inventory. These are known as transaction costs, and they’re huge. But there was no way around them. As Shirky points out, following the analysis of economist Ronald Coase’s 1937 article “The Nature of the Firm,” you either paid the heavy costs of organizing or you didn’t organize at all and got nothing done. And so for centuries, people collaborated massively only on tasks that would make enough money to afford those costs.

—they are engaging in the same collective decision making that was previously available only to well-funded organizations. This, again, is basic behavioral economics: If you make it easier for people to do something, they’ll do more of it. Finding your way around Skyrim or resolving conundrums like “Which movie are we seeing tonight?” are problems that traditionally couldn’t afford Ronald Coase–style transactional costs—they fell “under the Coasean floor,” as Shirky puts it. But things have decisively changed. “Because we can now reach beneath the Coasean floor,” he writes, “we can have groups that operate with a birthday party’s informality and a multinational’s scope. . . . Now that group-forming has gone from hard to ridiculously easy, we are seeing an explosion of experiments with new groups and new kinds of groups.”


pages: 265 words: 15,515

Nomad Citizenship: Free-Market Communism and the Slow-Motion General Strike by Eugene W. Holland

business cycle, capital controls, cognitive dissonance, Colonization of Mars, commons-based peer production, complexity theory, continuation of politics by other means, deskilling, Eben Moglen, Firefox, Frederick Winslow Taylor, Free Software Foundation, full employment, Herbert Marcuse, informal economy, invisible hand, it's over 9,000, Jane Jacobs, Kim Stanley Robinson, Lewis Mumford, means of production, microcredit, military-industrial complex, money: store of value / unit of account / medium of exchange, Naomi Klein, New Urbanism, peak oil, post-Fordism, price mechanism, Richard Stallman, Rochdale Principles, Ronald Coase, scientific management, slashdot, Stuart Kauffman, The Death and Life of Great American Cities, The Wisdom of Crowds, transaction costs, Upton Sinclair, urban renewal, wage slave, working poor, Yochai Benkler

The final Im portant feature of the new system is that peer produc­ tion is based neither on incentives coming from the market nor on or­ ders coming from a boss or managing supervisor. A now-classic analysis of capitalist production spearheaded by Ronald Coase in the 1930s and developed subsequently by Oliver Williamson and others examined the relative transaction costs to a business firm of buying goods and services on the open market compared to hiring people to produce those same goods and services within the firm.95 Where transaction costs of buying on the open market are high, production is integrated into the firm and triggered by managerial command; where they are low, production is out­ sourced and triggered by market pricing mechanisms.


pages: 387 words: 112,868

Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money by Nathaniel Popper

4chan, Airbnb, Alan Greenspan, Apple's 1984 Super Bowl advert, banking crisis, Ben Horowitz, Benchmark Capital, bitcoin, Bitcoin Ponzi scheme, blockchain, Burning Man, buy and hold, capital controls, Colonization of Mars, crowdsourcing, cryptocurrency, David Graeber, Dogecoin, Edward Snowden, Elon Musk, Extropian, fiat currency, Fractional reserve banking, Jeff Bezos, Julian Assange, Kevin Roose, Kickstarter, life extension, litecoin, lone genius, low interest rates, M-Pesa, Marc Andreessen, Mark Zuckerberg, Max Levchin, Neal Stephenson, Occupy movement, off-the-grid, PalmPilot, peer-to-peer, peer-to-peer lending, Peter Thiel, Ponzi scheme, price stability, QR code, Ross Ulbricht, Satoshi Nakamoto, Silicon Valley, Simon Singh, Skype, slashdot, smart contracts, Startup school, stealth mode startup, the payments system, transaction costs, tulip mania, Tyler Cowen, Virgin Galactic, Vitalik Buterin, WikiLeaks

And even as their experiments failed, their ambitions grew beyond just anonymous money. Among other things, Back, Szabo, and Finney sought to overcome the costs and frustrations of the current financial system in which banks charged fees with every transaction and made it difficult to move money over international borders. “What we want is fully anonymous, ultra low transaction cost, transferable units of exchange. If we get that going (and obviously there are some people trying DigiCash, and a couple of others), the banks will become the obsolete dinosaurs they deserve to become,” Back told the Cypherpunk list soon after releasing hashcash. The Cypherpunk seekers were given a platonic ideal to shoot for when science fiction writer Neal Stephenson published his book Cryptonomicon in 1999.

The diminishing interest in anonymity and central banks did not mean that the panelists had modest ambitions for Bitcoin. They talked about how this new form of money—and the ledger on which it ran—could allow for new kinds of stock exchanges and other things that hadn’t even been thought of yet. “When you are offering free, radically reduced transactions costs, and when you are offering the ability for programmable money that can put a lot of additional functionality on money, then you are talking about a market size of everybody in the world,” Liew said. All the panelists compared Bitcoin in its current form to the Internet in 1992 or 1993, before the first web browser.


pages: 444 words: 118,393

The Nature of Software Development: Keep It Simple, Make It Valuable, Build It Piece by Piece by Ron Jeffries

Amazon Web Services, anti-pattern, bitcoin, business cycle, business intelligence, business logic, business process, c2.com, call centre, cloud computing, continuous integration, Conway's law, creative destruction, dark matter, data science, database schema, deep learning, DevOps, disinformation, duck typing, en.wikipedia.org, fail fast, fault tolerance, Firefox, Hacker News, industrial robot, information security, Infrastructure as a Service, Internet of things, Jeff Bezos, Kanban, Kubernetes, load shedding, loose coupling, machine readable, Mars Rover, microservices, Minecraft, minimum viable product, MITM: man-in-the-middle, Morris worm, move fast and break things, OSI model, peer-to-peer lending, platform as a service, power law, ransomware, revision control, Ruby on Rails, Schrödinger's Cat, Silicon Valley, six sigma, software is eating the world, source of truth, SQL injection, systems thinking, text mining, time value of money, transaction costs, Turing machine, two-pizza team, web application, zero day

Some pieces of software truly have no upside potential to rapid change and adaptation. In some industries, every release of software goes through expensive, time-consuming certification. Avionics and implantable medical devices come to mind. That creates inescapable overhead to cutting a release—a transaction cost. If you have to launch astronauts into orbit armed with a screwdriver and a chip-puller, then you have some serious transaction costs to work around. Of course, you can find exceptions to every rule. JPL deployed a hotfix to the Spirit rover on Mars;[83] and when Curiosity landed on Mars, it didn’t even have the software for ground operations. That was loaded after touchdown when all the code for interplanetary flight and landing could be evicted.


pages: 179 words: 42,006

Startup Weekend: How to Take a Company From Concept to Creation in 54 Hours by Marc Nager, Clint Nelsen, Franck Nouyrigat

Amazon Web Services, barriers to entry, business climate, fail fast, hockey-stick growth, invention of the steam engine, James Watt: steam engine, Mark Zuckerberg, minimum viable product, pattern recognition, Silicon Valley, TED Talk, transaction costs, web application, Y Combinator

Researchers Friederike Welter and David Smallbone write in an Entrepreneur article that while the role of trust in entrepreneurship is not fully understood yet, one beneficial effect may be that “Not all business relationships need to be regulated via contracts, thus allowing [the entrepreneur] to reduce transaction costs.” Trust, in other words, can simplify matters and make business work more smoothly. We have certainly found that to be the case. However, we don&apos;t establish trust with others in a vacuum; and researchers have found that trust is not simply bilateral. It also depends on the norms and rules of the environment that surround the people who are forming a relationship.


Tyler Cowen - Stubborn Attachments A Vision for a Society of Free, Prosperous, and Responsible Individuals by Meg Patrick

agricultural Revolution, behavioural economics, Berlin Wall, conceptual framework, Fall of the Berlin Wall, framing effect, hedonic treadmill, impulse control, Peter Singer: altruism, rent-seeking, Robert Solow, social discount rate, The Wealth of Nations by Adam Smith, total factor productivity, trade route, transaction costs, trickle-down economics, Tyler Cowen, Tyler Cowen: Great Stagnation, zero-sum game

In economic jargon, the positive interest rate equalizes marginal rates of substitution over time, or in other words, it expresses the value of a future dollar, relative to a current dollar. This argument does not require positive time preference. This argument, by the way, does not suggest that we accept observed market interest rates uncritically as a measure of how much we should discount the future. We must adjust market interest rates for risk, transactions costs, and other complicating factors, such as taxes. But still the market rate of interest would be a rough starting point for thinking about how much to discount the future.39 38 See Lind et.al.(1982), Arrow et.al. (1994), Broome (1994), Brennan (2007), and Gollier (2013). Cowen (2007) also discusses these issues. 39 This argument for discounting is more complex than is sometimes recognized.


A United Ireland: Why Unification Is Inevitable and How It Will Come About by Kevin Meagher

Boris Johnson, Brexit referendum, British Empire, Celtic Tiger, cognitive dissonance, colonial rule, deindustrialization, Jeremy Corbyn, knowledge economy, kremlinology, land reform, Nelson Mandela, period drama, Right to Buy, trade route, transaction costs

These are significant and a report by the devolved assembly’s enterprise committee in March 2015 found that quitting the EU would cost Northern Ireland £1 billion a year – equivalent to a 3 per cent fall in economic output.24 The report’s author, Dr Leslie Budd from the Open University, argued that as well as damaging Northern Ireland’s attractiveness as an entry route into the single market, transaction costs for trading into the EU would ‘rise significantly’ and inhibit economic cooperation with the neighbouring Irish Republic – a clearly not insignificant factor given the plans to harmonise its corporation tax rates with the south. Leaving the EU would also cut off vital funding that has done so much to copper-fasten peace in recent years.


pages: 140 words: 42,194

Stubborn Attachments: A Vision for a Society of Free, Prosperous, and Responsible Individuals by Tyler Cowen

agricultural Revolution, behavioural economics, Berlin Wall, Branko Milanovic, butterfly effect, conceptual framework, Daniel Kahneman / Amos Tversky, Fall of the Berlin Wall, framing effect, hedonic treadmill, impulse control, Peter Singer: altruism, rent-seeking, Robert Solow, social discount rate, Steven Pinker, The Wealth of Nations by Adam Smith, trade route, transaction costs, trickle-down economics, Tyler Cowen, Tyler Cowen: Great Stagnation, zero-sum game

In economic terms, the positive interest rate equalizes marginal rates of substitution over time, or, in other words, it expresses the value of a future dollar relative to a current dollar. This argument does not require positive time preference. This argument, by the way, does not suggest that we accept observed market interest rates uncritically as a measure of how much we should discount the future. We must adjust market interest rates for risk, transaction costs, and other complicating factors, such as taxes. Still, the market rate of interest would be a rough starting point for thinking about how much to discount the future.10 The opportunity cost argument expresses a powerful logic, but, if understood properly, it does not militate against caring deeply about the distant future.


Falling Behind: Explaining the Development Gap Between Latin America and the United States by Francis Fukuyama

Andrei Shleifer, Atahualpa, barriers to entry, Berlin Wall, British Empire, business climate, Cass Sunstein, central bank independence, collective bargaining, colonial rule, conceptual framework, creative destruction, crony capitalism, European colonialism, Fall of the Berlin Wall, first-past-the-post, Francis Fukuyama: the end of history, Francisco Pizarro, Hernando de Soto, income inequality, income per capita, land reform, land tenure, Monroe Doctrine, moral hazard, New Urbanism, oil shock, open economy, public intellectual, purchasing power parity, rent-seeking, Ronald Reagan, The Wealth of Nations by Adam Smith, total factor productivity, trade liberalization, transaction costs, upwardly mobile, Washington Consensus, zero-sum game

Brazil, despite its supposedly weak political parties and strong federalism, moved in this direction with passage of the Fiscal Responsibility Law, while Argentina has failed to deal with this problem due to the entrenched power of state-level politicians.34 The fact that we can connect certain changes in institutional designs with certain behavioral outcomes does not mean that institutional change is easy to bring about; institutions are in fact very “sticky” or path dependent. The transaction costs of institutional change are often far greater than the transaction costs of weak or suboptimal institutions. Societies need to generate political will to bring about reform and to prevent new institutions from being undermined by losers in the initial struggle. Political Culture As noted above, most conventional analyses of the formal structure of political institutions would have come to the conclusion that Brazil would produce a weaker government than Argentina, given its openlist proportional representation system, weak political parties, and entrenched federalism.


pages: 320 words: 33,385

Market Risk Analysis, Quantitative Methods in Finance by Carol Alexander

asset allocation, backtesting, barriers to entry, Brownian motion, capital asset pricing model, constrained optimization, credit crunch, Credit Default Swap, discounted cash flows, discrete time, diversification, diversified portfolio, en.wikipedia.org, financial engineering, fixed income, implied volatility, interest rate swap, low interest rates, market friction, market microstructure, p-value, performance metric, power law, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, seminal paper, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic bias, Thomas Bayes, transaction costs, two and twenty, value at risk, volatility smile, Wiener process, yield curve, zero-sum game

Table I.1.3 Portfolio returns Year Price 1 Price 2 2003 2004 2005 2006 100 125 80 120 200 500 250 400 Return 1 25% −36% 50% Return 2 Portfolio return Portfolio value Holding 1 Holding 2 150% −50% 60% 75% −416% 54% 100,000 175,000 102,200 157,388 600 480 750 500 200 80 160 100 In practice neither portfolio weights nor portfolio holdings remain constant. To rebalance a portfolio continually so that the portfolio weights are the same at the beginning of every day or at the beginning of every week is difficult, if not impossible. Even at the monthly frequency where constant weights rebalancing may be feasible, it would incur very high transactions costs. Of course portfolios are rebalanced. The holdings do change over time, but this is normally in accordance with the manager’s expectations of risk and return. However, in theoretical models of portfolio risk and return it greatly simplifies the analysis to make the constant weights assumption.

For instance, in enhanced indexation we would take holdings in the assets that are prescribed by the estimated regression coefficients. 3. Hold the portfolio over the investment horizon. For instance, if trades are made only once a week the trading horizon will be 5 working days. 4. Record the P&L on the portfolio over the investment horizon, including the transactions costs from buying or selling the assets at the beginning of the period. 5. Roll the historical sample forward over the investment horizon. For instance, for a weekly trading strategy the sample will be rolled forward 5 days. 6. Return to step 1 and repeat until all the historical data are exhausted, 7.


pages: 443 words: 125,510

The Great Delusion: Liberal Dreams and International Realities by John J. Mearsheimer

"World Economic Forum" Davos, affirmative action, Affordable Care Act / Obamacare, Ayatollah Khomeini, Cass Sunstein, Chelsea Manning, Clive Stafford Smith, Donald Trump, drone strike, Edward Snowden, failed state, Francis Fukuyama: the end of history, full employment, global village, Great Leap Forward, Gunnar Myrdal, invisible hand, laissez-faire capitalism, liberal world order, military-industrial complex, Monroe Doctrine, mutually assured destruction, Peace of Westphalia, Richard Thaler, Ronald Reagan, South China Sea, Steven Pinker, Suez crisis 1956, Ted Kaczynski, Thomas L Friedman, transaction costs

Although lying to Congress is a felony, Clapper was not charged and was not fired from his job.79 Pervasive obfuscation inevitably creates a poisonous culture of dishonesty, which gravely damages any body politic but especially a liberal democracy. Not only does lying make it difficult for citizens to make informed choices about candidates and issues, it also undermines policymaking. If government officials cannot trust each other, the transaction costs of doing business are greatly increased. Furthermore, in a world where distorting or hiding the truth is commonplace, the rule of law is severely weakened. Any legal system, to work effectively, demands public honesty and trust. Finally, if lying becomes pervasive in a liberal democracy, it may alienate the public to the point where it loses faith in that political order and becomes open to authoritarian rule.

Third, a system of rules can increase the amount of information available to the participants in cooperative agreements, which permits close monitoring. Raising the level of information discourages cheating by increasing the likelihood cheaters will be caught. It also provides victims with early warning of possible cheating, enabling them to take protective measures before they are badly hurt. Finally, rules can reduce the transaction costs of individual agreements. When institutions perform the tasks described above, states are able to devote less effort to negotiating and monitoring agreements, and to hedging against possible defections. By increasing the efficiency of international cooperation, institutions make it more profitable and thus more attractive.


pages: 960 words: 125,049

Mastering Ethereum: Building Smart Contracts and DApps by Andreas M. Antonopoulos, Gavin Wood Ph. D.

air gap, Amazon Web Services, bitcoin, blockchain, business logic, continuous integration, cryptocurrency, Debian, digital divide, Dogecoin, domain-specific language, don't repeat yourself, Edward Snowden, en.wikipedia.org, Ethereum, ethereum blockchain, fault tolerance, fiat currency, Firefox, functional programming, Google Chrome, information security, initial coin offering, intangible asset, Internet of things, litecoin, machine readable, move fast and break things, node package manager, non-fungible token, peer-to-peer, Ponzi scheme, prediction markets, pull request, QR code, Ruby on Rails, Satoshi Nakamoto, sealed-bid auction, sharing economy, side project, smart contracts, transaction costs, Turing complete, Turing machine, Vickrey auction, Vitalik Buterin, web application, WebSocket

Therefore, the maximum amount of ETH you will spend is 3 * 21,000 gwei = 63,000 gwei = 0.000063 ETH. (Be advised that average gas prices can fluctuate, as they are predominantly determined by miners. We will see in a later chapter how you can increase/decrease your gas limit to ensure your transaction takes precedence if need be.) All this to say: making a 1 ETH transaction costs 1.000063 ETH. MetaMask confusingly rounds that down to 1 ETH when showing the total, but the actual amount you need is 1.000063 ETH and you only have 1 ETH. Click Reject to cancel this transaction. Let’s get some more test ether! Click the green “request 1 ether from the faucet” button again and wait a few seconds.

In contrast to Bitcoin, whose transaction fees only take into account the size of a transaction in kilobytes, Ethereum must account for every computational step performed by transactions and smart contract code execution. Each operation performed by a transaction or contract costs a fixed amount of gas. Some examples, from the Ethereum Yellow Paper: Adding two numbers costs 3 gas Calculating a Keccak-256 hash costs 30 gas + 6 gas for each 256 bits of data being hashed Sending a transaction costs 21,000 gas Gas is a crucial component of Ethereum, and serves a dual role: as a buffer between the (volatile) price of Ethereum and the reward to miners for the work they do, and as a defense against denial-of-service attacks. To prevent accidental or malicious infinite loops or other computational wastage in the network, the initiator of each transaction is required to set a limit to the amount of computation they are willing to pay for.


pages: 386 words: 122,595

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

affirmative action, Alan Greenspan, Albert Einstein, Andrei Shleifer, barriers to entry, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, Boeing 747, Bretton Woods, business cycle, buy and hold, capital controls, carbon tax, Cass Sunstein, central bank independence, classic study, clean water, collapse of Lehman Brothers, congestion charging, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency risk, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, fixed income, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, Great Leap Forward, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, John Markoff, Joseph Schumpeter, junk bonds, Kenneth Rogoff, libertarian paternalism, low interest rates, low skilled workers, Malacca Straits, managed futures, market bubble, microcredit, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Sam Peltzman, school vouchers, seminal paper, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, tech worker, The Market for Lemons, the rule of 72, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional, zero-sum game

The New York Times reported that this settlement was believed to be the first deal by a company to dissolve an entire town. “It will help the company avoid the considerable expense and public-relations mess of individual lawsuits, legal and environmental experts said.” Coase made one final point: The transactions costs related to striking this kind of deal—everything from the time it takes to find everyone involved to the legal costs of making an agreement—must be reasonably low for the private parties to work out an externality on their own. Stuart and I can haggle over the fence in the backyard. The American Electric Power company can manage to strike a deal with 221 homeowners.

After all, Iowa has never had a financial meltdown because Illinois investors took their capital back across the Mississippi River. There are benefits to broadening a currency zone; this was the logic of the euro, which replaced most of the individual currencies in Europe. A single currency across Europe (and in the fifty U.S. states) reduces transaction costs and promotes price transparency (meaning that it’s easier to spot and exploit price discrepancies when goods are all priced in the same currency). But here, too, there is a trade-off. Remember, monetary policy is the primary tool that any government possesses to control the “speed” of its economy.


The Empire Project: The Rise and Fall of the British World-System, 1830–1970 by John Darwin

anti-communist, banking crisis, Bretton Woods, British Empire, capital controls, classic study, cognitive bias, colonial rule, Corn Laws, disinformation, European colonialism, floating exchange rates, full employment, imperial preference, Joseph Schumpeter, Khartoum Gordon, Kickstarter, labour mobility, land tenure, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Mahatma Gandhi, Monroe Doctrine, new economy, New Urbanism, open economy, railway mania, reserve currency, Right to Buy, rising living standards, scientific management, Scientific racism, South China Sea, Suez canal 1869, Suez crisis 1956, tacit knowledge, the market place, The Wealth of Nations by Adam Smith, trade route, transaction costs, transcontinental railway, undersea cable

There was also the threat, widely discussed in the 1870s and after, that large parts of the world beyond Europe would be walled off by tariffs – an economic partition to match the diplomatic division of spheres in Southeast Asia and Africa, and (as seemed increasingly likely) the Near East and China. These actual or possible barriers to trade were a forceful reminder that success in the new global economy depended on being able to meet the transaction costs it imposed. As Douglass North pointed out, in modern large-scale economies, the costs of coordinating productive activity usually exceed the cost of production itself.3 Settling the terms of exchange for different commodities, grading their quality, and securing the claims to property rights over them (a complex operation in tradeable goods) were elaborate tasks.

The long train of agents that brought products to market, and then to the consumer, cost time and effort to manage. The key to success was commercial intelligence. ‘Information’, remarked one profound economic observer, ‘is one of the principal commodities that the economic organisation is engaged in supplying.’4 The risks and transaction costs of global trade and investment were lowest where (more or less) reliable information was cheap and accessible. Their burden was lightest where commercial institutions responded most quickly to new products, new markets, new forms of exchange and the need for new kinds of investment. It was here that London's long lead as the world's principal entrepot conferred a crucial advantage.

In West and East Africa, the chartered companies were meant to limit imperial liability while protecting a commercial interest. In both cases, they proved more successful at increasing the liability than in guarding the interest. Both were as much political as commercial enterprises whose ‘virtual’ assets could only be realised if the transaction costs of external protection were transferred to the imperial government. It was the peculiarity of tropical Africa in the 1890s that the technical, administrative and financial cost of transfer was so low; the mobilisation of public interest sufficient; and the diplomatic argument so pressing: conditions which favoured a sudden, swift and complete partition.


pages: 843 words: 223,858

The Rise of the Network Society by Manuel Castells

air traffic controllers' union, Alan Greenspan, Apple II, Asian financial crisis, barriers to entry, Big bang: deregulation of the City of London, Bob Noyce, borderless world, British Empire, business cycle, capital controls, classic study, complexity theory, computer age, Computer Lib, computerized trading, content marketing, creative destruction, Credit Default Swap, declining real wages, deindustrialization, delayed gratification, dematerialisation, deskilling, digital capitalism, digital divide, disintermediation, double helix, Douglas Engelbart, Douglas Engelbart, edge city, experimental subject, export processing zone, Fairchild Semiconductor, financial deregulation, financial independence, floating exchange rates, future of work, gentrification, global village, Gunnar Myrdal, Hacker Ethic, hiring and firing, Howard Rheingold, illegal immigration, income inequality, independent contractor, Induced demand, industrial robot, informal economy, information retrieval, intermodal, invention of the steam engine, invention of the telephone, inventory management, Ivan Sutherland, James Watt: steam engine, job automation, job-hopping, John Markoff, John Perry Barlow, Kanban, knowledge economy, knowledge worker, labor-force participation, laissez-faire capitalism, Leonard Kleinrock, longitudinal study, low skilled workers, manufacturing employment, Marc Andreessen, Marshall McLuhan, means of production, megacity, Menlo Park, military-industrial complex, moral panic, new economy, New Urbanism, offshore financial centre, oil shock, open economy, packet switching, Pearl River Delta, peer-to-peer, planetary scale, popular capitalism, popular electronics, post-Fordism, post-industrial society, Post-Keynesian economics, postindustrial economy, prediction markets, Productivity paradox, profit maximization, purchasing power parity, RAND corporation, Recombinant DNA, Robert Gordon, Robert Metcalfe, Robert Solow, seminal paper, Shenzhen special economic zone , Shoshana Zuboff, Silicon Valley, Silicon Valley startup, social software, South China Sea, South of Market, San Francisco, special economic zone, spinning jenny, statistical model, Steve Jobs, Steve Wozniak, Strategic Defense Initiative, tacit knowledge, technological determinism, Ted Nelson, the built environment, the medium is the message, the new new thing, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, total factor productivity, trade liberalization, transaction costs, urban renewal, urban sprawl, vertical integration, work culture , zero-sum game

And the venerable Chicago Board of Trade was in turmoil, with its leadership fighting over how to adapt to the new technological medium after it had to concede its position as the world’s largest futures and options exchange market to Eurex.130 Why does the technology of transactions matter? How does it affect the finance industry? It reduces transaction costs (as much as 50 percent in the late 1990s in the US), thus attracting a much broader pool of individual investors, and reducing the cost of active trading. It also opens up investment opportunities to millions of individual investors, assessing value and seizing chances on the basis of on-line information.

Multinational Enterprises, Transnational Corporations, and International Networks The analysis of East Asian business networks shows the institutional/cultural production of organizational forms. But it also shows the limits of the market-driven theory of business organizations, ethnocentrically rooted in the Anglo-Saxon experience. Thus, Williamson’s influential interpretation130 of the emergence of the large corporation as the best way to reduce uncertainty and minimize transaction costs, by internalizing transactions within the corporation, simply does not hold when confronted with the empirical evidence of the spectacular process of capitalist development that took place in the Asian Pacific between the mid-1960s and the early 1990s, based on networks external to the corporation.131 Similarly, the process of economic globalization based on network formation seems also to contradict the classical analysis by Chandler132 that attributes the rise of the large multi-unit corporation to the growing size of the market, and to the availability of communications technology that enables the large firm to take hold on such a broad market, thus reaping economies of scale and scope, and internalizing them within the firm.

However, in Ernst’s analysis, the organizational effects are exactly the opposite of those expected by the traditional economic theory: while market size was supposed to induce the formation of the vertical, multiunit corporation, the globalization of competition dissolves the large corporation in a web of multidirectional networks, which become the actual operating unit. The increase of transaction costs, because of added technological complexity, does not result in the internalization of transactions within the corporation but in the externalization of transactions and sharing of costs throughout the network, obviously increasing uncertainty, but also making possible the spreading and sharing of uncertainty.


The Trade Lifecycle: Behind the Scenes of the Trading Process (The Wiley Finance Series) by Robert P. Baker

asset-backed security, bank run, banking crisis, Basel III, Black-Scholes formula, book value, Brownian motion, business continuity plan, business logic, business process, collapse of Lehman Brothers, corporate governance, credit crunch, Credit Default Swap, diversification, financial engineering, fixed income, functional programming, global macro, hiring and firing, implied volatility, interest rate derivative, interest rate swap, locking in a profit, London Interbank Offered Rate, low interest rates, margin call, market clearing, millennium bug, place-making, prediction markets, proprietary trading, short selling, statistical model, stochastic process, the market place, the payments system, time value of money, too big to fail, transaction costs, value at risk, Wiener process, yield curve, zero-coupon bond

For example, if I sell a call option on an equity, I could buy 65 Derivatives, Structures and Hybrids the underlying equity as a hedge. If the price rises, I will lose money on the option, but that loss will be exactly offset by the gain in holding the underlying (the hedge). Although there may be a transaction cost in putting on the hedge, the exposure to the equity price will be covered and the risk is controlled. Hedging will be discussed in greater detail in Chapter 10 on risk management. Other examples of leveraged positions include the following. Selling short This means entering a trade with a commitment to selling an underlying in the future that the trader does not hold at time of execution.

Orders may be aggregated to make trading more efficient. 91 Trade Lifecycle TABLE 8.1 Orders Order type Buy Sell Buy Buy Sell Net Size (pounds of aluminium) 70,000 60,000 95,000 85,000 90,000 Buy 100,000 For example, metals trader Mandy has the orders in Table 8.1 on her books. She will execute one trade to buy the balance, which is buy 100,000 pounds thus satisfying the five individual orders and reducing her transaction costs. Risks associated with orders An order is an instruction to trade and therefore it is important that orders are correctly input and processed. As orders and trades may not match one to one, it is useful to have a means by which trades can be reconciled against their composite orders for audit or tracking purposes and to prevent mistakes.


pages: 483 words: 141,836

Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

Abraham Wald, activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, book value, business cycle, capital asset pricing model, carbon tax, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, currency risk, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, fail fast, fear index, financial engineering, financial innovation, global macro, illegal immigration, implied volatility, independent contractor, index fund, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market clearing, market fundamentalism, market microstructure, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, power law, pre–internet, proprietary trading, quantitative trading / quantitative finance, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, stock buybacks, stocks for the long run, tail risk, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

These are the kinds of portfolios we would expect investors to hold under IGT CAPM; and until MPT CAPM pushed investors to huge portfolios, typical portfolio sizes were eight to 40 stocks, even among professional managers. While in theory investors might have improved their Sharpe ratios slightly by holding more stocks, it’s quite possible that the additional transaction costs would have offset the benefit. Also, with fewer stocks investors have more opportunity to monitor and even influence their companies. These factors can make small portfolios rational even under MPT CAPM. There are many people who unconsciously internalized a super-duper-strong law of large numbers that basically says ρ always equals 0 so all risk can be diversified.

If there is a lot of positive autocorrelation, you make money buying stocks that just went up, and a lot of negative autocorrelation means you should buy stocks that just went down; either way you arbitrage the autocorrelation away. Back in graduate school, I had a lot of faith in arbitrage to keep simple inefficiencies small. I thought it was a combination of data errors and transaction costs that made things look more autocorrelated than they really were. Incidentally, I changed my view quickly when I came to Wall Street and there was money on the line. I was more concerned with heteroskedasticity. That’s also not independent. It means if yesterday’s move was big in either direction, today’s move is likely to be bigger than average, although equally likely to be in the same or opposite direction.


The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good by William Easterly

"World Economic Forum" Davos, airport security, anti-communist, Asian financial crisis, bank run, banking crisis, Bob Geldof, Bretton Woods, British Empire, call centre, clean water, colonial exploitation, colonial rule, Edward Glaeser, end world poverty, European colonialism, failed state, farmers can use mobile phones to check market prices, George Akerlof, Gunnar Myrdal, guns versus butter model, Hernando de Soto, income inequality, income per capita, Indoor air pollution, intentional community, invisible hand, Kenneth Rogoff, laissez-faire capitalism, land bank, land reform, land tenure, Live Aid, microcredit, moral hazard, Naomi Klein, Nelson Mandela, publication bias, purchasing power parity, randomized controlled trial, Ronald Reagan, Scramble for Africa, structural adjustment programs, The Fortune at the Bottom of the Pyramid, the scientific method, The Wealth of Nations by Adam Smith, Tragedy of the Commons, transaction costs, TSMC, War on Poverty, Xiaogang Anhui farmers

If they were too small, all fishing was forbidden, and anyone who secretly fished the lake at this time was outcast, excluded from the formal and informal groups that formed the village’s social structure. Those who committed this breach of trust were often shunned by the whole community; no one would speak to the offender, or even acknowledge his existence for a year or more. When the value of the land increases, formal titles are worth the transaction costs—in return for greater ownership security. Now loose customary arrangements will not hold up; ignoring custom pays too well. Hence, a growing economy moves from customary law to formal law, but outsiders cannot know enough to engineer such a transition. One example of how not to do it is having Western lawyers and accountants rewrite the legal code overnight from the top down, as the West tried in Eastern Europe after 1990.

THE RICH HAVE MARKETS, THE POOR HAVE BUREAUCRATS 1.World Bank, “Assessing Aid,” 1998. 2.World Bank, Africa Development Indicators, 2002. 3.A brilliant review of the feedback problem and principal-agent theory in foreign aid is Bertin Martens, Uwe Mummert, Peter Murrell, and Paul Seabright, The Institutional Economics of Foreign Aid, Cambridge, UK: Cambridge University Press, 2002. 4.For a review, see Avinash Dixit, The Making of Eccentric Policy: A Transaction Cost Politics Perspective, Cambridge, MIT Press, 1996. 5.http://www.murphys-laws.com/murphy/murphy-laws.html. 6.World Bank, “The World Bank in Action: Stories of Development,” Washington, D.C., 2002. 7.Anirudh Krishna with Urban Jonsson and Wilbald Lorri, “The Iringa Nutrition Project: Child Survival and Development in Tanzania,” in Anirudh Krishna, Norman Uphoff, and Milton J.


pages: 537 words: 144,318

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

Albert Einstein, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bear Stearns, Bernie Madoff, Black Swan, bond market vigilante , book value, Bretton Woods, BRICs, British Empire, business cycle, business process, buy and hold, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, commoditize, commodity super cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, equity risk premium, family office, fiat currency, fixed income, follow your passion, full employment, George Santayana, global macro, Greenspan put, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, inverted yield curve, invisible hand, junk bonds, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, market microstructure, Minsky moment, moral hazard, Myron Scholes, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, proprietary trading, purchasing power parity, quantitative easing, random walk, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, savings glut, selection bias, Sharpe ratio, short selling, SoftBank, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, stocks for the long term, survivorship bias, tail risk, The Great Moderation, Thomas Bayes, time value of money, too big to fail, Tragedy of the Commons, transaction costs, two and twenty, unbiased observer, value at risk, Vanguard fund, yield curve, zero-sum game

They might correct sooner, but if they don’t, we thought we would have the balance sheet, the funds, and the stability to carry them to maturity if needed. During the second half of 2008, we lost a lot of money buying even more insurance protection than usual and reducing our balance sheet, which meant incurring significant transaction costs. We exited the year with a balance sheet that was roughly three times our equity, with virtually all government bonds. This level of leverage is insignificant for a fund that primarily trades government bonds. Meanwhile, we went into the mispriced trades much too early. With three- to five-year U.S.

On the other hand, if a trade is very crowded because people are looking at the same instrument through non-macro goggles, it could be driven far from fair value, which to me is an ideal situation to think about going the other way. How important is liquidity, and how do you measure it? Liquidity is important and I measure it primarily through transaction costs and looking at turnover data from authorities like the Bank of International Settlements (BIS), or exchanges and counterparties. It will show up in volatility. Cost and volatility are two of the factors that I use to adjust my sense of a trade’s attractiveness. Liquidity conditions changed drastically in 2008.


pages: 167 words: 50,652

Alternatives to Capitalism by Robin Hahnel, Erik Olin Wright

affirmative action, basic income, crowdsourcing, inventory management, iterative process, Kickstarter, loose coupling, means of production, Pareto efficiency, profit maximization, race to the bottom, tacit knowledge, transaction costs

In a world in which people are ecologically conscious about waste, a market in second-hand goods might be quite a significant market and account for a sizable part of total consumption. What is the optimal way of organizing the distribution of secondhand goods? A market solution might simply be better than participatory planning for the allocation of second-hand goods consumption—less hassle, quicker, fewer transaction costs, etc. Or consider a quite different kind of example: the allocation of tickets and seats in the performing arts. Getting tickets to a particular performance matters much more to some people than to others, as does getting the best seats. As long as the underlying income structure is just by egalitarian standards, I don’t see any reason why the price of theatre tickets shouldn’t be a simple reflection of what people are willing to pay for better and worse seats for a given production.


pages: 172 words: 49,890

The Dhandho Investor: The Low-Risk Value Method to High Returns by Mohnish Pabrai

asset allocation, backtesting, beat the dealer, Black-Scholes formula, book value, business intelligence, call centre, cuban missile crisis, discounted cash flows, Edward Thorp, Exxon Valdez, fixed income, hiring and firing, index fund, inventory management, John Bogle, Mahatma Gandhi, merger arbitrage, passive investing, price mechanism, Silicon Valley, time value of money, transaction costs, two and twenty, zero-sum game

In contrast, think about how many private businesses are on sale within 25 miles of your home at any given time. There is just no comparison. 6. At the racetrack, the track owner takes 17 percent of every dollar bet. The frictional costs are very high. Even when you buy a tiny private business, transaction costs between the buyer and seller are usually between 5 percent to 10 percent of the purchase price, which doesn’t include the considerable time and effort expended. You can buy or sell a stake in a publicly traded company for under $10. With a $100,000 portfolio and even at a hyperactive 50 trades a year, frictional costs are 0.5 percent—and they keep getting lower (as a percent) as the value of the portfolio rises over time.


pages: 209 words: 53,236

The Scandal of Money by George Gilder

Affordable Care Act / Obamacare, Alan Greenspan, bank run, behavioural economics, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, Claude Shannon: information theory, Clayton Christensen, cloud computing, corporate governance, cryptocurrency, currency manipulation / currency intervention, currency risk, Daniel Kahneman / Amos Tversky, decentralized internet, Deng Xiaoping, disintermediation, Donald Trump, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, glass ceiling, guns versus butter model, Home mortgage interest deduction, impact investing, index fund, indoor plumbing, industrial robot, inflation targeting, informal economy, Innovator's Dilemma, Internet of things, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jeff Bezos, John Bogle, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, Law of Accelerating Returns, low interest rates, Marc Andreessen, Mark Spitznagel, Mark Zuckerberg, Menlo Park, Metcalfe’s law, Money creation, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Nixon triggered the end of the Bretton Woods system, obamacare, OSI model, Paul Samuelson, Peter Thiel, Ponzi scheme, price stability, Productivity paradox, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, reality distortion field, reserve currency, road to serfdom, Robert Gordon, Robert Metcalfe, Ronald Reagan, Sand Hill Road, Satoshi Nakamoto, Search for Extraterrestrial Intelligence, secular stagnation, seigniorage, Silicon Valley, Skinner box, smart grid, Solyndra, South China Sea, special drawing rights, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Tim Cook: Apple, time value of money, too big to fail, transaction costs, trickle-down economics, Turing machine, winner-take-all economy, yield curve, zero-sum game

And the very process that validates the transaction would prohibit spam. There would be no hassle of bartering content for advertising revenues at some aggregator such as Google. Aggregators with advertising clout would merely add inefficiency to an automated system that rides a learning curve to minimize transaction costs. The Internet would have a money system of its own with a granularity commensurate with its huge variety and with the many gradations of value transacted as an Internet user. With a low market price for goods and services—Google and other players could charge millicents for their services and still make a mint—the Internet economy would transcend its current den of thieves and hustlers of spuriously free goods.


pages: 172 words: 54,066

The End of Loser Liberalism: Making Markets Progressive by Dean Baker

Alan Greenspan, Asian financial crisis, banking crisis, Bear Stearns, Bernie Sanders, business cycle, collateralized debt obligation, collective bargaining, corporate governance, currency manipulation / currency intervention, Doha Development Round, financial innovation, full employment, Glass-Steagall Act, Home mortgage interest deduction, income inequality, inflation targeting, invisible hand, low interest rates, manufacturing employment, market clearing, market fundamentalism, medical residency, patent troll, pets.com, pirate software, price stability, public intellectual, quantitative easing, regulatory arbitrage, rent-seeking, Robert Shiller, Silicon Valley, too big to fail, transaction costs

Before considering the prospects for the reform of Fannie and Freddie, it is worth discussing the benefits of homeownership. Over the last seven decades, politicians from both parties have pushed homeownership as a ticket to the middle class. This view of homeownership ignores much evidence and shows sloppy thinking. First, homeownership involves large transaction costs. The combination of realtors’ fees, mortgage origination fees, inspection fees, and other costs associated with buying and selling a home are likely to push the combined purchase and sale costs to close to 10 percent of the home’s price, or $20,000 on a $200,000 home. Averaged over a long period these costs will diminish, but for someone who lives in a home for five years or less they loom large.


pages: 204 words: 54,395

Drive: The Surprising Truth About What Motivates Us by Daniel H. Pink

Abraham Maslow, affirmative action, behavioural economics, call centre, Daniel Kahneman / Amos Tversky, Dean Kamen, deliberate practice, Firefox, Frederick Winslow Taylor, functional fixedness, game design, George Akerlof, Isaac Newton, Jean Tirole, job satisfaction, knowledge worker, longitudinal study, performance metric, profit maximization, profit motive, Results Only Work Environment, scientific management, side project, TED Talk, the built environment, Tony Hsieh, transaction costs, zero-sum game

The newly ascendant field of law and economics held that precisely because we were such awesome self-interest calculators, laws and regulations often impeded, rather than permitted, sensible and just outcomes. I survived law school in no small part because I discovered the talismanic phrase and offered it on exams: In a world of perfect information and low transaction costs, the parties will bargain to a wealth-maximizing result. Then, about a decade later, came a curious turn of events that made me question much of what I'd worked hard, and taken on enormous debt, to learn. In 2002, the Nobel Foundation awarded its prize in economics to a guy who wasn't even an economist.


pages: 516 words: 157,437

Principles: Life and Work by Ray Dalio

Alan Greenspan, Albert Einstein, asset allocation, autonomous vehicles, backtesting, Bear Stearns, Black Monday: stock market crash in 1987, cognitive bias, currency risk, Deng Xiaoping, diversification, Dunning–Kruger effect, Elon Musk, financial engineering, follow your passion, global macro, Greenspan put, hiring and firing, iterative process, Jeff Bezos, Long Term Capital Management, margin call, Market Wizards by Jack D. Schwager, microcredit, oil shock, performance metric, planetary scale, quantitative easing, risk tolerance, Ronald Reagan, Silicon Valley, Steve Jobs, transaction costs, yield curve

Until then our systems had been completely discrete—we would flip from a fully long position to a fully short one when we crossed a predetermined threshold (much as we switched from bonds to cash for the World Bank). But we weren’t always equally confident in our views, and we’d also get killed paying transaction costs when we crossed back and forth. That drove Bob crazy. I can remember him running laps around the office building to calm himself down. So at the end of the year, we moved to a more variable system that allowed us to size our bets in relation to how confident we were. These and other improvements Bob made to our systems have paid off many times since.

I believed strongly that we should bring problems and disagreements to the surface to learn what should be done to make things better. So Ross and I worked to build out an “error log” in the trading department. From then on, anytime there was any kind of bad outcome (a trade wasn’t executed, we paid significantly higher transaction costs than expected, etc.), the traders would make a record of it and we would follow up. As we consistently tracked and addressed those issues, our trade execution machine continually improved. Having a process that ensures problems are brought to the surface, and their root causes diagnosed, assures that continual improvements occur.


Crisis and Leviathan: Critical Episodes in the Growth of American Government by Robert Higgs, Arthur A. Ekirch, Jr.

Alistair Cooke, American ideology, business cycle, clean water, collective bargaining, creative destruction, credit crunch, declining real wages, endowment effect, fiat currency, fixed income, foreign exchange controls, full employment, Glass-Steagall Act, guns versus butter model, hiring and firing, Ida Tarbell, income per capita, Jones Act, Joseph Schumpeter, laissez-faire capitalism, land bank, manufacturing employment, means of production, military-industrial complex, minimum wage unemployment, plutocrats, post-industrial society, power law, price discrimination, profit motive, rent control, rent-seeking, Richard Thaler, road to serfdom, Ronald Reagan, Sam Peltzman, Savings and loan crisis, Simon Kuznets, strikebreaker, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, transcontinental railway, union organizing, Upton Sinclair, War on Poverty, Works Progress Administration

Freedom and Reform: Essays in Economics and Social Philosophy (Indianapolis: Liberty Press, 1982), p. 231. For an exceptionally full and careful treatment of this important issue, with a valuable survey of the related economic literature and an illuminating empirical application, see Charlotte Twight, "Government Manipulation of Constitutional-Level Transaction Costs: An Economic Theory and Its Application to OffBudget Expenditure through the Federal Financing Bank," (Ph.D. diss., University of Washington, 1983). 12. Nordlinger, Autonomy, p. 76. Also Dye, Understanding Public Policy, pp. 197-199; W. Lance Bennett, Public Opinion in American Politics (New York: Harcourt Brace Jovanovich, 1980), pp. 218, 269; Barry D.

Chicago: University of Chicago Press, 1975. Thaler, Richard H. "Illusions and Mirages in Public Policy." Public Interest (Fall 1983). Tufte, Edward. Political Control of the Economy. Princeton, N.J.: Princeton University Press, 1978. Twight, Charlotte. "Government Manipulation of Constitutional-Level Transaction Costs: An Economic Theory and Its Application to Off-Budget Expenditure through the Federal Financing Bank." Ph.D. diss., University of Washington, 1983. Wallace, Donald H. Economic Controls and Defense. New York: Twentieth Century Fund, 1953. Weidenbaum, Murray L. Business, Government, and the Public. 2nd ed.


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Connectography: Mapping the Future of Global Civilization by Parag Khanna

"World Economic Forum" Davos, 1919 Motor Transport Corps convoy, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 9 dash line, additive manufacturing, Admiral Zheng, affirmative action, agricultural Revolution, Airbnb, Albert Einstein, amateurs talk tactics, professionals talk logistics, Amazon Mechanical Turk, Anthropocene, Asian financial crisis, asset allocation, autonomous vehicles, banking crisis, Basel III, Berlin Wall, bitcoin, Black Swan, blockchain, borderless world, Boycotts of Israel, Branko Milanovic, BRICs, British Empire, business intelligence, call centre, capital controls, Carl Icahn, charter city, circular economy, clean water, cloud computing, collateralized debt obligation, commoditize, complexity theory, continuation of politics by other means, corporate governance, corporate social responsibility, credit crunch, crony capitalism, crowdsourcing, cryptocurrency, cuban missile crisis, data is the new oil, David Ricardo: comparative advantage, deglobalization, deindustrialization, dematerialisation, Deng Xiaoping, Detroit bankruptcy, digital capitalism, digital divide, digital map, disruptive innovation, diversification, Doha Development Round, driverless car, Easter island, edge city, Edward Snowden, Elon Musk, energy security, Ethereum, ethereum blockchain, European colonialism, eurozone crisis, export processing zone, failed state, Fairphone, Fall of the Berlin Wall, family office, Ferguson, Missouri, financial innovation, financial repression, fixed income, forward guidance, gentrification, geopolitical risk, global supply chain, global value chain, global village, Google Earth, Great Leap Forward, Hernando de Soto, high net worth, high-speed rail, Hyperloop, ice-free Arctic, if you build it, they will come, illegal immigration, income inequality, income per capita, industrial cluster, industrial robot, informal economy, Infrastructure as a Service, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Isaac Newton, Jane Jacobs, Jaron Lanier, John von Neumann, Julian Assange, Just-in-time delivery, Kevin Kelly, Khyber Pass, Kibera, Kickstarter, LNG terminal, low cost airline, low earth orbit, low interest rates, manufacturing employment, mass affluent, mass immigration, megacity, Mercator projection, Metcalfe’s law, microcredit, middle-income trap, mittelstand, Monroe Doctrine, Multics, mutually assured destruction, Neal Stephenson, New Economic Geography, new economy, New Urbanism, off grid, offshore financial centre, oil rush, oil shale / tar sands, oil shock, openstreetmap, out of africa, Panamax, Parag Khanna, Peace of Westphalia, peak oil, Pearl River Delta, Peter Thiel, Philip Mirowski, Planet Labs, plutocrats, post-oil, post-Panamax, precautionary principle, private military company, purchasing power parity, quantum entanglement, Quicken Loans, QWERTY keyboard, race to the bottom, Rana Plaza, rent-seeking, reserve currency, Robert Gordon, Robert Shiller, Robert Solow, rolling blackouts, Ronald Coase, Scramble for Africa, Second Machine Age, sharing economy, Shenzhen special economic zone , Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, six sigma, Skype, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, South China Sea, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, Stuxnet, supply-chain management, sustainable-tourism, systems thinking, TaskRabbit, tech worker, TED Talk, telepresence, the built environment, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, Tim Cook: Apple, trade route, Tragedy of the Commons, transaction costs, Tyler Cowen, UNCLOS, uranium enrichment, urban planning, urban sprawl, vertical integration, WikiLeaks, Yochai Benkler, young professional, zero day

We should not underestimate the intrinsic value of digital connections in a hybrid reality. Critics such as Harvard’s Robert Putnam and MIT’s Sherry Turkle who point to digital life as eroding family bonds ignore the importance of these new and more diverse relationships, as well as how digital communications reduce transaction costs and free up time for new kinds of engagement, learning, consumption, or investment. For example, Skype calling minutes increased by 500 percent from 2008 to 2013, no doubt bringing many families closer together while also enabling individuals to more easily afford to learn everything from the piano to Mandarin.*9 We should also remember that in low-trust societies such as Latin America, social media are essential to circulate accurate information to circumvent elite lies.

While Silicon Valley technology companies employ fewer workers than their industrial-age counterparts such as General Motors, their global services platforms facilitate portable and digital work for the connected masses whether posting advertisements, verifying addresses, photographing for registries, comparing prices for companies, or performing other basic tasks. A digital middle class is emerging whose prerequisite is not a broad consumer base or even a market economy but online connectivity. Economists such as Ronald Coase sought to determine the optimal size of firms to reduce transaction costs in carrying out certain functions efficiently. Today’s network structures that leverage growing frictionless connectivity shatter previous assumptions by expanding in scale without commensurate growth in size. Even as traditional productivity metrics still fail to capture all the benefits created by such connectivity, innovation itself very much depends on it.


pages: 524 words: 155,947

More: The 10,000-Year Rise of the World Economy by Philip Coggan

accounting loophole / creative accounting, Ada Lovelace, agricultural Revolution, Airbnb, airline deregulation, Alan Greenspan, Andrei Shleifer, anti-communist, Apollo 11, assortative mating, autonomous vehicles, bank run, banking crisis, banks create money, basic income, Bear Stearns, Berlin Wall, Black Monday: stock market crash in 1987, Bletchley Park, Bob Noyce, Boeing 747, bond market vigilante , Branko Milanovic, Bretton Woods, Brexit referendum, British Empire, business cycle, call centre, capital controls, carbon footprint, carbon tax, Carl Icahn, Carmen Reinhart, Celtic Tiger, central bank independence, Charles Babbage, Charles Lindbergh, clean water, collective bargaining, Columbian Exchange, Columbine, Corn Laws, cotton gin, credit crunch, Credit Default Swap, crony capitalism, cross-border payments, currency peg, currency risk, debt deflation, DeepMind, Deng Xiaoping, discovery of the americas, Donald Trump, driverless car, Easter island, Erik Brynjolfsson, European colonialism, eurozone crisis, Fairchild Semiconductor, falling living standards, financial engineering, financial innovation, financial intermediation, floating exchange rates, flying shuttle, Ford Model T, Fractional reserve banking, Frederick Winslow Taylor, full employment, general purpose technology, germ theory of disease, German hyperinflation, gig economy, Gini coefficient, Glass-Steagall Act, global supply chain, global value chain, Gordon Gekko, Great Leap Forward, greed is good, Greenspan put, guns versus butter model, Haber-Bosch Process, Hans Rosling, Hernando de Soto, hydraulic fracturing, hydroponic farming, Ignaz Semmelweis: hand washing, income inequality, income per capita, independent contractor, indoor plumbing, industrial robot, inflation targeting, Isaac Newton, James Watt: steam engine, job automation, John Snow's cholera map, joint-stock company, joint-stock limited liability company, Jon Ronson, Kenneth Arrow, Kula ring, labour market flexibility, land reform, land tenure, Lao Tzu, large denomination, Les Trente Glorieuses, liquidity trap, Long Term Capital Management, Louis Blériot, low cost airline, low interest rates, low skilled workers, lump of labour, M-Pesa, Malcom McLean invented shipping containers, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Martin Wolf, McJob, means of production, Mikhail Gorbachev, mittelstand, Modern Monetary Theory, moral hazard, Murano, Venice glass, Myron Scholes, Nelson Mandela, Network effects, Northern Rock, oil shale / tar sands, oil shock, Paul Samuelson, Paul Volcker talking about ATMs, Phillips curve, popular capitalism, popular electronics, price stability, principal–agent problem, profit maximization, purchasing power parity, quantitative easing, railway mania, Ralph Nader, regulatory arbitrage, road to serfdom, Robert Gordon, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, savings glut, scientific management, Scramble for Africa, Second Machine Age, secular stagnation, Silicon Valley, Simon Kuznets, South China Sea, South Sea Bubble, special drawing rights, spice trade, spinning jenny, Steven Pinker, Suez canal 1869, TaskRabbit, techlash, Thales and the olive presses, Thales of Miletus, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Rise and Fall of American Growth, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, Tragedy of the Commons, transaction costs, transatlantic slave trade, transcontinental railway, Triangle Shirtwaist Factory, universal basic income, Unsafe at Any Speed, Upton Sinclair, V2 rocket, Veblen good, War on Poverty, Washington Consensus, Watson beat the top human players on Jeopardy!, women in the workforce, world market for maybe five computers, Yom Kippur War, you are the product, zero-sum game

So bankers operated at the fairs, acting as clearing houses for all the trades; a merchant would end up with a credit or debit that could be settled later, or simply rolled over to the next fair. In this way, credit allowed more trade to occur; as one author wrote, “credit enabled a small investment of hard cash to go to work simultaneously at more than one place”.14 Financial innovation thus lowered transaction costs, allowed cash that would otherwise be hoarded to be put to work, and allowed merchants to take more risk. Without it, trade would not have flourished as it did. There was a general shortage of coins in Europe in the Middle Ages. At the start of the period, Europe was surviving with the help of coins from the Byzantine and Islamic worlds.

Retailers can keep track of which goods are selling well, and order more when supplies start to run low. This saves them tying up capital in excess stock. Fishermen and farmers can find out the current market prices for their produce, and sell them where they are most profitable. And consumers can easily compare prices to stop themselves from being ripped off. Third, transaction costs have fallen. The internet can eliminate the role of middlemen. Booking a holiday, for example, used to involve a visit to a travel agent and a trawl through brochures, but now everything can be purchased online. Part of this cost saving is in the form of time, as doing an internet search means that consumers can find the goods they desire much more quickly.


pages: 1,000 words: 247,974

Empire of Cotton: A Global History by Sven Beckert

agricultural Revolution, Bartolomé de las Casas, British Empire, colonial exploitation, colonial rule, company town, Corn Laws, cotton gin, creative destruction, crony capitalism, deindustrialization, European colonialism, flying shuttle, Francisco Pizarro, Great Leap Forward, imperial preference, industrial cluster, James Hargreaves, James Watt: steam engine, joint-stock company, laissez-faire capitalism, land tenure, Mahatma Gandhi, market fundamentalism, race to the bottom, restrictive zoning, scientific management, Silicon Valley, spice trade, spinning jenny, Suez canal 1869, The Wealth of Nations by Adam Smith, transaction costs, transatlantic slave trade, union organizing, vertical integration, women in the workforce, work culture

Some, such as the Browns, in a savvy move, had already mostly exited the cotton business before the Civil War. Others, such as the Rathbones, accumulated huge losses after the war, and then retreated from the trade. Lower transaction costs meant lower profits for people invested in the cotton trade, giving a premium to those able to secure a vastly increased quantity of goods. One of the nineteenth century’s greatest authorities on the global cotton trade, Thomas Ellison, estimated that between 1870 and 1886 transaction costs, as a percentage of the value of the traded cotton, fell by 2.5 percent.13 The role of merchants also changed because, as the result of the state-driven transformation of the countryside, connecting growers and producers of raw cotton had become much simpler.

Yet ironically, under manufacturers’ pressure to deliver the cheapest possible cotton, the commission-intensive business of importers, brokers, and factors were increasingly squeezed as well, and eventually replaced by a much simpler—and much less expensive—system of trade. In fact, so successful had merchants become in connecting distant growers and manufacturers to one another that their own labor had become less and less important. Pressured by manufacturers who sought to cut transaction costs, the myriad intermediaries who had moved cotton from the plantation to the factory before the 1860s consolidated, to be replaced by a few vertically integrated cotton dealers. New characters now strode onto the cotton empire’s stage, people who would connect growers directly to manufacturers.


pages: 214 words: 57,614

America at the Crossroads: Democracy, Power, and the Neoconservative Legacy by Francis Fukuyama

affirmative action, Ayatollah Khomeini, Berlin Wall, Bretton Woods, cuban missile crisis, David Brooks, European colonialism, failed state, Francis Fukuyama: the end of history, information security, Internet Archive, John Perry Barlow, Mikhail Gorbachev, Monroe Doctrine, mutually assured destruction, New Journalism, no-fly zone, oil-for-food scandal, race to the bottom, RAND corporation, rent-seeking, road to serfdom, Ronald Reagan, Ronald Reagan: Tear down this wall, transaction costs, uranium enrichment, War on Poverty, Washington Consensus

International legitimacy, on the other hand, requires working through international institutions that are inherently slow-moving, rigid, and hobbled by cumbersome procedures and methods. Legitimacy is ultimately based on consent, which is in turn a by-product of a slow process of diplomacy and persuasion. International institutions exist in part to reduce the transaction costs of achieving consent, but under the best of circumstances they necessarily move less quickly than security requires. A Different Kind of Foreign Policy It is doubtful whether we will ever be able to create truly democratic global institutions, particularly if they aspire, like the United Nations, to be globally representative.


pages: 176 words: 55,819

The Start-Up of You: Adapt to the Future, Invest in Yourself, and Transform Your Career by Reid Hoffman, Ben Casnocha

Airbnb, Andy Kessler, Apollo 13, Benchmark Capital, Black Swan, business intelligence, Cal Newport, Clayton Christensen, commoditize, David Brooks, Donald Trump, Dunbar number, en.wikipedia.org, fear of failure, follow your passion, future of work, game design, independent contractor, information security, Jeff Bezos, job automation, Joi Ito, late fees, lateral thinking, Marc Andreessen, Mark Zuckerberg, Max Levchin, Menlo Park, out of africa, PalmPilot, Paul Graham, paypal mafia, Peter Thiel, public intellectual, recommendation engine, Richard Bolles, risk tolerance, rolodex, Salesforce, shareholder value, Sheryl Sandberg, side project, Silicon Valley, Silicon Valley startup, social web, Steve Jobs, Steve Wozniak, the strength of weak ties, Tony Hsieh, transaction costs, Tyler Cowen

Networks and networking were always associated with job hunting because it was so costly in time and effort to deploy your network that you’d only do it for really important things—like finding a job. But now it’s easy and inexpensive to access the information bouncing around the brains of our connections. With everyone connected, the transaction costs of engaging your network are so low that it makes sense to pull intelligence from your network not only for the big career challenges—like finding a good job—but on a broad range of day-to-day issues. The individuals we’ve met in previous chapters turned to their network on a regular basis as they navigated their careers.


pages: 215 words: 59,188

Seriously Curious: The Facts and Figures That Turn Our World Upside Down by Tom Standage

"World Economic Forum" Davos, agricultural Revolution, augmented reality, autonomous vehicles, Big Tech, blood diamond, business logic, corporate governance, CRISPR, deep learning, Deng Xiaoping, Donald Trump, Dr. Strangelove, driverless car, Elon Musk, failed state, financial independence, gender pay gap, gig economy, Gini coefficient, high net worth, high-speed rail, income inequality, index fund, industrial robot, Internet of things, invisible hand, it's over 9,000, job-hopping, Julian Assange, life extension, Lyft, M-Pesa, Mahatma Gandhi, manufacturing employment, mega-rich, megacity, Minecraft, mobile money, natural language processing, Nelson Mandela, plutocrats, post-truth, price mechanism, private spaceflight, prosperity theology / prosperity gospel / gospel of success, purchasing power parity, ransomware, reshoring, ride hailing / ride sharing, Ronald Coase, self-driving car, Silicon Valley, Snapchat, South China Sea, speech recognition, stem cell, supply-chain management, transaction costs, Uber and Lyft, uber lyft, undersea cable, US Airways Flight 1549, WikiLeaks, zoonotic diseases

It is often cheaper to direct tasks by fiat than to negotiate and enforce separate contracts for every transaction. Such “exchange costs” are low in markets for uniform goods, wrote Coase, but are high in other instances. But his answer only raised further tricky questions. For instance, if the reason firms exist is to reduce transaction costs, why have market transactions at all? To address such questions, economists have developed a theory of contracts, which makes a distinction between spot transactions and business dealings that require longer-term co-operation. Most transactions take place in spot markets. They are well suited to simple, low-value transactions, such as buying a newspaper or taking a taxi.


pages: 207 words: 59,298

The Gig Economy: A Critical Introduction by Jamie Woodcock, Mark Graham

Airbnb, algorithmic management, Amazon Mechanical Turk, autonomous vehicles, barriers to entry, British Empire, business process, business process outsourcing, Californian Ideology, call centre, collective bargaining, commoditize, corporate social responsibility, crowdsourcing, data science, David Graeber, deindustrialization, Didi Chuxing, digital divide, disintermediation, emotional labour, en.wikipedia.org, full employment, future of work, gamification, gender pay gap, gig economy, global value chain, Greyball, independent contractor, informal economy, information asymmetry, inventory management, Jaron Lanier, Jeff Bezos, job automation, knowledge economy, low interest rates, Lyft, mass immigration, means of production, Network effects, new economy, Panopticon Jeremy Bentham, planetary scale, precariat, rent-seeking, RFID, ride hailing / ride sharing, Ronald Reagan, scientific management, self-driving car, sentiment analysis, sharing economy, Silicon Valley, Silicon Valley ideology, TaskRabbit, The Future of Employment, transaction costs, Travis Kalanick, two-sided market, Uber and Lyft, Uber for X, uber lyft, union organizing, women in the workforce, working poor, young professional

Here there are both extended interactions between workers and clients and repeated interactions between those same workers and clients: leading to the danger of disintermediation for platforms. For those reasons, platforms such as Homejoy in the US have struggled. Yet some platforms in this line of work still thrive by reducing transaction costs and offering a mechanism for trust to be built between worker and client. Degree of explicit coordination We then see that geographically tethered platforms tend to exert a high degree of control over their workforce. Most platforms need to control the locations of workers, manage the time it takes for them to carry out their jobs, set the rates that they receive to do that work.


pages: 244 words: 58,247

The Gone Fishin' Portfolio: Get Wise, Get Wealthy...and Get on With Your Life by Alexander Green

Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, backtesting, behavioural economics, borderless world, buy and hold, buy low sell high, cognitive dissonance, diversification, diversified portfolio, Elliott wave, endowment effect, Everybody Ought to Be Rich, financial independence, fixed income, framing effect, hedonic treadmill, high net worth, hindsight bias, impulse control, index fund, interest rate swap, Johann Wolfgang von Goethe, John Bogle, junk bonds, Long Term Capital Management, means of production, mental accounting, Michael Milken, money market fund, Paul Samuelson, Ponzi scheme, risk tolerance, risk-adjusted returns, short selling, statistical model, stocks for the long run, sunk-cost fallacy, transaction costs, Vanguard fund, yield curve

The fund’s non-inflation-indexed holdings may include the following:• Corporate debt obligations • U.S. government and agency bonds • Cash investments • Futures, options, and other derivatives • Restricted or illiquid securities • Mortgage dollar rolls The fund may invest up to 20% of its total assets in bond futures contracts, options, credit swaps, interest rate swaps, and other types of derivatives. These contracts may be used to keep cash on hand to meet shareholder redemptions or other needs while simulating full investment in bonds, to reduce transaction costs, for hedging purposes, or to add value when these instruments are favorably priced. Losses (or gains) involving futures can be substantial—in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for the fund. Similar risks exist for other types of derivatives.


pages: 225 words: 61,388

Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa by Dambisa Moyo

affirmative action, Asian financial crisis, belling the cat, Bob Geldof, Bretton Woods, business cycle, buy and hold, colonial rule, correlation does not imply causation, credit crunch, diversification, diversified portfolio, en.wikipedia.org, European colonialism, failed state, financial engineering, financial innovation, financial intermediation, Hernando de Soto, income inequality, information asymmetry, invisible hand, Live Aid, low interest rates, M-Pesa, market fundamentalism, Mexican peso crisis / tequila crisis, microcredit, moral hazard, Multics, Ponzi scheme, rent-seeking, risk free rate, Ronald Reagan, seminal paper, sovereign wealth fund, The Chicago School, trade liberalization, transaction costs, trickle-down economics, Washington Consensus, Yom Kippur War

., ‘The Asian Flu and Russian Virus: Firm Level Evidence on How Crises are Transmitted Internationally’, NBER Working Paper No. W7807, July 2000 Foster, Mick and Adrian Fozzard, ‘Aid and Public Expenditure: A Guide’, Centre for Aid and Public Expenditure, Overseas Development Institute, Working Paper 141, October 2000 Freund, C. and N. Spatafora, ‘Remittances: Transaction Costs, Determinants, and Informal Flows’, The World Bank Policy Research Working Paper WPS3704, 2005 Genesis, ‘Evolving Opportunities and Constraints in Remittances: A View from SADC’, presentation at the 2nd International Conference on Migrant Remittances, London, November 2006 Gimbel, John, The Origins of the Marshall Plan, Stanford: Stanford University Press, 1976 Giridharadas, Anand, ‘India hopes to wean citizens from gold’, International Herald Tribune, 16 March 2005, at http://www.iht.com/articles/2005/03/15/news/gold.php.


The Orbital Perspective: Lessons in Seeing the Big Picture From a Journey of 71 Million Miles by Astronaut Ron Garan, Muhammad Yunus

Airbnb, Apollo 13, barriers to entry, book scanning, Buckminster Fuller, carbon credits, clean water, corporate social responsibility, crowdsourcing, fake it until you make it, global village, Google Earth, Indoor air pollution, jimmy wales, low earth orbit, optical character recognition, overview effect, private spaceflight, ride hailing / ride sharing, shareholder value, Silicon Valley, Skype, smart transportation, Stephen Hawking, transaction costs, Turing test, Uber for X, web of trust

Co-Laborers After we have set aside the limited framework that may represent the largest impediment to mutual understanding, we have set the stage to form relationships and undertake global collaboration. Effective collaboration isn’t easy. Creating and maintaining relationships takes work, collaboration can come at the expense of building new capabilities within existing organizations, and partnerships can incur high transaction costs. There’s also much con- T h e K e y I s “ W e ”â•…  85 fusion about what collaboration means, and a tendency to reduce it to a buzzword. Nonetheless, the first step is to filter global collaboration through the lens of the orbital perspective, to begin to view our Earth as one community, as a complex, living system, rather than simply as an arena for self-interested competition.


Phil Thornton by The Great Economists Ten Economists whose thinking changed the way we live-FT Publishing International (2014)

Alan Greenspan, availability heuristic, behavioural economics, Berlin Wall, bitcoin, Bretton Woods, British Empire, business cycle, business process, call centre, capital controls, Cass Sunstein, choice architecture, cognitive bias, collapse of Lehman Brothers, Corn Laws, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, double helix, endogenous growth, endowment effect, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, fiat currency, financial deregulation, fixed income, Ford Model T, full employment, hindsight bias, income inequality, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Kenneth Arrow, Kenneth Rogoff, Kickstarter, liquidity trap, loss aversion, mass immigration, means of production, mental accounting, Myron Scholes, paradox of thrift, Pareto efficiency, Paul Samuelson, Post-Keynesian economics, price mechanism, pushing on a string, quantitative easing, Richard Thaler, road to serfdom, Ronald Coase, Ronald Reagan, school vouchers, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Toyota Production System, trade route, transaction costs, unorthodox policies, Vilfredo Pareto, women in the workforce

While these concepts are normally the domain of economists, all have become part of the language not only of business people and analysts but also, particularly in terms of supply and demand, of the man and woman in the street. Finally, the whole discipline of industrial economics has its roots in Marshall’s thinking on industrial districts, external economies and the firm as an organisation rather than simply an arena for reducing transaction costs. The areas of industrial dynamics, which looks at the growth of capabilities within an industry rather than just a firm, and economic geography, which looks at how economic activity is organised, that feed into today’s government business policies, are in part a reflection of the way that Marshall saw the world.


pages: 276 words: 59,165

Impact: Reshaping Capitalism to Drive Real Change by Ronald Cohen

"World Economic Forum" Davos, asset allocation, benefit corporation, biodiversity loss, carbon footprint, carbon tax, circular economy, commoditize, corporate governance, corporate social responsibility, crowdsourcing, decarbonisation, diversification, driverless car, Elon Musk, family office, financial independence, financial innovation, full employment, high net worth, housing crisis, impact investing, income inequality, invisible hand, Kickstarter, lockdown, Mark Zuckerberg, microbiome, minimum viable product, moral hazard, performance metric, risk-adjusted returns, risk/return, Silicon Valley, sovereign wealth fund, Steve Ballmer, Steve Jobs, tech worker, TED Talk, The Wealth of Nations by Adam Smith, transaction costs, zero-sum game

So far, most SIBs are quite small: the median number of beneficiaries of each of them is around 600, with a median upfront capital commitment of only around £2 million ($2.7 million).25 The largest SIB in the world, which supports teenage mothers in South Carolina, is still only $30 million. SIBs are more complicated to design and implement than grants, as they involve three stakeholders: the outcome payer, the delivery organization and the investor. This is currently leading to higher transaction costs relative to capital deployed, but the ease and speed of implementation are improving all the time. As experience grows, terms and outcome metrics will standardize, and both professional outcome funds and SIB/DIB investment funds will enter the market and allow impact bonds to scale. SIBs and DIBs should ultimately be judged according to the cost per successful outcome and the number of successful outcomes they can achieve, both of which I expect to be significantly more favorable than can be achieved through a traditional grant.


Debtor Nation: The History of America in Red Ink (Politics and Society in Modern America) by Louis Hyman

Alan Greenspan, asset-backed security, bank run, barriers to entry, Bretton Woods, business cycle, business logic, card file, central bank independence, computer age, corporate governance, credit crunch, declining real wages, deindustrialization, diversified portfolio, financial independence, financial innovation, fixed income, Gini coefficient, Glass-Steagall Act, Home mortgage interest deduction, housing crisis, income inequality, invisible hand, It's morning again in America, late fees, London Interbank Offered Rate, low interest rates, market fundamentalism, means of production, mortgage debt, mortgage tax deduction, p-value, pattern recognition, post-Fordism, profit maximization, profit motive, risk/return, Ronald Reagan, Savings and loan crisis, Silicon Valley, statistical model, Tax Reform Act of 1986, technological determinism, technology bubble, the built environment, transaction costs, union organizing, white flight, women in the workforce, working poor, zero-sum game

Successful applicants received a Charga-Plate for identify.58 Using the ChargaPlate, the bank could exploit all the cost savings associated with centralized accounting, billing, and collections.59 Daily, stores would send the bank a slip with the charges and the bank would, that same day, credit the store’s account, even before the customer paid the bill. The bank then used a “National Class 31 (18) cycle billing machine,” like the department stores used, to send notices to the customers.60 Centralized, mechanized credit, pioneered by department stores using Charga-Plate in the 1940s, made the per transaction cost of the Charg-It system much lower and more reliable. Descriptions of the system explicitly stated that the “mechanics of the system parallel[ed] the system used in any department store.”61 The lax collection policies and accounting of small shops would be replaced by professional, mechanized collection systems of the bank.

Commercial paper markets were deep, allowing the commercial paper issues to be easily resold, which gave investors the liquidity that they prized. Without that liquidity, card bonds commanded a premium. Banks could move large or small amounts of receivables off their books to the subsidiary, which could flexibly issue paper against the receivables. Securitization, with a shallow market and higher transaction costs, still posed obstacles. But that would change quickly, as a recession collided with changes in banking regulation to make securitization come to the fore of consumer debt financing. While in the late 1980s securitization offered a clever maneuver to find additional funds, by the early 1990s securitization became necessary for banks’ profitability if banks were to comply with the new regulations resulting from the Basel Accord.154 Securitization was not required by Basel, but to comply and to profit, securitization was necessary.


pages: 598 words: 169,194

Bernie Madoff, the Wizard of Lies: Inside the Infamous $65 Billion Swindle by Diana B. Henriques

accounting loophole / creative accounting, airport security, Albert Einstein, AOL-Time Warner, banking crisis, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, break the buck, British Empire, buy and hold, centralized clearinghouse, collapse of Lehman Brothers, computerized trading, corporate raider, diversified portfolio, Donald Trump, dumpster diving, Edward Thorp, financial deregulation, financial engineering, financial thriller, fixed income, forensic accounting, Gordon Gekko, index fund, locking in a profit, low interest rates, mail merge, merger arbitrage, messenger bag, money market fund, payment for order flow, plutocrats, Ponzi scheme, Potemkin village, proprietary trading, random walk, Renaissance Technologies, riskless arbitrage, Ronald Reagan, Savings and loan crisis, short selling, short squeeze, Small Order Execution System, source of truth, sovereign wealth fund, too big to fail, transaction costs, traveling salesman

But he was, and some of the biggest names on the Street would send him small arbitrage orders to execute for their customers, he said. “They liked to send me the business,” he recalled. “They thought I was a nice Jewish boy.” Madoff was well positioned to earn honest arbitrage profits. Because transaction costs would wipe out most arbitrage profits, which tended to be paper-thin, arbitrage trading was usually pursued only by market insiders who could trade at far less cost than retail customers—market insiders such as Madoff. Speed mattered in other ways, too. If it took too long to complete the paperwork involved in converting a bond into its equivalent shares of stock, the opportunity for a locked-in profit could vanish.

Those robust returns, which did not include cash dividends, were challenged in Paul F. Jessup and Roger B. Upson, Returns in the Over-the-Counter Stock Markets (Minneapolis: University of Minnesota Press, 1973), which argued that the total return on OTC stocks did not significantly outperform New York Stock Exchange returns after adjusting for transaction costs and including cash dividends. Jessup and Upson’s findings were too arcane to have shaped public opinion about the OTC market, however, and their methodology was occasionally quite odd. For example, for some reason they decided to exclude banks and insurance companies from their sample of OTC stocks, although virtually all such companies traded only in the OTC market and virtually all of them paid cash dividends.


pages: 923 words: 163,556

Advanced Stochastic Models, Risk Assessment, and Portfolio Optimization: The Ideal Risk, Uncertainty, and Performance Measures by Frank J. Fabozzi

algorithmic trading, Benoit Mandelbrot, Black Monday: stock market crash in 1987, capital asset pricing model, collateralized debt obligation, correlation coefficient, distributed generation, diversified portfolio, financial engineering, fixed income, global macro, index fund, junk bonds, Louis Bachelier, Myron Scholes, p-value, power law, quantitative trading / quantitative finance, random walk, risk free rate, risk-adjusted returns, short selling, stochastic volatility, subprime mortgage crisis, Thomas Bayes, transaction costs, value at risk

In 2006, more than half of the total traded FX volume was executed through electronic trading.171 Some advantages that ECNs provide to market participants are increased speed of trade execution, lower transaction costs, access to a greater number and variety of market players, opportunity for clients to observe the whole order book, etc. The growth of algorithmic trading strategies is related to the expansion of electronic trading. An algorithmic trading strategy, in general, relies on a computer program to execute trades based on a set of rules determined in advance, in order to minimize transaction costs. Depending on the complexity of those rules, such computer programs are capable of firing and executing multiple trade orders per second.


Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-border payments, currency peg, currency risk, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Glass-Steagall Act, Herman Kahn, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Japanese asset price bubble, joint-stock company, junk bonds, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Mary Meeker, Michael Milken, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, Suez canal 1869, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

Previously the United States bought silver from Mexico which was then shipped to China to finance the US trade deficit; then the silver was shipped to Britain to finance China’s trade deficit. The institutional innovation was that American merchants sent bills of exchange that specified payment in the British pound for China’s imports; the Chinese then shipped these bills to Britain to finance their trade deficit. The transactions costs involved in making cross-border payments using bills of exchange were much smaller than those that involved the shipment of silver. The result of this innovation was that the silver stayed in the United States so that the US money supply did not decline.2 The global boom of the 1850s followed from the combination of new gold discoveries, the formation of new banks in Britain, France, Germany, and the United States, the establishment of clearing-houses by the banks in New York and in Philadelphia and the expansion of the London clearing-house.

Amazon developed the technology for the sale of books and electronic products. Peapod allowed individuals to shop for most of their groceries at home. Millions of accounts were established at the discount broker Charles Schwab and at its competitors. Firms were established that enabled investors to trade stocks using the computer at extremely low transaction costs. ‘Day traders’ emerged: individuals who quit their regular jobs to trade stocks either from their computers at home or from desks in specially designed shops. Priceline enabled airlines and hotels to sell seats and rooms at sharply discounted prices. Entrepreneurs were able to get the cash to develop these ideas from venture capitalists (VCs) who provided seed money.


pages: 272 words: 71,487

Getting Better: Why Global Development Is Succeeding--And How We Can Improve the World Even More by Charles Kenny

agricultural Revolution, Berlin Wall, British Empire, Charles Lindbergh, clean water, demographic transition, double entry bookkeeping, Edward Jenner, experimental subject, Fall of the Berlin Wall, germ theory of disease, Golden arches theory, Great Leap Forward, Gunnar Myrdal, income inequality, income per capita, Indoor air pollution, inventory management, Kickstarter, Milgram experiment, off grid, open borders, public intellectual, purchasing power parity, randomized controlled trial, Robert Solow, seminal paper, structural adjustment programs, The Wealth of Nations by Adam Smith, total factor productivity, Toyota Production System, trade liberalization, transaction costs, Tyler Cowen, very high income, Washington Consensus, X Prize

“The Colonial Origins of Comparative Development: An Empirical Investigation.” American Economic Review 91, no. 5. Acemoglu, D., and J. Robinson. 2006. The Economic Origins of Dictatorship and Democracy. Cambridge: Cambridge University Press. Acharya, A., A. Fuzzo de Lima, and M. Moore. 2006. “Proliferation and Fragmentation: Transactions Costs and the Value of Aid.” Journal of Development Studies 42, no. 1. Aisbett, E. 2005. “Why Are the Critics So Convinced That Globalization Is Bad for the Poor?” NBER Working Paper 11066. Andersson, N., C. Whitaker, and A. Swaminathen. 1998. Afghanistan: The 1997 National Mine Awareness Evaluation.


pages: 265 words: 70,788

The Wide Lens: What Successful Innovators See That Others Miss by Ron Adner

ASML, barriers to entry, Bear Stearns, Blue Ocean Strategy, book value, call centre, Clayton Christensen, Ford Model T, inventory management, iterative process, Jeff Bezos, Lean Startup, M-Pesa, minimum viable product, mobile money, new economy, RAND corporation, RFID, smart grid, smart meter, SoftBank, spectrum auction, Steve Ballmer, Steve Jobs, Steven Levy, supply-chain management, Tim Cook: Apple, transaction costs, vertical integration

The proposition was inspired by the fact that, while 81 percent of Kenyans did not have access to a bank account, 27 percent of its citizens owned mobile phones, and an additional 27 percent had access to one—and those numbers were rapidly increasing. (By the end of 2010, 63 percent of Kenyans were mobile phone subscribers.) M-PESA sought to deliver a basic banking function to Kenya’s huge unbanked population, facilitating commerce and entrepreneurship by increasing access to capital while reducing transaction costs—and to do it profitably. In 2005, M-PESA (M is for “mobile” and pesa is Swahili for “cash”) launched a pilot test of its proposition by partnering with a local microfinance institution, Faulu Kenya. Faulu Kenya, which distributed small loans to groups of small business borrowers who would then assume a collective responsibility to pay back the money, provided the customer base for the pilot program while M-PESA provided the technology and delivered the mobile services.


pages: 288 words: 64,771

The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality by Brink Lindsey

Airbnb, Asian financial crisis, bank run, barriers to entry, Bernie Sanders, Build a better mousetrap, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, Cass Sunstein, collective bargaining, creative destruction, Credit Default Swap, crony capitalism, Daniel Kahneman / Amos Tversky, David Brooks, diversified portfolio, Donald Trump, Edward Glaeser, endogenous growth, experimental economics, experimental subject, facts on the ground, financial engineering, financial innovation, financial intermediation, financial repression, hiring and firing, Home mortgage interest deduction, housing crisis, income inequality, informal economy, information asymmetry, intangible asset, inventory management, invisible hand, Jones Act, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, knowledge worker, labor-force participation, Long Term Capital Management, low skilled workers, Lyft, Mark Zuckerberg, market fundamentalism, mass immigration, mass incarceration, medical malpractice, Menlo Park, moral hazard, mortgage debt, Network effects, patent troll, plutocrats, principal–agent problem, regulatory arbitrage, rent control, rent-seeking, ride hailing / ride sharing, Robert Metcalfe, Robert Solow, Ronald Reagan, Savings and loan crisis, Silicon Valley, Silicon Valley ideology, smart cities, software patent, subscription business, tail risk, tech bro, too big to fail, total factor productivity, trade liberalization, tragedy of the anticommons, Tragedy of the Commons, transaction costs, tulip mania, Tyler Cowen, Uber and Lyft, uber lyft, Washington Consensus, white picket fence, winner-take-all economy, women in the workforce

Taylor, “Leveraged Bubbles,” National Bureau of Economic Research Working Paper no. 21486, August 2015, http://www.nber.org/papers/w21486.pdf. 18.Quoted in Anat Admati and Martin Hellwig, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It (Princeton, NJ: Princeton University Press, 2013), p. 6. 19.The Modigliani-Miller theorem also assumes no transaction costs and no market inefficiencies like asymmetric information. 20.John H. Cochrane, “Equity-Financed Banking and a Run-Free Financial System,” 2016, https://faculty.chicagobooth.edu/john.cochrane/research/papers/run-free_talk_mn_2016.pdf. 21.Gregory Phelan, “Financial Intermediation, Leverage, and Macroeconomic Instability,” unpublished working paper, January 20, 2016, http://papers.ssrn.com/sol3/papers.cfm?


pages: 233 words: 66,446

Bitcoin: The Future of Money? by Dominic Frisby

3D printing, Alan Greenspan, altcoin, bank run, banking crisis, banks create money, barriers to entry, bitcoin, Bitcoin Ponzi scheme, blockchain, capital controls, Chelsea Manning, cloud computing, computer age, cryptocurrency, disintermediation, Dogecoin, Ethereum, ethereum blockchain, fiat currency, financial engineering, fixed income, friendly fire, game design, Hacker News, hype cycle, Isaac Newton, John Gilmore, Julian Assange, land value tax, litecoin, low interest rates, M-Pesa, mobile money, Money creation, money: store of value / unit of account / medium of exchange, Occupy movement, Peter Thiel, Ponzi scheme, prediction markets, price stability, printed gun, QR code, quantitative easing, railway mania, Ronald Reagan, Ross Ulbricht, Satoshi Nakamoto, Silicon Valley, Skype, slashdot, smart contracts, Snapchat, Stephen Hawking, Steve Jobs, Ted Nelson, too big to fail, transaction costs, Turing complete, Twitter Arab Spring, Virgin Galactic, Vitalik Buterin, War on Poverty, web application, WikiLeaks

The Bitcoin protocol offers enormous savings for people who wish to do business with each other using it – particularly at the smaller end of the business scale. These savings and efficiencies mean that many exchanges that would not be possible under existing payments systems can now happen. It is by exchange that people prosper and progress. I asked Nick Szabo if Bitcoin can change the world. ‘Yes it can,’ he said. ‘By lowering transaction costs for a wide variety of people that are shut out of the current financial system.’ Goldman Sachs IT analyst Roman Leal has made some rough calculations as to the savings that Bitcoin could have made possible globally in electronic payment in 2013. There’s no proving the block chain could yet manage such levels of volume, and Leal makes the point that regulatory and operating costs for Bitcoin could quite easily rise, while the competition it brings to existing payment services means these costs will probably fall.


pages: 265 words: 71,143

Empires of the Weak: The Real Story of European Expansion and the Creation of the New World Order by Jason Sharman

British Empire, cognitive dissonance, colonial rule, corporate social responsibility, death of newspapers, European colonialism, joint-stock company, joint-stock limited liability company, land tenure, offshore financial centre, passive investing, Peace of Westphalia, performance metric, profit maximization, Scramble for Africa, South China Sea, spice trade, trade route, transaction costs

Patrons, Clients, and Empire: Chieftaincy and Over-Rule in Asia, Africa, and the Pacific. Oxford: Oxford University Press. North, Douglass C. 1990a. Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press. North, Douglass C. 1990b. “Institutions, Transaction Costs, and the Rise of Merchant Empires.” In The Political Economy of Merchant Empires: State Power and World Trade 1350–1750, edited by James D. Tracy, 22–40. Cambridge: Cambridge University Press. North, Douglass C., and Robert Paul Thomas. 1973. The Rise of the Western World: A New Economic History.


pages: 430 words: 68,225

Blockchain Basics: A Non-Technical Introduction in 25 Steps by Daniel Drescher

bitcoin, blockchain, business process, central bank independence, collaborative editing, cryptocurrency, disintermediation, disruptive innovation, distributed ledger, Ethereum, ethereum blockchain, fiat currency, job automation, linked data, machine readable, peer-to-peer, place-making, Satoshi Nakamoto, smart contracts, transaction costs

Stanford Institute for Economic Policy Research Working Paper (2004): 3–18; Leyshon, Andrew. Scary monsters? Software formats, peer-to-peer networks, and the spectre of the gift. Environment and Planning D: Society and Space 21.5 (2003): 533–558. 22 Step 3 | Recognizing the Potential processing time and incurs high transactions costs. In a peer-to-peer system, the same transfer would be much simpler and it would take less time and costs since it could be processed as what it is: a transfer of bits and bytes between two peers or nodes, respectively. The advantage of peer-to-peer systems over centralized systems is that direct interactions occur between contractual partners instead of indirect interac- tions through a middleman, hence, there is less processing time and lower costs.


pages: 228 words: 68,315

The Complete Guide to Property Investment: How to Survive & Thrive in the New World of Buy-To-Let by Rob Dix

buy and hold, diversification, diversified portfolio, driverless car, Firefox, low interest rates, Mr. Money Mustache, risk tolerance, TaskRabbit, transaction costs, young professional

Because we’re professionals, we run the project like a military operation and finish on time and on budget, finally achieving the anticipated sale price of £140,000. With the property sold, it’s time to calculate the profit. The difference between the purchase price (£90,000) and sale price (£140,000) is £50,000 – from which we need to deduct: Refurbishment: £18,000 Stamp duty: £2,700 Bridging interest and fees: £6,300 Legal fees and other transaction costs (for both purchase and sale): £3,000 That leaves a profit of £20,000. I said I was going to leave tax aside for these models, but it’s more straightforward to calculate with property trading: if the property was bought within a limited company (generally a good idea for buy-to-sell projects, as we’ll see later), we’ll pay corporation tax (currently 20%) on the profits.


pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

Alan Greenspan, Andrei Shleifer, banking crisis, Bear Stearns, Bernie Madoff, business cycle, collateralized debt obligation, collective bargaining, compensation consultant, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Glass-Steagall Act, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, low interest rates, market bubble, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, oil shock, Ponzi scheme, price stability, profit maximization, proprietary trading, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, savings glut, shareholder value, short selling, statistical model, subprime mortgage crisis, too big to fail, transaction costs, very high income

So the terms of the security itself or some notion of fiduciary duty may oblige the servicer to obtain the unanimous consent of the owners of the different tiers (which would require compensating the owners of the lower tiers—a requirement of unanimity empowers holdouts) in order to be entitled to modify one of these mortgages in the pool of mortgages that backs the security, and this will increase the transaction costs of modification. An economic-legal team at Columbia University has proposed that to facilitate modification and thus reduce the foreclosure rate, Congress should pass a law that would allow the mortgage servicer to modify a mortgage without the consent of all the owners but would provide government compensation for the lower-tier investors.


pages: 204 words: 67,922

Elsewhere, U.S.A: How We Got From the Company Man, Family Dinners, and the Affluent Society to the Home Office, BlackBerry Moms,and Economic Anxiety by Dalton Conley

Alan Greenspan, assortative mating, call centre, clean water, commoditize, company town, dematerialisation, demographic transition, Edward Glaeser, extreme commuting, feminist movement, financial independence, Firefox, Frank Levy and Richard Murnane: The New Division of Labor, Home mortgage interest deduction, income inequality, informal economy, insecure affluence, It's morning again in America, Jane Jacobs, Joan Didion, John Maynard Keynes: Economic Possibilities for our Grandchildren, knowledge economy, knowledge worker, labor-force participation, late capitalism, low interest rates, low skilled workers, manufacturing employment, mass immigration, McMansion, Michael Shellenberger, mortgage tax deduction, new economy, off grid, oil shock, PageRank, Paradox of Choice, Ponzi scheme, positional goods, post-industrial society, post-materialism, principal–agent problem, recommendation engine, Richard Florida, rolodex, Ronald Reagan, Silicon Valley, Skype, statistical model, Ted Nordhaus, The Death and Life of Great American Cities, The Great Moderation, the long tail, the strength of weak ties, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tragedy of the Commons, transaction costs, women in the workforce, Yom Kippur War

What’s more, pricing the formerly unpriced brings many once shadowy relationships out in the open. Where prices are not explicit, there lurks the potential for exploitation. Think about hidden fees in credit cards. The more explicit such costs are, the better informed the consumer is, and the more we can make good choices for ourselves. This would all be fine and dandy if there were no transaction costs—that is, costs inherent in just enforcing such fairness and efficiency. And it would be okay if it stopped at lousy airline food and other “stuff.” But pricing the formerly priceless has spread to every nook and cranny of our lives, thereby eroding other sorts of economies. When we move to price marriage (through divorce settlements or prenups) or physical comfort (by paying masseuses) or even a friendly ear (through psychotherapy), we destroy the desire, need, and ability to exchange such “priceless” things through nonmarket channels, and we thereby add to our sense of alienation from one another.


pages: 226 words: 65,516

Kings of Crypto: One Startup's Quest to Take Cryptocurrency Out of Silicon Valley and Onto Wall Street by Jeff John Roberts

4chan, Airbnb, Alan Greenspan, altcoin, Apple II, Bernie Sanders, Bertram Gilfoyle, Big Tech, bitcoin, blockchain, Blythe Masters, Bonfire of the Vanities, Burning Man, buttonwood tree, cloud computing, coronavirus, COVID-19, creative destruction, Credit Default Swap, cryptocurrency, democratizing finance, Dogecoin, Donald Trump, double helix, driverless car, Elliott wave, Elon Musk, Ethereum, ethereum blockchain, family office, financial engineering, Flash crash, forensic accounting, hacker house, Hacker News, hockey-stick growth, index fund, information security, initial coin offering, Jeff Bezos, John Gilmore, Joseph Schumpeter, litecoin, Marc Andreessen, Mark Zuckerberg, Masayoshi Son, Menlo Park, move fast and break things, Multics, Network effects, offshore financial centre, open borders, Paul Graham, Peter Thiel, Ponzi scheme, prediction markets, proprietary trading, radical decentralization, ransomware, regulatory arbitrage, reserve currency, ride hailing / ride sharing, Robert Shiller, rolodex, Ross Ulbricht, Sam Altman, Sand Hill Road, Satoshi Nakamoto, sharing economy, side hustle, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, smart contracts, SoftBank, software is eating the world, Startup school, Steve Ballmer, Steve Jobs, Steve Wozniak, transaction costs, Vitalik Buterin, WeWork, work culture , Y Combinator, zero-sum game

Officials in the state of New York piled on, telling the New York Times that—contrary to Fred’s claims—the company had been operating without a license. Worse was soon to come. Fred had created a PowerPoint deck for investors that highlighted four benefits of bitcoin, including the obvious ones like low transaction costs and a reduced risk of fraud. But the first bullet on that list explained that bitcoin was “immune to country-specific sanctions,” citing Russia as an example. This may have been true—governments in many cases could not stop the flow of bitcoin—but advertising this on a company slide amounted to saying, “Our product can subvert US banking sanctions.”


pages: 199 words: 64,272

Money: The True Story of a Made-Up Thing by Jacob Goldstein

Alan Greenspan, Antoine Gombaud: Chevalier de Méré, back-to-the-land, bank run, banks create money, Bear Stearns, Berlin Wall, Bernie Sanders, bitcoin, blockchain, break the buck, card file, central bank independence, collective bargaining, coronavirus, COVID-19, cryptocurrency, David Graeber, Edmond Halley, Fall of the Berlin Wall, fiat currency, financial innovation, Fractional reserve banking, full employment, German hyperinflation, Glass-Steagall Act, index card, invention of movable type, invention of writing, Isaac Newton, life extension, M-Pesa, Marc Andreessen, Martin Wolf, Menlo Park, Mikhail Gorbachev, mobile money, Modern Monetary Theory, money market fund, probability theory / Blaise Pascal / Pierre de Fermat, Ronald Reagan, Ross Ulbricht, Satoshi Nakamoto, Second Machine Age, side hustle, Silicon Valley, software is eating the world, Steven Levy, the new new thing, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, transaction costs

The Washington Post called it a “love fest.” What was going on? Silicon Valley had started to seize on bitcoin as the next big thing. There was less bitcoiny talk about ending the tyranny of democracy and more about offering lower transaction fees for online purchases. “The appeal of zero transaction costs is really strong and extremely disruptive for a massive industry, the payments industry,” a venture capitalist told the Wall Street Journal in May 2013. (“Extremely disruptive” and “massive industry” are venture-capital speak for “there are boatloads of money to be made here.”) This view lacked the world-historical punch of the crypto anarchist manifesto, but it was very exciting to rich people seeking to become more rich.


pages: 231 words: 64,734

Safe Haven: Investing for Financial Storms by Mark Spitznagel

Albert Einstein, Antoine Gombaud: Chevalier de Méré, asset allocation, behavioural economics, bitcoin, Black Swan, blockchain, book value, Brownian motion, Buckminster Fuller, cognitive dissonance, commodity trading advisor, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, delayed gratification, diversification, diversified portfolio, Edward Thorp, fiat currency, financial engineering, Fractional reserve banking, global macro, Henri Poincaré, hindsight bias, Long Term Capital Management, Mark Spitznagel, Paul Samuelson, phenotype, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, random walk, rent-seeking, Richard Feynman, risk free rate, risk-adjusted returns, Schrödinger's Cat, Sharpe ratio, spice trade, Steve Jobs, tail risk, the scientific method, transaction costs, value at risk, yield curve, zero-sum game

Both Mark and I were pit traders before doing quantitative stuff. While our work has been based on detecting mathematical flaws in existing finance models, our edge has been linked to having been in the pit and understanding the centrality of calibration, fine‐tuning, execution, orderflow, and transaction costs. Remarkably, people who have skin in the game, that is, self‐made successful people with their own money at risk (say a retired textile importer or a former shopping center developer), get it right away. On the other hand the neither‐this‐nor‐that MBA in finance with year‐end evaluation filed by the personnel department needs a helping hand—they can neither connect to the intuitions nor to the mathematics.


pages: 232 words: 70,835

A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan by Ben Carlson

Albert Einstein, asset allocation, backtesting, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, book value, business cycle, buy and hold, buy low sell high, commodity super cycle, corporate governance, delayed gratification, discounted cash flows, diversification, diversified portfolio, do what you love, endowment effect, family office, financial independence, fixed income, Gordon Gekko, high net worth, index fund, John Bogle, junk bonds, loss aversion, market bubble, medical residency, Occam's razor, paper trading, passive investing, Ponzi scheme, price anchoring, Reminiscences of a Stock Operator, Richard Thaler, risk tolerance, Robert Shiller, robo advisor, South Sea Bubble, sovereign wealth fund, stocks for the long run, technology bubble, Ted Nelson, transaction costs, Vanguard fund, Vilfredo Pareto

Table 3.1 Annual Returns by Decade Stocks Bonds 1930s –0.9% 4.0% 1940s 8.5% 2.5% 1950s 19.5% 0.8% 1960s 7.7% 2.4% 1970s 5.9% 5.4% 1980s 17.3% 12.0% 1990s 18.1% 7.4% 2000s –1.0% 6.3% 2010s 15.7% 4.2% Source: Aswath Damodaran. You also have to remember that these long-term performance numbers for stocks don't include any fees, taxes, or transaction costs. They're simple historical performance numbers. But they also aren't 9.6 percent per year because someone traded in and out of them when they felt like it. They aren't 9.6 percent because an investor side-stepped the latest market crash. They are 9.6 percent including the really good times and the really bad times—wars, recessions, bubbles, crashes, and everything in-between.


pages: 295 words: 66,912

Walled Culture: How Big Content Uses Technology and the Law to Lock Down Culture and Keep Creators Poor by Glyn Moody

Aaron Swartz, Big Tech, bioinformatics, Brewster Kahle, connected car, COVID-19, disinformation, Donald Knuth, en.wikipedia.org, full text search, intangible asset, Internet Archive, Internet of things, jimmy wales, Kevin Kelly, Kickstarter, non-fungible token, Open Library, optical character recognition, p-value, peer-to-peer, place-making, quantitative trading / quantitative finance, rent-seeking, text mining, the market place, TikTok, transaction costs, WikiLeaks

A report on the topic by the World Intellectual Property Organization (WIPO) in 2002 explained: “In the framework of a collective management system, owners of rights authorize collective management organizations to monitor the use of their works, negotiate with prospective users, give them licenses against appropriate remuneration on the basis of a tariff system and under appropriate conditions, collect such remuneration, and distribute it among the owners of rights … although a collective management system serves primarily the interests of owners of copyright and related rights, such a system also offers great advantages to users who, thus, may have access to the works they need in a simple manner from one single source, and—since collective management simplifies negotiations with users, monitoring uses and collecting fees—at low transaction costs.”577 Yet the history of such collective right organisations (CROs)578 is not a happy one. The nature and scale of the problem is indicated by two reports published by Infojustice, an initiative by the American University Washington College of Law, in 2013 and 2018. The episodes in the first report ‘reveal a long history of corruption, mismanagement, confiscation of funds, and lack of transparency [by CROs] that has deprived artists of the revenues they earned’.579 Countries where CROs have been engaged in one or more of these activities in the 21st century include Australia, the Bahamas, Brazil, Canada, China, Columbia, Ghana, Italy, Kenya, the Netherlands, Nigeria, Romania, Senegal, South Africa, Spain, Sweden, Russia and the United States.


Termites of the State: Why Complexity Leads to Inequality by Vito Tanzi

accounting loophole / creative accounting, Affordable Care Act / Obamacare, Alan Greenspan, Andrei Shleifer, Andrew Keen, Asian financial crisis, asset allocation, barriers to entry, basic income, behavioural economics, bitcoin, Black Swan, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, clean water, crony capitalism, David Graeber, David Ricardo: comparative advantage, deindustrialization, Donald Trump, Double Irish / Dutch Sandwich, experimental economics, financial engineering, financial repression, full employment, George Akerlof, Gini coefficient, Gunnar Myrdal, high net worth, hiring and firing, illegal immigration, income inequality, indoor plumbing, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jean Tirole, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labor-force participation, libertarian paternalism, Long Term Capital Management, low interest rates, market fundamentalism, means of production, military-industrial complex, moral hazard, Naomi Klein, New Urbanism, obamacare, offshore financial centre, open economy, Pareto efficiency, Paul Samuelson, Phillips curve, price stability, principal–agent problem, profit maximization, pushing on a string, quantitative easing, rent control, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Second Machine Age, secular stagnation, self-driving car, Silicon Valley, Simon Kuznets, synthetic biology, The Chicago School, The Great Moderation, The Market for Lemons, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, Tyler Cowen: Great Stagnation, universal basic income, unorthodox policies, urban planning, very high income, Vilfredo Pareto, War on Poverty, Washington Consensus, women in the workforce

This is often the case with some environmental problems, including the contamination of rivers, the diversion of the water of rivers, the acidification of oceans, the excessive exploitation of fishing in the oceans, global warming, or even the exploitation of loopholes in international aspects of taxation (see Castellucci, 2014; Sandmo, 2003; Tanzi, 2016a). Often, the transaction costs are high, especially when lawyers need to get involved. Because of growing economic activity and population density, and also because of the globalization of economic activities, multinational or global externalities have become common in recent decades, although they have always existed. The “discovery” of America by Columbus generated enormous global externalities (both positive and negative) in the years that followed (see Mann, 2011).

They would also make the constitutions potential tools of powerful governments to manipulate majorities, or of current majorities to reduce the rights of minorities, as the late James Buchanan stressed in some of his works, and as Mussolini undertook in Italy. Current developments in Poland and in Venezuela point to this danger. The economic laws and the rules that exist in a country must aim at facilitating economic relations and at reducing the transaction costs that legitimate exchanges involve. They must keep low the cost of legitimately dealing with other individuals and also of dealing with the government, making these costs affordable to most. It can be argued that in some areas the costs of dealing with the government have increased considerably over the years, giving as a result more power to those who have higher means to cover those costs (see Rakoff, 2016).


pages: 602 words: 177,874

Thank You for Being Late: An Optimist's Guide to Thriving in the Age of Accelerations by Thomas L. Friedman

3D printing, additive manufacturing, affirmative action, Airbnb, AltaVista, Amazon Web Services, Anthropocene, Apple Newton, autonomous vehicles, Ayatollah Khomeini, barriers to entry, Berlin Wall, Bernie Sanders, Big Tech, biodiversity loss, bitcoin, blockchain, Bob Noyce, business cycle, business process, call centre, carbon tax, centre right, Chris Wanstrath, Clayton Christensen, clean tech, clean water, cloud computing, cognitive load, corporate social responsibility, creative destruction, CRISPR, crowdsourcing, data science, David Brooks, deep learning, demand response, demographic dividend, demographic transition, Deng Xiaoping, digital divide, disinformation, Donald Trump, dual-use technology, end-to-end encryption, Erik Brynjolfsson, fail fast, failed state, Fairchild Semiconductor, Fall of the Berlin Wall, Ferguson, Missouri, first square of the chessboard / second half of the chessboard, Flash crash, fulfillment center, game design, gig economy, global pandemic, global supply chain, Great Leap Forward, illegal immigration, immigration reform, income inequality, indoor plumbing, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invention of the steam engine, inventory management, Irwin Jacobs: Qualcomm, Jeff Bezos, job automation, John Markoff, John von Neumann, Khan Academy, Kickstarter, knowledge economy, knowledge worker, land tenure, linear programming, Live Aid, low interest rates, low skilled workers, Lyft, Marc Andreessen, Mark Zuckerberg, mass immigration, Maui Hawaii, Menlo Park, Mikhail Gorbachev, mutually assured destruction, Neil Armstrong, Nelson Mandela, ocean acidification, PalmPilot, pattern recognition, planetary scale, power law, pull request, Ralph Waldo Emerson, ransomware, Ray Kurzweil, Richard Florida, ride hailing / ride sharing, Robert Gordon, Ronald Reagan, Salesforce, Second Machine Age, self-driving car, shareholder value, sharing economy, Silicon Valley, Skype, smart cities, Solyndra, South China Sea, Steve Jobs, subscription business, supercomputer in your pocket, synthetic biology, systems thinking, TaskRabbit, tech worker, TED Talk, The Rise and Fall of American Growth, Thomas L Friedman, Tony Fadell, transaction costs, Transnistria, uber lyft, undersea cable, urban decay, urban planning, Watson beat the top human players on Jeopardy!, WikiLeaks, women in the workforce, Y2K, Yogi Berra, zero-sum game

Fast trading does keep markets liquid, Nature noted, which can “benefit trade in the same way that free-flowing traffic helps transport. Such markets tend to have low ‘spreads’—the difference between the prices at which one can buy or sell a stock, which reflects the fee that dealers demand and thus transaction costs for investors.” But there are real downsides, it added: “The algorithms they use to trade profitably make more errors and are programmed to get out of the market altogether when markets get too volatile. The problem is exacerbated by the similarity of the algorithms used by many high-frequency trading firms—they all bail out at the same time.

Jonathan Haidt, a social psychologist at the NYU Stern School of Business, made the case for why in an essay in The American Interest on July 10, 2016, entitled “When and Why Nationalism Beats Globalism.” “Having a shared sense of identity, norms, and history generally promotes trust … Societies with high trust, or high social capital, produce many beneficial outcomes for their citizens: lower crime rates, lower transaction costs for businesses, higher levels of prosperity, and a propensity toward generosity, among others … The trick … is figuring out how to balance reasonable concerns about the integrity of one’s own community with the obligation to welcome strangers, particularly strangers in dire need.” Minnesota right now is wrestling with that trick—as are other communities in America.


pages: 456 words: 185,658

More Guns, Less Crime: Understanding Crime and Gun-Control Laws by John R. Lott

affirmative action, Columbine, crack epidemic, Donald Trump, Edward Glaeser, G4S, gun show loophole, income per capita, More Guns, Less Crime, Sam Peltzman, selection bias, statistical model, the medium is the message, transaction costs

Depending upon how responsive victims are to these threats, the coefficient for a variable like the percent of young males in the population could be zero even when the group in question poses a large criminal threat. 23. Edward L. Glaeser and Bruce Sacerdote, “Why Is There More Crime in Cities?” Harvard University working paper, Nov. 14, 1995. 24. For a discussion of the relationship between income and crime, see John R. Lott, Jr., “A Transaction-Costs Explanation for Why the Poor Are More Likely to Commit Crime” Journal of Legal Studies 19 (Jan. 1990): 243–45. 25. A brief survey of the laws, excluding the changes in the rules regarding permits, reveals the following: Alabama made no significant changes in these laws during the period. Connecticut law gradually changed its wording from “criminal use” to “criminal possession” from 1986 to 1994.

“Juvenile Delinquency and Education: A Comparison of Public and Private Provision.” International Review of Law and Economics 7 (Dec. 1987). ———. “Should the Wealthy Be Able to ‘Buy Justice’?” Journal of Political Economy 95 (Dec.1987). ———. “The Effect of Conviction on the Legitimate Income of Criminals.” Economics Letters 34 (Dec. 1990). ———. “A Transaction-Costs Explanation for Why the Poor Are More Likely to Commit Crime.” Journal of Legal Studies 19 (Jan. 1990). ———. “An Attempt at Measuring the Total Monetary Penalty from Drug Convictions: The Importance of an Individual’s Reputation.” Journal of Legal Studies 21 (Jan. 1992). ———. “Do We Punish High-Income Criminals Too Heavily?”


pages: 782 words: 187,875

Big Debt Crises by Ray Dalio

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, break the buck, Bretton Woods, British Empire, business cycle, buy the rumour, sell the news, capital controls, central bank independence, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, declining real wages, equity risk premium, European colonialism, fiat currency, financial engineering, financial innovation, foreign exchange controls, German hyperinflation, global macro, housing crisis, implied volatility, intangible asset, it's over 9,000, junk bonds, Kickstarter, land bank, large denomination, low interest rates, manufacturing employment, margin call, market bubble, market fundamentalism, military-industrial complex, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Northern Rock, Ponzi scheme, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, refrigerator car, reserve currency, risk free rate, Savings and loan crisis, short selling, short squeeze, sovereign wealth fund, subprime mortgage crisis, too big to fail, transaction costs, universal basic income, uptick rule, value at risk, yield curve

This will run through the system with the speed of a hurricane (over the next four to six months), and it will leave weaker financial credits dead or damaged and stronger financial credits in the catbird seat… …We have a game-plan (developed over many years) that we have confidence in because we planned for times like this, but for safety’s sake, we are checking that all the hatches are battened down and that the expensive radar we’ve developed is working well. That game-plan doesn’t just pertain to our investment strategy; it includes our strategy for handling counterparty risks and transactions costs in an environment of extreme risk-aversion and illiquidity. What I was referring to as a game plan for this is what we called a “Depression gauge.” Because big debt crises and depressions had happened many times before and we had the template explained in this study, we had created this gauge as a simple algorithm based on the proximity of interest rates to 0 percent, a few measures of debt vulnerability, and indications of the beginning of debt deleveraging that would lead us to change our overall portfolio and risk controls (including our counterparty risks).

If everyone is asking these questions the natural path is to cut back on trading and concentrate positions with a few firms. But these few firms have the incentive to ration their capacity to the highest quality financial institutions and managers. The inevitable result is substantially lower liquidity, higher transactions cost, and higher volatility. Higher volatility then feeds back into the real economy because people and businesses transact at these prices. And capital constraints in the financial sector mean that credit growth remains low, which undermines economic growth. We are getting very close to crossing this line.


pages: 651 words: 180,162

Antifragile: Things That Gain From Disorder by Nassim Nicholas Taleb

"World Economic Forum" Davos, Air France Flight 447, Alan Greenspan, Andrei Shleifer, anti-fragile, banking crisis, Benoit Mandelbrot, Berlin Wall, biodiversity loss, Black Swan, business cycle, caloric restriction, caloric restriction, Chuck Templeton: OpenTable:, commoditize, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discrete time, double entry bookkeeping, Emanuel Derman, epigenetics, fail fast, financial engineering, financial independence, Flash crash, flying shuttle, Gary Taubes, George Santayana, Gini coefficient, Helicobacter pylori, Henri Poincaré, Higgs boson, high net worth, hygiene hypothesis, Ignaz Semmelweis: hand washing, informal economy, invention of the wheel, invisible hand, Isaac Newton, James Hargreaves, Jane Jacobs, Jim Simons, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, knowledge economy, language acquisition, Lao Tzu, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, Marc Andreessen, Mark Spitznagel, meta-analysis, microbiome, money market fund, moral hazard, mouse model, Myron Scholes, Norbert Wiener, pattern recognition, Paul Samuelson, placebo effect, Ponzi scheme, Post-Keynesian economics, power law, principal–agent problem, purchasing power parity, quantitative trading / quantitative finance, Ralph Nader, random walk, Ray Kurzweil, rent control, Republic of Letters, Ronald Reagan, Rory Sutherland, Rupert Read, selection bias, Silicon Valley, six sigma, spinning jenny, statistical model, Steve Jobs, Steven Pinker, Stewart Brand, stochastic process, stochastic volatility, synthetic biology, tacit knowledge, tail risk, Thales and the olive presses, Thales of Miletus, The Great Moderation, the new new thing, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Malthus, too big to fail, transaction costs, urban planning, Vilfredo Pareto, Yogi Berra, Zipf's Law

So this tells us that if, instead of having one very large bank, with Monsieur Kerviel as a rogue trader, we had ten smaller banks, each with a proportional Monsieur Micro-Kerviel, and each conducted his rogue trading independently and at random times, the total losses for the ten banks would be close to nothing. FIGURE 15. Small may be beautiful; it is certainly less fragile. The graph shows transaction costs as a function of the size of the error: they increase nonlinearly, and we can see the megafragility. About a few weeks before the Kerviel episode, a French business school hired me to present to the board of executives of the Societé Générale meeting in Prague my ideas of Black Swan risks.

Costs of execution: “Price impact,” that is, execution costs, increase with size; they tend to follow the square root—meaning the total price is convex and grows at exponent 3/2 (meaning costs are concave). But the problem is that for large deviations, such as the Société Générale case, it is a lot worse; transaction costs accelerate, in a less and less precise manner—all these papers on price impact by the new research tradition are meaningless when you need them. Remarkably, Bent Flyvbjerg found a similar effect, but slightly less concave in total, for bridges and tunnels with proportional costs growing at 10 Log[x] of size.


pages: 252 words: 75,349

Spam Nation: The Inside Story of Organized Cybercrime-From Global Epidemic to Your Front Door by Brian Krebs

barriers to entry, bitcoin, Brian Krebs, cashless society, defense in depth, Donald Trump, drop ship, employer provided health coverage, independent contractor, information security, John Markoff, mutually assured destruction, offshore financial centre, operational security, payday loans, pirate software, placebo effect, ransomware, seminal paper, Silicon Valley, Stuxnet, the payments system, transaction costs, web application

After all, the transactions in which they engage are in most cases illegal. To combat any such “ripping” activity, forums enforce a strict code of ethics so that members caught trying to cheat fellow members are quickly ostracized or banned. For starters, most established forums will offer an escrow service—a small percentage of the transaction cost—that will hold the buyer’s funds until he is satisfied that the seller upheld his part of the bargain. Legitimate and longtime forum members tend to insist on the use of escrow for all transactions, while cheapskates and less experienced members eschew this offering at their own risk. Much like the online auction house eBay encouraging users to leave positive or negative feedback based on the quality of the transactions they conduct with other members, a fraud forum member’s standing is governed in part by the number of reputation or “rep” points he has accrued during his time on the forum.


Global Governance and Financial Crises by Meghnad Desai, Yahia Said

Asian financial crisis, bank run, banking crisis, Bretton Woods, business cycle, capital controls, central bank independence, corporate governance, creative destruction, credit crunch, crony capitalism, currency peg, deglobalization, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, floating exchange rates, frictionless, frictionless market, German hyperinflation, information asymmetry, Japanese asset price bubble, knowledge economy, liberal capitalism, liberal world order, Long Term Capital Management, low interest rates, market bubble, Meghnad Desai, Mexican peso crisis / tequila crisis, moral hazard, Nick Leeson, Nixon triggered the end of the Bretton Woods system, oil shock, open economy, Post-Keynesian economics, price mechanism, price stability, Real Time Gross Settlement, rent-seeking, short selling, special drawing rights, structural adjustment programs, Tobin tax, transaction costs, Washington Consensus

As this trend will occur in successive waves modulated by the speed of aging, a potential for higher growth and higher rates of returns in quite large non-OECD countries than in the OECD area is a distinctive prospect. A technological catching-up process might enhance the growth differential. Indeed information technology channeled by world networks and multinational companies exhibits both decreasing transfer costs and decreasing transaction costs in access to world markets. Assuming that these trends will take hold, the distribution of economic and financial power in the coming decades will look different from the present state of affairs. If risk-adjusted real rates of return are higher in large non-OECD countries which make the institutional overhaul required to mobilize their human resources, financial savings and technology will be attracted where human capital stands.


pages: 267 words: 74,296

Unhappy Union: How the Euro Crisis - and Europe - Can Be Fixed by John Peet, Anton La Guardia, The Economist

"World Economic Forum" Davos, bank run, banking crisis, Berlin Wall, Bretton Woods, business cycle, capital controls, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, debt deflation, Doha Development Round, electricity market, eurozone crisis, Fall of the Berlin Wall, financial engineering, fixed income, Flash crash, illegal immigration, labour market flexibility, labour mobility, light touch regulation, low interest rates, market fundamentalism, Money creation, moral hazard, Northern Rock, oil shock, open economy, pension reform, price stability, quantitative easing, special drawing rights, supply-chain management, The Great Moderation, too big to fail, transaction costs, éminence grise

One was theoretical: the literature on shared currencies that began with Robert Mundell’s 1961 article outlining a theory of “optimum currency areas”. Mundell, a Canadian economics professor, posited that substantial welfare gains were to be had if a group of countries shared a currency – because of more transparent prices, lower transaction costs, enhanced competition and greater economies of scale for businesses and investors. But these gains needed to be weighed against the possible costs from losing both monetary and exchange-rate independence.10 Such costs, according to optimal currency-area theory, risked being especially high if the countries concerned suffered from internal labour- or product-market rigidities, had very different economic structures or were likely to be subject to asymmetric shocks.


pages: 279 words: 76,796

The Unbanking of America: How the New Middle Class Survives by Lisa Servon

Affordable Care Act / Obamacare, Airbnb, basic income, behavioural economics, Build a better mousetrap, business cycle, Cass Sunstein, choice architecture, creative destruction, Credit Default Swap, cross-border payments, do well by doing good, employer provided health coverage, financial exclusion, financial independence, financial innovation, gender pay gap, gentrification, George Akerlof, gig economy, Glass-Steagall Act, income inequality, independent contractor, informal economy, Jane Jacobs, Joseph Schumpeter, late fees, low interest rates, Lyft, M-Pesa, medical bankruptcy, microcredit, Occupy movement, payday loans, peer-to-peer lending, precariat, Ralph Nader, Richard Thaler, Robert Shiller, Ronald Reagan, Savings and loan crisis, sharing economy, subprime mortgage crisis, too big to fail, transaction costs, unbanked and underbanked, underbanked, universal basic income, Unsafe at Any Speed, We are the 99%, white flight, working poor, Zipcar

She works part-time at a daycare center on New York’s Upper East Side and goes to school in the evening. She beams when she tells us that her younger brother is in college and that her sister will be starting as a freshman in the fall. The networks created and reinforced through ROSCAs spread information about members, enabling those involved to reduce the risks and transaction costs of lending to one another without having a typical credit-scoring system. This pooling of information offers “stronger economies of scale when small amounts are involved” and helps “predict individual repayment probabilities.” These informal practices are not confined to lower-income communities or to people who are credit-constrained.


pages: 252 words: 73,131

The Inner Lives of Markets: How People Shape Them—And They Shape Us by Tim Sullivan

Abraham Wald, Airbnb, airport security, Al Roth, Alvin Roth, Andrei Shleifer, attribution theory, autonomous vehicles, barriers to entry, behavioural economics, Brownian motion, business cycle, buy and hold, centralized clearinghouse, Chuck Templeton: OpenTable:, classic study, clean water, conceptual framework, congestion pricing, constrained optimization, continuous double auction, creative destruction, data science, deferred acceptance, Donald Trump, Dutch auction, Edward Glaeser, experimental subject, first-price auction, framing effect, frictionless, fundamental attribution error, George Akerlof, Goldman Sachs: Vampire Squid, Gunnar Myrdal, helicopter parent, information asymmetry, Internet of things, invisible hand, Isaac Newton, iterative process, Jean Tirole, Jeff Bezos, Johann Wolfgang von Goethe, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, late fees, linear programming, Lyft, market clearing, market design, market friction, medical residency, multi-sided market, mutually assured destruction, Nash equilibrium, Occupy movement, opioid epidemic / opioid crisis, Pareto efficiency, Paul Samuelson, Peter Thiel, pets.com, pez dispenser, power law, pre–internet, price mechanism, price stability, prisoner's dilemma, profit motive, proxy bid, RAND corporation, ride hailing / ride sharing, Robert Shiller, Robert Solow, Ronald Coase, school choice, school vouchers, scientific management, sealed-bid auction, second-price auction, second-price sealed-bid, sharing economy, Silicon Valley, spectrum auction, Steve Jobs, Tacoma Narrows Bridge, techno-determinism, technoutopianism, telemarketer, The Market for Lemons, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, two-sided market, uber lyft, uranium enrichment, Vickrey auction, Vilfredo Pareto, WarGames: Global Thermonuclear War, winner-take-all economy

Jean Tirole and Jean-Charles Rochet convey this point more precisely in a 2006 article where they show that two-sided markets are only necessary when the Coase Theorem fails. This theorem, more a conjecture provided by economist Ronald Coase, essentially argues that free markets maximize efficiency in the absence of externalities or transaction costs. Andrei Hagiu and Julian Wright explore the continuum of reseller and pure marketplace in “Do You Really Want to Be an eBay?” Harvard Business Review, March 2013. 7. We thank Pierre Azoulay for this. 8. David S. Evans and Richard Schmalensee, “Markets with Two-Sided Platforms,” Issues in Competition Law and Policy (ABA Section of Antitrust Law) 1, chap. 28 (2008); Joe Nocera, A Piece of the Action: How the Middle Class Joined the Moneyed Class (New York: Simon & Schuster, 1994).


pages: 233 words: 75,712

In Defense of Global Capitalism by Johan Norberg

anti-globalists, Asian financial crisis, capital controls, clean water, correlation does not imply causation, creative destruction, Deng Xiaoping, Edward Glaeser, export processing zone, Gini coefficient, Great Leap Forward, half of the world's population has never made a phone call, Hernando de Soto, illegal immigration, income inequality, income per capita, informal economy, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Joseph Schumpeter, Kenneth Rogoff, land reform, Lao Tzu, liberal capitalism, market fundamentalism, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, open economy, prediction markets, profit motive, race to the bottom, rising living standards, Silicon Valley, Simon Kuznets, structural adjustment programs, The Wealth of Nations by Adam Smith, Tobin tax, trade liberalization, trade route, transaction costs, trickle-down economics, Tyler Cowen, union organizing, zero-sum game

Criticism of the Tobin tax has focused on the impossibility of introducing it. In practice, all countries would have to agree on it; otherwise transactions would go through nonsignatory countries. And if it could be introduced, more and more trade would go to the major currencies in order to avoid transaction costs. Perhaps nearly the entire world economy would end up using U.S. dollars. But there is a more serious objection to the Tobin tax: even if it were possible to introduce, it would be harmful. This tax would actually be more harmful to the financial market than regulations by individual countries.


pages: 477 words: 75,408

The Economic Singularity: Artificial Intelligence and the Death of Capitalism by Calum Chace

"World Economic Forum" Davos, 3D printing, additive manufacturing, agricultural Revolution, AI winter, Airbnb, AlphaGo, Alvin Toffler, Amazon Robotics, Andy Rubin, artificial general intelligence, augmented reality, autonomous vehicles, banking crisis, basic income, Baxter: Rethink Robotics, Berlin Wall, Bernie Sanders, bitcoin, blockchain, Boston Dynamics, bread and circuses, call centre, Chris Urmson, congestion charging, credit crunch, David Ricardo: comparative advantage, deep learning, DeepMind, Demis Hassabis, digital divide, Douglas Engelbart, Dr. Strangelove, driverless car, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Fairchild Semiconductor, Flynn Effect, full employment, future of work, Future Shock, gender pay gap, Geoffrey Hinton, gig economy, Google Glasses, Google X / Alphabet X, Hans Moravec, Herman Kahn, hype cycle, ImageNet competition, income inequality, industrial robot, Internet of things, invention of the telephone, invisible hand, James Watt: steam engine, Jaron Lanier, Jeff Bezos, job automation, John Markoff, John Maynard Keynes: technological unemployment, John von Neumann, Kevin Kelly, Kiva Systems, knowledge worker, lifelogging, lump of labour, Lyft, machine translation, Marc Andreessen, Mark Zuckerberg, Martin Wolf, McJob, means of production, Milgram experiment, Narrative Science, natural language processing, Neil Armstrong, new economy, Nick Bostrom, Occupy movement, Oculus Rift, OpenAI, PageRank, pattern recognition, post scarcity, post-industrial society, post-work, precariat, prediction markets, QWERTY keyboard, railway mania, RAND corporation, Ray Kurzweil, RFID, Rodney Brooks, Sam Altman, Satoshi Nakamoto, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Skype, SoftBank, software is eating the world, speech recognition, Stephen Hawking, Steve Jobs, TaskRabbit, technological singularity, TED Talk, The future is already here, The Future of Employment, Thomas Malthus, transaction costs, Two Sigma, Tyler Cowen, Tyler Cowen: Great Stagnation, Uber for X, uber lyft, universal basic income, Vernor Vinge, warehouse automation, warehouse robotics, working-age population, Y Combinator, young professional

When you take possession of a car, it could be tagged with a cryptographic signature, which would mean that you are the only person who could open and start the car.[cccli] The revolutionary benefit of the blockchain is that all kinds of agreements can be validated without setting up a centralised institution to do so. By removing the need for a central intermediary, the blockchain can reduce transaction costs, and it can enhance privacy: no government agents need have access to your data without your permission. Most importantly, for our present purposes, the blockchain may make possible the decentralised ownership and management of collective assets. Collective ownership Imagine a future in which it is apparent to many people that we are heading towards the scenario of the gods and the useless.


The Handbook of Personal Wealth Management by Reuvid, Jonathan.

asset allocation, banking crisis, BRICs, business cycle, buy and hold, carbon credits, collapse of Lehman Brothers, correlation coefficient, credit crunch, cross-subsidies, currency risk, diversification, diversified portfolio, estate planning, financial deregulation, fixed income, global macro, high net worth, income per capita, index fund, interest rate swap, laissez-faire capitalism, land tenure, low interest rates, managed futures, market bubble, merger arbitrage, negative equity, new economy, Northern Rock, pattern recognition, Ponzi scheme, prediction markets, proprietary trading, Right to Buy, risk tolerance, risk-adjusted returns, risk/return, short selling, side project, sovereign wealth fund, statistical arbitrage, systematic trading, transaction costs, yield curve

Adding fine art to a diversified portfolio is likely to produce a slightly greater return for each unit of risk and a significantly better return with less volatility than stocks and bonds on their own. Based on data from 1980 to 2006, Campbell found that contemporary art offered the highest returns; Old Masters had the lowest, while also being the least volatile. She recommended an optimal asset allocation of 4.19 per cent including transaction costs, and 2.82 per cent when hedge funds are part of the portfolio. Another study by Clare McAndrew and Rex Thompson (2005), based on a study of Impressionists sold between 1985 and 2001, concluded that ignoring unsold (bought-in) art led to the downside risk being understated by as much as 50 per cent.


pages: 264 words: 76,643

The Growth Delusion: Wealth, Poverty, and the Well-Being of Nations by David Pilling

Airbnb, Alan Greenspan, banking crisis, Bernie Sanders, Big bang: deregulation of the City of London, Branko Milanovic, call centre, carbon tax, centre right, clean tech, clean water, collapse of Lehman Brothers, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, dark matter, Deng Xiaoping, Diane Coyle, Donald Trump, double entry bookkeeping, Easter island, Erik Brynjolfsson, falling living standards, financial deregulation, financial engineering, financial intermediation, financial repression, Gini coefficient, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Google Hangouts, Great Leap Forward, Hans Rosling, happiness index / gross national happiness, Higgs boson, high-speed rail, income inequality, income per capita, informal economy, invisible hand, Jeremy Corbyn, job satisfaction, Mahatma Gandhi, Mahbub ul Haq, market fundamentalism, Martin Wolf, means of production, military-industrial complex, Monkeys Reject Unequal Pay, mortgage debt, off grid, old-boy network, Panopticon Jeremy Bentham, peak oil, performance metric, pez dispenser, profit motive, purchasing power parity, race to the bottom, rent-seeking, Robert Gordon, Ronald Reagan, Rory Sutherland, science of happiness, shareholder value, sharing economy, Simon Kuznets, sovereign wealth fund, TED Talk, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Malthus, total factor productivity, Tragedy of the Commons, transaction costs, transfer pricing, trickle-down economics, urban sprawl, women in the workforce, World Values Survey

Will Page, director of economics at Spotify, the Swedish music-streaming service, says, “GDP faces a square peg, round hole dilemma” because it was “originally designed to measure tangible manufactured goods, which are losing relevance in the modern economy.”1 When I went to see Page in Spotify’s London offices—open plan, help-yourself drinks fridge, mandatory games room—I had to print out my own security badge and attach it to my lapel, a job that would once have been done by a receptionist. “The goal of disruptive technology companies, in the statistical sense, is to reduce GDP,” Page said when I found him lurking in one of the corridors. “To wipe out transaction costs, which are being measured, and to replace them with convenience, which is not being measured. So the economy is shrinking, but everyone is getting a better deal. Lots of what tech is doing is destroying what wasn’t needed. The end result is you’re going to have less of an economy, but higher welfare.”


pages: 267 words: 71,941

How to Predict the Unpredictable by William Poundstone

accounting loophole / creative accounting, Albert Einstein, Bernie Madoff, Brownian motion, business cycle, butter production in bangladesh, buy and hold, buy low sell high, call centre, centre right, Claude Shannon: information theory, computer age, crowdsourcing, Daniel Kahneman / Amos Tversky, Edward Thorp, Firefox, fixed income, forensic accounting, high net worth, index card, index fund, Jim Simons, John von Neumann, market bubble, money market fund, pattern recognition, Paul Samuelson, Ponzi scheme, power law, prediction markets, proprietary trading, random walk, Richard Thaler, risk-adjusted returns, Robert Shiller, Rubik’s Cube, statistical model, Steven Pinker, subprime mortgage crisis, transaction costs

The momentum system skipped the 1929 crash and both crashes of the 2000s with remarkable timing. It sold near the top of the 1901 and 1966 bubbles, though it bought back in before the ultimate low. Here’s a chart of portfolio value. These are real gains after allowing for the diminishing dollar (but not transaction costs, management fees, and taxes). During this 132-year period an investment in ten-year US Treasury bonds might have turned an initial $1,000 into $18,704, inflation adjusted. I do not chart that because the line would hug the axis so closely as to be indistinguishable from it. A buy-and-hold stock investor in the S&P 500 and its precursor companies would have turned $1,000 into about $2,932,653.


pages: 268 words: 75,490

The Knowledge Economy by Roberto Mangabeira Unger

additive manufacturing, adjacent possible, balance sheet recession, business cycle, collective bargaining, commoditize, deindustrialization, disruptive innovation, first-past-the-post, full employment, global value chain, information asymmetry, knowledge economy, market fundamentalism, means of production, Paul Samuelson, Phillips curve, post-Fordism, radical decentralization, savings glut, secular stagnation, side project, tacit knowledge, total factor productivity, transaction costs, union organizing, wealth creators

From the standpoint of the main line of economic theory since the late nineteenth century, however, the division of the world into economies separated by national frontiers and governed by different laws is an accident without economic significance, if it is not a costly embarrassment. There might just as well be a unified world economy under the aegis of a world government and its laws, free of the transaction costs and of the complications and risks, including armed conflicts as well as trade wars and real wars, that result from state sovereignty. It is as if the neo-Darwinian synthesis in evolutionary theory were reduced to half of its present composition: the half about Darwinian natural selection unaccompanied by the other half about genetic mutation and recombination.


pages: 251 words: 76,128

Borrow: The American Way of Debt by Louis Hyman

Alan Greenspan, asset-backed security, barriers to entry, big-box store, business cycle, cashless society, collateralized debt obligation, credit crunch, deindustrialization, deskilling, diversified portfolio, financial engineering, financial innovation, Ford Model T, Ford paid five dollars a day, Home mortgage interest deduction, housing crisis, income inequality, low interest rates, market bubble, McMansion, mortgage debt, mortgage tax deduction, Network effects, new economy, Paul Samuelson, plutocrats, price stability, Ronald Reagan, Savings and loan crisis, statistical model, Tax Reform Act of 1986, technology bubble, transaction costs, vertical integration, women in the workforce

With the default risk on the bank and not the retailer, retailers didn’t provide as much “negative information” as the banks would have liked.5 Promotional costs were high, since this form of credit was brand-new.6 Perhaps most important, the programs could not capture economies of scale. The per transaction costs were extremely high and, without sufficient scale, made profits impossible. For small transactions, low processing costs were the key to success.7 The programs flopped. While bank cards failed, T&E cards—which superficially seemed very similar—flourished. The business behind the two cards couldn’t have been more different despite their surface similarities.


pages: 271 words: 77,448

Humans Are Underrated: What High Achievers Know That Brilliant Machines Never Will by Geoff Colvin

Ada Lovelace, autonomous vehicles, Baxter: Rethink Robotics, behavioural economics, Black Swan, call centre, capital asset pricing model, commoditize, computer age, corporate governance, creative destruction, deskilling, driverless car, en.wikipedia.org, flying shuttle, Freestyle chess, future of work, Google Glasses, Grace Hopper, Hans Moravec, industrial cluster, industrial robot, interchangeable parts, job automation, knowledge worker, low skilled workers, Marc Andreessen, meta-analysis, Narrative Science, new economy, rising living standards, self-driving car, sentiment analysis, Silicon Valley, Skype, social intelligence, Steve Jobs, Steve Wozniak, Steven Levy, Steven Pinker, theory of mind, Tim Cook: Apple, transaction costs, Tyler Cowen

Competition is getting more intense as performance is measured more rigorously, and we’re being paid according to what we deliver. Technology is advancing and disrupting all around us, doing wonderful things but increasingly making our business, whatever it is, more commoditized, leaving us struggling to achieve and maintain some kind of competitive advantage. A friction-free economy—in which information costs, transaction costs, and switching costs are dropping rapidly to zero—is more efficient but also more merciless; in an always-on environment, stress and burnout are increasing. As technology takes over cognitive tasks, deep human connection becomes more economically valuable. We’re all discovering what the health care industry has already discovered—that empathizing responds to all those challenges.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

Alan Greenspan, banking crisis, banks create money, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, bond market vigilante , Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, compensation consultant, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, currency risk, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, Glass-Steagall Act, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, junk bonds, labor-force participation, light touch regulation, liquidity trap, London Interbank Offered Rate, low interest rates, market bubble, market clearing, Martin Wolf, means of production, Michael Milken, mobile money, Money creation, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nixon triggered the end of the Bretton Woods system, Paul Volcker talking about ATMs, Ponzi scheme, profit motive, proprietary trading, prudent man rule, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, Savings and loan crisis, seigniorage, shareholder value, Silicon Valley, SoftBank, Solyndra, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

Also, don’t take for granted that money market funds are risk free in today’s world. Stay Debt Free Fifth, not spending money is as good as earning more money in a repressed economy. For starters, if your portfolio is doing a bit better than the market, but you are paying substantial management or advisor fees, it can cancel out. Transaction costs and taxes can also dilute your returns. Beyond avoiding excess investment costs, there is a good case for simplification and even downsizing of our lives to assure that we live within our means across the board. Any lifestyle that requires the accumulation of consumer debt and does not fit into current income is unsustainable over time and extremely stressful.


pages: 775 words: 208,604

The Great Leveler: Violence and the History of Inequality From the Stone Age to the Twenty-First Century by Walter Scheidel

agricultural Revolution, assortative mating, basic income, Berlin Wall, Bernie Sanders, Branko Milanovic, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, classic study, collective bargaining, colonial rule, Columbian Exchange, conceptual framework, confounding variable, corporate governance, cosmological principle, CRISPR, crony capitalism, dark matter, declining real wages, democratizing finance, demographic transition, Dissolution of the Soviet Union, Downton Abbey, Edward Glaeser, failed state, Fall of the Berlin Wall, financial deregulation, fixed income, Francisco Pizarro, full employment, Gini coefficient, global pandemic, Great Leap Forward, guns versus butter model, hiring and firing, income inequality, John Markoff, knowledge worker, land reform, land tenure, low skilled workers, means of production, mega-rich, Network effects, nuclear winter, offshore financial centre, plutocrats, race to the bottom, recommendation engine, rent control, rent-seeking, road to serfdom, Robert Gordon, Ronald Reagan, Second Machine Age, Simon Kuznets, synthetic biology, The Future of Employment, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, transatlantic slave trade, universal basic income, very high income, working-age population, zero-sum game

In the judgment of a leading expert, “the Akkadian governing elite enjoyed resources far in excess of what Sumerian notables before them had known.” 45 Empire building had the potential to influence the distribution of income and wealth in ways that were unrelated to returns on economic activity and turned material inequality into a by-product of the underlying restructuring of power relations. Political unification on a large scale could improve overall conditions for commercial activity by lowering transaction costs, by boosting demand for high-end goods and services, and by enabling entrepreneurs to capitalize on networks of exchange established for extractive purposes, thereby widening the gap between capital holders and others. It spurred urban growth, especially in metropolitan centers, that exacerbated material imbalances.

The degree of inequality was therefore at least in part a function of the sheer scale of imperial state formation. Building on mechanisms of capital investment and exploitation that had first been developed thousands of years earlier, these empires raised the stakes ever higher. Greater profits were to be had from state office; lowered transaction costs for trade and investment over long distances benefited those who had income to spare. In the end, imperial income inequality and wealth polarization could be terminated and reversed only by dismemberment through conquest, state failure, or wholesale systems collapse, all of them intrinsically violent upheavals.


pages: 306 words: 82,765

Skin in the Game: Hidden Asymmetries in Daily Life by Nassim Nicholas Taleb

anti-fragile, availability heuristic, behavioural economics, Benoit Mandelbrot, Bernie Madoff, Black Swan, Brownian motion, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, cellular automata, Claude Shannon: information theory, cognitive dissonance, complexity theory, data science, David Graeber, disintermediation, Donald Trump, Edward Thorp, equity premium, fake news, financial independence, information asymmetry, invisible hand, knowledge economy, loss aversion, mandelbrot fractal, Mark Spitznagel, mental accounting, microbiome, mirror neurons, moral hazard, Murray Gell-Mann, offshore financial centre, p-value, Paradox of Choice, Paul Samuelson, Ponzi scheme, power law, precautionary principle, price mechanism, principal–agent problem, public intellectual, Ralph Nader, random walk, rent-seeking, Richard Feynman, Richard Thaler, Ronald Coase, Ronald Reagan, Rory Sutherland, Rupert Read, Silicon Valley, Social Justice Warrior, Steven Pinker, stochastic process, survivorship bias, systematic bias, tail risk, TED Talk, The Nature of the Firm, Tragedy of the Commons, transaction costs, urban planning, Yogi Berra

His style is so rigorous that he is known for the Coase Theorem (about how markets are very smart about allocating resources and nuisances such as pollution), an idea that he posited without a single word of mathematics, but which is as fundamental as many things written in mathematics. Aside from his theorem, Coase was the first to shed light on why firms exist. For him, contracts can be too costly to negotiate due to transaction costs; the solution is to incorporate your business and hire employees with clear job descriptions because you can’t afford legal and organizational bills for every transaction. A free market is a place where forces act to determine specialization, and information travels via price point; but within a firm these market forces are lifted because they cost more to run than the benefits they bring.


pages: 318 words: 85,824

A Brief History of Neoliberalism by David Harvey

"World Economic Forum" Davos, affirmative action, air traffic controllers' union, Asian financial crisis, Berlin Wall, Bretton Woods, business climate, business cycle, California energy crisis, capital controls, centre right, collective bargaining, creative destruction, crony capitalism, debt deflation, declining real wages, deglobalization, deindustrialization, Deng Xiaoping, Fall of the Berlin Wall, financial deregulation, financial intermediation, financial repression, full employment, gentrification, George Gilder, Gini coefficient, global reserve currency, Great Leap Forward, illegal immigration, income inequality, informal economy, labour market flexibility, land tenure, late capitalism, Long Term Capital Management, low interest rates, low-wage service sector, manufacturing employment, market fundamentalism, mass immigration, means of production, megaproject, Mexican peso crisis / tequila crisis, military-industrial complex, Mont Pelerin Society, mortgage tax deduction, neoliberal agenda, new economy, Pearl River Delta, phenotype, Ponzi scheme, price mechanism, race to the bottom, rent-seeking, reserve currency, Ronald Reagan, Savings and loan crisis, Silicon Valley, special economic zone, structural adjustment programs, Suez crisis 1956, the built environment, The Chicago School, Tragedy of the Commons, transaction costs, union organizing, urban renewal, urban sprawl, Washington Consensus, We are all Keynesians now, Winter of Discontent

While neoliberals admit the problem and some concede the case for limited state intervention, others argue for inaction because the cure will almost certainly be worse than the disease. Most would agree, however, that if there are to be interventions these should work through market mechanisms (via tax impositions or incentives, trading rights of pollutants, and the like). Competitive failures are approached in a similar fashion. Rising transaction costs can be incurred as contractual and subcontractual relations proliferate. The vast apparatus of currency speculation, to take just one example, appears more and more costly at the same time as it becomes more and more fundamental to capturing speculative profits. Other problems arise when, say, all competing hospitals in a region buy the same sophisticated equipment that remains underutilized, thus driving up aggregate costs.


pages: 278 words: 83,468

The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses by Eric Ries

3D printing, barriers to entry, Benchmark Capital, call centre, Clayton Christensen, clean tech, clean water, cloud computing, commoditize, Computer Numeric Control, continuous integration, corporate governance, disruptive innovation, experimental subject, Ford Model T, Frederick Winslow Taylor, hockey-stick growth, Kanban, Lean Startup, Marc Andreessen, Mark Zuckerberg, Metcalfe’s law, minimum viable product, Mitch Kapor, Network effects, payday loans, Peter Thiel, pets.com, Ponzi scheme, pull request, reality distortion field, risk tolerance, scientific management, selection bias, Silicon Valley, Silicon Valley startup, six sigma, skunkworks, social bookmarking, stealth mode startup, Steve Jobs, the scientific method, Toyota Production System, transaction costs

In addition to quarterly reports on profits and margins, companies on the LTSE would report using innovation accounting on their internal entrepreneurship efforts. Like Intuit, they would report on the revenue they were generating from products that did not exist a few years earlier. Executive compensation in LTSE companies would be tied to the company’s long-term performance. Trading on the LTSE would have much higher transaction costs and fees to minimize day trading and massive price swings. In exchange, LTSE companies would be allowed to structure their corporate governance to facilitate greater freedom for management to pursue long-term investments. In addition to support for long-term thinking, the transparency of the LTSE will provide valuable data about how to nurture innovation in the real world.


pages: 302 words: 84,428

Mastering the Market Cycle: Getting the Odds on Your Side by Howard Marks

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, behavioural economics, business cycle, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, financial engineering, financial innovation, fixed income, Glass-Steagall Act, if you build it, they will come, income inequality, Isaac Newton, job automation, junk bonds, Long Term Capital Management, low interest rates, margin call, Michael Milken, money market fund, moral hazard, new economy, profit motive, quantitative easing, race to the bottom, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, secular stagnation, short selling, South Sea Bubble, stocks for the long run, superstar cities, The Chicago School, The Great Moderation, transaction costs, uptick rule, VA Linux, Y2K, yield curve

Yet the one thing we know for sure is that, on average, all investors are average. Thus logic tells us they can’t all make above-average judgments. Empirical—Performance studies show that very few investors are consistently more right than others about those judgments. Most investors do worse than the markets, especially after the subtraction of transaction costs, management fees and expenses. That’s the reason for the rising popularity of passive index investing. That’s not to say no one beats the market. Lots of people do so every year, but usually no more than would be the case under an assumption of randomness. A few do it more consistently than randomness would suggest, and some of those become famous.


pages: 334 words: 82,041

How Did We Get Into This Mess?: Politics, Equality, Nature by George Monbiot

Affordable Care Act / Obamacare, Alfred Russel Wallace, Anthropocene, bank run, bilateral investment treaty, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, creative destruction, credit crunch, David Attenborough, dematerialisation, demographic transition, drone strike, en.wikipedia.org, first-past-the-post, full employment, Gini coefficient, hedonic treadmill, income inequality, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, invisible hand, land bank, land reform, land value tax, Leo Hollis, market fundamentalism, meta-analysis, Mont Pelerin Society, moral panic, Naomi Klein, Northern Rock, obamacare, oil shale / tar sands, old-boy network, peak oil, place-making, planned obsolescence, plutocrats, profit motive, rent-seeking, rewilding, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, urban sprawl, We are all Keynesians now, wealth creators, World Values Survey

By extending intellectual property rights over every aspect of production, by developing plants which either won’t breed true or which don’t reproduce at all, it ensures that only those with access to capital can cultivate.13 As it captures both the wholesale and retail markets, it seeks to reduce its transaction costs by engaging only with major sellers. If you think that supermarkets are giving farmers in the UK a hard time, you should see what they are doing to growers in the poor world. As developing countries sweep away street markets and hawkers’ stalls and replace them with superstores and glossy malls, the most productive farmers lose their customers and are forced to sell up.


pages: 309 words: 85,584

Nine Crises: Fifty Years of Covering the British Economy From Devaluation to Brexit by William Keegan

Alan Greenspan, banking crisis, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, Bretton Woods, Brexit referendum, British Empire, capital controls, congestion charging, deindustrialization, Donald Trump, Etonian, eurozone crisis, Fall of the Berlin Wall, financial engineering, financial innovation, financial thriller, floating exchange rates, foreign exchange controls, full employment, gig economy, inflation targeting, Jeremy Corbyn, Just-in-time delivery, light touch regulation, liquidity trap, low interest rates, Martin Wolf, military-industrial complex, moral hazard, negative equity, Neil Kinnock, Nixon triggered the end of the Bretton Woods system, non-tariff barriers, North Sea oil, Northern Rock, oil shock, Parkinson's law, Paul Samuelson, pre–internet, price mechanism, quantitative easing, Ronald Reagan, school vouchers, short selling, South Sea Bubble, Suez crisis 1956, The Chicago School, transaction costs, tulip mania, Winter of Discontent, Yom Kippur War

At the time of the intense discussions that took place after our adventures with the ERM, when the pioneers were preparing to embark on the single currency – which began for the banking system in 1999 but for the European public, with notes and coins, in 2002 – much was made of the convenience the Eurozone would provide for both business and the public: no need to change into another currency within the euro area, and no transaction costs! This was of obvious appeal to the general public, not least for making holiday travel easier. The same issue arose when the Blair–Brown government went through the laborious process of weighing up the pros and cons of joining the single currency. But there were many other considerations than the convenience of travel, not least the sacrifice of sovereignty over monetary policy, and the freedom to devalue the currency against others – the loss of which the Italian economy has suffered from vis-à-vis competition from the much less inflation-prone German economy.


pages: 286 words: 87,401

Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies by Reid Hoffman, Chris Yeh

"Susan Fowler" uber, activist fund / activist shareholder / activist investor, adjacent possible, Airbnb, Amazon Web Services, Andy Rubin, autonomous vehicles, Benchmark Capital, bitcoin, Blitzscaling, blockchain, Bob Noyce, business intelligence, Cambridge Analytica, Chuck Templeton: OpenTable:, cloud computing, CRISPR, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, database schema, DeepMind, Didi Chuxing, discounted cash flows, Elon Musk, fake news, Firefox, Ford Model T, forensic accounting, fulfillment center, Future Shock, George Gilder, global pandemic, Google Hangouts, Google X / Alphabet X, Greyball, growth hacking, high-speed rail, hockey-stick growth, hydraulic fracturing, Hyperloop, initial coin offering, inventory management, Isaac Newton, Jeff Bezos, Joi Ito, Khan Academy, late fees, Lean Startup, Lyft, M-Pesa, Marc Andreessen, Marc Benioff, margin call, Mark Zuckerberg, Max Levchin, minimum viable product, move fast and break things, Network effects, Oculus Rift, oil shale / tar sands, PalmPilot, Paul Buchheit, Paul Graham, Peter Thiel, pre–internet, Quicken Loans, recommendation engine, ride hailing / ride sharing, Salesforce, Sam Altman, Sand Hill Road, Saturday Night Live, self-driving car, shareholder value, sharing economy, Sheryl Sandberg, Silicon Valley, Silicon Valley startup, Skype, smart grid, social graph, SoftBank, software as a service, software is eating the world, speech recognition, stem cell, Steve Jobs, subscription business, synthetic biology, Tesla Model S, thinkpad, three-martini lunch, transaction costs, transport as a service, Travis Kalanick, Uber for X, uber lyft, web application, winner-take-all economy, work culture , Y Combinator, yellow journalism

Companies like Uber subsidize their customers in an attempt to manipulate the demand curve to reach that tipping point faster; the bet is that losing money in the short term may allow you to make money in the long term, once you’re past the tipping point. One challenge that this approach produces is the (eventual) need to eliminate the subsidies in order to make the unit economics work. When I was at PayPal, one of the things we did to encourage adoption was to proclaim that the service would always be free. This meant eating the transaction costs of accepting credit card payments. I wish I could say we had a grand plan. We had hoped that we could make up for the credit card transaction fee subsidy by making money off the float—the funds being kept in PayPal. Unfortunately, this came nowhere close to offsetting the fee subsidies, and the company was hemorrhaging money.


pages: 303 words: 83,564

Exodus: How Migration Is Changing Our World by Paul Collier

Ayatollah Khomeini, Boris Johnson, charter city, classic study, Edward Glaeser, experimental economics, first-past-the-post, full employment, game design, George Akerlof, global village, guest worker program, illegal immigration, income inequality, informal economy, language acquisition, mass immigration, mirror neurons, moral hazard, open borders, radical decentralization, risk/return, Silicon Valley, sovereign wealth fund, Steven Pinker, tacit knowledge, The Wealth of Nations by Adam Smith, transaction costs, University of East Anglia, white flight, zero-sum game

But even so, those migrants who wish to honor their commitment may wish regularly to signal to their family back home that they are doing their best. This may explain one of the current paradoxes in the analysis of remittances, namely that migrants typically choose to make small regular payments home.7 From the naive economic perspective, small and regular is stupid. The transactions costs of making remittances include a fixed charge that heavily penalizes small transfers. It would be much cheaper for the migrant to accumulate cash and occasionally send a single large payment. The only big winner from the prevailing pattern of small-and-frequent appears to be the wire agency Western Union.


pages: 348 words: 82,499

DIY Investor: How to Take Control of Your Investments & Plan for a Financially Secure Future by Andy Bell

asset allocation, bank run, Bear Stearns, Black Monday: stock market crash in 1987, buy and hold, collapse of Lehman Brothers, credit crunch, currency risk, diversification, diversified portfolio, estate planning, eurozone crisis, fixed income, high net worth, hiring and firing, Isaac Newton, junk bonds, Kickstarter, lateral thinking, low interest rates, money market fund, Northern Rock, passive investing, place-making, quantitative easing, selection bias, short selling, South Sea Bubble, technology bubble, transaction costs, Vanguard fund

It should also be pointed out that investing directly into less developed markets overseas also carries political and regulatory risk. You can never be sure how politicians or other pressure groups are going to change the terms under which companies are allowed to operate in less developed economies. Tax considerations for overseas equities While UK share purchases attract stamp duty of 0.5 per cent of the transaction cost, overseas equities do not. That said, France has introduced a transaction tax, and with governments around the world looking for new ways to raise cash, there is no guarantee others won’t follow suit, so check online what the rules are in the country you are planning to invest in before making too many trades, as these dealing costs will hit your returns.


pages: 250 words: 87,722

Flash Boys: A Wall Street Revolt by Michael Lewis

automated trading system, bash_history, Berlin Wall, Bernie Madoff, collateralized debt obligation, computerized markets, drone strike, Dutch auction, Fall of the Berlin Wall, financial intermediation, Flash crash, High speed trading, information security, latency arbitrage, National best bid and offer, pattern recognition, payment for order flow, Pershing Square Capital Management, proprietary trading, risk tolerance, Rubik’s Cube, Sergey Aleynikov, Small Order Execution System, Spread Networks laid a new fibre optics cable between New York and Chicago, the new new thing, too big to fail, trade route, transaction costs, Vanguard fund

Standing in front of the whiteboard, Brad now reviewed the problem at hand: It was unusual for an investor to direct his broker to send his order to one exchange, but that is what investors were preparing to do with IEX. But these investors had no way of determining if the Wall Street brokers followed their instructions and actually sent the orders to IEX. The report investors typically received from their brokers—the Transaction Cost Analysis, or TCA—was useless, so sloppily and inconsistently compiled as to be beyond analysis. Some of it came time-stamped to the second; some, time-stamped in tenths of microseconds. None of it told you which exchange you traded on. As a result, there was no way to determine the context of any transaction, the event immediately before it and the one immediately after.


Rethinking Money: How New Currencies Turn Scarcity Into Prosperity by Bernard Lietaer, Jacqui Dunne

3D printing, 90 percent rule, agricultural Revolution, Albert Einstein, Asian financial crisis, banking crisis, Berlin Wall, BRICs, business climate, business cycle, business process, butterfly effect, carbon credits, carbon footprint, Carmen Reinhart, clockwork universe, collapse of Lehman Brothers, complexity theory, conceptual framework, credit crunch, different worldview, discounted cash flows, en.wikipedia.org, Fall of the Berlin Wall, fear of failure, fiat currency, financial innovation, Fractional reserve banking, full employment, German hyperinflation, Glass-Steagall Act, happiness index / gross national happiness, holacracy, job satisfaction, John Perry Barlow, liberation theology, low interest rates, Marshall McLuhan, microcredit, mobile money, Money creation, money: store of value / unit of account / medium of exchange, more computing power than Apollo, new economy, Occupy movement, price stability, reserve currency, Silicon Valley, systems thinking, the payments system, too big to fail, transaction costs, trickle-down economics, urban decay, War on Poverty, working poor

The demurrage fee thus ensures the Terras’ usage as a mechanism of exchange and not as a mechanism of savings. • Terra Operational Cost Coverage. The Terra demurrage fee is calculated to cover the costs of the entire operation of the Terra mechanism (e.g., storage costs of the basket, administrative overhead, transaction costs in future markets). The demurrage fees for a particular Terra transaction can be calculated by the following formula: (Terra Operation Costs/time unit) × (Terra holding period) × (Terras on account) = Demurrage Fee Let us assume that the TRC’s operation costs are evaluated at 3.65 percent per year, or 0.01 percent per day.


pages: 306 words: 85,836

When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants by Steven D. Levitt, Stephen J. Dubner

Affordable Care Act / Obamacare, Airbus A320, airport security, augmented reality, barriers to entry, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, Broken windows theory, Captain Sullenberger Hudson, carbon tax, creative destruction, Daniel Kahneman / Amos Tversky, deliberate practice, feminist movement, food miles, George Akerlof, global pandemic, information asymmetry, invisible hand, loss aversion, mental accounting, Netflix Prize, obamacare, oil shale / tar sands, Pareto efficiency, peak oil, pre–internet, price anchoring, price discrimination, principal–agent problem, profit maximization, Richard Thaler, Sam Peltzman, security theater, sugar pill, Ted Kaczynski, the built environment, The Chicago School, the High Line, Thorstein Veblen, transaction costs, Tyler Cowen, US Airways Flight 1549

So there would still be men out there afraid of their wives finding out, and I still wouldn’t want to share my job title with my family. Q. Dubner and Levitt wrote that you have some economics training. Has that informed the way you think about your occupation? A. Sure, here are some examples: Dinner with friends = opportunity cost Perfect information = review sites Transaction cost = setting up an appointment Repeated game = reputation Product differentiation = not a blonde Seriously, I wish I had known then what I know now. Freakonomics Radio Gets Results (SJD) It’s nice to have a podcast that is popular, but it’s another thing to have a podcast that actually changes the world.


pages: 317 words: 84,400

Automate This: How Algorithms Came to Rule Our World by Christopher Steiner

23andMe, Ada Lovelace, airport security, Al Roth, algorithmic trading, Apollo 13, backtesting, Bear Stearns, big-box store, Black Monday: stock market crash in 1987, Black-Scholes formula, call centre, Charles Babbage, cloud computing, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, Donald Trump, Douglas Hofstadter, dumpster diving, financial engineering, Flash crash, G4S, Gödel, Escher, Bach, Hacker News, High speed trading, Howard Rheingold, index fund, Isaac Newton, Jim Simons, John Markoff, John Maynard Keynes: technological unemployment, knowledge economy, late fees, machine translation, Marc Andreessen, Mark Zuckerberg, market bubble, Max Levchin, medical residency, money market fund, Myron Scholes, Narrative Science, PageRank, pattern recognition, Paul Graham, Pierre-Simon Laplace, prediction markets, proprietary trading, quantitative hedge fund, Renaissance Technologies, ride hailing / ride sharing, risk tolerance, Robert Mercer, Sergey Aleynikov, side project, Silicon Valley, Skype, speech recognition, Spread Networks laid a new fibre optics cable between New York and Chicago, transaction costs, upwardly mobile, Watson beat the top human players on Jeopardy!, Y Combinator

He’s a symbol of all that’s different between the two worlds. One side uses bots and algorithms to chop up subprime mortgages and peddle them to unsuspecting German banks that end up eating the debt for pennies on the dollar—sorry about that!—and to trade stocks at fast speeds that do in fact benefit the public in lower transaction costs, but also cost them in the way of higher volatilities and the possibility of epic chaos. The other side, Silicon Valley, uses similar brains and technology to create a game that may keep you entertained for fifteen minutes a day. The best products from the Silicon Valley help you keep in touch with relatives, trace your family’s origins, teach your daughter calculus, or smooth your relationship with your health insurer.


A Primer for the Mathematics of Financial Engineering by Dan Stefanica

asset allocation, Black-Scholes formula, capital asset pricing model, constrained optimization, delta neutral, discrete time, Emanuel Derman, financial engineering, implied volatility, law of one price, margin call, quantitative trading / quantitative finance, risk free rate, Sharpe ratio, short selling, time value of money, transaction costs, volatility smile, yield curve, zero-coupon bond

The short is closed by buying the share (at a later time) on the market and returning it to the original owner (via the broker; the owner rarely knows that the asset was borrowed and sold short). We will not consider here these or other issues, such as margin calls, the liquidity of the market and the availability of shares for short selling, transaction costs, and the impossibility of taking the exact position required for the "correct" hedge. 106 CHAPTER 3. PROBABILITY. BLACK-SCHOLES FORMULA. By letting dS -+ 0, we find that the appropriate position .6. in the underlying asset in order to hedge a call option is ac .6. = as' which is the same as .6.


pages: 561 words: 87,892

Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

"World Economic Forum" Davos, Admiral Zheng, Alan Greenspan, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, foreign exchange controls, Francis Fukuyama: the end of history, full employment, G4S, George Akerlof, German hyperinflation, Gini coefficient, Great Leap Forward, guns versus butter model, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, junk bonds, knowledge economy, labour market flexibility, labour mobility, liberal capitalism, low interest rates, low skilled workers, market clearing, Martin Wolf, mass immigration, Meghnad Desai, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, old age dependency ratio, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, Savings and loan crisis, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, We are all Keynesians now, women in the workforce, working-age population, Y2K, Yom Kippur War

Imagine, also, that the use of the renminbi in this way led to a partial displacement of the dollar. How would China fare in these circumstances? The likely appreciation of the renminbi against the dollar would leave China nursing losses on its foreign-exchange reserves. However, the wider use of the renminbi around the world would lower transaction costs for Chinese individuals and businesses. Ultimately, whether China gained or lost overall from this process would be an empirical question. Nevertheless, China’s own dependency on a monetary system created in Washington would gradually fade. In practice, of course, turning the renminbi into a reserve currency poses all sorts of difficulties.


pages: 296 words: 83,254

After the Gig: How the Sharing Economy Got Hijacked and How to Win It Back by Juliet Schor, William Attwood-Charles, Mehmet Cansoy

1960s counterculture, Airbnb, algorithmic management, Amazon Mechanical Turk, American Legislative Exchange Council, back-to-the-land, barriers to entry, bike sharing, Californian Ideology, carbon footprint, clean tech, collaborative consumption, collaborative economy, Community Supported Agriculture, COVID-19, creative destruction, crowdsourcing, deskilling, driverless car, en.wikipedia.org, financial independence, future of work, gentrification, George Gilder, gig economy, global supply chain, global village, haute cuisine, income inequality, independent contractor, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Jean Tirole, Jeff Bezos, jitney, job satisfaction, John Perry Barlow, John Zimmer (Lyft cofounder), Kevin Kelly, Lyft, Marshall McLuhan, Mason jar, mass incarceration, Mitch Kapor, Network effects, new economy, New Urbanism, Occupy movement, peer-to-peer rental, Post-Keynesian economics, precariat, profit maximization, profit motive, race to the bottom, regulatory arbitrage, rent gap, rent-seeking, ride hailing / ride sharing, Ruby on Rails, selection bias, sharing economy, Silicon Valley, Silicon Valley ideology, Skype, smart cities, social distancing, Stewart Brand, TaskRabbit, technological determinism, technoutopianism, Telecommunications Act of 1996, The Nature of the Firm, the payments system, Tragedy of the Commons, transaction costs, transportation-network company, Travis Kalanick, two-sided market, Uber and Lyft, Uber for X, uber lyft, urban planning, wage slave, walking around money, Whole Earth Catalog, women in the workforce, working poor, Yochai Benkler, Zipcar

But what if the early optimism was partly right, in the sense that the technology could help satisfy those aspirations? While technology doesn’t guarantee outcomes, it does open up possibilities. Digital technology is remaking the economics of many sectors by offering convenience through reducing transactions costs, creating new mechanisms for ensuring trust, and developing ways to deploy excess capacity. The enthusiasts got that part right. What they missed was that in order to realize the full benefits of the technology, the social relations under which people are “sharing” also have to change.63 Instead of private ownership and a conventional market orientation, which have pulled the companies toward business-as-usual, the sector would need to go deeper into sharing.


pages: 291 words: 80,068

Framers: Human Advantage in an Age of Technology and Turmoil by Kenneth Cukier, Viktor Mayer-Schönberger, Francis de Véricourt

Albert Einstein, Andrew Wiles, Apollo 11, autonomous vehicles, Ben Bernanke: helicopter money, Berlin Wall, bitcoin, Black Lives Matter, blockchain, Blue Ocean Strategy, circular economy, Claude Shannon: information theory, cognitive dissonance, cognitive load, contact tracing, coronavirus, correlation does not imply causation, COVID-19, credit crunch, CRISPR, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, deep learning, DeepMind, defund the police, Demis Hassabis, discovery of DNA, Donald Trump, double helix, Douglas Hofstadter, Elon Musk, en.wikipedia.org, fake news, fiat currency, framing effect, Francis Fukuyama: the end of history, Frank Gehry, game design, George Floyd, George Gilder, global pandemic, global village, Gödel, Escher, Bach, Higgs boson, Ignaz Semmelweis: hand washing, informal economy, Isaac Newton, Jaron Lanier, Jeff Bezos, job-hopping, knowledge economy, Large Hadron Collider, lockdown, Louis Pasteur, Mark Zuckerberg, Mercator projection, meta-analysis, microaggression, Mustafa Suleyman, Neil Armstrong, nudge unit, OpenAI, packet switching, pattern recognition, Peter Thiel, public intellectual, quantitative easing, Ray Kurzweil, Richard Florida, Schrödinger's Cat, scientific management, self-driving car, Silicon Valley, Steve Jobs, Steven Pinker, TED Talk, The Structural Transformation of the Public Sphere, Thomas Kuhn: the structure of scientific revolutions, TikTok, Tim Cook: Apple, too big to fail, transaction costs, Tyler Cowen

“No matter who you are, most of the smartest people work for someone else,” chirped the consummate Silicon Valley geek Bill Joy in the 1990s. Even if an organization is able to attract diverse members to its teams, the most appropriate mental models may be held by individuals elsewhere, especially for tough reframing challenges. The internet lowers the transaction costs of involving outsiders, underpinning the open-innovation, crowdsourcing platforms like InnoCentive and Kaggle. They don’t simply bring together different people but their diverse frames. At times the approach works extremely well. The Japanese company Cuusoo created a site for fans to share Lego ideas.


pages: 282 words: 85,658

Ask Your Developer: How to Harness the Power of Software Developers and Win in the 21st Century by Jeff Lawson

Airbnb, AltaVista, Amazon Web Services, barriers to entry, big data - Walmart - Pop Tarts, Big Tech, big-box store, bitcoin, business process, call centre, Chuck Templeton: OpenTable:, cloud computing, coronavirus, COVID-19, create, read, update, delete, cryptocurrency, data science, David Heinemeier Hansson, deep learning, DevOps, Elon Musk, financial independence, global pandemic, global supply chain, Hacker News, Internet of things, Jeff Bezos, Kanban, Lean Startup, loose coupling, Lyft, Marc Andreessen, Marc Benioff, Mark Zuckerberg, microservices, minimum viable product, Mitch Kapor, move fast and break things, Paul Graham, peer-to-peer, ride hailing / ride sharing, risk tolerance, Ruby on Rails, Salesforce, side project, Silicon Valley, Silicon Valley startup, Skype, social distancing, software as a service, software is eating the world, sorting algorithm, Startup school, Steve Ballmer, Steve Jobs, Telecommunications Act of 1996, Toyota Production System, transaction costs, transfer pricing, two-pizza team, Uber and Lyft, uber lyft, ubercab, web application, Y Combinator

Thanks to software, it’s just as easy to do that for medical staff as it is for ride shares. Only the delusion that there’s no connection between software and patient care prevents that from becoming the norm. The digital revolution is fundamentally rewriting the rules of general management. Software simultaneously lowers transaction costs, demolishes barriers to entry, and accelerates the pace of change. Companies—and institutions—that cannot cope with this pace and intensity will cease to be relevant. There are few people in the world who are experienced both as software developers and as business executives. That’s what makes Jeff so unique: he has feet in both worlds.


pages: 1,535 words: 337,071

Networks, Crowds, and Markets: Reasoning About a Highly Connected World by David Easley, Jon Kleinberg

Albert Einstein, AltaVista, AOL-Time Warner, Apollo 13, classic study, clean water, conceptual framework, Daniel Kahneman / Amos Tversky, Douglas Hofstadter, Dutch auction, Erdős number, experimental subject, first-price auction, fudge factor, Garrett Hardin, George Akerlof, Gerard Salton, Gerard Salton, Gödel, Escher, Bach, incomplete markets, information asymmetry, information retrieval, John Nash: game theory, Kenneth Arrow, longitudinal study, market clearing, market microstructure, moral hazard, Nash equilibrium, Network effects, Pareto efficiency, Paul Erdős, planetary scale, power law, prediction markets, price anchoring, price mechanism, prisoner's dilemma, random walk, recommendation engine, Richard Thaler, Ronald Coase, sealed-bid auction, search engine result page, second-price auction, second-price sealed-bid, seminal paper, Simon Singh, slashdot, social contagion, social web, Steve Jobs, Steve Jurvetson, stochastic process, Ted Nelson, the long tail, The Market for Lemons, the strength of weak ties, The Wisdom of Crowds, trade route, Tragedy of the Commons, transaction costs, two and twenty, ultimatum game, Vannevar Bush, Vickrey auction, Vilfredo Pareto, Yogi Berra, zero-sum game

The one qualification that is necessary in Coase’s argument (that initial ownership is irrelevant) is that it ignores transaction costs and simply assumes that negotiation beginning from any assignment of property rights will lead to an efficient outcome. As we noted in the smoking example this is not plausible when many individuals are involved in the negotiation. Similarly, in the case of pollution, establishing marketable pollution rights is more likely to minimize transaction costs and lead to socially optimal outcomes. 24.2 The Tragedy of the Commons In a 1968 article in Science, entitled “The Tragedy of the Commons” [204], Garrett Hardin offered a compelling story about the inevitable “tragedy” of commonly shared resources.

It is worth pointing out that social optimality is unlikely to mean there would be no pollution. Instead, it simply requires that the amount of pollution, like the amount of all other goods, is determined so that there is no reallocation that improves welfare. But also just as in the case of the restaurant, the transaction costs involved in negotiation between the power plant and all those affected by its activities may be prohibitive. Mechanisms for Determining Socially Optimal Allocations. One difficulty with using property rights and mutually agreeable compensation to determine the socially optimal allocation in our power plant example is the following: how do we discover the true amount of harm created by the pollution?


pages: 332 words: 91,780

Starstruck: The Business of Celebrity by Currid

barriers to entry, Bernie Madoff, Big Tech, Donald Trump, income inequality, index card, industrial cluster, Mark Zuckerberg, Metcalfe’s law, natural language processing, place-making, Ponzi scheme, post-industrial society, power law, prediction markets, public intellectual, Renaissance Technologies, Richard Florida, Robert Metcalfe, Robert Solow, rolodex, search costs, shareholder value, Silicon Valley, slashdot, Stephen Fry, the long tail, The Theory of the Leisure Class by Thorstein Veblen, transaction costs, Tyler Cowen, upwardly mobile, urban decay, Vilfredo Pareto, Virgin Galactic, winner-take-all economy

Mark Lorenzen, a professor at the Copenhagen Business School in Denmark and expert on the Indian film industry, explains that Bollywood creates stars through very informal networks. The industry is almost completely organized through very close ties among people who have worked together year after year. “The family-based system tends to govern the whole system,” Lorenzen says. “On one hand, [this system] has controlled the negotiations and transaction costs. On the other hand, it has limited Bollywood from becoming really professional like Hollywood. No publishing houses, no conglomerates, no real agents. The stars are represented by their wife or secretary. Everyone knows everyone so you don’t really need an agent. Everybody is in the inner circle: There are twenty to twenty-five producers and directors, and in that inner circle maybe one hundred people who know everyone.


pages: 285 words: 86,853

What Algorithms Want: Imagination in the Age of Computing by Ed Finn

Airbnb, Albert Einstein, algorithmic bias, algorithmic management, algorithmic trading, AlphaGo, Amazon Mechanical Turk, Amazon Web Services, bitcoin, blockchain, business logic, Charles Babbage, Chuck Templeton: OpenTable:, Claude Shannon: information theory, commoditize, Computing Machinery and Intelligence, Credit Default Swap, crowdsourcing, cryptocurrency, data science, DeepMind, disruptive innovation, Donald Knuth, Donald Shoup, Douglas Engelbart, Douglas Engelbart, Elon Musk, Evgeny Morozov, factory automation, fiat currency, Filter Bubble, Flash crash, game design, gamification, Google Glasses, Google X / Alphabet X, Hacker Conference 1984, High speed trading, hiring and firing, Ian Bogost, industrial research laboratory, invisible hand, Isaac Newton, iterative process, Jaron Lanier, Jeff Bezos, job automation, John Conway, John Markoff, Just-in-time delivery, Kickstarter, Kiva Systems, late fees, lifelogging, Loebner Prize, lolcat, Lyft, machine readable, Mother of all demos, Nate Silver, natural language processing, Neal Stephenson, Netflix Prize, new economy, Nicholas Carr, Nick Bostrom, Norbert Wiener, PageRank, peer-to-peer, Peter Thiel, power law, Ray Kurzweil, recommendation engine, Republic of Letters, ride hailing / ride sharing, Satoshi Nakamoto, self-driving car, sharing economy, Silicon Valley, Silicon Valley billionaire, Silicon Valley ideology, Silicon Valley startup, SimCity, Skinner box, Snow Crash, social graph, software studies, speech recognition, statistical model, Steve Jobs, Steven Levy, Stewart Brand, supply-chain management, tacit knowledge, TaskRabbit, technological singularity, technological solutionism, technoutopianism, the Cathedral and the Bazaar, The Coming Technological Singularity, the scientific method, The Signal and the Noise by Nate Silver, The Structural Transformation of the Public Sphere, The Wealth of Nations by Adam Smith, transaction costs, traveling salesman, Turing machine, Turing test, Uber and Lyft, Uber for X, uber lyft, urban planning, Vannevar Bush, Vernor Vinge, wage slave

In 2014, Google exceeded the market capitalization of ExxonMobil, leaving it second only to Apple among the most valuable companies in the world.16 The typical Google advertisement nets the company some tiny fraction of a penny to serve up to a customer, but over the volume of the tens of billions of ads it serves each day, those fractions add up to a kind of minimal transaction cost for using the Internet, collected by its most powerful gatekeeper.17 The functionality of AdSense is in fact a kind of HFT arbitrage in its own right: every time a user navigates to a site serving advertisements via Google’s network, a rapid auction takes place for the marketers with the highest bids to serve their ads.


pages: 297 words: 91,141

Market Sense and Nonsense by Jack D. Schwager

3Com Palm IPO, asset allocation, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Brownian motion, buy and hold, collateralized debt obligation, commodity trading advisor, computerized trading, conceptual framework, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fixed income, global macro, high net worth, implied volatility, index arbitrage, index fund, Jim Simons, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, managed futures, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, merger arbitrage, negative equity, pattern recognition, performance metric, pets.com, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, selection bias, Sharpe ratio, short selling, statistical arbitrage, statistical model, subprime mortgage crisis, survivorship bias, tail risk, transaction costs, two-sided market, value at risk, yield curve

In effect, the intrinsic value is that part of the premium that could be realized if the option were exercised at the current market price. The intrinsic value serves as a floor price for an option. Why? Because if the premium were less than the intrinsic value, a trader could buy and exercise the option and immediately offset the resulting market position, thereby realizing a net gain (assuming that the trader covers at least transaction costs). Options that have intrinsic value (i.e., calls with strike prices below the market price and puts with strike prices above the market price) are said to be in-the-money. Options that have no intrinsic value are called out-of-the-money options. Options with a strike price closest to the market price are called at-the-money options.


pages: 389 words: 87,758

No Ordinary Disruption: The Four Global Forces Breaking All the Trends by Richard Dobbs, James Manyika

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, access to a mobile phone, additive manufacturing, Airbnb, Amazon Mechanical Turk, American Society of Civil Engineers: Report Card, asset light, autonomous vehicles, Bakken shale, barriers to entry, business cycle, business intelligence, carbon tax, Carmen Reinhart, central bank independence, circular economy, cloud computing, corporate governance, creative destruction, crowdsourcing, data science, demographic dividend, deskilling, digital capitalism, disintermediation, disruptive innovation, distributed generation, driverless car, Erik Brynjolfsson, financial innovation, first square of the chessboard, first square of the chessboard / second half of the chessboard, Gini coefficient, global supply chain, global village, high-speed rail, hydraulic fracturing, illegal immigration, income inequality, index fund, industrial robot, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, inventory management, job automation, Just-in-time delivery, Kenneth Rogoff, Kickstarter, knowledge worker, labor-force participation, low interest rates, low skilled workers, Lyft, M-Pesa, machine readable, mass immigration, megacity, megaproject, mobile money, Mohammed Bouazizi, Network effects, new economy, New Urbanism, ocean acidification, oil shale / tar sands, oil shock, old age dependency ratio, openstreetmap, peer-to-peer lending, pension reform, pension time bomb, private sector deleveraging, purchasing power parity, quantitative easing, recommendation engine, Report Card for America’s Infrastructure, RFID, ride hailing / ride sharing, Salesforce, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart cities, Snapchat, sovereign wealth fund, spinning jenny, stem cell, Steve Jobs, subscription business, supply-chain management, synthetic biology, TaskRabbit, The Great Moderation, trade route, transaction costs, Travis Kalanick, uber lyft, urban sprawl, Watson beat the top human players on Jeopardy!, working-age population, Zipcar

A platform that started out allowing people to trade used Beanie Babies and baseball cards has evolved into an international bazaar where everything from small cities (Bridgeville, California, has been auctioned three times since 2002) to a $28,000 partially eaten grilled cheese sandwich bearing an image of the Virgin Mary changes hands.1 The $2,642 worth of goods that trade on eBay every second symbolizes the peer-to-peer business opportunities it has enabled for small businesses.2 By 2002, when eBay grew to become a $1 billion revenue business, many believed it to be unstoppable.3 With its low transaction costs and overhead, eBay forged a business model that could scale rapidly—and posed a threat to a host of retailers. In 2003, eBay, fresh off its success in the United States, plunged into the nascent Chinese e-commerce market. By 2005, according to Forbes, eBay had one-half of the country’s $1 billion e-commerce market.


pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, Boeing 747, book value, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, Eyjafjallajökull, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, foreign exchange controls, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, junk bonds, Kenneth Rogoff, lateral thinking, Lewis Mumford, London Whale, Long Term Capital Management, market bubble, Michael Milken, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, proprietary trading, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, Sam Peltzman, savings glut, scientific management, subprime mortgage crisis, tail risk, technology bubble, TED Talk, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

Starting in the early 1980s, state antiusury laws were repealed and lenders began extending credit to groups that had long been denied, in particular minority and lower-income families. Loan denial rates dropped sharply, marking the birth of the subprime loan market. In the mid-1990s, Bill Clinton pushed hard to ease financial barriers to home ownership; his National Home Ownership Strategy pressed lenders and regulators to lower down payment requirements and reduce transaction costs in an effort to boost home ownership, “fueled by the creativity and resources of the private and public sectors.” That making home ownership easier would be politically popular was neither surprising nor new. What is striking when we look back at the 1990s and 2000s is that economists, who knew very well the risks of excessive debt, were so sanguine.


pages: 327 words: 90,542

The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril by Satyajit Das

"there is no alternative" (TINA), "World Economic Forum" Davos, 9 dash line, accounting loophole / creative accounting, additive manufacturing, Airbnb, Alan Greenspan, Albert Einstein, Alfred Russel Wallace, Anthropocene, Anton Chekhov, Asian financial crisis, banking crisis, Bear Stearns, Berlin Wall, bitcoin, bond market vigilante , Bretton Woods, BRICs, British Empire, business cycle, business process, business process outsourcing, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, Clayton Christensen, cloud computing, collaborative economy, colonial exploitation, computer age, creative destruction, cryptocurrency, currency manipulation / currency intervention, David Ricardo: comparative advantage, declining real wages, Deng Xiaoping, deskilling, digital divide, disintermediation, disruptive innovation, Downton Abbey, Emanuel Derman, energy security, energy transition, eurozone crisis, financial engineering, financial innovation, financial repression, forward guidance, Francis Fukuyama: the end of history, full employment, geopolitical risk, gig economy, Gini coefficient, global reserve currency, global supply chain, Goldman Sachs: Vampire Squid, Great Leap Forward, Greenspan put, happiness index / gross national happiness, high-speed rail, Honoré de Balzac, hydraulic fracturing, Hyman Minsky, illegal immigration, income inequality, income per capita, indoor plumbing, informal economy, Innovator's Dilemma, intangible asset, Intergovernmental Panel on Climate Change (IPCC), it is difficult to get a man to understand something, when his salary depends on his not understanding it, It's morning again in America, Jane Jacobs, John Maynard Keynes: technological unemployment, junk bonds, Kenneth Rogoff, Kevin Roose, knowledge economy, knowledge worker, Les Trente Glorieuses, light touch regulation, liquidity trap, Long Term Capital Management, low interest rates, low skilled workers, Lyft, Mahatma Gandhi, margin call, market design, Marshall McLuhan, Martin Wolf, middle-income trap, Mikhail Gorbachev, military-industrial complex, Minsky moment, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, oil shale / tar sands, oil shock, old age dependency ratio, open economy, PalmPilot, passive income, peak oil, peer-to-peer lending, pension reform, planned obsolescence, plutocrats, Ponzi scheme, Potemkin village, precariat, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, Ralph Nader, Rana Plaza, rent control, rent-seeking, reserve currency, ride hailing / ride sharing, rising living standards, risk/return, Robert Gordon, Robert Solow, Ronald Reagan, Russell Brand, Satyajit Das, savings glut, secular stagnation, seigniorage, sharing economy, Silicon Valley, Simon Kuznets, Slavoj Žižek, South China Sea, sovereign wealth fund, Stephen Fry, systems thinking, TaskRabbit, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, the payments system, The Spirit Level, Thorstein Veblen, Tim Cook: Apple, too big to fail, total factor productivity, trade route, transaction costs, uber lyft, unpaid internship, Unsafe at Any Speed, Upton Sinclair, Washington Consensus, We are the 99%, WikiLeaks, Y2K, Yom Kippur War, zero-coupon bond, zero-sum game

Unlike businesses, houses, once constructed, produce limited income, profits, employment, or investment. Overinvestment also reduces the mobility of workers, creating an inflexible labor force. The ability to follow employment opportunities is restricted by fluctuations in house prices, the time often needed to sell properties, and high transaction costs (buying and selling can cost 5–15 percent of value). Overinvestment also limits wage flexibility, as workers are constrained by their mortgage payments. The link between higher rates of home ownership and the wealth of nations is tenuous. The US, UK, and Australia have home ownership rates of around 65–70 percent.


pages: 346 words: 90,371

Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane

agricultural Revolution, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, basic income, book value, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, debt deflation, deindustrialization, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, foreign exchange controls, full employment, garden city movement, George Akerlof, ghettoisation, Gini coefficient, Hernando de Soto, housing crisis, Hyman Minsky, income inequality, information asymmetry, knowledge worker, labour market flexibility, labour mobility, land bank, land reform, land tenure, land value tax, Landlord’s Game, low interest rates, low skilled workers, market bubble, market clearing, Martin Wolf, means of production, Minsky moment, Money creation, money market fund, mortgage debt, negative equity, Network effects, new economy, New Urbanism, Northern Rock, offshore financial centre, Pareto efficiency, place-making, Post-Keynesian economics, price stability, profit maximization, quantitative easing, rent control, rent-seeking, Richard Florida, Right to Buy, rising living standards, risk tolerance, Robert Solow, Second Machine Age, secular stagnation, shareholder value, subprime mortgage crisis, the built environment, The Great Moderation, The Market for Lemons, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, universal basic income, urban planning, urban sprawl, working poor, working-age population

Increasingly, the model favours the generation of profits through the securitisation and selling on of loans, with the most popular type of securitised loan being residential mortgage-backed securities. The imperatives of short-term shareholder value both incentivise excessive risk-taking and mean that lending to SMEs – involving high transaction costs for relatively small loans – does not make business sense for larger banks (Berger and Udell, 2002). By contrast, in other countries, for example Germany, Switzerland and Austria, there is a much stronger culture of ‘relationship banking’. In Germany, two-thirds of bank deposits are controlled by either cooperative or public savings banks, most of which are owned by regional or local people and/or businesses.


pages: 319 words: 89,477

The Power of Pull: How Small Moves, Smartly Made, Can Set Big Things in Motion by John Hagel Iii, John Seely Brown

Albert Einstein, Andrew Keen, barriers to entry, Black Swan, business process, call centre, Clayton Christensen, clean tech, cloud computing, commoditize, corporate governance, creative destruction, disruptive innovation, Elon Musk, en.wikipedia.org, future of work, game design, George Gilder, intangible asset, Isaac Newton, job satisfaction, Joi Ito, knowledge economy, knowledge worker, loose coupling, Louis Pasteur, Malcom McLean invented shipping containers, Marc Benioff, Maui Hawaii, medical residency, Network effects, old-boy network, packet switching, pattern recognition, peer-to-peer, pre–internet, profit motive, recommendation engine, Ronald Coase, Salesforce, shareholder value, Silicon Valley, Skype, smart transportation, software as a service, supply-chain management, tacit knowledge, The Nature of the Firm, the new new thing, the strength of weak ties, too big to fail, trade liberalization, transaction costs, TSMC, Yochai Benkler

Second, during the 1950s, another generation of business leaders broadened their horizons to scale push programs beyond national boundaries to take advantage of trade liberalization and to serve global markets. It is no coincidence that the famous British economist Ronald Coase wrote his path-breaking essay, “The Nature of the Firm,” in 1937.4 He effectively captured the primary thrust of institution-building during this period, arguing that firms existed to reduce the transaction costs that made coordinating activity across independent entities difficult. For this insight, he won the Nobel Prize in Economics. As firms deployed these new push-based approaches, other institutions underwent similar transformations. Educational systems were rationalized through push-based programs of their own—standardized curricula—that were designed to mold students into predictable participants in the workplace.


pages: 299 words: 91,839

What Would Google Do? by Jeff Jarvis

"World Economic Forum" Davos, 23andMe, Amazon Mechanical Turk, Amazon Web Services, Anne Wojcicki, AOL-Time Warner, barriers to entry, Berlin Wall, bike sharing, business process, call centre, carbon tax, cashless society, citizen journalism, clean water, commoditize, connected car, content marketing, credit crunch, crowdsourcing, death of newspapers, different worldview, disintermediation, diversified portfolio, don't be evil, Dunbar number, fake news, fear of failure, Firefox, future of journalism, G4S, Golden age of television, Google Earth, Googley, Howard Rheingold, informal economy, inventory management, Jeff Bezos, jimmy wales, John Perry Barlow, Kevin Kelly, Marc Benioff, Mark Zuckerberg, moral hazard, Network effects, new economy, Nicholas Carr, old-boy network, PageRank, peer-to-peer lending, post scarcity, prediction markets, pre–internet, Ronald Coase, Salesforce, search inside the book, Sheryl Sandberg, Silicon Valley, Skype, social graph, social software, social web, spectrum auction, speech recognition, Steve Jobs, the long tail, the medium is the message, The Nature of the Firm, the payments system, The Wisdom of Crowds, transaction costs, web of trust, WikiLeaks, Y Combinator, Zipcar

Tobaccowala defines advertising as “the economics of information” (the title of a 1961 essay by Nobel laureate and University of Chicago professor George J. Stigler). Advertising is supposed to tell us about a product or its price so we can save effort, time, and money in our search for it. The internet has made that much more efficient. If the customers’ goal is to reduce their transaction cost—the effort to find the right product at the right price—then doesn’t the internet itself replace advertising? Often, yes. A 2007 economics honors thesis by Daniel A. Epstein compared the pricing of similar cars listed in expensive newspaper ads with cars listed for free in craigslist. His hypothesis was that sellers who pay to advertise would want to price cars lower to sell more quickly so they would spend less on advertising.


pages: 310 words: 90,817

Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown by Detlev S. Schlichter

bank run, banks create money, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, currency peg, fixed income, Fractional reserve banking, German hyperinflation, global reserve currency, inflation targeting, Kenneth Rogoff, Kickstarter, Long Term Capital Management, low interest rates, market clearing, Martin Wolf, means of production, Money creation, money market fund, moral hazard, mortgage debt, open economy, Ponzi scheme, price discovery process, price mechanism, price stability, pushing on a string, quantitative easing, reserve currency, rising living standards, risk tolerance, savings glut, the market place, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, We are all Keynesians now, Y2K

Holding the monetary asset thus involves opportunity costs. The one essential advantage that the monetary asset has over all other goods and services is its general acceptance in return for goods and services. Like no other asset, it can be exchanged for any other good or service instantly and with no or minimal transaction costs. This marketability gives its owner a flexibility that no other good can provide. The demand for money is demand for readily usable purchasing power. People have demand for money because they want to be ready to trade. The demand for money can also be called the demand for cash holdings although the term demand for money will be used here.


Monte Carlo Simulation and Finance by Don L. McLeish

algorithmic bias, Black-Scholes formula, Brownian motion, capital asset pricing model, compound rate of return, discrete time, distributed generation, finite state, frictionless, frictionless market, implied volatility, incomplete markets, invention of the printing press, martingale, p-value, random walk, risk free rate, Sharpe ratio, short selling, stochastic process, stochastic volatility, survivorship bias, the market place, transaction costs, value at risk, Wiener process, zero-coupon bond, zero-sum game

In this case, the equation specializes to −rV + ∂V ∂V σ2 S 2 ∂ 2 V = 0. + (r − D0 )S + ∂t ∂S 2 ∂S 2 (2.38) Note that we have not used any of the properties of the particular derivative product yet, nor does this differential equation involve the drift coefficient µ. The assumption that there are no transaction costs is essential to this analysis, as we have assumed that the portfolio is continually rebalanced. We have now seen two derivations of parabolic partial differential equations, so-called because like the equation of a parabola, they are first order (derivatives) in one variable (t) and second order in the other (x).


pages: 326 words: 91,559

Everything for Everyone: The Radical Tradition That Is Shaping the Next Economy by Nathan Schneider

1960s counterculture, Aaron Swartz, Adam Curtis, Affordable Care Act / Obamacare, Airbnb, altcoin, Amazon Mechanical Turk, antiwork, back-to-the-land, basic income, Berlin Wall, Bernie Sanders, bitcoin, Black Lives Matter, blockchain, Brewster Kahle, Burning Man, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, carbon tax, Clayton Christensen, collaborative economy, collective bargaining, commons-based peer production, Community Supported Agriculture, corporate governance, creative destruction, crowdsourcing, cryptocurrency, Debian, degrowth, disruptive innovation, do-ocracy, Donald Knuth, Donald Trump, Edward Snowden, Elon Musk, emotional labour, Ethereum, ethereum blockchain, Evgeny Morozov, Fairphone, Food sovereignty, four colour theorem, future of work, Gabriella Coleman, gentrification, gig economy, Google bus, holacracy, hydraulic fracturing, initial coin offering, intentional community, Internet Archive, Jeff Bezos, Jeremy Corbyn, jimmy wales, John Perry Barlow, joint-stock company, Joseph Schumpeter, Julian Assange, Kevin Roose, Kickstarter, low interest rates, Lyft, M-Pesa, Marc Andreessen, Mark Zuckerberg, Marshall McLuhan, mass immigration, means of production, Money creation, multi-sided market, Murray Bookchin, new economy, offshore financial centre, old-boy network, Peter H. Diamandis: Planetary Resources, Pier Paolo Pasolini, post-work, precariat, premature optimization, pre–internet, profit motive, race to the bottom, Richard Florida, Richard Stallman, ride hailing / ride sharing, Rutger Bregman, Salesforce, Sam Altman, Satoshi Nakamoto, self-driving car, shareholder value, sharing economy, Silicon Valley, Slavoj Žižek, smart contracts, Steve Bannon, Steve Jobs, Steve Wozniak, Stewart Brand, surveillance capitalism, tech worker, TED Talk, transaction costs, Turing test, Uber and Lyft, uber lyft, underbanked, undersea cable, universal basic income, Upton Sinclair, Vanguard fund, Vitalik Buterin, W. E. B. Du Bois, white flight, Whole Earth Catalog, WikiLeaks, women in the workforce, working poor, workplace surveillance , Y Combinator, Y2K, Zipcar

But Swanson grew increasingly skeptical that Bitcoin would unsettle the existing finance megaliths. “You have centralization without the benefits of centralization,” he told me. He calculated that the cost of bringing Bitcoin services to the developing world would wipe away the savings from the system’s low transaction costs. By the time I met the TerraMiner IV, Bitcoin wealth was distributed far more unequally than in the conventional economy. Users were probably more than 90 percent male.6 Entrusting money to algorithms, it turns out, was no guarantee of a better result than managing it with institutions and people.


pages: 339 words: 88,732

The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies by Erik Brynjolfsson, Andrew McAfee

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, access to a mobile phone, additive manufacturing, Airbnb, Alan Greenspan, Albert Einstein, Amazon Mechanical Turk, Amazon Web Services, American Society of Civil Engineers: Report Card, Any sufficiently advanced technology is indistinguishable from magic, autonomous vehicles, barriers to entry, basic income, Baxter: Rethink Robotics, Boston Dynamics, British Empire, business cycle, business intelligence, business process, call centre, carbon tax, Charles Lindbergh, Chuck Templeton: OpenTable:, clean water, combinatorial explosion, computer age, computer vision, congestion charging, congestion pricing, corporate governance, cotton gin, creative destruction, crowdsourcing, data science, David Ricardo: comparative advantage, digital map, driverless car, employer provided health coverage, en.wikipedia.org, Erik Brynjolfsson, factory automation, Fairchild Semiconductor, falling living standards, Filter Bubble, first square of the chessboard / second half of the chessboard, Frank Levy and Richard Murnane: The New Division of Labor, Freestyle chess, full employment, G4S, game design, general purpose technology, global village, GPS: selective availability, Hans Moravec, happiness index / gross national happiness, illegal immigration, immigration reform, income inequality, income per capita, indoor plumbing, industrial robot, informal economy, intangible asset, inventory management, James Watt: steam engine, Jeff Bezos, Jevons paradox, jimmy wales, job automation, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kevin Kelly, Khan Academy, Kiva Systems, knowledge worker, Kodak vs Instagram, law of one price, low skilled workers, Lyft, Mahatma Gandhi, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Mars Rover, mass immigration, means of production, Narrative Science, Nate Silver, natural language processing, Network effects, new economy, New Urbanism, Nicholas Carr, Occupy movement, oil shale / tar sands, oil shock, One Laptop per Child (OLPC), pattern recognition, Paul Samuelson, payday loans, post-work, power law, price stability, Productivity paradox, profit maximization, Ralph Nader, Ray Kurzweil, recommendation engine, Report Card for America’s Infrastructure, Robert Gordon, Robert Solow, Rodney Brooks, Ronald Reagan, search costs, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Simon Kuznets, six sigma, Skype, software patent, sovereign wealth fund, speech recognition, statistical model, Steve Jobs, Steven Pinker, Stuxnet, supply-chain management, TaskRabbit, technological singularity, telepresence, The Bell Curve by Richard Herrnstein and Charles Murray, the Cathedral and the Bazaar, the long tail, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, Tyler Cowen, Tyler Cowen: Great Stagnation, Vernor Vinge, warehouse robotics, Watson beat the top human players on Jeopardy!, winner-take-all economy, Y2K

.* Remember that productivity growth has been in the neighborhood of 2 percent per year for most of the past century, so contribution of new goods is not a trivial portion. Reputations and Recommendations Digitization also brings a related but subtler benefit to the vast array of goods and services that already exist in the economy. Lower search and transaction costs mean faster and easier access and increased efficiency and convenience. For example, the rating site Yelp collects millions of customer reviews to help diners find nearby restaurants in the quality and price ranges they seek, even when they are visiting new cities. The reservation service OpenTable then lets them book a table with just a few mouse clicks.


pages: 353 words: 88,376

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett by Jack (edited By) Guinan

Albert Einstein, asset allocation, asset-backed security, book value, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, clean water, collateralized debt obligation, computerized markets, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, fear index, financial engineering, fixed income, Glass-Steagall Act, implied volatility, index fund, intangible asset, interest rate swap, inventory management, inverted yield curve, junk bonds, London Interbank Offered Rate, low interest rates, margin call, money market fund, mortgage debt, Myron Scholes, passive investing, performance metric, risk free rate, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, short squeeze, statistical model, time value of money, transaction costs, yield curve, zero-coupon bond

A mutual fund sold without a sales charge or commission. This is the opposite of a load fund, which charges an up-front commission, usually levied as a percentage, for example, a 3% front-end load, or as a level-load for as long as the investor holds the fund. Investopedia explains No-Load Fund Because there is no transaction cost to purchase a no-load fund, all the money is invested in the fund. For example, if an investor 202 The Investopedia Guide to Wall Speak purchases $10,000 worth of a no-load mutual fund, the whole $10,000 will be invested in the fund. In contrast, if an investor buys a load fund that charges a front-end load (sales commission) of 5%, the amount actually invested in the fund is only $9,500.


The Data Revolution: Big Data, Open Data, Data Infrastructures and Their Consequences by Rob Kitchin

Bayesian statistics, business intelligence, business process, cellular automata, Celtic Tiger, cloud computing, collateralized debt obligation, conceptual framework, congestion charging, corporate governance, correlation does not imply causation, crowdsourcing, data science, discrete time, disruptive innovation, George Gilder, Google Earth, hype cycle, Infrastructure as a Service, Internet Archive, Internet of things, invisible hand, knowledge economy, Large Hadron Collider, late capitalism, lifelogging, linked data, longitudinal study, machine readable, Masdar, means of production, Nate Silver, natural language processing, openstreetmap, pattern recognition, platform as a service, recommendation engine, RFID, semantic web, sentiment analysis, SimCity, slashdot, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, smart grid, smart meter, software as a service, statistical model, supply-chain management, technological solutionism, the scientific method, The Signal and the Noise by Nate Silver, transaction costs

It is generally argued by open data advocates that securing a stable financial base for open data within and outside the state is best achieved by direct government subvention of the costs. Proponents of this approach argue that the increased public expenditure is offset in four ways. First, enabling direct access to the data can reduce some of the producers’ transaction costs, such as staffing required for marketing, sales, communicating with customers, and monitoring compliance with licence arrangements (Pollock 2006). Second, the open model can leverage free additional labour and innovation from the crowd of users that adds significant value to the dataset and for the organisation in terms of data quality, analysis and derived knowledge, new products and innovations, and new relationships and partnerships (de Vries et al. 2011; Houghton 2011).


pages: 327 words: 91,351

Traders at Work: How the World's Most Successful Traders Make Their Living in the Markets by Tim Bourquin, Nicholas Mango

algorithmic trading, automated trading system, backtesting, buy and hold, commodity trading advisor, Credit Default Swap, Elliott wave, financial engineering, fixed income, global macro, Long Term Capital Management, managed futures, Market Wizards by Jack D. Schwager, paper trading, pattern recognition, prediction markets, risk tolerance, Small Order Execution System, statistical arbitrage, The Wisdom of Crowds, transaction costs, zero-sum game

It’s like putting a scale or a ruler or some measuring device against a rhythm and a pattern that you’re very familiar with, and you’re getting confirmation of that with technical analysis. Bourquin: How does being a member of the CME give you an advantage in your trading? Miller: Reduced transaction costs. And for those that do engage in frequent transactions over the course of the day, which I certainly do, and as an incentive to help increase the liquidity in the markets, the exchanges allow people to either buy seats on the exchange or, in my case, lease a seat for a very modest monthly amount.


pages: 279 words: 87,875

Underwater: How Our American Dream of Homeownership Became a Nightmare by Ryan Dezember

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", activist fund / activist shareholder / activist investor, Airbnb, Bear Stearns, business cycle, call centre, Carl Icahn, Cesare Marchetti: Marchetti’s constant, cloud computing, collateralized debt obligation, company town, coronavirus, corporate raider, COVID-19, Credit Default Swap, credit default swaps / collateralized debt obligations, data science, deep learning, Donald Trump, Home mortgage interest deduction, housing crisis, interest rate swap, low interest rates, margin call, McMansion, mortgage debt, mortgage tax deduction, negative equity, opioid epidemic / opioid crisis, pill mill, rent control, rolodex, Savings and loan crisis, sharing economy, sovereign wealth fund, transaction costs

The administration of President Bill Clinton in 1994 convened the National Partners in Homeownership, which brought together bankers, builders, mortgage companies, real estate agents, and their regulators with orders to push homeownership to new highs. The group aimed to do this by “making homeownership more affordable, expanding creative financing, simplifying the home buying process, reducing transaction costs, changing conventional methods of design and building less expensive houses, among other means.” It worked. Within a few years, the homeownership rate topped the old high that was reached back in 1980. This feat was not without cost, though. Debt soared. Consumers became accustomed to spending more than they earned.


pages: 326 words: 91,532

The Pay Off: How Changing the Way We Pay Changes Everything by Gottfried Leibbrandt, Natasha de Teran

"World Economic Forum" Davos, Alan Greenspan, Ayatollah Khomeini, bank run, banking crisis, banks create money, Bear Stearns, Big Tech, bitcoin, blockchain, call centre, cashless society, Clayton Christensen, cloud computing, coronavirus, COVID-19, Credit Default Swap, cross-border payments, cryptocurrency, David Graeber, Donald Trump, Edward Snowden, Ethereum, ethereum blockchain, financial exclusion, global pandemic, global reserve currency, illegal immigration, information asymmetry, initial coin offering, interest rate swap, Internet of things, Irish bank strikes, Julian Assange, large denomination, light touch regulation, lockdown, low interest rates, M-Pesa, machine readable, Money creation, money: store of value / unit of account / medium of exchange, move fast and break things, Network effects, Northern Rock, off grid, offshore financial centre, payday loans, post-industrial society, printed gun, QR code, RAND corporation, ransomware, Real Time Gross Settlement, reserve currency, Rishi Sunak, Silicon Valley, Silicon Valley startup, Skype, smart contracts, sovereign wealth fund, special drawing rights, tech billionaire, the payments system, too big to fail, transaction costs, WikiLeaks, you are the product

The FinTech revolution has largely lived up to its billing thus far, unleashing a wave of innovation in financial services and repairing some of its prevailing shortfalls. These innovations offer consumers more choice, bettertargeted services and keener pricing. Small businesses are able to get access to new forms of credit. Banks are becoming more productive, with lower transaction costs, and the financial system itself is becoming more resilient, with greater diversity, redundancy and depth. Fundamentally, financial services are becoming more inclusive; people are better connected, more informed and increasingly empowered. Needless to say, venture capital money has pooled behind FinTech, much of which is backed by the belief that banking in general and payments in particular must be ripe for disruption.


pages: 312 words: 93,836

Barometer of Fear: An Insider's Account of Rogue Trading and the Greatest Banking Scandal in History by Alexis Stenfors

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Big bang: deregulation of the City of London, bonus culture, capital controls, collapse of Lehman Brothers, credit crunch, Credit Default Swap, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, fixed income, foreign exchange controls, game design, Gordon Gekko, inflation targeting, information asymmetry, interest rate derivative, interest rate swap, London Interbank Offered Rate, loss aversion, mental accounting, millennium bug, Nick Leeson, Northern Rock, oil shock, Post-Keynesian economics, price stability, profit maximization, proprietary trading, regulatory arbitrage, reserve currency, Rubik’s Cube, Snapchat, Suez crisis 1956, the market place, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, work culture , Y2K

Instead, the behaviour failings were seen as a convention that ‘had anticompetitive consequences and was harmful to the interests of investors’.21 In 2014, the European Commission fined a handful of market makers for agreeing: to quote to all third parties wider, fixed bid–offer spreads on certain categories of short-term over-the-counter Swiss franc interest rate derivatives, whilst maintaining narrower spreads for trades amongst themselves. The aim of the agreement was to lower the parties’ own transaction costs and maintain liquidity between them whilst seeking to impose wider spreads on third parties. Another objective of the collusion was to prevent other market players from competing on the same terms as these four major players in the Swiss franc derivatives market. In this case, the collective behaviour of RBS, UBS, J.


pages: 332 words: 93,672

Life After Google: The Fall of Big Data and the Rise of the Blockchain Economy by George Gilder

23andMe, Airbnb, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Albert Einstein, AlphaGo, AltaVista, Amazon Web Services, AOL-Time Warner, Asilomar, augmented reality, Ben Horowitz, bitcoin, Bitcoin Ponzi scheme, Bletchley Park, blockchain, Bob Noyce, British Empire, Brownian motion, Burning Man, business process, butterfly effect, carbon footprint, cellular automata, Claude Shannon: information theory, Clayton Christensen, cloud computing, computer age, computer vision, crony capitalism, cross-subsidies, cryptocurrency, Danny Hillis, decentralized internet, deep learning, DeepMind, Demis Hassabis, disintermediation, distributed ledger, don't be evil, Donald Knuth, Donald Trump, double entry bookkeeping, driverless car, Elon Musk, Erik Brynjolfsson, Ethereum, ethereum blockchain, fake news, fault tolerance, fiat currency, Firefox, first square of the chessboard, first square of the chessboard / second half of the chessboard, floating exchange rates, Fractional reserve banking, game design, Geoffrey Hinton, George Gilder, Google Earth, Google Glasses, Google Hangouts, index fund, inflation targeting, informal economy, initial coin offering, Internet of things, Isaac Newton, iterative process, Jaron Lanier, Jeff Bezos, Jim Simons, Joan Didion, John Markoff, John von Neumann, Julian Assange, Kevin Kelly, Law of Accelerating Returns, machine translation, Marc Andreessen, Mark Zuckerberg, Mary Meeker, means of production, Menlo Park, Metcalfe’s law, Money creation, money: store of value / unit of account / medium of exchange, move fast and break things, Neal Stephenson, Network effects, new economy, Nick Bostrom, Norbert Wiener, Oculus Rift, OSI model, PageRank, pattern recognition, Paul Graham, peer-to-peer, Peter Thiel, Ponzi scheme, prediction markets, quantitative easing, random walk, ransomware, Ray Kurzweil, reality distortion field, Recombinant DNA, Renaissance Technologies, Robert Mercer, Robert Metcalfe, Ronald Coase, Ross Ulbricht, Ruby on Rails, Sand Hill Road, Satoshi Nakamoto, Search for Extraterrestrial Intelligence, self-driving car, sharing economy, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Singularitarianism, Skype, smart contracts, Snapchat, Snow Crash, software is eating the world, sorting algorithm, South Sea Bubble, speech recognition, Stephen Hawking, Steve Jobs, Steven Levy, Stewart Brand, stochastic process, Susan Wojcicki, TED Talk, telepresence, Tesla Model S, The Soul of a New Machine, theory of mind, Tim Cook: Apple, transaction costs, tulip mania, Turing complete, Turing machine, Vernor Vinge, Vitalik Buterin, Von Neumann architecture, Watson beat the top human players on Jeopardy!, WikiLeaks, Y Combinator, zero-sum game

By disintermediating transactions, cryptocurrencies also offer a remedy for the hypertrophy of finance—up near 40 percent of business profits—that has also coincided with the decline of GDP growth.4 Companies are abandoning hierarchy and pursuing heterarchy because, as the Tapscotts put it, “blockchain technology offers a credible and effective means not only of cutting out intermediaries, but also of radically lowering transaction costs, turning firms into networks, distributing economic power, and enabling both wealth creation and a more prosperous future.”5 Bitcoin aimed to burst the overstuffed $5.1 trillion daily piñata of modern currencies and unleash a crypto-copia. But the units of account—the monetary measuring sticks—remained in the world of fiat and gold.


pages: 798 words: 240,182

The Transhumanist Reader by Max More, Natasha Vita-More

"World Economic Forum" Davos, 23andMe, Any sufficiently advanced technology is indistinguishable from magic, artificial general intelligence, augmented reality, Bill Joy: nanobots, bioinformatics, brain emulation, Buckminster Fuller, cellular automata, clean water, cloud computing, cognitive bias, cognitive dissonance, combinatorial explosion, Computing Machinery and Intelligence, conceptual framework, Conway's Game of Life, cosmological principle, data acquisition, discovery of DNA, Douglas Engelbart, Drosophila, en.wikipedia.org, endogenous growth, experimental subject, Extropian, fault tolerance, Flynn Effect, Francis Fukuyama: the end of history, Frank Gehry, friendly AI, Future Shock, game design, germ theory of disease, Hans Moravec, hypertext link, impulse control, index fund, John von Neumann, joint-stock company, Kevin Kelly, Law of Accelerating Returns, life extension, lifelogging, Louis Pasteur, Menlo Park, meta-analysis, moral hazard, Network effects, Nick Bostrom, Norbert Wiener, pattern recognition, Pepto Bismol, phenotype, positional goods, power law, precautionary principle, prediction markets, presumed consent, Project Xanadu, public intellectual, radical life extension, Ray Kurzweil, reversible computing, RFID, Ronald Reagan, scientific worldview, silicon-based life, Singularitarianism, social intelligence, stem cell, stochastic process, superintelligent machines, supply-chain management, supply-chain management software, synthetic biology, systems thinking, technological determinism, technological singularity, Ted Nelson, telepresence, telepresence robot, telerobotics, the built environment, The Coming Technological Singularity, the scientific method, The Wisdom of Crowds, transaction costs, Turing machine, Turing test, Upton Sinclair, Vernor Vinge, Von Neumann architecture, VTOL, Whole Earth Review, women in the workforce, zero-sum game

Ideally, there would be a “complete market,” with assets contingent on every possible state of the world. In reality markets are not complete, and various sorts of “market failure” are traced to this fact. Incompleteness is usually (Hirshleifer 1971) explained as due to judging difficulties, finite transaction costs, and market thinness. In fact, these authors are often unaware that such markets are almost universally prohibited by anti-gambling laws, as joint-stock companies, life insurance, and commodity futures (Rose 1986) were prohibited before special interests managed to obtain exemptions. Though unevenly enforced, such laws prohibit public science bets between strangers in all of the US and in most of the world.

These limits may not curb all progress, but as previous limitations, they may bring new turns into the development process that we may currently find difficult to foresee. Still, we can probably already imagine some of the features of the posthuman world. Increasing independence of functional systems from the physical substrate, continued growth in architectural liquidity of systems, low transaction costs, and secure and semantic-rich communication mechanisms will result in the dissolution of large quasi-static systems and the obsolescence of the idea of structural identity. The development arena may belong to the “teleological threads” – chains of systems creating each other for sequences of purposes using for their execution temporary custom assemblages of small function-specific units.


pages: 308 words: 99,298

Brexit, No Exit: Why in the End Britain Won't Leave Europe by Denis MacShane

"World Economic Forum" Davos, 3D printing, Alan Greenspan, Alvin Toffler, banking crisis, battle of ideas, Big bang: deregulation of the City of London, Boris Johnson, Bretton Woods, Brexit referendum, British Empire, centre right, Corn Laws, deindustrialization, Doha Development Round, Donald Trump, Etonian, European colonialism, fake news, financial engineering, first-past-the-post, fixed income, Gini coefficient, greed is good, illegal immigration, information security, James Dyson, Jeremy Corbyn, labour mobility, liberal capitalism, low cost airline, low interest rates, Martin Wolf, mass immigration, military-industrial complex, Mont Pelerin Society, negative equity, Neil Kinnock, new economy, non-tariff barriers, offshore financial centre, open borders, open economy, post-truth, price stability, purchasing power parity, quantitative easing, reshoring, road to serfdom, secular stagnation, Silicon Valley, Thales and the olive presses, trade liberalization, transaction costs, women in the workforce

But why should France and Germany or Italy and Spain and other EU member states offer a privileged relationship with the UK not offered to French- or Spanish-speaking countries elsewhere in the world, let alone to the United States, China or Russia? Many have forgotten that the main advantages of EU and Single Market membership are the application of rules and regulations and standards that are applicable across the member countries. This reduces transaction costs and creates a level playing field for business. The European Commission works at preventing monopolistic or oligopolistic abuse; containing state aid and other support from national governments that favours domestic producers; and opening up access to public procurement opportunities across the region.


pages: 317 words: 101,074

The Road Ahead by Bill Gates, Nathan Myhrvold, Peter Rinearson

Albert Einstein, Apple's 1984 Super Bowl advert, Berlin Wall, Bill Gates: Altair 8800, Bob Noyce, Bonfire of the Vanities, business process, California gold rush, Charles Babbage, Claude Shannon: information theory, computer age, Donald Knuth, first square of the chessboard, first square of the chessboard / second half of the chessboard, glass ceiling, global village, informal economy, invention of movable type, invention of the printing press, invention of writing, John von Neumann, knowledge worker, medical malpractice, Mitch Kapor, new economy, packet switching, popular electronics, Richard Feynman, Ronald Reagan, SimCity, speech recognition, Steve Ballmer, Steve Jobs, Steven Pinker, Ted Nelson, telemarketer, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, Turing machine, Turing test, Von Neumann architecture

Servers distributed worldwide will accept bids, resolve offers into completed transactions, control authentication and security, and handle all other aspects of the marketplace, including the transfer of funds. This will carry us into a new world of low-friction, low-overhead capitalism, in which market information will be plentiful and transaction costs low. It will be a shopper's heaven. Every market, from a bazaar to the highway, facilitates competitive pricing and allows goods to move from seller to buyer efficiently with modest friction. This is thanks to the market makers—those whose job it is to bring buyers and sellers together. As the information highway assumes the role of market maker in realm after realm, traditional middlemen will have to contribute real value to a transaction to justify a commission.


pages: 360 words: 100,063

Ninefox Gambit by Yoon Ha Lee

centre right, death from overwork, Future Shock, game design, transaction costs

At some point, Rahal Iruja was going to ask Mikodez to remove Kujen for real. Mikodez already had files detailing possible ways to do it, which he updated twice a month (more often when he got bored), although he wasn’t going to unless it became necessary. True, Kujen’s taste in hobbies made him an annoying transaction cost, but he was good at his job and he represented a certain amount of stability. Of course, Mikodez had plans for how to deal with the inevitable transition after Kujen’s death, just in case. Kujen had sent Mikodez his projections of possible heretical calendars. “I’ve sorted them by likelihood,” Kujen said.


pages: 347 words: 97,721

Only Humans Need Apply: Winners and Losers in the Age of Smart Machines by Thomas H. Davenport, Julia Kirby

"World Economic Forum" Davos, AI winter, Amazon Robotics, Andy Kessler, Apollo Guidance Computer, artificial general intelligence, asset allocation, Automated Insights, autonomous vehicles, basic income, Baxter: Rethink Robotics, behavioural economics, business intelligence, business process, call centre, carbon-based life, Clayton Christensen, clockwork universe, commoditize, conceptual framework, content marketing, dark matter, data science, David Brooks, deep learning, deliberate practice, deskilling, digital map, disruptive innovation, Douglas Engelbart, driverless car, Edward Lloyd's coffeehouse, Elon Musk, Erik Brynjolfsson, estate planning, financial engineering, fixed income, flying shuttle, follow your passion, Frank Levy and Richard Murnane: The New Division of Labor, Freestyle chess, game design, general-purpose programming language, global pandemic, Google Glasses, Hans Lippershey, haute cuisine, income inequality, independent contractor, index fund, industrial robot, information retrieval, intermodal, Internet of things, inventory management, Isaac Newton, job automation, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joi Ito, Khan Academy, Kiva Systems, knowledge worker, labor-force participation, lifelogging, longitudinal study, loss aversion, machine translation, Mark Zuckerberg, Narrative Science, natural language processing, Nick Bostrom, Norbert Wiener, nuclear winter, off-the-grid, pattern recognition, performance metric, Peter Thiel, precariat, quantitative trading / quantitative finance, Ray Kurzweil, Richard Feynman, risk tolerance, Robert Shiller, robo advisor, robotic process automation, Rodney Brooks, Second Machine Age, self-driving car, Silicon Valley, six sigma, Skype, social intelligence, speech recognition, spinning jenny, statistical model, Stephen Hawking, Steve Jobs, Steve Wozniak, strong AI, superintelligent machines, supply-chain management, tacit knowledge, tech worker, TED Talk, the long tail, transaction costs, Tyler Cowen, Tyler Cowen: Great Stagnation, Watson beat the top human players on Jeopardy!, Works Progress Administration, Zipcar

While most of the work that these coordination mechanisms are combining is of a commodity nature—capable of being performed by many people with minimal depth in their field—the same kind of structure also allows for narrow-steppers to plug their specialized talents into larger endeavors without the high “transaction costs” that usually go with outside contracting. Meanwhile, even for those who perform the outsourced tasks that require minimal training, these mechanisms make it increasingly possible to concentrate on a certain type of work, develop real strength at it, and become known for mastery of some very specialized work—thus, to excel by stepping narrowly—because demand for it can be aggregated from all around the world.


pages: 447 words: 104,258

Mathematics of the Financial Markets: Financial Instruments and Derivatives Modelling, Valuation and Risk Issues by Alain Ruttiens

algorithmic trading, asset allocation, asset-backed security, backtesting, banking crisis, Black Swan, Black-Scholes formula, Bob Litterman, book value, Brownian motion, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delta neutral, discounted cash flows, discrete time, diversification, financial engineering, fixed income, implied volatility, interest rate derivative, interest rate swap, low interest rates, managed futures, margin call, market microstructure, martingale, p-value, passive investing, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk/return, Satyajit Das, seminal paper, Sharpe ratio, short selling, statistical model, stochastic process, stochastic volatility, time value of money, transaction costs, value at risk, volatility smile, Wiener process, yield curve, zero-coupon bond

For example, a position in a (bought or sold) option is asymmetric per se. Such an objective is ambitious, of course, given what has been said about the lack of stationarity of these higher moments, without mentioning other risks such as possible lack of liquidity presented by less traditional investments, higher transaction costs, and so on. Regarding AI within the framework of the four-moments CAPM, option positions, for example, do present some skewness because of their asymmetric payoff. Going back to Eq. 4.15, the differences between investing in traditional assets (bonds and stocks) versus investing in AI can be summarized as follows (TI means traditional investment here): This explains why, in the case of AI, performance measures must incorporate the impact of M3 and M4 (cf.


pages: 346 words: 102,625

Early Retirement Extreme by Jacob Lund Fisker

8-hour work day, active transport: walking or cycling, barriers to entry, book value, buy and hold, caloric restriction, caloric restriction, clean water, Community Supported Agriculture, delayed gratification, discounted cash flows, diversification, dogs of the Dow, don't be evil, dumpster diving, Easter island, fake it until you make it, financial engineering, financial independence, game design, index fund, invention of the steam engine, inventory management, junk bonds, lateral thinking, lifestyle creep, loose coupling, low interest rates, market bubble, McMansion, passive income, peak oil, place-making, planned obsolescence, Plato's cave, Ponzi scheme, power law, psychological pricing, retail therapy, risk free rate, sunk-cost fallacy, systems thinking, tacit knowledge, the scientific method, time value of money, Tragedy of the Commons, transaction costs, wage slave, working poor

Therefore, depending on alignment, there's an optimal number of people in a household. If you can't share rooms with others and/or living in solitude is very important to you, you need to reduce your expenses in other ways, by finding something smaller or relocating to another town. Rent or own? There is much money to be made in building and in transaction costs from buying and selling houses.70 There are significant pressures, political and economic, to get people involved in this game, including the strange idea of including the value of one's home in one's net worth or having taxpayers pay part of your interest while you pay the other part to the bank.71 This begets the crazy idea of a starter home and the even crazier idea of buying something bigger as income increases.


pages: 463 words: 105,197

Radical Markets: Uprooting Capitalism and Democracy for a Just Society by Eric Posner, E. Weyl

3D printing, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, anti-communist, augmented reality, basic income, Berlin Wall, Bernie Sanders, Big Tech, Branko Milanovic, business process, buy and hold, carbon footprint, Cass Sunstein, Clayton Christensen, cloud computing, collective bargaining, commoditize, congestion pricing, Corn Laws, corporate governance, crowdsourcing, cryptocurrency, data science, deep learning, DeepMind, Donald Trump, Elon Musk, endowment effect, Erik Brynjolfsson, Ethereum, feminist movement, financial deregulation, Francis Fukuyama: the end of history, full employment, gamification, Garrett Hardin, George Akerlof, global macro, global supply chain, guest worker program, hydraulic fracturing, Hyperloop, illegal immigration, immigration reform, income inequality, income per capita, index fund, informal economy, information asymmetry, invisible hand, Jane Jacobs, Jaron Lanier, Jean Tirole, Jeremy Corbyn, Joseph Schumpeter, Kenneth Arrow, labor-force participation, laissez-faire capitalism, Landlord’s Game, liberal capitalism, low skilled workers, Lyft, market bubble, market design, market friction, market fundamentalism, mass immigration, negative equity, Network effects, obamacare, offshore financial centre, open borders, Pareto efficiency, passive investing, patent troll, Paul Samuelson, performance metric, plutocrats, pre–internet, radical decentralization, random walk, randomized controlled trial, Ray Kurzweil, recommendation engine, rent-seeking, Richard Thaler, ride hailing / ride sharing, risk tolerance, road to serfdom, Robert Shiller, Ronald Coase, Rory Sutherland, search costs, Second Machine Age, second-price auction, self-driving car, shareholder value, sharing economy, Silicon Valley, Skype, special economic zone, spectrum auction, speech recognition, statistical model, stem cell, telepresence, Thales and the olive presses, Thales of Miletus, The Death and Life of Great American Cities, The Future of Employment, The Market for Lemons, The Nature of the Firm, The Rise and Fall of American Growth, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, Tragedy of the Commons, transaction costs, trickle-down economics, Tyler Cowen, Uber and Lyft, uber lyft, universal basic income, urban planning, Vanguard fund, vertical integration, women in the workforce, Zipcar

If they tried to expand their factories, a landowner would hold out. If they tried to build a railroad, thousands of local politicians tried to extract a pound of flesh. Every small supplier of oil, coal, or parts would waste endless hours bargaining with them or trying to take advantage of them. Nobel Laureate Ronald Coase called these frustrations the “transaction costs of the market.”10 He explained that to avoid this chaos, business people formed large corporations that would own many assets, such as factories and parcels of land, and employed many workers whom the head of the corporation could centrally direct to accomplish its goals without constant negotiation.


pages: 723 words: 98,951

Down the Tube: The Battle for London's Underground by Christian Wolmar

congestion charging, Crossrail, iterative process, liquidationism / Banker’s doctrine / the Treasury view, megaproject, profit motive, transaction costs

Indeed, its own report,* which continues to haunt the supporters of the PPP because it is always quoted by its opponents, found that the option closest to the PPP concept came 15th out of 16 in an analysis of the benefits of the various approaches. The report argued that there are powerful arguments against splitting up the Underground. Subdivided structures would create more boundaries, which impose higher set-up and transaction costs. They will make it more difficult to achieve co-ordination between technical and operational elements of the system and reduce the seamlessness of the network from the customers’ point of view. They will also increase the risk of things going wrong at interfaces, which could affect service performance and safety.* The LU report looked at a series of options ranging from the existing structure to outright privatisation of the whole system or groups of lines, splitting operations from infrastructure as well as the current PPP option which it called ‘structured PFI’.


Systematic Trading: A Unique New Method for Designing Trading and Investing Systems by Robert Carver

asset allocation, automated trading system, backtesting, barriers to entry, Black Swan, buy and hold, cognitive bias, commodity trading advisor, Credit Default Swap, diversification, diversified portfolio, easy for humans, difficult for computers, Edward Thorp, Elliott wave, fear index, fixed income, global macro, implied volatility, index fund, interest rate swap, Long Term Capital Management, low interest rates, margin call, Market Wizards by Jack D. Schwager, merger arbitrage, Nick Leeson, paper trading, performance metric, proprietary trading, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, survivorship bias, systematic trading, technology bubble, transaction costs, Two Sigma, Y Combinator, yield curve

However the skills required to day trade are very different from those a long-term investor needs, as I’m sure Warren Buffett would agree. This is particularly true for systematic trading rules which tend to have a ‘sweet spot’ holding period. For example at medium frequencies of weeks to months most assets exhibit momentum; but at shorter and longer horizons they behave differently. More importantly the law ignores transaction costs. As you’ll see later in the book these can seriously damage the returns of fast traders, except perhaps in very cheap markets. Nevertheless this result seems to hold reasonably well for longer periods where costs are not an issue. Most trading rules see their Sharpe ratios declining once they have holding periods exceeding several months.


pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, business cycle, buy and hold, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, Future Shock, George Akerlof, George Santayana, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, junk bonds, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Michael Milken, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Paul Samuelson, Phillips curve, plutocrats, Post-Keynesian economics, price stability, profit maximization, public intellectual, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, seminal paper, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, W. E. B. Du Bois, We are all Keynesians now, working-age population, Y2K, Yom Kippur War

Up until the 1980s the prevailing wisdom among economists had been that it was very difficult, if not impossible, to engage in a profitable hostile takeover bid. If the firm was undervalued before the bid was made, the bid itself would cause it to rise in value. By the time the deal was closed, the surplus for the bidder would be insufficient to pay the transaction costs of the takeover.10 But Milken found a way to drastically reduce the cost of takeovers. He would enable deals to go through at near-lightning speed by using other people’s money. This money came straight from the S&Ls through their purchase of Milken’s junk bonds. If Milken or a Milken-connected enterprise made a hostile bid for a firm, it very much helped that he could guarantee a large part of the purchase through the sale of junk bonds.


pages: 377 words: 97,144

Singularity Rising: Surviving and Thriving in a Smarter, Richer, and More Dangerous World by James D. Miller

23andMe, affirmative action, Albert Einstein, artificial general intelligence, Asperger Syndrome, barriers to entry, brain emulation, cloud computing, cognitive bias, correlation does not imply causation, crowdsourcing, Daniel Kahneman / Amos Tversky, David Brooks, David Ricardo: comparative advantage, Deng Xiaoping, en.wikipedia.org, feminist movement, Flynn Effect, friendly AI, hive mind, impulse control, indoor plumbing, invention of agriculture, Isaac Newton, John Gilmore, John von Neumann, knowledge worker, Larry Ellison, Long Term Capital Management, low interest rates, low skilled workers, Netflix Prize, neurotypical, Nick Bostrom, Norman Macrae, pattern recognition, Peter Thiel, phenotype, placebo effect, prisoner's dilemma, profit maximization, Ray Kurzweil, recommendation engine, reversible computing, Richard Feynman, Rodney Brooks, Silicon Valley, Singularitarianism, Skype, statistical model, Stephen Hawking, Steve Jobs, sugar pill, supervolcano, tech billionaire, technological singularity, The Coming Technological Singularity, the scientific method, Thomas Malthus, transaction costs, Turing test, twin studies, Vernor Vinge, Von Neumann architecture

Buck v. Bell, 274 US 200 (1927). 288. http://singinst.org/summit2007/quotes/rodneybrooks/ 289. https://attra.ncat.org/intern_handbook/history.html 290. Cowen (2011). 291. Cowen (2011) and http://en.wikipedia.org/wiki/Advanced_Chess as it appeared on March 11, 2011. 292. I’m assuming that transaction costs are not so large as to eat up all of the gains from this trade. 293. Hanson (November 30, 2009). 294. Aaronson (2008). 295. This includes indirect agricultural production in which a country produces food by making non-edible items and trading them to other countries for food. 296. Ricardo (1821). 297.


pages: 416 words: 100,130

New Power: How Power Works in Our Hyperconnected World--And How to Make It Work for You by Jeremy Heimans, Henry Timms

"Susan Fowler" uber, "World Economic Forum" Davos, 3D printing, 4chan, Affordable Care Act / Obamacare, Airbnb, algorithmic management, augmented reality, autonomous vehicles, battle of ideas, benefit corporation, Benjamin Mako Hill, Big Tech, bitcoin, Black Lives Matter, blockchain, British Empire, Chris Wanstrath, Columbine, Corn Laws, crowdsourcing, data science, David Attenborough, death from overwork, Donald Trump, driverless car, Elon Musk, fake news, Ferguson, Missouri, future of work, game design, gig economy, hiring and firing, holacracy, hustle culture, IKEA effect, impact investing, income inequality, informal economy, job satisfaction, John Zimmer (Lyft cofounder), Jony Ive, Kevin Roose, Kibera, Kickstarter, Lean Startup, Lyft, Mark Zuckerberg, Minecraft, Network effects, new economy, Nicholas Carr, obamacare, Occupy movement, post-truth, profit motive, race to the bottom, radical decentralization, ride hailing / ride sharing, rolling blackouts, rolodex, Salesforce, Saturday Night Live, sharing economy, side hustle, Silicon Valley, six sigma, Snapchat, social web, subscription business, TaskRabbit, tech billionaire, TED Talk, the scientific method, transaction costs, Travis Kalanick, Uber and Lyft, uber lyft, upwardly mobile, web application, WikiLeaks, Yochai Benkler

These movements can more easily include wider groups of people, including those who previously had been left on the sidelines or couldn’t easily participate. This dynamic has not just been playing out in the activism space. A macro theme of our age is that participating in almost anything has become easier, whether we are protesting, taking vacations, or even managing our dating lives. The “dating” app Tinder, famously, has reduced the transaction costs associated with finding a date to a series of brutally efficient left or right swipes. To join, you don’t even need to create a profile—Tinder can scrape together our existing Facebook profile info and pictures to make one for us so that we can get to judging and being judged right away. What is common among all these things is that we are seeing the barriers to participation lowered and a heightened focus on improving and streamlining user experiences.


pages: 332 words: 97,325

The Launch Pad: Inside Y Combinator, Silicon Valley's Most Exclusive School for Startups by Randall Stross

affirmative action, Airbnb, AltaVista, always be closing, Amazon Mechanical Turk, Amazon Web Services, barriers to entry, Ben Horowitz, Benchmark Capital, Burning Man, business cycle, California gold rush, call centre, cloud computing, crowdsourcing, don't be evil, Elon Musk, Hacker News, high net worth, hockey-stick growth, index fund, inventory management, John Markoff, Justin.tv, Lean Startup, Marc Andreessen, Mark Zuckerberg, Max Levchin, medical residency, Menlo Park, Minecraft, minimum viable product, Morris worm, Paul Buchheit, Paul Graham, Peter Thiel, QR code, Richard Feynman, Richard Florida, ride hailing / ride sharing, Salesforce, Sam Altman, Sand Hill Road, selling pickaxes during a gold rush, side project, Silicon Valley, Silicon Valley startup, Skype, social graph, software is eating the world, South of Market, San Francisco, speech recognition, Stanford marshmallow experiment, Startup school, stealth mode startup, Steve Jobs, Steve Wozniak, Steven Levy, TaskRabbit, transaction costs, Y Combinator

In the 1990s, many startups tried, and failed, to get micropayments accepted: FirstVirtual, Cybercoin, Millicent, Digicash, Internet Dollar, Pay2See, MicroMint, Cybercent. Clay Shirky wrote an epitaph in 2000, “The Case Against Micropayments,” arguing that users hated them because they imposed a “mental transaction cost” as the user was forced to contemplate a transaction that would always be “too small to be worth the hassle.”3 Ready-Campbell and Young think the landscape has changed since then, that today users have become accustomed to paying small amounts of money for apps in the app stores and for virtual goods within games.


The Winner-Take-All Society: Why the Few at the Top Get So Much More Than the Rest of Us by Robert H. Frank, Philip J. Cook

accounting loophole / creative accounting, air freight, Alvin Roth, Apple's 1984 Super Bowl advert, business cycle, compensation consultant, Daniel Kahneman / Amos Tversky, delayed gratification, Garrett Hardin, global village, haute couture, income inequality, independent contractor, invisible hand, junk bonds, labor-force participation, longitudinal study, Marshall McLuhan, medical malpractice, Network effects, positional goods, prisoner's dilemma, rent-seeking, rising living standards, Ronald Reagan, school choice, Shoshana Zuboff, Stephen Hawking, stock buybacks, Tragedy of the Commons, transaction costs, trickle-down economics, winner-take-all economy

An alternative solution to the tragedy of the commons is to auction a limited number of grazing permits to the highest bidders. Here, too, an alternative solution would be to auction 122 The Winner-Take-All Society licenses to compete for the recording contract. In a world of perfect capital markets and no transaction costs, the tax and auction alterna­ tives would be equivalent. In practice, however, the tax solution is likely to be more attractive. The auction approach assumes that potential contestants have re­ sources to bid the expected value of a singing license. H they do not, and if capital markets are imperfect, then the license auction will be in­ efficient.


The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities by Mancur Olson

barriers to entry, British Empire, business cycle, California gold rush, collective bargaining, correlation coefficient, David Ricardo: comparative advantage, full employment, income per capita, Kenneth Arrow, market clearing, Norman Macrae, Pareto efficiency, Phillips curve, price discrimination, profit maximization, rent-seeking, Robert Solow, Sam Peltzman, search costs, selection bias, Simon Kuznets, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, urban decay, working poor

One of these is the "putting out system" in the textile industry, which was then the most important manufacturing industry. Under this remarkable system, merchants would travel all over the countryside to "put out" to individual families material that was to be spun or woven and then return at a later time to pick up the yarn or cloth. Clearly such a system required a lot of time, travel, and transaction costs. There were uncertainties about how much material had been left with each family and how much yarn or cloth could be made from it, and these uncertainties provoked haggling and disputes. The merchant also had the risk that the material he had put out would be stolen. Given the obvious disadvantages, we must ask why this system was used.


pages: 352 words: 98,561

The City by Tony Norfield

accounting loophole / creative accounting, air traffic controllers' union, anti-communist, Asian financial crisis, asset-backed security, bank run, banks create money, Basel III, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, capital controls, central bank independence, colonial exploitation, colonial rule, continuation of politics by other means, currency risk, dark matter, Edward Snowden, Fall of the Berlin Wall, financial innovation, financial intermediation, foreign exchange controls, Francis Fukuyama: the end of history, G4S, global value chain, Goldman Sachs: Vampire Squid, interest rate derivative, interest rate swap, Irish property bubble, Leo Hollis, linked data, London Interbank Offered Rate, London Whale, Londongrad, low interest rates, Mark Zuckerberg, Martin Wolf, means of production, Money creation, money market fund, mortgage debt, North Sea oil, Northern Rock, Occupy movement, offshore financial centre, plutocrats, purchasing power parity, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Ronald Reagan, seigniorage, Sharpe ratio, sovereign wealth fund, Suez crisis 1956, The Great Moderation, transaction costs, transfer pricing, zero-sum game

In that case it would apply if Deutsche Bank, for example, did a deal in London and the German government had agreed to the new transactions tax. The UK government would then have to become the tax collector for Germany.7 Even if the banks paid the levy directly, it would be passed on in extra transaction costs to their counterparties, including industrial companies. It should not be forgotten that the latter also perform these transactions. Governments of all capitalist countries will do little to restrict the activities of their major corporations, banks and other financial institutions. The UK authorities are even less likely to sign up to international regulations that would disadvantage UK-based banks.


pages: 329 words: 99,504

Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud by Ben McKenzie, Jacob Silverman

algorithmic trading, asset allocation, bank run, barriers to entry, Ben McKenzie, Bernie Madoff, Big Tech, bitcoin, Bitcoin "FTX", blockchain, capital controls, citizen journalism, cognitive dissonance, collateralized debt obligation, COVID-19, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, cryptocurrency, data science, distributed ledger, Dogecoin, Donald Trump, effective altruism, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, experimental economics, financial deregulation, financial engineering, financial innovation, Flash crash, Glass-Steagall Act, high net worth, housing crisis, information asymmetry, initial coin offering, Jacob Silverman, Jane Street, low interest rates, Lyft, margin call, meme stock, money market fund, money: store of value / unit of account / medium of exchange, Network effects, offshore financial centre, operational security, payday loans, Peter Thiel, Ponzi scheme, Potemkin village, prediction markets, proprietary trading, pushing on a string, QR code, quantitative easing, race to the bottom, ransomware, regulatory arbitrage, reserve currency, risk tolerance, Robert Shiller, Robinhood: mobile stock trading app, Ross Ulbricht, Sam Bankman-Fried, Satoshi Nakamoto, Saturday Night Live, short selling, short squeeze, Silicon Valley, Skype, smart contracts, Steve Bannon, systems thinking, TikTok, too big to fail, transaction costs, tulip mania, uber lyft, underbanked, vertical integration, zero-sum game

Most Salvadorans rely on services such as Western Union or MoneyGram to accept remittances from relatives overseas, despite the sometimes high fees those services charge. On the face of it, Bukele’s plan appeared promising: If he could convince Salvadorans to eschew traditional means and use a government program built on Bitcoin instead, it could be a win for his administration as well as the people. It would fill government coffers while lowering transaction costs for Salvadorans living at home and abroad, boosting economic growth. The pitch when it came to tourism was equally simple. El Salvador is small and mountainous, making large-scale agricultural production difficult. The country’s biggest export is cheap textiles, but that pales against remittances, which are, as mentioned above, a quarter of its annual GDP.


pages: 289 words: 95,046

Chaos Kings: How Wall Street Traders Make Billions in the New Age of Crisis by Scott Patterson

"World Economic Forum" Davos, 2021 United States Capitol attack, 4chan, Alan Greenspan, Albert Einstein, asset allocation, backtesting, Bear Stearns, beat the dealer, behavioural economics, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, bitcoin, Bitcoin "FTX", Black Lives Matter, Black Monday: stock market crash in 1987, Black Swan, Black Swan Protection Protocol, Black-Scholes formula, blockchain, Bob Litterman, Boris Johnson, Brownian motion, butterfly effect, carbon footprint, carbon tax, Carl Icahn, centre right, clean tech, clean water, collapse of Lehman Brothers, Colonization of Mars, commodity super cycle, complexity theory, contact tracing, coronavirus, correlation does not imply causation, COVID-19, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, decarbonisation, disinformation, diversification, Donald Trump, Doomsday Clock, Edward Lloyd's coffeehouse, effective altruism, Elliott wave, Elon Musk, energy transition, Eugene Fama: efficient market hypothesis, Extinction Rebellion, fear index, financial engineering, fixed income, Flash crash, Gail Bradbrook, George Floyd, global pandemic, global supply chain, Gordon Gekko, Greenspan put, Greta Thunberg, hindsight bias, index fund, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Jeff Bezos, Jeffrey Epstein, Joan Didion, John von Neumann, junk bonds, Just-in-time delivery, lockdown, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, Mark Spitznagel, Mark Zuckerberg, market fundamentalism, mass immigration, megacity, Mikhail Gorbachev, Mohammed Bouazizi, money market fund, moral hazard, Murray Gell-Mann, Nick Bostrom, off-the-grid, panic early, Pershing Square Capital Management, Peter Singer: altruism, Ponzi scheme, power law, precautionary principle, prediction markets, proprietary trading, public intellectual, QAnon, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Nader, Ralph Nelson Elliott, random walk, Renaissance Technologies, rewilding, Richard Thaler, risk/return, road to serfdom, Ronald Reagan, Ronald Reagan: Tear down this wall, Rory Sutherland, Rupert Read, Sam Bankman-Fried, Silicon Valley, six sigma, smart contracts, social distancing, sovereign wealth fund, statistical arbitrage, statistical model, stem cell, Stephen Hawking, Steve Jobs, Steven Pinker, Stewart Brand, systematic trading, tail risk, technoutopianism, The Chicago School, The Great Moderation, the scientific method, too big to fail, transaction costs, University of East Anglia, value at risk, Vanguard fund, We are as Gods, Whole Earth Catalog

A big chunk of that $500 million had been in Universa. Indeed, so-called Black Swan funds didn’t exist before Universa (aside from Empirica). Many that started up in the wake of the crisis were flying blind. Spitznagel had spent years refining the strategy, building relationships with options dealers on the Street, working out how to cut down transaction costs, building sophisticated computer models. One of Universa’s advantages was that it effectively became a brokerage house for options, acting like a middleman providing liquidity to investors when they wanted it (investors being the ones selling the options). Many trading outfits, when it came to far-out-of-the-money put options, only wanted to sell them.


pages: 903 words: 235,753

The Stack: On Software and Sovereignty by Benjamin H. Bratton

1960s counterculture, 3D printing, 4chan, Ada Lovelace, Adam Curtis, additive manufacturing, airport security, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, algorithmic trading, Amazon Mechanical Turk, Amazon Robotics, Amazon Web Services, Andy Rubin, Anthropocene, augmented reality, autonomous vehicles, basic income, Benevolent Dictator For Life (BDFL), Berlin Wall, bioinformatics, Biosphere 2, bitcoin, blockchain, Buckminster Fuller, Burning Man, call centre, capitalist realism, carbon credits, carbon footprint, carbon tax, carbon-based life, Cass Sunstein, Celebration, Florida, Charles Babbage, charter city, clean water, cloud computing, company town, congestion pricing, connected car, Conway's law, corporate governance, crowdsourcing, cryptocurrency, dark matter, David Graeber, deglobalization, dematerialisation, digital capitalism, digital divide, disintermediation, distributed generation, don't be evil, Douglas Engelbart, Douglas Engelbart, driverless car, Edward Snowden, Elon Musk, en.wikipedia.org, Eratosthenes, Ethereum, ethereum blockchain, Evgeny Morozov, facts on the ground, Flash crash, Frank Gehry, Frederick Winslow Taylor, fulfillment center, functional programming, future of work, Georg Cantor, gig economy, global supply chain, Google Earth, Google Glasses, Guggenheim Bilbao, High speed trading, high-speed rail, Hyperloop, Ian Bogost, illegal immigration, industrial robot, information retrieval, Intergovernmental Panel on Climate Change (IPCC), intermodal, Internet of things, invisible hand, Jacob Appelbaum, James Bridle, Jaron Lanier, Joan Didion, John Markoff, John Perry Barlow, Joi Ito, Jony Ive, Julian Assange, Khan Academy, Kim Stanley Robinson, Kiva Systems, Laura Poitras, liberal capitalism, lifelogging, linked data, lolcat, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, Masdar, McMansion, means of production, megacity, megaproject, megastructure, Menlo Park, Minecraft, MITM: man-in-the-middle, Monroe Doctrine, Neal Stephenson, Network effects, new economy, Nick Bostrom, ocean acidification, off-the-grid, offshore financial centre, oil shale / tar sands, Oklahoma City bombing, OSI model, packet switching, PageRank, pattern recognition, peak oil, peer-to-peer, performance metric, personalized medicine, Peter Eisenman, Peter Thiel, phenotype, Philip Mirowski, Pierre-Simon Laplace, place-making, planetary scale, pneumatic tube, post-Fordism, precautionary principle, RAND corporation, recommendation engine, reserve currency, rewilding, RFID, Robert Bork, Sand Hill Road, scientific management, self-driving car, semantic web, sharing economy, Silicon Valley, Silicon Valley ideology, skeuomorphism, Slavoj Žižek, smart cities, smart grid, smart meter, Snow Crash, social graph, software studies, South China Sea, sovereign wealth fund, special economic zone, spectrum auction, Startup school, statistical arbitrage, Steve Jobs, Steven Levy, Stewart Brand, Stuxnet, Superbowl ad, supply-chain management, supply-chain management software, synthetic biology, TaskRabbit, technological determinism, TED Talk, the built environment, The Chicago School, the long tail, the scientific method, Torches of Freedom, transaction costs, Turing complete, Turing machine, Turing test, undersea cable, universal basic income, urban planning, Vernor Vinge, vertical integration, warehouse automation, warehouse robotics, Washington Consensus, web application, Westphalian system, WikiLeaks, working poor, Y Combinator, yottabyte

This standardization of essential components produces an effect of generative entrenchment by which one platform's early consolidation of systems (formats, protocols, and interfaces) decreases a User's opportunity costs to invest more and more transactions into that particular platform, while it increases the costs to translate earlier investments into another platform's (at least partially) incompatible systems.9 The ongoing consolidation of systems and reduction of transaction costs leverages that advantage toward increasing the robustness of that platform's unique requirements. 4..  Standardized components may also be reprogrammable within constraints by Users, allowing them to innovate new functions for machines that are composed, at least partially, of preexisting platform systems.

These forms of sovereignty may be produced by an automated normalized exception, programmed at the level of the Interface, and may coincide with formal legal norms, may transgress them, or may operate outside their supervision altogether. Exit/entrance dynamics are a key site of contestation where different degrees of platform sovereignty cohere or filter Users in their image Platform Surplus Value Platforms often provide core service at no direct transaction cost to the User. Platform economics is based on absorbing value from the provision of each transaction that is ultimately greater than the cost of providing it. Platform surplus value is this differential. For example, the ultimate value for Google that Users provide in training its algorithms to anticipate future User interactions has proved much greater than Google's net costs to provide its search algorithms to Users for free Stacks Generally stacks are platforms, but not all platforms are stacks.


pages: 1,233 words: 239,800

Public Places, Urban Spaces: The Dimensions of Urban Design by Matthew Carmona, Tim Heath, Steve Tiesdell, Taner Oc

"hyperreality Baudrillard"~20 OR "Baudrillard hyperreality", A Pattern Language, Arthur Eddington, Big bang: deregulation of the City of London, big-box store, Broken windows theory, Buckminster Fuller, car-free, carbon footprint, cellular automata, City Beautiful movement, Community Supported Agriculture, complexity theory, deindustrialization, disinformation, Donald Trump, drive until you qualify, East Village, edge city, food miles, Frank Gehry, Future Shock, game design, garden city movement, gentrification, global supply chain, Guggenheim Bilbao, income inequality, invisible hand, iterative process, Jane Jacobs, land bank, late capitalism, Lewis Mumford, longitudinal study, Masdar, Maslow's hierarchy, megaproject, megastructure, New Urbanism, peak oil, Peter Calthorpe, place-making, post-oil, precautionary principle, principal–agent problem, prisoner's dilemma, profit motive, Richard Florida, Seaside, Florida, starchitect, streetcar suburb, systems thinking, tacit knowledge, technological determinism, telepresence, the built environment, The Chicago School, The Death and Life of Great American Cities, The Great Good Place, the market place, The Structural Transformation of the Public Sphere, The Wealth of Nations by Adam Smith, Traffic in Towns by Colin Buchanan, Tragedy of the Commons, transaction costs, transit-oriented development, urban decay, urban planning, urban renewal, urban sprawl, vertical integration, zero-sum game

Real estate investments are, for example, fixed in their location (not moveable), heterogeneous, generally indivisible and entail inherent responsibilities for management (e.g. collecting rents, dealing with repairs and renewals, and lease negotiations). The total supply of land (and property) is also fixed, and although the supply in a particular land use can change, it is relatively fixed in the short-term. It takes a large amount of capital to buy a small amount of real estate and there also tend to be high transaction costs involved in the transfer of real estate holdings. Real estate investments are, nevertheless, generally durable and typically provide a source of income. Investors often use yield to gauge investment performance and to balance risk with return. In markets exhibiting significant uncertainties, investors will generally seek developments delivering a high yield and a quicker turn around on their investments.

, Planning, Practice & Research, 11(1), 85–98 Rowley, A (1994) Definitions of urban design: The nature and concerns of urban design’, Planning Practice & Research, 9(3), 179–197 Royal Society (2008) Ground-Level Ozone in the 21st Century: Future Trends, Impacts and Policy Implications, The Royal Society, London Rudlin, D (2000) The Hulme and Manchester design guides, Built Environment, 25(2), 317–324 Rudlin, D & Falk, N (1999) Building the 21st Century Home: The Sustainable Urban Neighbourhood, Architectural Press, Oxford Rugare, S & Schwarz, T (2008) Urban Infill No 1: Cities Growing Smaller, Cleveland Urban Design Collaborative, Cleveland Rybczynski, W (1997) The Pasteboard Past’, New York Times Book Review, 6 April, 13 Rybczynski, W (1995) City Life, Simon & Schuster, London Rybczynski, W (1994) Epilogue’, in Scheer, B C & Preiser, W (1994) (editors) Design Review: Challenging Urban Aesthetic Control, Chapman & Hall, New York, 210–212 Rypkema, D.D. (2001) Property Rights and Public Values, paper to the Georgetown Environmental Law & Policy Institute, June 13-www.law.georgetown.edu/gelp/takingsprypkema.html (accessed 24 January 2005) S Sabatier, P A (1988) An Advocacy Coalition Framework of policy change and the role of policy-oriented learning therein Policy Science 21(2), 129–168 Saegert, S (1980) Masculine cities and feminine suburbs: Polarised ideas, contradictory realities’, Signs 5 (3 supplement) 93–108 Salamon, L (2002) The Tools of Government: A Guide to the New Governance, Oxford University Press, Oxford Salingaros, N A (2005) Principles of Urban Structure, Techne Press, Amsterdam Sandercock, L & Forsyth, A (1992) A gender agenda: New directions for planning theory, Journal of the American Planning Association, 58(1), 49–59 Sandercock, L (1997) Towards Cosmopolis, Academy Editions, London Saoud, R (1995) Political influences on urban form, Paper Presented to the New Academics in Planning Conference, Oxford Brookes University Sathaye, J & Murtishaw, S (2004) Market Failures, Consumer Preferences, and Transaction Costs in Energy Efficiency Purchase Decisions, California Energy Commission, Sacramento Sawyer, A & Bright K (2007) The Access Manual, Auditing and Managing Inclusive Built Environments, Blackwell Publishing, Oxford SceneSusTech (1998) Car-Systems in the City: Report 1, Department of Sociology, Trinity College, Dublin Scheer, B C (1994) Introduction: The debate on design review, in Scheer B C & Preiser W (Editors) Design Review: Challenging Urban Aesthetic Control, Chapman & Hall, New York, 3–9 Scheer B C & Preiser, W (Editors) (1994) Design Review: Challenging Urban Aesthetic Control, Chapman & Hall, New York Schon, D (1991) The Reflective Practitioner: How Professionals Think in Action, Ashgate, Aldershot Schuster M (2005) Substituting information for regulation, In search of an alternative approach to shaping urban design’, in Ben-Joseph E & Szold T Regulating Place, Standards and the Shaping of Urban America, Routledge, New York Schuster, M & de Monchaux, J (1997) (editors) Preserving the Built Heritage: Tools for Implementation, Salzburg Seminar/University Press of New England, Hanover Schwarz, T & Rugare, S (2009) Urban Infill No 2: Pop Up City, Cleveland Urban Design Collaborative, Cleveland Schwarzer, M (2000) The contemporary city in four movements, Journal of Urban Design, 5(2) 127–144 Scoffham, E R (1984) The Shape of British Housing, George Godwin, London Scott, A (2001) Capitalism, cities and the production of symbolic forms, The Royal Geographical Society, 26(1), 11–23 Scottish Office (1994) Planning Advice Note 44: Fitting New Housing Development into the Landscape, Scottish Office, Edinburgh Scruton, R (1982) A Dictionary of Political Thought, Pan, London Sebba, R & Churchman, A (1983) Territories and territoriality in the home, Environment and Behaviour, 15(2), 191–210 Sennett, R (1994) Flesh and Stone: The Body and the City in Western Civilisation, Faber & Faber, London Sennett, R (1990) The Conscience of the Eye: The Design and Social Life of Cities, Faber & Faber, London Sennett, R (1977) The Fall of Public Man, Faber & Faber, London Sennett, R (1970) The Uses of Disorder, Faber & Faber, London Sert, J L (1944) Can Our Cities Survive?


pages: 416 words: 106,532

Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond: The Innovative Investor's Guide to Bitcoin and Beyond by Chris Burniske, Jack Tatar

Airbnb, Alan Greenspan, altcoin, Alvin Toffler, asset allocation, asset-backed security, autonomous vehicles, Bear Stearns, bitcoin, Bitcoin Ponzi scheme, blockchain, Blythe Masters, book value, business cycle, business process, buy and hold, capital controls, carbon tax, Carmen Reinhart, Clayton Christensen, clean water, cloud computing, collateralized debt obligation, commoditize, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, disintermediation, distributed ledger, diversification, diversified portfolio, Dogecoin, Donald Trump, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, fiat currency, financial engineering, financial innovation, fixed income, Future Shock, general purpose technology, George Gilder, Google Hangouts, high net worth, hype cycle, information security, initial coin offering, it's over 9,000, Jeff Bezos, Kenneth Rogoff, Kickstarter, Leonard Kleinrock, litecoin, low interest rates, Marc Andreessen, Mark Zuckerberg, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, packet switching, passive investing, peer-to-peer, peer-to-peer lending, Peter Thiel, pets.com, Ponzi scheme, prediction markets, quantitative easing, quantum cryptography, RAND corporation, random walk, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Ross Ulbricht, Salesforce, Satoshi Nakamoto, seminal paper, Sharpe ratio, Silicon Valley, Simon Singh, Skype, smart contracts, social web, South Sea Bubble, Steve Jobs, transaction costs, tulip mania, Turing complete, two and twenty, Uber for X, Vanguard fund, Vitalik Buterin, WikiLeaks, Y2K

In a 2014 report it states: Contrary to a widely-held opinion, Bitcoin is not a deliberate Ponzi. And there is little to learn by treating it as such. The main value of Bitcoin may, in retrospect, turn out to be the lessons it offers to central banks on the prospects of electronic currency, and on how to enhance efficiency and cut transactions cost.11 Historical Ponzi schemes require a central authority to hide the facts and promise a certain annual percent return. Bitcoin has neither. The system is decentralized, and the facts are out in the open. People can sell any time, and they do, and no one is guaranteed any return. In fact, many longtime advocates of the space warn people not to invest more money than they’re willing to lose.


pages: 311 words: 17,232

Living in a Material World: The Commodity Connection by Kevin Morrison

addicted to oil, Alan Greenspan, An Inconvenient Truth, barriers to entry, Berlin Wall, biodiversity loss, carbon credits, carbon footprint, carbon tax, clean water, commoditize, commodity trading advisor, computerized trading, diversified portfolio, Doha Development Round, Elon Musk, energy security, European colonialism, flex fuel, food miles, Ford Model T, Great Grain Robbery, Gregor Mendel, Hernando de Soto, Hugh Fearnley-Whittingstall, hydrogen economy, Intergovernmental Panel on Climate Change (IPCC), junk bonds, Kickstarter, Long Term Capital Management, managed futures, Market Wizards by Jack D. Schwager, Michael Milken, new economy, North Sea oil, oil rush, oil shale / tar sands, oil shock, out of africa, Paul Samuelson, peak oil, planned obsolescence, price mechanism, Ronald Coase, Ronald Reagan, Silicon Valley, sovereign wealth fund, the payments system, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, uranium enrichment, vertical integration, young professional

The theory took another step in the early 1980s when Dr John Lintner of Harvard University concluded in his study that, ‘The combined portfolios of stocks, after including judicious investments in managed futures accounts, show substantially less risk, at every possible level of expected return, than portfolios of stocks (or stocks and bonds) alone’ (Lintner, 1983). For portfolio managers, futures provided an enhanced ability to sell short, which meant investors could make money when the markets fell. Another bonus was that there were lower transaction costs than with equity trading. 244 | LIVING IN A MATERIAL WORLD Among the first large pension funds to become involved in commodity investments were the Dutch government pension fund ABP, and PGGM, which manages the money for Dutch healthcare workers. Most pension funds have put a small proportion of their funds into commodity indices, including local government run pensions and large corporations across Europe as well as the largest US pension fund, the California Public Employees’ Retirement System (Calipers) and the Ontario Teachers’ Fund.8 Commodity investment by pension, endowment and mutual funds was part of their diversification strategy into alternative assets, which also included private equity, hedge funds and commercial property.


pages: 411 words: 108,119

The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan, Paul Slovic

"World Economic Forum" Davos, Alan Greenspan, An Inconvenient Truth, Andrei Shleifer, availability heuristic, bank run, behavioural economics, Black Swan, business cycle, Cass Sunstein, classic study, clean water, cognitive dissonance, collateralized debt obligation, complexity theory, conceptual framework, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, Daniel Kahneman / Amos Tversky, endowment effect, experimental economics, financial innovation, Fractional reserve banking, George Akerlof, hindsight bias, incomplete markets, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, iterative process, Kenneth Arrow, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, money market fund, moral hazard, mortgage debt, Oklahoma City bombing, Pareto efficiency, Paul Samuelson, placebo effect, precautionary principle, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, social discount rate, source of truth, statistical model, stochastic process, subprime mortgage crisis, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning, Vilfredo Pareto

Another possible explanation as to why individuals fail to purchase adequate coverage against disasters is that there are real personal costs to becoming fully informed. The percentage of people who have read their insurance contract in its entirety is likely to be very low. Learning about the terms of available insurance contracts involves transactions costs (e.g., making calls to different insurers to compare what they would offer, or carefully reading the entire car or home insurance contract; many consumers just don’t), so people may not know all of the conditions under which they are covered or not. However, given the opportunity to purchase subsidized insurance, people may need to know little about the insurance terms as long as they know that it is heavily subsidized by the government.


pages: 398 words: 105,917

Bean Counters: The Triumph of the Accountants and How They Broke Capitalism by Richard Brooks

"World Economic Forum" Davos, accounting loophole / creative accounting, Alan Greenspan, asset-backed security, banking crisis, Bear Stearns, Big bang: deregulation of the City of London, blockchain, BRICs, British Empire, business process, Charles Babbage, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Strachan, Deng Xiaoping, Donald Trump, double entry bookkeeping, Double Irish / Dutch Sandwich, energy security, Etonian, eurozone crisis, financial deregulation, financial engineering, Ford Model T, forensic accounting, Frederick Winslow Taylor, G4S, Glass-Steagall Act, high-speed rail, information security, intangible asset, Internet of things, James Watt: steam engine, Jeremy Corbyn, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, junk bonds, light touch regulation, Long Term Capital Management, low cost airline, new economy, Northern Rock, offshore financial centre, oil shale / tar sands, On the Economy of Machinery and Manufactures, Ponzi scheme, post-oil, principal–agent problem, profit motive, race to the bottom, railway mania, regulatory arbitrage, risk/return, Ronald Reagan, Savings and loan crisis, savings glut, scientific management, short selling, Silicon Valley, South Sea Bubble, statistical model, supply-chain management, The Chicago School, too big to fail, transaction costs, transfer pricing, Upton Sinclair, WikiLeaks

By 2007, while McKinsey were advising on ‘creating a commissioning market’, PwC had been brought in to set up a framework for ‘contracting and procurement’, with predictably expensive results. ‘Whatever the benefits of the purchaser/provider split,’ a parliamentary committee would report in 2010, ‘it has led to an increase in transaction costs, notably management and administration costs.’ Confidential NHS research showed its administration costs had risen to 14% of its budget, more than double the level before the 1990s reforms.22 Just as with PFI, the fragmentation of the health service created huge demand for advice from ‘purchasers’ and ‘providers’ unfamiliar with how to contract competitively in a health service built on co-operation.


pages: 375 words: 105,067

Pound Foolish: Exposing the Dark Side of the Personal Finance Industry by Helaine Olen

Alan Greenspan, American ideology, asset allocation, Bear Stearns, behavioural economics, Bernie Madoff, buy and hold, Cass Sunstein, Credit Default Swap, David Brooks, delayed gratification, diversification, diversified portfolio, Donald Trump, Elliott wave, en.wikipedia.org, estate planning, financial engineering, financial innovation, Flash crash, game design, greed is good, high net worth, impulse control, income inequality, index fund, John Bogle, Kevin Roose, London Whale, longitudinal study, low interest rates, Mark Zuckerberg, Mary Meeker, money market fund, mortgage debt, multilevel marketing, oil shock, payday loans, pension reform, Ponzi scheme, post-work, prosperity theology / prosperity gospel / gospel of success, quantitative easing, Ralph Nader, RAND corporation, random walk, Richard Thaler, Ronald Reagan, Saturday Night Live, Stanford marshmallow experiment, stocks for the long run, The 4% rule, too big to fail, transaction costs, Unsafe at Any Speed, upwardly mobile, Vanguard fund, wage slave, women in the workforce, working poor, éminence grise

Firms such as Interactive Broker, a brokerage house that targets the day-trading crowd, confirm the increase, admitting the number of their accounts grew by 18 percent between 2009 and 2010 alone. These frequent fliers of the investment world represent, in the view of Celent, “a significant opportunity” for brokerage houses. Win or lose, traders need to pay transaction costs—something the industry is quite aware of. Take a look at options—that is, the trade in contracts to buy or sell a particular equity at a predetermined price. The growth in this area is nothing short of astonishing. According to the Options Industry Council, there were 3,899,068,670 contracts traded in 2010, an increase of almost 8 percent from 2009, which itself broke the options record from 2008.


pages: 350 words: 109,379

How to Run a Government: So That Citizens Benefit and Taxpayers Don't Go Crazy by Michael Barber

Affordable Care Act / Obamacare, anti-fragile, Atul Gawande, battle of ideas, Berlin Wall, Black Swan, Checklist Manifesto, collapse of Lehman Brothers, collective bargaining, deep learning, deliberate practice, facts on the ground, failed state, fear of failure, full employment, G4S, illegal immigration, invisible hand, libertarian paternalism, Mark Zuckerberg, Nate Silver, North Sea oil, obamacare, performance metric, Potemkin village, Ronald Reagan, school choice, The Signal and the Noise by Nate Silver, transaction costs, WikiLeaks

At this point the choice and competition policy may need a dose of hierarchy and targets to make it work. Nevertheless, the policy can also be attractive to politicians both because some ideologically prefer markets and because, if the policy works, it frees the government from day-to-day intervention as the system becomes sustainable. As Bevan and Wilson put it, ‘Quasi-markets have high transaction costs, but are popular with governments because pressure on poor performance comes from an invisible hand …’6 Blair saw choice as a key ingredient in creating ‘self-improving systems’ – different words for the same basic point. There is much academic debate about whether choice and competition work in the sense of driving up performance.


pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

Alan Greenspan, American ideology, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Bonfire of the Vanities, bonus culture, book value, break the buck, business cycle, business logic, buy and hold, capital controls, Carmen Reinhart, central bank independence, Charles Lindbergh, collapse of Lehman Brothers, collateralized debt obligation, commoditize, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency risk, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Glass-Steagall Act, Gordon Gekko, greed is good, Greenspan put, Home mortgage interest deduction, Hyman Minsky, income per capita, information asymmetry, interest rate derivative, interest rate swap, junk bonds, Kenneth Rogoff, laissez-faire capitalism, late fees, light touch regulation, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, Martin Wolf, Michael Milken, money market fund, moral hazard, mortgage tax deduction, Myron Scholes, Paul Samuelson, Ponzi scheme, price stability, profit maximization, proprietary trading, race to the bottom, regulatory arbitrage, rent-seeking, Robert Bork, Robert Shiller, Ronald Reagan, Saturday Night Live, Satyajit Das, Savings and loan crisis, sovereign wealth fund, Tax Reform Act of 1986, The Myth of the Rational Market, too big to fail, transaction costs, Tyler Cowen, value at risk, yield curve

In a 1995 paper, Robert Merton wrote, “Looking at financial innovations … one sees them as the force driving the global financial system towards its goal of greater economic efficiency. In particular, innovations involving derivatives can improve efficiency by expanding opportunities for risk sharing, by lowering transaction costs and by reducing asymmetric information and agency costs.”45 Two years later, Alan Greenspan said, The unbundling of financial products is now extensive throughout our financial system. Perhaps the most obvious example is the ever-expanding array of financial derivatives available to help firms manage interest rate risk, other market risks, and, increasingly, credit risks.… Another far-reaching innovation is the technology of securitization—a form of derivative—which has encouraged unbundling of the production processes for many credit services.… These and other developments facilitating the unbundling of financial products have surely improved the efficiency of our financial markets.46 As the financial sector became a bigger part of the U.S. economy, the celebration of financial innovation only increased.


pages: 401 words: 109,892

The Great Reversal: How America Gave Up on Free Markets by Thomas Philippon

airline deregulation, Amazon Mechanical Turk, Amazon Web Services, Andrei Shleifer, barriers to entry, Big Tech, bitcoin, blockchain, book value, business cycle, business process, buy and hold, Cambridge Analytica, carbon tax, Carmen Reinhart, carried interest, central bank independence, commoditize, crack epidemic, cross-subsidies, disruptive innovation, Donald Trump, driverless car, Erik Brynjolfsson, eurozone crisis, financial deregulation, financial innovation, financial intermediation, flag carrier, Ford Model T, gig economy, Glass-Steagall Act, income inequality, income per capita, index fund, intangible asset, inventory management, Jean Tirole, Jeff Bezos, Kenneth Rogoff, labor-force participation, law of one price, liquidity trap, low cost airline, manufacturing employment, Mark Zuckerberg, market bubble, minimum wage unemployment, money market fund, moral hazard, natural language processing, Network effects, new economy, offshore financial centre, opioid epidemic / opioid crisis, Pareto efficiency, patent troll, Paul Samuelson, price discrimination, profit maximization, purchasing power parity, QWERTY keyboard, rent-seeking, ride hailing / ride sharing, risk-adjusted returns, Robert Bork, Robert Gordon, robo advisor, Ronald Reagan, search costs, Second Machine Age, self-driving car, Silicon Valley, Snapchat, spinning jenny, statistical model, Steve Jobs, stock buybacks, supply-chain management, Telecommunications Act of 1996, The Chicago School, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, Travis Kalanick, vertical integration, Vilfredo Pareto, warehouse automation, zero-sum game

Technological development of the past forty years should have disproportionately increased efficiency in the finance industry. How is it possible for today’s finance industry not to be significantly more efficient than the finance industry of John Pierpont Morgan? Information technologies (IT) must have lowered the transaction costs of buying and holding financial assets. An apt analogy is with retail and wholesale trade. After all, retail banking and retail trade both provide intermediation services. As we discussed in Chapter 2, the retail and wholesale industries invested in IT. They became more productive, and their prices went down.


Smart Mobs: The Next Social Revolution by Howard Rheingold

"hyperreality Baudrillard"~20 OR "Baudrillard hyperreality", A Pattern Language, Alvin Toffler, AOL-Time Warner, augmented reality, barriers to entry, battle of ideas, Brewster Kahle, Burning Man, business climate, citizen journalism, computer vision, conceptual framework, creative destruction, Dennis Ritchie, digital divide, disinformation, Douglas Engelbart, Douglas Engelbart, experimental economics, experimental subject, Extropian, Free Software Foundation, Garrett Hardin, Hacker Ethic, Hedy Lamarr / George Antheil, Herman Kahn, history of Unix, hockey-stick growth, Howard Rheingold, invention of the telephone, inventory management, Ivan Sutherland, John Markoff, John von Neumann, Joi Ito, Joseph Schumpeter, Ken Thompson, Kevin Kelly, Lewis Mumford, Metcalfe's law, Metcalfe’s law, more computing power than Apollo, move 37, Multics, New Urbanism, Norbert Wiener, packet switching, PalmPilot, Panopticon Jeremy Bentham, pattern recognition, peer-to-peer, peer-to-peer model, pez dispenser, planetary scale, pre–internet, prisoner's dilemma, radical decentralization, RAND corporation, recommendation engine, Renaissance Technologies, RFID, Richard Stallman, Robert Metcalfe, Robert X Cringely, Ronald Coase, Search for Extraterrestrial Intelligence, seminal paper, SETI@home, sharing economy, Silicon Valley, skunkworks, slashdot, social intelligence, spectrum auction, Steven Levy, Stewart Brand, the Cathedral and the Bazaar, the scientific method, Tragedy of the Commons, transaction costs, ultimatum game, urban planning, web of trust, Whole Earth Review, Yochai Benkler, zero-sum game

Developing a reputation for distributing high-quality recommendations is one way to accrue social status, and humans have extraordinary talents for social games. Trading know-how with people on six continents in real time, however, is more than just new; it fundamentally transforms knowledge-sharing by drastically lowering the transaction cost of matching questions and answers. While surfing the Web, little extra effort is required to send email to friends with a URL pointing to an interesting page, and little effort is required in finding the right specialized forum to ask a question. More recently, the phenomenon of “weblogging,” which enables thousands of Web surfers to publish and update their own lists of favorite Web sites, has tipped online recommendation-sharing into an epidemic.


pages: 407 words: 104,622

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, Andrew Wiles, automated trading system, backtesting, Bayesian statistics, Bear Stearns, beat the dealer, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, blockchain, book value, Brownian motion, butter production in bangladesh, buy and hold, buy low sell high, Cambridge Analytica, Carl Icahn, Claude Shannon: information theory, computer age, computerized trading, Credit Default Swap, Daniel Kahneman / Amos Tversky, data science, diversified portfolio, Donald Trump, Edward Thorp, Elon Musk, Emanuel Derman, endowment effect, financial engineering, Flash crash, George Gilder, Gordon Gekko, illegal immigration, index card, index fund, Isaac Newton, Jim Simons, John Meriwether, John Nash: game theory, John von Neumann, junk bonds, Loma Prieta earthquake, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, Mark Zuckerberg, Michael Milken, Monty Hall problem, More Guns, Less Crime, Myron Scholes, Naomi Klein, natural language processing, Neil Armstrong, obamacare, off-the-grid, p-value, pattern recognition, Peter Thiel, Ponzi scheme, prediction markets, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, Robert Mercer, Ronald Reagan, self-driving car, Sharpe ratio, Silicon Valley, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, Steve Bannon, Steve Jobs, stochastic process, the scientific method, Thomas Bayes, transaction costs, Turing machine, Two Sigma

It’s meaningless to know that copper prices will rise from $3.00 a contract to $3.10, for example, if your buying pushes the price up to $3.05 before you even have a chance to complete your transaction—perhaps as dealers hike the price or as rivals do their own buying—slashing potential profits by half. From the earliest days of the fund, Simons’s team had been wary of these transaction costs, which they called slippage. They regularly compared their trades against a model that tracked how much the firm would have profited or lost were it not for those bothersome trading costs. The group coined a name for the difference between the prices they were getting and the theoretical trades their model made without the pesky costs.


pages: 379 words: 109,223

Frenemies: The Epic Disruption of the Ad Business by Ken Auletta

"World Economic Forum" Davos, Airbnb, Alvin Toffler, AOL-Time Warner, barriers to entry, Bernie Sanders, bike sharing, Boris Johnson, Build a better mousetrap, Burning Man, call centre, Cambridge Analytica, capitalist realism, carbon footprint, cloud computing, commoditize, connected car, content marketing, corporate raider, crossover SUV, data science, digital rights, disintermediation, Donald Trump, driverless car, Elon Musk, fake news, financial engineering, forensic accounting, Future Shock, Google Glasses, Internet of things, Jeff Bezos, Kevin Roose, Khan Academy, Lyft, Mark Zuckerberg, market design, Mary Meeker, Max Levchin, Menlo Park, move fast and break things, Naomi Klein, NetJets, Network effects, pattern recognition, pets.com, race to the bottom, Richard Feynman, ride hailing / ride sharing, Salesforce, Saturday Night Live, self-driving car, sharing economy, Sheryl Sandberg, Shoshana Zuboff, Silicon Valley, Snapchat, Steve Ballmer, Steve Jobs, surveillance capitalism, Susan Wojcicki, The Theory of the Leisure Class by Thorstein Veblen, three-martini lunch, Tim Cook: Apple, transaction costs, Uber and Lyft, uber lyft, Upton Sinclair, éminence grise

But as advertising and marketing shifts to a plethora of digital platforms, Thompson wrote, the idea of agencies as the essential middleman, “a one-stop shop for advertisers,” fades into history. The Internet ends the limited ad space of old media as online stores like Amazon offer unlimited shelf space. Distribution and transaction costs become “zero,” and “the critical competency is discovery”—where to find and target desired customers. At the same time, discovery on digital is monopolized by two companies, Facebook and Google. (He overlooked emerging rival Amazon.) Assuming that all media, old or new, will in the future be delivered digitally, the problem agencies haven’t confronted, he concluded, is that “their business model is obsolete.”


pages: 360 words: 113,429

Uneasy Street: The Anxieties of Affluence by Rachel Sherman

American ideology, Bernie Sanders, Capital in the Twenty-First Century by Thomas Piketty, deindustrialization, Donald Trump, estate planning, financial independence, gig economy, high net worth, income inequality, Mark Zuckerberg, McMansion, mental accounting, NetJets, new economy, Occupy movement, plutocrats, precariat, school choice, sharing economy, Silicon Valley, Silicon Valley billionaire, Southern State Parkway, Steve Jobs, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, transaction costs, upwardly mobile, We are the 99%, women in the workforce, working poor

New York: Oxford University Press. Thaler, Richard H. 1999. “Mental Accounting Matters.” Journal of Behavioral Decision Making 12: 183–206. Tichenor, Veronica. 2005. Earning More and Getting Less: Why Successful Wives Can’t Buy Equality. New Brunswick, NJ: Rutgers University Press. Treas, Judith. 1993. “Money in the Bank: Transaction Costs and the Economic Organization of Marriage.” American Sociological Review 58 (5): 723–734. U.S. Census Bureau. 2016. “QuickFacts, New York City, New York.” https://www.census.gov/quickfacts/table/PST045215/3651000. Last accessed January 2017. Vaisey, Steven. 2009. “Motivation and Justification: A Dual-Process Model of Culture in Action.”


pages: 455 words: 116,578

The Power of Habit: Why We Do What We Do in Life and Business by Charles Duhigg

Atul Gawande, behavioural economics, Checklist Manifesto, corporate governance, cuban missile crisis, delayed gratification, desegregation, game design, haute couture, impulse control, index card, longitudinal study, meta-analysis, patient HM, pattern recognition, power law, randomized controlled trial, rolodex, Rosa Parks, Silicon Valley, Stanford marshmallow experiment, tacit knowledge, telemarketer, Tenerife airport disaster, the strength of weak ties, Toyota Production System, transaction costs, Walter Mischel

Gittell, “Coordinating Mechanisms in Care Provider Groups: Relational Coordination as a Mediator and Input Uncertainty as a Moderator of Performance Effects,” Management Science 48 (2002): 1408–26; A. M. Knott and Hart Posen, “Firm R&D Behavior and Evolving Technology in Established Industries,” Organization Science 20 (2009): 352–67. 6.19 companies need to operate G. M. Hodgson, Economics and Evolution (Cambridge: Polity Press, 1993); Richard N. Langlois, “Transaction-Cost Economics in Real Time,” Industrial and Corporate Change (1992): 99–127; R. R. Nelson, “Routines”; R. Coombs and J. S. Metcalfe, “Organizing for Innovation: Co-ordinating Distributed Innovation Capabilities,” in Competence, Governance, and Entrepreneurship, ed. J. N. Foss and V. Mahnke (Oxford: Oxford University Press, 2000); R.


pages: 396 words: 117,149

The Master Algorithm: How the Quest for the Ultimate Learning Machine Will Remake Our World by Pedro Domingos

Albert Einstein, Amazon Mechanical Turk, Arthur Eddington, backpropagation, basic income, Bayesian statistics, Benoit Mandelbrot, bioinformatics, Black Swan, Brownian motion, cellular automata, Charles Babbage, Claude Shannon: information theory, combinatorial explosion, computer vision, constrained optimization, correlation does not imply causation, creative destruction, crowdsourcing, Danny Hillis, data is not the new oil, data is the new oil, data science, deep learning, DeepMind, double helix, Douglas Hofstadter, driverless car, Erik Brynjolfsson, experimental subject, Filter Bubble, future of work, Geoffrey Hinton, global village, Google Glasses, Gödel, Escher, Bach, Hans Moravec, incognito mode, information retrieval, Jeff Hawkins, job automation, John Markoff, John Snow's cholera map, John von Neumann, Joseph Schumpeter, Kevin Kelly, large language model, lone genius, machine translation, mandelbrot fractal, Mark Zuckerberg, Moneyball by Michael Lewis explains big data, Narrative Science, Nate Silver, natural language processing, Netflix Prize, Network effects, Nick Bostrom, NP-complete, off grid, P = NP, PageRank, pattern recognition, phenotype, planetary scale, power law, pre–internet, random walk, Ray Kurzweil, recommendation engine, Richard Feynman, scientific worldview, Second Machine Age, self-driving car, Silicon Valley, social intelligence, speech recognition, Stanford marshmallow experiment, statistical model, Stephen Hawking, Steven Levy, Steven Pinker, superintelligent machines, the long tail, the scientific method, The Signal and the Noise by Nate Silver, theory of mind, Thomas Bayes, transaction costs, Turing machine, Turing test, Vernor Vinge, Watson beat the top human players on Jeopardy!, white flight, yottabyte, zero-sum game

This is one of the most astonishing facts in all of science. Figuring out how proteins fold into their characteristic shapes; reconstructing the evolutionary history of a set of species from their DNA; proving theorems in propositional logic; detecting arbitrage opportunities in markets with transaction costs; inferring a three-dimensional shape from two-dimensional views; compressing data on a disk; forming a stable coalition in politics; modeling turbulence in sheared flows; finding the safest portfolio of investments with a given return, the shortest route to visit a set of cities, the best layout of components on a microchip, the best placement of sensors in an ecosystem, or the lowest energy state of a spin glass; scheduling flights, classes, and factory jobs; optimizing resource allocation, urban traffic flow, social welfare, and (most important) your Tetris score: these are all NP-complete problems, meaning that if you can efficiently solve one of them you can efficiently solve all problems in the class NP, including each other.


pages: 464 words: 117,495

The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management by Alexander Elder

additive manufacturing, Atul Gawande, backtesting, behavioural economics, Benoit Mandelbrot, buy and hold, buy low sell high, Checklist Manifesto, computerized trading, deliberate practice, diversification, Elliott wave, endowment effect, fear index, loss aversion, mandelbrot fractal, margin call, offshore financial centre, paper trading, Ponzi scheme, price stability, psychological pricing, quantitative easing, random walk, Reminiscences of a Stock Operator, risk tolerance, short selling, South Sea Bubble, systematic trading, systems thinking, The Wisdom of Crowds, transaction costs, transfer pricing, traveling salesman, tulip mania, zero-sum game

Advantages: a wealth of trading opportunities, fairly tight risk control. Disadvantage: will miss major trends. Day-trading—The expected duration of a trade is measured in minutes, rarely hours. Advantages: great many opportunities, no overnight risk. Disadvantages: demands instant reflexes; transaction costs become a factor. If you decide to operate in more than one timeframe, consider making those trades in different accounts. This will allow you to evaluate your performance in each timeframe rather than lump together apples and oranges. Investing The decision to invest or trade for the long term is almost always based on some fundamental idea.


pages: 395 words: 116,675

The Evolution of Everything: How New Ideas Emerge by Matt Ridley

"World Economic Forum" Davos, adjacent possible, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, Alfred Russel Wallace, AltaVista, altcoin, An Inconvenient Truth, anthropic principle, anti-communist, bank run, banking crisis, barriers to entry, bitcoin, blockchain, Boeing 747, Boris Johnson, British Empire, Broken windows theory, carbon tax, Columbian Exchange, computer age, Corn Laws, cosmological constant, cotton gin, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, cryptocurrency, David Ricardo: comparative advantage, demographic transition, Deng Xiaoping, discovery of DNA, Donald Davies, double helix, Downton Abbey, driverless car, Eben Moglen, Edward Glaeser, Edward Lorenz: Chaos theory, Edward Snowden, endogenous growth, epigenetics, Ethereum, ethereum blockchain, facts on the ground, fail fast, falling living standards, Ferguson, Missouri, financial deregulation, financial innovation, flying shuttle, Frederick Winslow Taylor, Geoffrey West, Santa Fe Institute, George Gilder, George Santayana, Glass-Steagall Act, Great Leap Forward, Greenspan put, Gregor Mendel, Gunnar Myrdal, Henri Poincaré, Higgs boson, hydraulic fracturing, imperial preference, income per capita, indoor plumbing, information security, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jane Jacobs, Japanese asset price bubble, Jeff Bezos, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, Khan Academy, knowledge economy, land reform, Lao Tzu, long peace, low interest rates, Lyft, M-Pesa, Mahatma Gandhi, Mark Zuckerberg, means of production, meta-analysis, military-industrial complex, mobile money, Money creation, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, Necker cube, obamacare, out of africa, packet switching, peer-to-peer, phenotype, Pierre-Simon Laplace, precautionary principle, price mechanism, profit motive, RAND corporation, random walk, Ray Kurzweil, rent-seeking, reserve currency, Richard Feynman, rising living standards, road to serfdom, Robert Solow, Ronald Coase, Ronald Reagan, Satoshi Nakamoto, scientific management, Second Machine Age, sharing economy, smart contracts, South Sea Bubble, Steve Jobs, Steven Pinker, Stuart Kauffman, tacit knowledge, TED Talk, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, twin studies, uber lyft, women in the workforce

In effect, the cattlemen of the nineteenth century rediscovered what medieval merchants had found – that customs and laws would emerge where they were not imposed. It was very far from anarchic. Robert Ellickson of Yale documented a good example of this more recently in Shasta County, California, an area of farms and ranches. Taking his cue from a famous example given by the economist Ronald Coase (who argued that in the absence of transaction costs, wrongs between cattle ranchers and wheat farmers would be righted by private negotiation rather than state punishment), Ellickson looked to see how individuals actually dealt with trespassing cattle. He found that the law was largely irrelevant. People dealt with the problem privately, sometimes even illegally.


pages: 437 words: 113,173

Age of Discovery: Navigating the Risks and Rewards of Our New Renaissance by Ian Goldin, Chris Kutarna

"World Economic Forum" Davos, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, Airbnb, Albert Einstein, AltaVista, Asian financial crisis, asset-backed security, autonomous vehicles, banking crisis, barriers to entry, battle of ideas, Bear Stearns, Berlin Wall, bioinformatics, bitcoin, Boeing 747, Bonfire of the Vanities, bread and circuses, carbon tax, clean water, collective bargaining, Colonization of Mars, Credit Default Swap, CRISPR, crowdsourcing, cryptocurrency, Dava Sobel, demographic dividend, Deng Xiaoping, digital divide, Doha Development Round, double helix, driverless car, Edward Snowden, Elon Musk, en.wikipedia.org, epigenetics, experimental economics, Eyjafjallajökull, failed state, Fall of the Berlin Wall, financial innovation, full employment, Galaxy Zoo, general purpose technology, Glass-Steagall Act, global pandemic, global supply chain, Higgs boson, Hyperloop, immigration reform, income inequality, indoor plumbing, industrial cluster, industrial robot, information retrieval, information security, Intergovernmental Panel on Climate Change (IPCC), intermodal, Internet of things, invention of the printing press, Isaac Newton, Islamic Golden Age, Johannes Kepler, Khan Academy, Kickstarter, Large Hadron Collider, low cost airline, low skilled workers, Lyft, Mahbub ul Haq, Malacca Straits, mass immigration, Max Levchin, megacity, Mikhail Gorbachev, moral hazard, Nelson Mandela, Network effects, New Urbanism, non-tariff barriers, Occupy movement, On the Revolutions of the Heavenly Spheres, open economy, Panamax, Paris climate accords, Pearl River Delta, personalized medicine, Peter Thiel, post-Panamax, profit motive, public intellectual, quantum cryptography, rent-seeking, reshoring, Robert Gordon, Robert Metcalfe, Search for Extraterrestrial Intelligence, Second Machine Age, self-driving car, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Skype, smart grid, Snapchat, special economic zone, spice trade, statistical model, Stephen Hawking, Steve Jobs, Stuxnet, synthetic biology, TED Talk, The Future of Employment, too big to fail, trade liberalization, trade route, transaction costs, transatlantic slave trade, uber lyft, undersea cable, uranium enrichment, We are the 99%, We wanted flying cars, instead we got 140 characters, working poor, working-age population, zero day

In diplomacy, the absolute sovereignty of states over their own affairs—the bedrock of international relations going back to at least 1555**—is being challenged by humanitarian notions of a “responsibility to protect” other countries’ citizens, an international criminal court with jurisdiction to try “crimes against humanity,” and the growing realization that no state can achieve domestic prosperity without links to the international community (as the case of North Korea epitomizes). In business, the very concept of “the firm” is being reinvented. The old idea—that entrepreneurs assemble firms because it’s more economical than obtaining every good and service they need from the market—is being challenged by digital platforms that drive transaction costs down and make a new range of fractional services possible. New thinking sees the chief value of the firm in the unique set of values and practices it harbors. The nature of work is likewise transforming, from full-time employment to temporary contracts. Since 1995, more than half of all jobs created across advanced (OECD) economies have been part-time, self-employed or freelance.5 Digital freelance platforms like Upwork, Task Rabbit and Thumbtack are booming from Minneapolis to Mumbai.6 In art, the basic division between artist and audience is being broken, and participation in the act of creation is becoming commonplace.


pages: 374 words: 114,600

The Quants by Scott Patterson

Alan Greenspan, Albert Einstein, AOL-Time Warner, asset allocation, automated trading system, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Blythe Masters, Bonfire of the Vanities, book value, Brownian motion, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, Carl Icahn, centralized clearinghouse, Claude Shannon: information theory, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Doomsday Clock, Dr. Strangelove, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, Financial Modelers Manifesto, fixed income, Glass-Steagall Act, global macro, Gordon Gekko, greed is good, Haight Ashbury, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, index fund, invention of the telegraph, invisible hand, Isaac Newton, Jim Simons, job automation, John Meriwether, John Nash: game theory, junk bonds, Kickstarter, law of one price, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, Mark Spitznagel, merger arbitrage, Michael Milken, military-industrial complex, money market fund, Myron Scholes, NetJets, new economy, offshore financial centre, old-boy network, Paul Lévy, Paul Samuelson, Ponzi scheme, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, risk-adjusted returns, Robert Mercer, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Savings and loan crisis, Sergey Aleynikov, short selling, short squeeze, South Sea Bubble, speech recognition, statistical arbitrage, The Chicago School, The Great Moderation, The Predators' Ball, too big to fail, transaction costs, value at risk, volatility smile, yield curve, éminence grise

During his first year at Harvard, after reading a Forbes magazine article arguing that shares of Home Shopping Network were overpriced, he purchased put options on the stock, hoping to profit from a decline. The bet was a good one, earning a few thousand dollars, but it didn’t pay off as much as Griffin had hoped: commissions and transaction costs from the market maker, a Philadelphia securities firm called Susquehanna International Group, cut into his winnings. He realized the investing game was more complex than he’d thought, and started reading as many books about financial markets as he could get his hands on. Eventually, he came upon a textbook about convertible bonds—the favored investment vehicles of Ed Thorp.


pages: 482 words: 117,962

Exceptional People: How Migration Shaped Our World and Will Define Our Future by Ian Goldin, Geoffrey Cameron, Meera Balarajan

Admiral Zheng, agricultural Revolution, barriers to entry, Berlin Wall, Branko Milanovic, British Empire, conceptual framework, creative destruction, demographic transition, Deng Xiaoping, endogenous growth, failed state, Fall of the Berlin Wall, Gini coefficient, global pandemic, global supply chain, guest worker program, illegal immigration, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), job automation, Joseph Schumpeter, knowledge economy, labor-force participation, labour mobility, language acquisition, Lao Tzu, life extension, longitudinal study, low skilled workers, low-wage service sector, machine readable, Malacca Straits, mass immigration, microcredit, Nelson Mandela, Network effects, new economy, New Urbanism, old age dependency ratio, open borders, out of africa, price mechanism, purchasing power parity, Richard Florida, selection bias, Silicon Valley, Silicon Valley startup, Skype, social distancing, spice trade, trade route, transaction costs, transatlantic slave trade, women in the workforce, working-age population

The official channels for remitting funds can be expensive and difficult to access, particularly for undocumented workers. The World Bank estimates that a drop in the average costs of wiring money home from 13 percent (in 2000) to 3 percent would save migrants and their dependents $10 billion a year.45 Expanding banking services and regulating transaction costs would help more money flow toward poor families and entrepreneurs in developing countries. Government banks can also step in, as has the State Bank of India. It has opened overseas branches where there are large expatriate communities, it offers higher interest rates than local bank accounts and tax exemptions on a proportion of the interest earned, and it allows account holders to have beneficiaries in India.


pages: 401 words: 115,959

Philanthrocapitalism by Matthew Bishop, Michael Green, Bill Clinton

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, Abraham Maslow, Albert Einstein, An Inconvenient Truth, anti-communist, AOL-Time Warner, barriers to entry, battle of ideas, Bernie Madoff, Big Tech, Bob Geldof, Bonfire of the Vanities, business process, business process outsourcing, Charles Lindbergh, clean tech, clean water, corporate governance, corporate social responsibility, Dava Sobel, David Ricardo: comparative advantage, digital divide, do well by doing good, don't be evil, family office, financial innovation, full employment, global pandemic, global village, Global Witness, God and Mammon, Hernando de Soto, high net worth, Ida Tarbell, Intergovernmental Panel on Climate Change (IPCC), invisible hand, James Dyson, John Elkington, John Harrison: Longitude, joint-stock company, junk bonds, knowledge economy, knowledge worker, Larry Ellison, Live Aid, lone genius, Marc Andreessen, Marc Benioff, market bubble, mass affluent, Michael Milken, microcredit, Mikhail Gorbachev, Neil Armstrong, Nelson Mandela, new economy, offshore financial centre, old-boy network, PalmPilot, peer-to-peer lending, performance metric, Peter Singer: altruism, plutocrats, profit maximization, profit motive, Richard Feynman, risk tolerance, risk-adjusted returns, Ronald Coase, Ronald Reagan, Salesforce, scientific management, seminal paper, shareholder value, Silicon Valley, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, SpaceShipOne, stem cell, Steve Jobs, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade liberalization, transaction costs, trickle-down economics, Tyler Cowen, wealth creators, winner-take-all economy, working poor, World Values Survey, X Prize

Instead of focusing on designing a social stock exchange, he argues, it would be better to address several other questions, including how to develop standards of transparency and reporting for organizations that focus on social returns; why “after so many years of talking about it, have we made so little progress in reducing transaction costs for those looking to raise capital? Are we missing a trick?”; and what role competition should play among providers of capital and the social organizations seeking it. Make some real progress on addressing these questions, concludes Wheeler, and “we may decide we don’t even need a social stock exchange—that we have been barking up the wrong tree all along.


pages: 464 words: 116,945

Seventeen Contradictions and the End of Capitalism by David Harvey

accounting loophole / creative accounting, Alvin Toffler, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business climate, California gold rush, call centre, central bank independence, Charles Babbage, classic study, clean water, cloud computing, collapse of Lehman Brothers, colonial rule, company town, cotton gin, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, death from overwork, deindustrialization, demographic dividend, Deng Xiaoping, deskilling, drone strike, end world poverty, falling living standards, fiat currency, first square of the chessboard, first square of the chessboard / second half of the chessboard, Food sovereignty, Frank Gehry, future of work, gentrification, global reserve currency, Great Leap Forward, Guggenheim Bilbao, Gunnar Myrdal, Herbert Marcuse, income inequality, informal economy, invention of the steam engine, invisible hand, Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Just-in-time delivery, knowledge worker, low skilled workers, Mahatma Gandhi, market clearing, Martin Wolf, means of production, microcredit, military-industrial complex, Money creation, Murray Bookchin, new economy, New Urbanism, Occupy movement, peak oil, phenotype, planned obsolescence, plutocrats, Ponzi scheme, quantitative easing, rent-seeking, reserve currency, road to serfdom, Robert Gordon, Ronald Reagan, Savings and loan crisis, scientific management, short selling, Silicon Valley, special economic zone, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, Tyler Cowen, Tyler Cowen: Great Stagnation, wages for housework, Wall-E, women in the workforce, working poor, working-age population

Let me elaborate. There have been several bouts of financialisation throughout capital’s history (the latter half of the nineteenth century, for example). What makes the current phase special is the phenomenal acceleration in the speed of circulation of money capital and the reduction in financial transaction costs. The mobility of money capital relative to that of other forms of capital (commodities and production in particular) has dramatically increased. Capital’s penchant for the annihilation of space through time here has a large role to play. This, says Craig Calhoun in a recent essay, ‘facilitates the “creative destruction” of existing structures of capital (e.g. specific modes of industrial production) and spurs the development of new technologies’, which in turn spurs ‘the development of new products, production processes and new sites of production’.


pages: 397 words: 110,222

Habeas Data: Privacy vs. The Rise of Surveillance Tech by Cyrus Farivar

Apple's 1984 Super Bowl advert, autonomous vehicles, call centre, citizen journalism, cloud computing, computer age, connected car, do-ocracy, Donald Trump, Edward Snowden, en.wikipedia.org, failed state, Ferguson, Missouri, Frank Gehry, Golden Gate Park, information security, John Markoff, Laura Poitras, license plate recognition, lock screen, Lyft, national security letter, Occupy movement, operational security, optical character recognition, Port of Oakland, RAND corporation, Ronald Reagan, sharing economy, Silicon Valley, Silicon Valley startup, Skype, Steve Jobs, Steven Levy, tech worker, The Hackers Conference, Tim Cook: Apple, transaction costs, uber lyft, WikiLeaks, you are the product, Zimmermann PGP

However, as technology improves, invasive power can be projected from ever-increasing distances, ranging from a Prohibition-era wiretap, to a Kyllo-era thermal scan, to a forthcoming pervasive drone. Unless one wishes to be a total hermit, it’s almost impossible to lead a fully private life in the twenty-first century. Since just after the Jones decision, Ohm has written in both academic and popular forums that in recent decades, privacy has often been lost as part of the transactional cost of doing business. If I want to use a cell phone, for instance, I have to give up my location information at all times. If I want to use a service like Uber or Lyft, I have to tell them where I want to go at specific times, and they are effectively allowed to retain that information forever.


pages: 501 words: 114,888

The Future Is Faster Than You Think: How Converging Technologies Are Transforming Business, Industries, and Our Lives by Peter H. Diamandis, Steven Kotler

Ada Lovelace, additive manufacturing, Airbnb, Albert Einstein, AlphaGo, Amazon Mechanical Turk, Amazon Robotics, augmented reality, autonomous vehicles, barriers to entry, Big Tech, biodiversity loss, bitcoin, blockchain, blood diamond, Boston Dynamics, Burning Man, call centre, cashless society, Charles Babbage, Charles Lindbergh, Clayton Christensen, clean water, cloud computing, Colonization of Mars, computer vision, creative destruction, CRISPR, crowdsourcing, cryptocurrency, data science, Dean Kamen, deep learning, deepfake, DeepMind, delayed gratification, dematerialisation, digital twin, disruptive innovation, Donald Shoup, driverless car, Easter island, Edward Glaeser, Edward Lloyd's coffeehouse, Elon Musk, en.wikipedia.org, epigenetics, Erik Brynjolfsson, Ethereum, ethereum blockchain, experimental economics, fake news, food miles, Ford Model T, fulfillment center, game design, Geoffrey West, Santa Fe Institute, gig economy, gigafactory, Google X / Alphabet X, gravity well, hive mind, housing crisis, Hyperloop, impact investing, indoor plumbing, industrial robot, informal economy, initial coin offering, intentional community, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invention of the telegraph, Isaac Newton, Jaron Lanier, Jeff Bezos, job automation, Joseph Schumpeter, Kevin Kelly, Kickstarter, Kiva Systems, late fees, Law of Accelerating Returns, life extension, lifelogging, loss aversion, Lyft, M-Pesa, Mary Lou Jepsen, Masayoshi Son, mass immigration, megacity, meta-analysis, microbiome, microdosing, mobile money, multiplanetary species, Narrative Science, natural language processing, Neal Stephenson, Neil Armstrong, Network effects, new economy, New Urbanism, Nick Bostrom, Oculus Rift, One Laptop per Child (OLPC), out of africa, packet switching, peer-to-peer lending, Peter H. Diamandis: Planetary Resources, Peter Thiel, planned obsolescence, QR code, RAND corporation, Ray Kurzweil, RFID, Richard Feynman, Richard Florida, ride hailing / ride sharing, risk tolerance, robo advisor, Satoshi Nakamoto, Second Machine Age, self-driving car, Sidewalk Labs, Silicon Valley, Skype, smart cities, smart contracts, smart grid, Snapchat, SoftBank, sovereign wealth fund, special economic zone, stealth mode startup, stem cell, Stephen Hawking, Steve Jobs, Steve Jurvetson, Steven Pinker, Stewart Brand, supercomputer in your pocket, supply-chain management, tech billionaire, technoutopianism, TED Talk, Tesla Model S, Tim Cook: Apple, transaction costs, Uber and Lyft, uber lyft, unbanked and underbanked, underbanked, urban planning, Vision Fund, VTOL, warehouse robotics, Watson beat the top human players on Jeopardy!, We wanted flying cars, instead we got 140 characters, X Prize

But there are now app-based services like Bambuser that help anyone make their own live-streaming broadcast network, a development that allows creators to take aim at entire entertainment ecosystems. Blockchain will amplify this process. By allowing artists to create unchangeable digital records of their work (making piracy impossible), and because its transaction costs are negligibly low or nonexistent, blockchain is bringing us to that fabled land of content creation: micropayments. This is what writers, artists, filmmakers, comics, and journalists have been waiting for since the internet first arrived. Direct to fan, no middlemen. A true meritocracy of creativity—or so the story goes.


Common Stocks and Uncommon Profits and Other Writings by Philip A. Fisher

book value, business climate, business cycle, buy and hold, data science, El Camino Real, estate planning, fixed income, index fund, low interest rates, market bubble, market fundamentalism, profit motive, RAND corporation, Salesforce, the market place, transaction costs, vertical integration

If the market is effi-cient in prospect, then the nexus of analysis that leads to this efficiency must be collectively poor. Efficient market theory grew out of the academic School of Random Walkers. These people found that it was difficult to identify technical trading strategies that worked well enough after transactions costs to provide an attractive profit relative to the risks taken. I don't disagree with this. As you have seen, I believe that it is very, very tough to make money with in and out trading based on short-term market forecasts. Perhaps the market is efficient in this narrow sense of the word. Most of us are or should be investors, not traders.


pages: 400 words: 124,678

The Investment Checklist: The Art of In-Depth Research by Michael Shearn

accelerated depreciation, AOL-Time Warner, Asian financial crisis, barriers to entry, Bear Stearns, book value, business cycle, call centre, Carl Icahn, Clayton Christensen, collective bargaining, commoditize, compensation consultant, compound rate of return, Credit Default Swap, currency risk, do what you love, electricity market, estate planning, financial engineering, Henry Singleton, intangible asset, Jeff Bezos, Larry Ellison, London Interbank Offered Rate, margin call, Mark Zuckerberg, money market fund, Network effects, PalmPilot, pink-collar, risk tolerance, shareholder value, six sigma, Skype, Steve Jobs, stock buybacks, subscription business, supply-chain management, technology bubble, Teledyne, time value of money, transaction costs, urban planning, women in the workforce, young professional

In the business description section, look for the following information: Number of transactions Number of customers Number of locations Number of employees Total square footage of operating locations You can then take these operating numbers (such as the number of transactions) and divide by revenues and costs to calculate metrics such as these: Revenue per transaction Cost per transaction Transactions per location Industry Primers Useful sources for identifying the operating metrics typically used for an industry are industry primers, such as these: Reuters Operating Metrics Standard & Poor’s Industry Surveys Fisher Investments guides These are guides written for analysts who are researching specific industries.


pages: 410 words: 119,823

Radical Technologies: The Design of Everyday Life by Adam Greenfield

3D printing, Airbnb, algorithmic bias, algorithmic management, AlphaGo, augmented reality, autonomous vehicles, bank run, barriers to entry, basic income, bitcoin, Black Lives Matter, blockchain, Boston Dynamics, business intelligence, business process, Californian Ideology, call centre, cellular automata, centralized clearinghouse, centre right, Chuck Templeton: OpenTable:, circular economy, cloud computing, Cody Wilson, collective bargaining, combinatorial explosion, Computer Numeric Control, computer vision, Conway's Game of Life, CRISPR, cryptocurrency, David Graeber, deep learning, DeepMind, dematerialisation, digital map, disruptive innovation, distributed ledger, driverless car, drone strike, Elon Musk, Ethereum, ethereum blockchain, facts on the ground, fiat currency, fulfillment center, gentrification, global supply chain, global village, Goodhart's law, Google Glasses, Herman Kahn, Ian Bogost, IBM and the Holocaust, industrial robot, informal economy, information retrieval, Internet of things, Jacob Silverman, James Watt: steam engine, Jane Jacobs, Jeff Bezos, Jeff Hawkins, job automation, jobs below the API, John Conway, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, John Perry Barlow, John von Neumann, joint-stock company, Kevin Kelly, Kickstarter, Kiva Systems, late capitalism, Leo Hollis, license plate recognition, lifelogging, M-Pesa, Mark Zuckerberg, means of production, megacity, megastructure, minimum viable product, money: store of value / unit of account / medium of exchange, natural language processing, Network effects, New Urbanism, Nick Bostrom, Occupy movement, Oculus Rift, off-the-grid, PalmPilot, Pareto efficiency, pattern recognition, Pearl River Delta, performance metric, Peter Eisenman, Peter Thiel, planetary scale, Ponzi scheme, post scarcity, post-work, printed gun, proprietary trading, RAND corporation, recommendation engine, RFID, rolodex, Rutger Bregman, Satoshi Nakamoto, self-driving car, sentiment analysis, shareholder value, sharing economy, Shenzhen special economic zone , Sidewalk Labs, Silicon Valley, smart cities, smart contracts, social intelligence, sorting algorithm, special economic zone, speech recognition, stakhanovite, statistical model, stem cell, technoutopianism, Tesla Model S, the built environment, The Death and Life of Great American Cities, The Future of Employment, Tony Fadell, transaction costs, Uber for X, undersea cable, universal basic income, urban planning, urban sprawl, vertical integration, Vitalik Buterin, warehouse robotics, When a measure becomes a target, Whole Earth Review, WikiLeaks, women in the workforce

In principle, then, Bitcoin ought to have a built-in constituency among those who, for one reason or another, cannot participate in other modes of digital value exchange. And with World Bank and ILO estimates placing the size of the informal economy at anywhere up to 72 percent of total economic output, depending on region, this implies a very large number of highly motivated potential users. Moreover, because of the relatively low transaction costs it imposes—nothing like the considerable overhead banks and credit-card issuers must dedicate to detecting fraud, assessing the merits of chargeback attempts and so on—the Bitcoin network can in principle economically process much smaller amounts than other payment systems. Some, indeed, thought of it as a key enabling infrastructure for an economy based on micropayments, minuscule charges that would be levied every time a song is played or a news article downloaded.14 One would think that a mode of payment capable of supporting entirely new business models might attract no small amount of interest, especially at a time when “content creators” and the media more broadly are under extraordinary, even existential financial pressure.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, buy and hold, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, Cornelius Vanderbilt, corporate governance, Credit Default Swap, cross-subsidies, currency risk, dematerialisation, disinformation, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Greenspan put, Growth in a Time of Debt, Ida Tarbell, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jim Simons, John Meriwether, junk bonds, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, M-Pesa, market design, Mary Meeker, megaproject, Michael Milken, millennium bug, mittelstand, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, Paul Volcker talking about ATMs, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, reality distortion field, regulatory arbitrage, Renaissance Technologies, rent control, risk free rate, risk tolerance, road to serfdom, Robert Shiller, Ronald Reagan, Schrödinger's Cat, seminal paper, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, vertical integration, Washington Consensus, We are the 99%, Yom Kippur War

On average, active fund managers under-perform their benchmark, and by an amount that reflects their fees: since these managers now account for a major fraction of asset holding, this outcome is almost inevitable. Managers who charge higher fees tend to under-perform managers who charge lower fees, not just on account of their charges but also because higher fees tend to be associated with higher turnover and hence transactions costs. The experience of retail investors is made still worse by their own poor timing of purchases and sales. The returns to investors in mutual funds are lower than the returns earned by the funds in which they invest, because they tend to buy fashionable, over-priced sectors and sell unfashionable, underpriced ones.


pages: 312 words: 93,504

Common Knowledge?: An Ethnography of Wikipedia by Dariusz Jemielniak

Andrew Keen, barriers to entry, Benevolent Dictator For Life (BDFL), citation needed, collaborative consumption, collaborative editing, commons-based peer production, conceptual framework, continuous integration, crowdsourcing, Debian, deskilling, digital Maoism, disinformation, en.wikipedia.org, Filter Bubble, Free Software Foundation, Gabriella Coleman, Google Glasses, Guido van Rossum, Hacker Ethic, hive mind, Internet Archive, invisible hand, Jaron Lanier, jimmy wales, job satisfaction, Julian Assange, knowledge economy, knowledge worker, Menlo Park, moral hazard, online collectivism, pirate software, RFC: Request For Comment, Richard Stallman, selection bias, Silicon Valley, Skype, slashdot, social software, Stewart Brand, the Cathedral and the Bazaar, The Hackers Conference, The Nature of the Firm, the strength of weak ties, The Wisdom of Crowds, transaction costs, Wayback Machine, WikiLeaks, wikimedia commons, Wikivoyage, Yochai Benkler, zero-sum game

Reasons for participation in surveys among Wikipedians vary greatly, and survey interpretation depends on the paradigm and discipline of the researcher. Some studies indicate that a dominant motivator for participating in surveys is the possibility of gaining recognition in the community (Forte & Bruckman, 2005), which is particularly attractive when paired with a relatively low transactional cost of entry and participation (Ciffolilli, 2003). Other motivators are gaining self-fulfillment, having fun, and acquiring and sharing knowledge (even if just to boost one’s ego; Rafaeli & Ariel, 2008), maintaining W i k i p e d i a i n S h o r t    1 7 a positive self-image, contributing to the common good (Ciffolilli, 2003; Baytiyeh & Pfaffman, 2010; Yang & Lai, 2010), and enjoying a sense of accomplishment (Kuznetsov, 2006).


pages: 421 words: 125,417

Common Wealth: Economics for a Crowded Planet by Jeffrey Sachs

agricultural Revolution, air freight, Anthropocene, back-to-the-land, biodiversity loss, British Empire, business process, carbon credits, carbon footprint, carbon tax, clean water, colonial rule, corporate social responsibility, correlation does not imply causation, creative destruction, demographic transition, Diane Coyle, digital divide, Edward Glaeser, energy security, failed state, Garrett Hardin, Gini coefficient, global pandemic, Global Witness, Haber-Bosch Process, impact investing, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), intermodal, invention of agriculture, invention of the steam engine, invisible hand, Joseph Schumpeter, knowledge worker, labor-force participation, low skilled workers, mass immigration, microcredit, ocean acidification, oil shale / tar sands, old age dependency ratio, peak oil, profit maximization, profit motive, purchasing power parity, road to serfdom, Ronald Reagan, Simon Kuznets, Skype, statistical model, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, Tragedy of the Commons, transaction costs, unemployed young men, War on Poverty, women in the workforce, working-age population, zoonotic diseases

Online social networking allows friends to know who is participating in what causes, to give social approbation for such participation, and to facilitate linkages of the network of friends with particular social service organizations. These tools will allow people with shared interests and commitments to organize at vastly lower transaction costs than in the past and to use gentle social cues to promote participation and avoid free riding. NEW FORMS OF GOVERNANCE Corporations, academic institutions, NGOs, and professional bodies are all being reshaped by the forces and opportunities of globalization. Governments need an even greater overhaul.


pages: 424 words: 119,679

It's Better Than It Looks: Reasons for Optimism in an Age of Fear by Gregg Easterbrook

affirmative action, Affordable Care Act / Obamacare, air freight, Alan Greenspan, Apollo 11, autonomous vehicles, basic income, Bernie Madoff, Bernie Sanders, Black Lives Matter, Boeing 747, Branko Milanovic, Brexit referendum, business cycle, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, clean tech, clean water, coronavirus, Crossrail, David Brooks, David Ricardo: comparative advantage, deindustrialization, Dissolution of the Soviet Union, Donald Trump, driverless car, Elon Musk, Exxon Valdez, factory automation, failed state, fake news, full employment, Gini coefficient, Google Earth, Home mortgage interest deduction, hydraulic fracturing, Hyperloop, illegal immigration, impulse control, income inequality, independent contractor, Indoor air pollution, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), invisible hand, James Watt: steam engine, labor-force participation, liberal capitalism, longitudinal study, Lyft, mandatory minimum, manufacturing employment, Mikhail Gorbachev, minimum wage unemployment, Modern Monetary Theory, obamacare, oil shale / tar sands, Paul Samuelson, peak oil, plant based meat, plutocrats, Ponzi scheme, post scarcity, purchasing power parity, quantitative easing, reserve currency, rising living standards, Robert Gordon, Ronald Reagan, self-driving car, short selling, Silicon Valley, Simon Kuznets, Slavoj Žižek, South China Sea, Steve Wozniak, Steven Pinker, supervolcano, The Chicago School, The Rise and Fall of American Growth, the scientific method, There's no reason for any individual to have a computer in his home - Ken Olsen, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, transaction costs, Tyler Cowen, uber lyft, universal basic income, War on Poverty, Washington Consensus, We are all Keynesians now, WikiLeaks, working poor, Works Progress Administration

The veteran investment banker William Cohan wrote in 2017, “The job of one out of every five people on Wall Street these days is to watch what the other four are doing.” Some regulations produce benefits: those who object to environmental rules may slide glissando past the good they do, especially improvement of public health. But contemporary economic regulations impose deadweight transaction costs that further the interests only of lawyers seeking billable hours and of federal, state, and local government officials seeking to protect their sinecure. Studies by the nonpartisan Kauffman Foundation show that about 80 percent of new jobs in the United States are created by start-up firms.


Hedgehogging by Barton Biggs

activist fund / activist shareholder / activist investor, Alan Greenspan, asset allocation, backtesting, barriers to entry, Bear Stearns, Big Tech, book value, Bretton Woods, British Empire, business cycle, buy and hold, diversification, diversified portfolio, eat what you kill, Elliott wave, family office, financial engineering, financial independence, fixed income, full employment, global macro, hiring and firing, index fund, Isaac Newton, job satisfaction, junk bonds, low interest rates, margin call, market bubble, Mary Meeker, Mikhail Gorbachev, new economy, oil shale / tar sands, PalmPilot, paradox of thrift, Paul Samuelson, Ponzi scheme, proprietary trading, random walk, Reminiscences of a Stock Operator, risk free rate, Ronald Reagan, secular stagnation, Sharpe ratio, short selling, Silicon Valley, transaction costs, upwardly mobile, value at risk, Vanguard fund, We are all Keynesians now, zero-sum game, éminence grise

It can even be done in the mutual-fund business. Look at Capital Research! As long as the number of dedicated alpha shops is small in relation to the overall investment-management industry, these firms should be able to earn sufficient alpha at the expense of the asset-collection factories to pay transaction costs and management fees and still leave substantial excess returns for their clients. These fees should be sufficient to allow the good alpha firms to make a lot of money, motivating them to limit capital under management, attract superior talent, and build highly profitable, stable businesses populated with motivated, contented, rich investors.


pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, book value, Bretton Woods, British Empire, business cycle, buy and hold, California energy crisis, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, Glass-Steagall Act, Greenspan put, guns versus butter model, inflation targeting, interest rate swap, inventory management, Isaac Newton, John Meriwether, junk bonds, low interest rates, margin call, market bubble, Mary Meeker, McMansion, Menlo Park, Michael Milken, money market fund, mortgage debt, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, Norman Mailer, Northern Rock, oil shock, Paul Samuelson, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, Robert Solow, rolodex, Ronald Reagan, Sand Hill Road, Savings and loan crisis, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, stock buybacks, stocks for the long run, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War, zero-sum game

A substantial part of the equity extraction related to home sales, which is running at an annual rate close to $200 billion, is expended on personal consumption and home modernization, two components, of course, of the GDP.”41 Greenspan had eliminated the negative at an earlier meeting: “There clearly is concern at this stage about a housing value bubble that is going to burst.”42 He dismissed it: “It’s the notion that there is an equivalency between equity bubbles and housing bubbles that I think is an illusion.”43 This is the first time he had addressed the recent stock market bubble (although, strictly speaking, Greenspan is making a general comment and does not admit to his personally autographed Nasdaq bubble here). He told the FOMC that housing bubbles were different. “[W]ith transaction costs as high as they are . . . and the necessity to move if the house is sold, the incentive to sell a house is nowhere near what it is to sell a stock to take advantage of a capital gain.”44 Granted, Americans never did sell two billion houses a day. Transaction and brokerage costs are high, but it was the next meeting he told the FOMC that the average equity extraction was $50,000.45 That (minus fees) was adequate compensation for many, even with the headache of moving. 39 FOMC meeting transcript, September 24, 2002, p. 48. 40 FOMC meeting transcript, November 6, 2002, p. 56. 41 FOMC meeting transcript, September 24, 2002, p. 78. 42 FOMC meeting transcript, August 13, 2002, p. 74. 43 Ibid.


pages: 420 words: 124,202

The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention by William Rosen

Albert Einstein, All science is either physics or stamp collecting, barriers to entry, Charles Babbage, collective bargaining, computer age, Copley Medal, creative destruction, David Ricardo: comparative advantage, decarbonisation, delayed gratification, Fellow of the Royal Society, flying shuttle, Flynn Effect, fudge factor, full employment, Higgs boson, independent contractor, invisible hand, Isaac Newton, Islamic Golden Age, iterative process, James Hargreaves, James Watt: steam engine, John Harrison: Longitude, Joseph Schumpeter, Joseph-Marie Jacquard, knowledge economy, language acquisition, Lewis Mumford, moral hazard, Network effects, Panopticon Jeremy Bentham, Paul Samuelson, Peace of Westphalia, Peter Singer: altruism, QWERTY keyboard, Ralph Waldo Emerson, rent-seeking, Robert Solow, Ronald Coase, Simon Kuznets, spinning jenny, tacit knowledge, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, three-masted sailing ship, transaction costs, transcontinental railway, zero-sum game, éminence grise

The most important of all, however, was the Industrial Enlightenment’s de facto market in what would one day be called “best practices” from the craft world. By the first decades of the eighteenth century, a market had emerged in which an English ironmonger could learn German forging techniques, and a surveyor could acquire the tools of descriptive geometry. But markets do more than bring buyers and sellers together. They also reduce transaction costs. One of those costs, in the early decades of the eighteenth century, was incurred due to the fact that an awful lot of the newest bits of useful knowledge were hard to compare, one with the other, because they described the same phenomenon using different words (and different symbols). As the metaphorical shelves of the knowledge market filled with innovations, buyers demanded that they be comparable, which led directly to standardization of everything from mathematical notation to temperature scales.


pages: 424 words: 121,425

How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy by Mehrsa Baradaran

access to a mobile phone, affirmative action, Alan Greenspan, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Bear Stearns, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, cashless society, credit crunch, David Graeber, disintermediation, disruptive innovation, diversification, failed state, fiat currency, financial innovation, financial intermediation, Glass-Steagall Act, Goldman Sachs: Vampire Squid, housing crisis, income inequality, Internet Archive, invisible hand, junk bonds, Kickstarter, low interest rates, M-Pesa, McMansion, Michael Milken, microcredit, mobile money, Money creation, moral hazard, mortgage debt, new economy, Own Your Own Home, Paul Volcker talking about ATMs, payday loans, peer-to-peer lending, price discrimination, profit maximization, profit motive, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, Ronald Reagan: Tear down this wall, Savings and loan crisis, savings glut, subprime mortgage crisis, the built environment, the payments system, too big to fail, trade route, transaction costs, unbanked and underbanked, underbanked, union organizing, W. E. B. Du Bois, white flight, working poor

See Fannie Mae Federal Open Market Committee (FOMC), 15 Federal Reserve, 3, 14–15; discount window, 3, 62; short-term loans to banks, 3, 16; core function of, 9; discount rate, 14–15; federal fund rate, 14–15; quantitative easing (QE), 15–16; overnight loans by, 16; creation of, 40–41; Federal Reserve Act, 41; Federal Reserve Board, 41 Federal Reserve Bank of New York (FRBNY), 54, 60 Federal Savings and Loan Insurance Corporation (FSLIC), 89, 92 Fees: for unbanked, 1; on payday loans, 2; on checking accounts, 141–142; effects of, 143; prohibition of, 145; as source of income, 148; for prepaid cards, 174–175; charged by Wal-Mart, 175, 176; for alternative financial services, 212 FHA (Federal Housing Administration), 90 Fidelity Fiduciary Bank, 13, 16, 17 Fidelity Savings & Trust Company, 96 Filene, Edward Albert, 66, 67, 69, 70, 76 Financial crisis (2008): factors in, 19, 157–160; and deregulation, 61; defaults on Adjustable Rate Mortgages, 93; scorn for victims of, 108; and leverage, 119–120; lack of punishment for, 120, 274n81; poor blamed for, 120, 157–160; CRA blamed for, 155–157; and underwriting standards, 156, 157; and subprime market, 157; effect on Chicago, 165, 292n14 Financial Crisis Inquiry Commission, 155 Financial literacy/education, 115, 116–117 Financial regulation: mutually beneficial arrangement between government and banks, 4, 11–12, 16–18, 26–27, 41, 136; national banking system debate, 5–6, 28–32, 36–38; deregulation, 7, 52–63, 64, 91–94, 146; regulatory capture, 19, 20, 58, 59–60, 93, 234n24; “revolving door” effect, 20, 234n24; early national banks and state law, 32–33; early regulation by states, 33; by New York State, 33, 125, 127, 146; size and location restrictions, 33, 34, 41, 45, 48, 144–145, 284n39 (see also branches); activity restrictions, 37, 44, 46, 52, 71, 99, 145; motivation for, 48; deregulation post-New Deal, 51–53; abandonment of restrictions on activity and location, 52, 54–55, 56–58, 61–63, 99–100, 109, 145–146, 147, 246n104; federal preemption of state law, 56; misbehavior permitted by regulators, 56, 60; opposition to, 154–157; bank monopolies, 189; during New Deal (see New Deal); use of credit market to set policy and influence economy (see social contract). See also deregulation; individual acts Financial transactions, costs of, 1, 138–139, 212. See also fees Findley, William, 30 Fisher, Richard, 59 Fletcher, James, 163 FOMC (Federal Open Market Committee), 15 Foreclosures, after TARP, 24 Four Oaks Bank, 127 Frank, Barney, 24, 58 FRBNY (Federal Reserve Bank of New York), 54, 60 Freddie Mac, 18, 84, 121, 150, 157, 221, 222, 233n19 Free banking, 34 Freedman’s Savings Bank, 80–84, 221–222, 256nn96,99, 257n104 Fringe banking, 2, 8.


pages: 320 words: 87,853

The Black Box Society: The Secret Algorithms That Control Money and Information by Frank Pasquale

Adam Curtis, Affordable Care Act / Obamacare, Alan Greenspan, algorithmic trading, Amazon Mechanical Turk, American Legislative Exchange Council, asset-backed security, Atul Gawande, bank run, barriers to entry, basic income, Bear Stearns, Berlin Wall, Bernie Madoff, Black Swan, bonus culture, Brian Krebs, business cycle, business logic, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chelsea Manning, Chuck Templeton: OpenTable:, cloud computing, collateralized debt obligation, computerized markets, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, data science, Debian, digital rights, don't be evil, drone strike, Edward Snowden, en.wikipedia.org, Evgeny Morozov, Fall of the Berlin Wall, Filter Bubble, financial engineering, financial innovation, financial thriller, fixed income, Flash crash, folksonomy, full employment, Gabriella Coleman, Goldman Sachs: Vampire Squid, Google Earth, Hernando de Soto, High speed trading, hiring and firing, housing crisis, Ian Bogost, informal economy, information asymmetry, information retrieval, information security, interest rate swap, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, John Bogle, Julian Assange, Kevin Kelly, Kevin Roose, knowledge worker, Kodak vs Instagram, kremlinology, late fees, London Interbank Offered Rate, London Whale, machine readable, Marc Andreessen, Mark Zuckerberg, Michael Milken, mobile money, moral hazard, new economy, Nicholas Carr, offshore financial centre, PageRank, pattern recognition, Philip Mirowski, precariat, profit maximization, profit motive, public intellectual, quantitative easing, race to the bottom, reality distortion field, recommendation engine, regulatory arbitrage, risk-adjusted returns, Satyajit Das, Savings and loan crisis, search engine result page, shareholder value, Silicon Valley, Snapchat, social intelligence, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical arbitrage, statistical model, Steven Levy, technological solutionism, the scientific method, too big to fail, transaction costs, two-sided market, universal basic income, Upton Sinclair, value at risk, vertical integration, WikiLeaks, Yochai Benkler, zero-sum game

The bankers’ bounty fuels a derangement of value and deteriorating values. Banks charge plenty for their vital ser vices. Consider that late fee on your credit card; even before you incurred it, the bank had already taken a cut of every purchase you made. Consider the mysterious charges eating away at your 401(k), and the transaction costs whenever your broker buys or sells. Fee churning contributes hugely to the livelihoods of finance professionals. But how much value do those professionals really create in the process? Not much, it would appear. The crisis of 2008 is only the most recent demonstration of how the quick “scores” of fi nancial intermediaries drain resources away from Main Street investors.


pages: 415 words: 125,089

Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein

Alan Greenspan, Albert Einstein, Alvin Roth, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, Bayesian statistics, behavioural economics, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buttonwood tree, buy and hold, capital asset pricing model, cognitive dissonance, computerized trading, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Lloyd's coffeehouse, endowment effect, experimental economics, fear of failure, Fellow of the Royal Society, Fermat's Last Theorem, financial deregulation, financial engineering, financial innovation, full employment, Great Leap Forward, index fund, invention of movable type, Isaac Newton, John Nash: game theory, John von Neumann, Kenneth Arrow, linear programming, loss aversion, Louis Bachelier, mental accounting, moral hazard, Myron Scholes, Nash equilibrium, Norman Macrae, Paul Samuelson, Philip Mirowski, Post-Keynesian economics, probability theory / Blaise Pascal / Pierre de Fermat, prudent man rule, random walk, Richard Thaler, Robert Shiller, Robert Solow, spectrum auction, statistical model, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas Bayes, trade route, transaction costs, tulip mania, Vanguard fund, zero-sum game

Indeed, more dramatically than any other portfolio, the indexes reflect all the fads and nonrational behavior that is going on in the market. Yet a portfolio designed to track one of the major indexes, like the S&P 500, still has clear advantages over actively managed portfolios. Since turnover occurs only when a change is made in the index, transaction costs and capital-gains taxes can be held to a minimum. Furthermore, the fees charged by managers of index funds run about 0.10% of assets; active managers charge many times that, often exceeding 1% of assets. These built-in advantages are due neither to luck nor are they sensitive to some particular time period; they are working for the investor all the time.


pages: 482 words: 125,973

Competition Demystified by Bruce C. Greenwald

additive manufacturing, airline deregulation, AltaVista, AOL-Time Warner, asset allocation, barriers to entry, book value, business cycle, creative destruction, cross-subsidies, deindustrialization, discounted cash flows, diversified portfolio, Do you want to sell sugared water for the rest of your life?, Everything should be made as simple as possible, fault tolerance, intangible asset, John Nash: game theory, Nash equilibrium, Network effects, new economy, oil shock, packet switching, PalmPilot, Pepsi Challenge, pets.com, price discrimination, price stability, revenue passenger mile, search costs, selective serotonin reuptake inhibitor (SSRI), shareholder value, Silicon Valley, six sigma, Steve Jobs, transaction costs, vertical integration, warehouse automation, yield management, zero-sum game

While the differences are not altogether clear, the general idea seems to be that the strategic acquirer brings something to the deal that will enhance the underlying operations of either the target firm or the buyer itself. The financial buyer, by contrast, simply adds the acquired company to a portfolio of operations without changing the fundamental performance at either firm. Without such changes, a standard acquisition involves only a concentrated investment at above market prices with high transaction costs. It makes little or no business sense. That leaves strategic acquisitions as the only kind that bear detailed consideration. In order for a merger or acquisition to be justified, the buyer has to contribute something to the combined enterprise. This contribution can be either of general value, like improved management or a tax advantage, or, more likely, something highly specific, such as special industry-related technology, joint economies of scale, or a marketing position within the industry.


World Cities and Nation States by Greg Clark, Tim Moonen

active transport: walking or cycling, Asian financial crisis, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, business climate, clean tech, congestion charging, corporate governance, Crossrail, deindustrialization, Deng Xiaoping, driverless car, financial independence, financial intermediation, Francis Fukuyama: the end of history, full employment, gentrification, global supply chain, global value chain, high net worth, high-speed rail, housing crisis, immigration reform, income inequality, informal economy, Kickstarter, knowledge economy, low skilled workers, managed futures, megacity, megaproject, new economy, New Urbanism, Norman Mailer, open economy, Pearl River Delta, rent control, Richard Florida, Shenzhen special economic zone , Silicon Valley, smart cities, sovereign wealth fund, special economic zone, stem cell, supply-chain management, tacit knowledge, The Wealth of Nations by Adam Smith, trade route, transaction costs, transit-oriented development, upwardly mobile, urban planning, urban renewal, urban sprawl, War on Poverty, zero-sum game

The organisational reshuffle of the Ministry of Security and Public Administration, which oversees regional autonomy, represents an opportunity to renegotiate the transfer of duties to local governments in Seoul and other Korean cities. Support and incentives for regional co-operation Seoul has needed to make the case to central government of the benefits of broader regional co‐operation – reduced transaction costs, greater efficiency and economic returns. Shared associations, committees, corporations and funds Seoul 79 have boosted co‐operation across jurisdictions, but a broader programme of co‐ordinated development will be important if Seoul is to avoid a situation where remote suburbs are locked out from new sources of employment (Kim, 2006).


pages: 516 words: 116,875

Greater: Britain After the Storm by Penny Mordaunt, Chris Lewis

"World Economic Forum" Davos, 2021 United States Capitol attack, 3D printing, accelerated depreciation, Ada Lovelace, Airbnb, banking crisis, battle of ideas, behavioural economics, Bernie Madoff, bitcoin, Black Lives Matter, blockchain, Bob Geldof, Boeing 747, Boris Johnson, Bretton Woods, Brexit referendum, British Empire, carbon footprint, Charles Babbage, collective bargaining, Corn Laws, corporate social responsibility, COVID-19, credit crunch, crowdsourcing, data is not the new oil, data is the new oil, David Attenborough, death from overwork, Deng Xiaoping, Diane Coyle, Donald Trump, Downton Abbey, driverless car, Elon Musk, en.wikipedia.org, experimental economics, failed state, fake news, Firefox, fixed income, full employment, gender pay gap, global pandemic, global supply chain, green new deal, happiness index / gross national happiness, high-speed rail, impact investing, Jeremy Corbyn, Khartoum Gordon, lateral thinking, Live Aid, lockdown, loss aversion, low skilled workers, microaggression, mittelstand, moral hazard, Neil Kinnock, Nelson Mandela, Ocado, off-the-grid, offshore financial centre, Panamax, Ponzi scheme, post-truth, quantitative easing, remote working, road to serfdom, Salesforce, Sheryl Sandberg, Skype, smart cities, social distancing, South China Sea, sovereign wealth fund, Steve Jobs, Steven Pinker, surveillance capitalism, transaction costs, transcontinental railway

It’s projected to increase an additional nine times over the next five years as flows of information (searches, communication, video, transactions and intracompany traffic) continue to grow. Virtually every type of cross-border transaction now has a digital component. Director of the Institute of International Monetary Research Dr Juan Castañeda has pointed out: The Internet facilitates trade and expands the market. If anything, it reduces transaction costs and therefore enhances trade and economic activity. In this vein, rather than inflationary, what it does is to increase the availability of goods and services in the overall market (be it the traditional ‘onsite’ markets or online). In the end what will determine the rate of inflation/deflation is the rate of growth of the amount of money relative to the rate of growth of the supply of goods and services.


pages: 1,073 words: 314,528

Strategy: A History by Lawrence Freedman

Albert Einstein, anti-communist, Anton Chekhov, Ayatollah Khomeini, barriers to entry, battle of ideas, behavioural economics, Black Swan, Blue Ocean Strategy, British Empire, business process, butterfly effect, centre right, Charles Lindbergh, circulation of elites, cognitive dissonance, coherent worldview, collective bargaining, complexity theory, conceptual framework, Cornelius Vanderbilt, corporate raider, correlation does not imply causation, creative destruction, cuban missile crisis, Daniel Kahneman / Amos Tversky, defense in depth, desegregation, disinformation, Dr. Strangelove, Edward Lorenz: Chaos theory, en.wikipedia.org, endogenous growth, endowment effect, escalation ladder, Ford Model T, Ford paid five dollars a day, framing effect, Frederick Winslow Taylor, Gordon Gekko, greed is good, Herbert Marcuse, Herman Kahn, Ida Tarbell, information retrieval, interchangeable parts, invisible hand, John Nash: game theory, John von Neumann, Kenneth Arrow, lateral thinking, linear programming, loose coupling, loss aversion, Mahatma Gandhi, means of production, mental accounting, Murray Gell-Mann, mutually assured destruction, Nash equilibrium, Nelson Mandela, Norbert Wiener, Norman Mailer, oil shock, Pareto efficiency, performance metric, Philip Mirowski, prisoner's dilemma, profit maximization, race to the bottom, Ralph Nader, RAND corporation, Richard Thaler, road to serfdom, Ronald Reagan, Rosa Parks, scientific management, seminal paper, shareholder value, social contagion, social intelligence, Steven Pinker, strikebreaker, The Chicago School, The Myth of the Rational Market, the scientific method, theory of mind, Thomas Davenport, Thomas Kuhn: the structure of scientific revolutions, Torches of Freedom, Toyota Production System, transaction costs, Twitter Arab Spring, ultimatum game, unemployed young men, Upton Sinclair, urban sprawl, Vilfredo Pareto, W. E. B. Du Bois, War on Poverty, women in the workforce, Yogi Berra, zero-sum game

Their performance was being judged against ever more demanding standards, but short-term profitability of the sort that would impress investors increasingly became the most important objective by far. Investing for the long term appeared less attractive than selling off weaker units or taking aggressive action against all perceived inefficiencies. The challenge to the role of the managers was posed by agency theory, derived from transaction cost economics. It directly addressed the issue of cooperating parties that still had distinctive interests. In particular, it considered situations in which one party, the principal, delegated work to another, the agent. The principal could be in a quandary by not knowing exactly what the agent was up to, and whether their views of risk were truly aligned.

Because modern software made large-scale number crunching possible, there was also a large database mentality. Research students were advised to avoid qualitative studies.13 The effects could be seen not only in the research but in the norms for behavior the standard models were suggesting. In 2005, Sumantra Ghoshal observed: Combine agency theory with transaction costs economics, add in standard versions of game theory and negotiations analysis, and the picture of the manager that emerges is one that is now very familiar in practice: the ruthlessly hard-driving, strictly top-down, command-and control focused, shareholder-value-obsessed, win-at-any-cost business leader.14 During the 1990s, theories were developed for this new breed of manager, promising success that could be measured in profit margins, market share, and stock prices.


pages: 742 words: 137,937

The Future of the Professions: How Technology Will Transform the Work of Human Experts by Richard Susskind, Daniel Susskind

23andMe, 3D printing, Abraham Maslow, additive manufacturing, AI winter, Albert Einstein, Amazon Mechanical Turk, Amazon Robotics, Amazon Web Services, Andrew Keen, Atul Gawande, Automated Insights, autonomous vehicles, Big bang: deregulation of the City of London, big data - Walmart - Pop Tarts, Bill Joy: nanobots, Blue Ocean Strategy, business process, business process outsourcing, Cass Sunstein, Checklist Manifesto, Clapham omnibus, Clayton Christensen, clean water, cloud computing, commoditize, computer age, Computer Numeric Control, computer vision, Computing Machinery and Intelligence, conceptual framework, corporate governance, creative destruction, crowdsourcing, Daniel Kahneman / Amos Tversky, data science, death of newspapers, disintermediation, Douglas Hofstadter, driverless car, en.wikipedia.org, Erik Brynjolfsson, Evgeny Morozov, Filter Bubble, full employment, future of work, Garrett Hardin, Google Glasses, Google X / Alphabet X, Hacker Ethic, industrial robot, informal economy, information retrieval, interchangeable parts, Internet of things, Isaac Newton, James Hargreaves, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Khan Academy, knowledge economy, Large Hadron Collider, lifelogging, lump of labour, machine translation, Marshall McLuhan, Metcalfe’s law, Narrative Science, natural language processing, Network effects, Nick Bostrom, optical character recognition, Paul Samuelson, personalized medicine, planned obsolescence, pre–internet, Ray Kurzweil, Richard Feynman, Second Machine Age, self-driving car, semantic web, Shoshana Zuboff, Skype, social web, speech recognition, spinning jenny, strong AI, supply-chain management, Susan Wojcicki, tacit knowledge, TED Talk, telepresence, The Future of Employment, the market place, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, transaction costs, Turing test, Two Sigma, warehouse robotics, Watson beat the top human players on Jeopardy!, WikiLeaks, world market for maybe five computers, Yochai Benkler, young professional

Although multi-disciplinary practice in various professions was set back very considerably in the early 2000s, with the fall of Arthur Andersen and the avalanche of law and regulations that followed,15 these developments did not and do not negate the fundamental benefits for clients of having one provider looking after many or all of their professional interests. Although conflicts can and do arise when professionals from different fields collaborate under the one roof, many of these can be managed, and represent a lesser burden than the hassle and transaction costs incurred by maintaining several teams of competing advisers. As the boundaries of the professions blur and service becomes more focused on meeting clients’ overall needs, it is probable that multi-disciplinary practices will be formed and re-establish themselves as commercially viable. At the same time, firms that do not choose to merge may instead choose to diversify.


pages: 370 words: 129,096

Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future by Ashlee Vance

addicted to oil, Burning Man, clean tech, digital map, El Camino Real, Elon Musk, fail fast, Ford Model T, gigafactory, global supply chain, Great Leap Forward, high-speed rail, Hyperloop, industrial robot, Jeff Bezos, Kickstarter, Kwajalein Atoll, Larry Ellison, low earth orbit, Mark Zuckerberg, Mars Society, Maui Hawaii, Max Levchin, Menlo Park, Mercator projection, military-industrial complex, money market fund, multiplanetary species, off-the-grid, optical character recognition, orbital mechanics / astrodynamics, PalmPilot, paypal mafia, performance metric, Peter Thiel, pneumatic tube, pre–internet, risk tolerance, Ronald Reagan, Sand Hill Road, Scaled Composites, self-driving car, side project, Silicon Valley, Silicon Valley startup, Solyndra, Steve Jobs, Steve Jurvetson, technoutopianism, Tesla Model S, Tony Fadell, transaction costs, Tyler Cowen, Tyler Cowen: Great Stagnation, vertical integration, Virgin Galactic, We wanted flying cars, instead we got 140 characters, X Prize

And the reason the cost of transactions was lower is because we were able to do an increasing percentage of our transactions as ACH, or automated clearinghouse, electronic transactions, and most importantly, internal transactions. Internal transactions were essentially fraud-free and cost us nothing. An ACH transaction costs, I don’t know, like twenty cents or something. But it was slow, so that was the bad thing. It’s dependent on the bank’s batch processing time. And then the credit card transaction was fast, but expensive in terms of the credit card processing fees and very prone to fraud. That’s the problem Square is having now.


pages: 692 words: 127,032

Fool Me Twice: Fighting the Assault on Science in America by Shawn Lawrence Otto

affirmative action, Albert Einstein, An Inconvenient Truth, anthropic principle, Apollo 11, Berlin Wall, biodiversity loss, Brownian motion, carbon footprint, carbon tax, Cepheid variable, clean water, Climategate, Climatic Research Unit, cognitive dissonance, Columbine, commoditize, cosmological constant, crowdsourcing, cuban missile crisis, Dean Kamen, desegregation, different worldview, disinformation, double helix, Dr. Strangelove, energy security, Exxon Valdez, fudge factor, Garrett Hardin, ghettoisation, global pandemic, Great Leap Forward, Gregor Mendel, Harlow Shapley and Heber Curtis, Harvard Computers: women astronomers, informal economy, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Large Hadron Collider, Louis Pasteur, luminiferous ether, military-industrial complex, mutually assured destruction, Neil Armstrong, ocean acidification, Richard Feynman, Ronald Reagan, Saturday Night Live, shareholder value, sharing economy, smart grid, stem cell, synthetic biology, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Tragedy of the Commons, transaction costs, University of East Anglia, War on Poverty, white flight, Winter of Discontent, working poor, yellow journalism, zero-sum game

TYRANNY ON THE COMMONS All of this ties back in to the ideas of conservative economics, particularly those of its father, the American economist Milton Friedman. In every economic transaction there is a willing buyer and a willing seller, and they agree on a price that benefits both. But there are spillover effects in many economic transactions—costs and/or benefits that are transferred to third parties. Friedman called these spillovers “neighborhood effects.” Today, most economists call them “externalities.” At their most basic, externalities don’t have to involve buying and selling. If you smoke in a restaurant instead of stepping outside it’s easier for you, but it’s worse for everybody else.


pages: 503 words: 131,064

Liars and Outliers: How Security Holds Society Together by Bruce Schneier

Abraham Maslow, airport security, Alvin Toffler, barriers to entry, behavioural economics, benefit corporation, Berlin Wall, Bernie Madoff, Bernie Sanders, Brian Krebs, Broken windows theory, carried interest, Cass Sunstein, Chelsea Manning, commoditize, corporate governance, crack epidemic, credit crunch, CRISPR, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, desegregation, don't be evil, Double Irish / Dutch Sandwich, Douglas Hofstadter, Dunbar number, experimental economics, Fall of the Berlin Wall, financial deregulation, Future Shock, Garrett Hardin, George Akerlof, hydraulic fracturing, impulse control, income inequality, information security, invention of agriculture, invention of gunpowder, iterative process, Jean Tirole, John Bogle, John Nash: game theory, joint-stock company, Julian Assange, language acquisition, longitudinal study, mass incarceration, meta-analysis, microcredit, mirror neurons, moral hazard, Multics, mutually assured destruction, Nate Silver, Network effects, Nick Leeson, off-the-grid, offshore financial centre, Oklahoma City bombing, patent troll, phenotype, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, profit motive, race to the bottom, Ralph Waldo Emerson, RAND corporation, Recombinant DNA, rent-seeking, RFID, Richard Thaler, risk tolerance, Ronald Coase, security theater, shareholder value, slashdot, statistical model, Steven Pinker, Stuxnet, technological singularity, The Market for Lemons, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Timothy McVeigh, too big to fail, traffic fines, Tragedy of the Commons, transaction costs, ultimatum game, UNCLOS, union organizing, Vernor Vinge, WikiLeaks, World Values Survey, Y2K, Yochai Benkler, zero-sum game

Any society—a family, a business, a government—is constantly balancing its need for security with the side effects, unintended consequences, and other considerations. Can we afford this particular societal pressure system? Are our fundamental freedoms and liberties more important than more security?4 More onerous ATM security will result in fewer ATM transactions, costing a bank more than the ATM fraud. A retail store that installs security cameras in its dressing rooms will probably have fewer customers as a result, with a greater loss of revenue than was saved by the decrease of shoplifting. Online retailers face similar choices, since complicated security measures reduce purchases.


pages: 442 words: 130,526

The Billionaire Raj: A Journey Through India's New Gilded Age by James Crabtree

"World Economic Forum" Davos, accounting loophole / creative accounting, Asian financial crisis, behavioural economics, Big bang: deregulation of the City of London, Branko Milanovic, business climate, call centre, Capital in the Twenty-First Century by Thomas Piketty, centre right, colonial rule, commodity super cycle, Cornelius Vanderbilt, corporate raider, creative destruction, crony capitalism, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, facts on the ground, failed state, fake news, Francis Fukuyama: the end of history, global supply chain, Gunnar Myrdal, income inequality, informal economy, Joseph Schumpeter, land bank, liberal capitalism, Mahatma Gandhi, McMansion, megacity, Meghnad Desai, middle-income trap, New Urbanism, offshore financial centre, open economy, Parag Khanna, Pearl River Delta, plutocrats, Ponzi scheme, post-truth, public intellectual, quantitative easing, rent-seeking, Rubik’s Cube, Shenzhen special economic zone , Silicon Valley, Simon Kuznets, smart cities, special economic zone, spectrum auction, tech billionaire, The Great Moderation, Thomas L Friedman, transaction costs, trickle-down economics, vertical integration, Washington Consensus, WikiLeaks, yellow journalism, young professional

After 1991, brokers were no longer needed to buy televisions or fridge-freezers, but they grew ever more essential in business. For those officials or politicians taking the bribes, meanwhile, fixers helped to save face by removing the risk and embarrassment of demanding money in person. “Middlemen reduce transaction costs for citizens and officials alike,” as one study put it. “They know whom to approach, and how to do so, and which officials will ‘stay bought.’ ”39 Middlemen proved invaluable in even mundane situations, as I discovered when my own time in India began to wind to a close, and my wife and I began to grapple with the problem of how to export our cats.40 We had arrived with two Maine Coons, a breed with thick furry coats quite unsuited for hot Indian summers.


pages: 420 words: 130,503

Actionable Gamification: Beyond Points, Badges and Leaderboards by Yu-Kai Chou

Apple's 1984 Super Bowl advert, barriers to entry, behavioural economics, bitcoin, Burning Man, Cass Sunstein, crowdsourcing, Daniel Kahneman / Amos Tversky, delayed gratification, Do you want to sell sugared water for the rest of your life?, don't be evil, en.wikipedia.org, endowment effect, Firefox, functional fixedness, game design, gamification, growth hacking, IKEA effect, Internet of things, Kickstarter, late fees, lifelogging, loss aversion, Maui Hawaii, Minecraft, pattern recognition, peer-to-peer, performance metric, QR code, recommendation engine, Richard Thaler, Silicon Valley, Skinner box, Skype, software as a service, Stanford prison experiment, Steve Jobs, TED Talk, The Wealth of Nations by Adam Smith, transaction costs

In his book Thinking: Fast and Slow, Economics Nobel Prize Laureate Daniel Kahneman describes how a certain well-respected academic and wine lover becomes very reluctant to sell a bottle of wine from his collection for $100, but would also not pay more than $35 for a wine of similar quality. This made little economic sense because the same or similar wine should hold the same value in a person’s mind. The purchasing price and selling price should be roughly the same, deducting transaction costs. This illustrates that when a person starts to own something, they immediately place more value on that item relative to others who don’t own it. Researchers Dan Ariely and Ziv Carmon took this concept further by testing it on Duke University students who were avid basketball fans and would go through a demanding process to obtain tickets for Duke basketball games.5 After a semester of camping in small tents and checking in regularly whenever an air horn sounded, students who camped in front of the line were only given a lottery number towards obtaining the actual tickets.


pages: 496 words: 131,938

The Future Is Asian by Parag Khanna

3D printing, Admiral Zheng, affirmative action, Airbnb, Amazon Web Services, anti-communist, Asian financial crisis, asset-backed security, augmented reality, autonomous vehicles, Ayatollah Khomeini, barriers to entry, Basel III, bike sharing, birth tourism , blockchain, Boycotts of Israel, Branko Milanovic, British Empire, call centre, capital controls, carbon footprint, cashless society, clean tech, clean water, cloud computing, colonial rule, commodity super cycle, computer vision, connected car, corporate governance, CRISPR, crony capitalism, cross-border payments, currency peg, death from overwork, deindustrialization, Deng Xiaoping, Didi Chuxing, Dissolution of the Soviet Union, Donald Trump, driverless car, dual-use technology, energy security, European colonialism, factory automation, failed state, fake news, falling living standards, family office, financial engineering, fixed income, flex fuel, gig economy, global reserve currency, global supply chain, Great Leap Forward, green transition, haute couture, haute cuisine, illegal immigration, impact investing, income inequality, industrial robot, informal economy, initial coin offering, Internet of things, karōshi / gwarosa / guolaosi, Kevin Kelly, Kickstarter, knowledge worker, light touch regulation, low cost airline, low skilled workers, Lyft, machine translation, Malacca Straits, Marc Benioff, Mark Zuckerberg, Masayoshi Son, megacity, megaproject, middle-income trap, Mikhail Gorbachev, money market fund, Monroe Doctrine, mortgage debt, natural language processing, Netflix Prize, new economy, off grid, oil shale / tar sands, open economy, Parag Khanna, payday loans, Pearl River Delta, prediction markets, purchasing power parity, race to the bottom, RAND corporation, rent-seeking, reserve currency, ride hailing / ride sharing, Ronald Reagan, Salesforce, Scramble for Africa, self-driving car, Shenzhen special economic zone , Silicon Valley, smart cities, SoftBank, South China Sea, sovereign wealth fund, special economic zone, stem cell, Steve Jobs, Steven Pinker, supply-chain management, sustainable-tourism, synthetic biology, systems thinking, tech billionaire, tech worker, trade liberalization, trade route, transaction costs, Travis Kalanick, uber lyft, upwardly mobile, urban planning, Vision Fund, warehouse robotics, Washington Consensus, working-age population, Yom Kippur War

Together with demonetization and the mandatory linkage of Aadhar IDs to bank accounts, well over $100 billion has been brought into the banking system in a year. Aadhar has also enabled rapid digital transfers of subsidies to the poor, with mobile wallets eliminating the need for bank branches and e-payments reducing transaction costs and corruption. Then there is IndiaStack, which brings together employment, medical, address, tax, and other records onto one platform accessed through fingerprints and, soon, retinal scans. India is set to export these digital innovations all across developing Asia. Bangladesh is now installing one-stop community centers to process everything from birth certificates to business licenses and minimize corruption.


pages: 567 words: 122,311

Lean Analytics: Use Data to Build a Better Startup Faster by Alistair Croll, Benjamin Yoskovitz

Airbnb, Amazon Mechanical Turk, Amazon Web Services, Any sufficiently advanced technology is indistinguishable from magic, barriers to entry, Bay Area Rapid Transit, Ben Horowitz, bounce rate, business intelligence, call centre, cloud computing, cognitive bias, commoditize, constrained optimization, data science, digital rights, en.wikipedia.org, Firefox, Frederick Winslow Taylor, frictionless, frictionless market, game design, gamification, Google X / Alphabet X, growth hacking, hockey-stick growth, Infrastructure as a Service, Internet of things, inventory management, Kickstarter, lateral thinking, Lean Startup, lifelogging, longitudinal study, Marshall McLuhan, minimum viable product, Network effects, PalmPilot, pattern recognition, Paul Graham, performance metric, place-making, platform as a service, power law, price elasticity of demand, reality distortion field, recommendation engine, ride hailing / ride sharing, rolodex, Salesforce, sentiment analysis, skunkworks, Skype, social graph, social software, software as a service, Steve Jobs, subscription business, telemarketer, the long tail, transaction costs, two-sided market, Uber for X, web application, Y Combinator

You’re trying to figure out the best way to monetize the product. Recall Sergio Zyman’s definition of marketing (more stuff to more people for more money more often more efficiently) using. In the Revenue stage, you need to figure out which “more” increases your revenues per engaged customer the most: If you’re dependent on physical, per-transaction costs (like direct sales, shipping products to a buyer, or signing up merchants), then more efficiently will figure prominently on either the supply or demand side of your business model. If you’ve found a high viral coefficient, then more people makes sense, because you’ve got a strong force multiplier added to every dollar you pour into customer acquisition.


pages: 368 words: 145,841

Financial Independence by John J. Vento

Affordable Care Act / Obamacare, Albert Einstein, asset allocation, diversification, diversified portfolio, estate planning, financial independence, fixed income, high net worth, Home mortgage interest deduction, low interest rates, money market fund, mortgage debt, mortgage tax deduction, oil shock, Own Your Own Home, passive income, retail therapy, risk tolerance, the rule of 72, time value of money, transaction costs, young professional, zero day

As a result, mutual funds provide you with three opportunities for growth of your investments, through dividends, capital gains distributions, and possibly capital gains on the sale of your investment. 3 As with other investments, there are generally fees and expenses associated with buying mutual funds. Some of these fees may include shareholder transaction costs, investment advisory fees, and marketing and distribution expenses. c09.indd 231 26/02/13 2:51 PM 232 Financial Independence (Getting to Point X ) When you invest in a mutual fund, you are pooling your money together with many other investors under the common control and management of an investment company.


pages: 432 words: 127,985

The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry by William K. Black

accounting loophole / creative accounting, affirmative action, Alan Greenspan, Andrei Shleifer, Black Monday: stock market crash in 1987, book value, business climate, cognitive dissonance, corporate governance, corporate raider, Donald Trump, fear of failure, financial deregulation, friendly fire, George Akerlof, hiring and firing, junk bonds, margin call, market bubble, Michael Milken, money market fund, moral hazard, offshore financial centre, Ponzi scheme, race to the bottom, Ronald Reagan, Savings and loan crisis, short selling, The Market for Lemons, transaction costs

And I haven’t mentioned banks and credit unions, each with the same insurance limit. Altogether, that made about 20,000 insured depositories, which meant one could deposit about $800 million in insured funds under the old limit. In short, the old limit imposed no meaningful restraint, so the new limit’s only impact was a tiny reduction in transaction costs, because Merrill Lynch’s computers no longer had to divide a $80,000 deposit into two $40,000 deposits to attain full insurance coverage. Other than approving ARMs, every act of deregulation that Pratt undertook contributed to the debacle. Pratt was a whirlwind who deregulated a broad range of activities.


pages: 431 words: 132,416

No One Would Listen: A True Financial Thriller by Harry Markopolos

Alan Greenspan, backtesting, barriers to entry, Bernie Madoff, buy and hold, call centre, centralized clearinghouse, correlation coefficient, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, family office, financial engineering, financial thriller, fixed income, forensic accounting, high net worth, index card, Long Term Capital Management, Louis Bachelier, low interest rates, Market Wizards by Jack D. Schwager, offshore financial centre, payment for order flow, Ponzi scheme, price mechanism, proprietary trading, quantitative trading / quantitative finance, regulatory arbitrage, Renaissance Technologies, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, statistical arbitrage, too big to fail, transaction costs, two and twenty, your tax dollars at work

These BrokerlDealers would need to offset their short OTC index put option exposure to a falling stock market by hedging out their short put option risk by either buying listed put options or selling short index futures and the derivatives markets are not deep and liquid enough to accomplish this without paying a penalty in prohibitively expensive transaction costs. Red Flag # 9: Extensive and voluminous paperwork would be required to keep track of and clear each OTC trade. Plus, why aren’t Goldman, Sachs and Citigroup involved in handling BM’s order flow? Both Goldman and Citigroup are a lot larger in the OTC derivatives markets than UBS or Merrill Lynch.


pages: 349 words: 134,041

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives by Satyajit Das

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, Asian financial crisis, asset-backed security, Bear Stearns, beat the dealer, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, Brownian motion, business logic, business process, buy and hold, buy low sell high, call centre, capital asset pricing model, collateralized debt obligation, commoditize, complexity theory, computerized trading, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, currency peg, currency risk, disinformation, disintermediation, diversification, diversified portfolio, Edward Thorp, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, financial engineering, financial innovation, fixed income, Glass-Steagall Act, Haight Ashbury, high net worth, implied volatility, index arbitrage, index card, index fund, interest rate derivative, interest rate swap, Isaac Newton, job satisfaction, John Bogle, John Meriwether, junk bonds, locking in a profit, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, Marshall McLuhan, mass affluent, mega-rich, merger arbitrage, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mutually assured destruction, Myron Scholes, new economy, New Journalism, Nick Leeson, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, Parkinson's law, placebo effect, Ponzi scheme, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, random walk, regulatory arbitrage, Right to Buy, risk free rate, risk-adjusted returns, risk/return, Salesforce, Satyajit Das, shareholder value, short selling, short squeeze, South Sea Bubble, statistical model, technology bubble, the medium is the message, the new new thing, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, volatility smile, yield curve, Yogi Berra, zero-coupon bond

The stock exchange was debating a move to electronic trading but there was resistance. They invited a Nobel Prize-winning US financial economist to speak at a conference, seeking to win over the brokers to electronic trading. The economist spoke eloquently and movingly of ‘greater trading efficiency’, ‘lower transaction costs’, ‘lower commissions’, ‘improved price discovery’ and ‘greater pricing transparency’. The audience was almost in tears – of laughter. After the speech, I found myself with some brokers and the celebrated guest speaker. ‘I cannot be understanding how you could have been gotten the Nobel Prize, sir.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, behavioural economics, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, classic study, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial engineering, financial innovation, financial intermediation, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Glass-Steagall Act, Great Leap Forward, Hyman Minsky, inflation targeting, invisible hand, Japanese asset price bubble, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, low interest rates, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, no-fly zone, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Solow, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

They argue that we should expect to see fewer currencies than countries because at least some countries will see advantages in forming a currency union with others. The novel idea that money and nations are not synonymous, and that an ‘optimum currency area’ could encompass several nations, or regions within nations, was popularised by the Canadian economist Robert Mundell in 1961.1 Sharing a currency reduces the transaction costs of trade within the union. If each of the fifty states in the USA used its own dollar then the cost of doing business across states would be much greater than it is today. Just as there is a federal system of weights and measures, so the dollar is the single monetary unit of account. But whereas there are single international systems of weights and measures for time, length and weight (the last expressed in two forms: imperial and metric), there is no single world currency.


pages: 524 words: 130,909

The Contrarian: Peter Thiel and Silicon Valley's Pursuit of Power by Max Chafkin

3D printing, affirmative action, Airbnb, anti-communist, bank run, Bernie Sanders, Big Tech, bitcoin, Black Lives Matter, Black Monday: stock market crash in 1987, Blitzscaling, Boeing 747, borderless world, Cambridge Analytica, charter city, cloud computing, cognitive dissonance, Cornelius Vanderbilt, coronavirus, COVID-19, Credit Default Swap, cryptocurrency, David Brooks, David Graeber, DeepMind, digital capitalism, disinformation, don't be evil, Donald Trump, driverless car, Electric Kool-Aid Acid Test, Elon Musk, Ethereum, Extropian, facts on the ground, Fairchild Semiconductor, fake news, Ferguson, Missouri, Frank Gehry, Gavin Belson, global macro, Gordon Gekko, Greyball, growth hacking, guest worker program, Hacker News, Haight Ashbury, helicopter parent, hockey-stick growth, illegal immigration, immigration reform, Internet Archive, Jeff Bezos, John Markoff, Kevin Roose, Kickstarter, Larry Ellison, life extension, lockdown, low interest rates, Lyft, Marc Andreessen, Mark Zuckerberg, Maui Hawaii, Max Levchin, Menlo Park, military-industrial complex, moral panic, move fast and break things, Neal Stephenson, Nelson Mandela, Network effects, off grid, offshore financial centre, oil shale / tar sands, open borders, operational security, PalmPilot, Paris climate accords, Patri Friedman, paypal mafia, Peter Gregory, Peter Thiel, pets.com, plutocrats, Ponzi scheme, prosperity theology / prosperity gospel / gospel of success, public intellectual, QAnon, quantitative hedge fund, quantitative trading / quantitative finance, randomized controlled trial, regulatory arbitrage, Renaissance Technologies, reserve currency, ride hailing / ride sharing, risk tolerance, Robinhood: mobile stock trading app, Ronald Reagan, Sam Altman, Sand Hill Road, self-driving car, sharing economy, Sheryl Sandberg, Silicon Valley, Silicon Valley billionaire, Silicon Valley ideology, Silicon Valley startup, skunkworks, social distancing, software is eating the world, sovereign wealth fund, Steve Bannon, Steve Jobs, Steven Levy, Stewart Brand, surveillance capitalism, TaskRabbit, tech billionaire, tech worker, TechCrunch disrupt, techlash, technology bubble, technoutopianism, Ted Kaczynski, TED Talk, the new new thing, the scientific method, Tim Cook: Apple, transaction costs, Travis Kalanick, Tyler Cowen, Uber and Lyft, uber lyft, Upton Sinclair, Vitalik Buterin, We wanted flying cars, instead we got 140 characters, Whole Earth Catalog, WikiLeaks, William Shockley: the traitorous eight, Y Combinator, Y2K, yellow journalism, Zenefits

In February 2000, it was paying out $100,000 per day in incentives alone—and that was just to get people to open new accounts. Once users started using PayPal to buy stuff, the company lost even more. Credit card processors charged as much as 3 percent in so-called interchange fees, meaning a “free” $100 transaction cost the company $3. The more money people moved, the more PayPal lost. And if a PayPal user committed fraud by stealing someone’s credit card and using it in a PayPal transaction—something that seemed to be happening with increasing regularity, though no one was sure just how often—the card issuers could force PayPal to pay back the stolen sum as a chargeback, deepening the losses


pages: 554 words: 149,489

The Content Trap: A Strategist's Guide to Digital Change by Bharat Anand

Airbnb, Alan Greenspan, An Inconvenient Truth, AOL-Time Warner, Benjamin Mako Hill, Bernie Sanders, Clayton Christensen, cloud computing, commoditize, correlation does not imply causation, creative destruction, crowdsourcing, death of newspapers, disruptive innovation, Donald Trump, driverless car, electricity market, Eyjafjallajökull, fulfillment center, gamification, Google Glasses, Google X / Alphabet X, information asymmetry, Internet of things, inventory management, Jean Tirole, Jeff Bezos, John Markoff, Just-in-time delivery, Kaizen: continuous improvement, Khan Academy, Kickstarter, late fees, managed futures, Mark Zuckerberg, market design, Minecraft, multi-sided market, Network effects, post-work, price discrimination, publish or perish, QR code, recommendation engine, ride hailing / ride sharing, Salesforce, selection bias, self-driving car, shareholder value, Shenzhen special economic zone , Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Skype, social graph, social web, special economic zone, Stephen Hawking, Steve Jobs, Steven Levy, Stuart Kauffman, the long tail, Thomas L Friedman, transaction costs, two-sided market, ubercab, vertical integration, WikiLeaks, winner-take-all economy, zero-sum game

Worse, “Canadian and European consumers were unfamiliar with the St. Michael’s brand, and employee enthusiasm was difficult to re-create.” On the face of it, digital businesses shouldn’t confront these problems. Aren’t they run similarly everywhere, that being the virtue of digital? Online storefronts can be perfectly replicated, transactions costs should be similar across markets, communication costs are negligible, payment systems are rapidly converging, and servers are everywhere. The usual reasons why retailers struggle to expand overseas—differences in real estate costs, brand awareness, product access, and employee skills, among other things—are no longer differentiators.


pages: 552 words: 143,074

Without Copyrights: Piracy, Publishing, and the Public Domain (Modernist Literature and Culture) by Robert Spoo

invisible hand, Network effects, New Journalism, peer-to-peer, Ronald Reagan, tragedy of the anticommons, transaction costs

Although Pound in his New Age article complained about the impact on contemporary writers of unequal competition with public domain authors, he does not seem to have considered the real cost savings that he and his fellow writers enjoyed by being able to borrow freely from those same authors.159 It could be argued that any competitive disadvantage that modernist writers suffered with respect to earlier literary periods was at least mitigated by modernists’ ability to mine those periods for literary material without having to contend with permissions fees, transaction costs, and threats of litigation. The cost savings that allowed publishers to issue Shakespeare more cheaply than T. S. Eliot arose from the same free public resource that allowed Eliot in The Waste Land to quote from and adapt Shakespeare without having to acquire a license160—though this does not alter the fact that in 1922 a publisher of Shakespeare’s sonnets could presumably have undersold a publisher of The Waste Land.


pages: 399 words: 155,913

The Right to Earn a Living: Economic Freedom and the Law by Timothy Sandefur

"Friedman doctrine" OR "shareholder theory", Alan Greenspan, American ideology, barriers to entry, big-box store, Cass Sunstein, clean water, collective bargaining, corporate governance, corporate social responsibility, creative destruction, Edward Glaeser, housing crisis, independent contractor, joint-stock company, Joseph Schumpeter, minimum wage unemployment, positional goods, price stability, profit motive, race to the bottom, Ralph Nader, RAND corporation, rent control, Robert Bork, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, The Wealth of Nations by Adam Smith, trade route, transaction costs, Upton Sinclair, urban renewal, wealth creators

Unfortunately, some courts have gone further and manufactured their own, often vague reasons for intervening in at-will employment contracts. Some have even abandoned the at-will contract entirely. At-will employment benefits workers, employers, and the economy in general. Because it requires little negotiation, transaction costs are kept to a minimum when employees are hired on an at-will basis.66 The more streamlined hiring process also allows employees and employers a wider range of choices. In a dynamic economy, workers should be free to switch their employment whenever they find other jobs preferable. Today, it seems deeply ironic that in 1986 the Pennsylvania Superior Court approvingly quoted from a report by the New York Bar that “[t]he modern reality of relative immobility in the labor market, encouraged by a web of ties that bind the employee to the job, places [the at-will employment doctrine] in question.”67 Whatever the circumstances may have been 25 years ago, the American economy has only become more dynamic and employees more willing to change jobs to suit their needs.


pages: 487 words: 151,810

The Social Animal: The Hidden Sources of Love, Character, and Achievement by David Brooks

"World Economic Forum" Davos, Abraham Maslow, Albert Einstein, asset allocation, assortative mating, Atul Gawande, behavioural economics, Bernie Madoff, business process, Cass Sunstein, choice architecture, classic study, clean water, cognitive load, creative destruction, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, deliberate practice, disintermediation, Donald Trump, Douglas Hofstadter, Emanuel Derman, en.wikipedia.org, fake it until you make it, fear of failure, financial deregulation, financial independence, Flynn Effect, George Akerlof, Henri Poincaré, hiring and firing, impulse control, invisible hand, Jeff Hawkins, Joseph Schumpeter, labor-force participation, language acquisition, longitudinal study, loss aversion, medical residency, meta-analysis, mirror neurons, Monroe Doctrine, Paul Samuelson, power law, Richard Thaler, risk tolerance, Robert Shiller, school vouchers, six sigma, social intelligence, Stanford marshmallow experiment, Steve Jobs, Steven Pinker, tacit knowledge, the scientific method, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Tyler Cowen, Walter Mischel, young professional

Trust is habitual reciprocity that becomes coated by emotion. It grows when two people begin volleys of communication and cooperation and slowly learn they can rely upon each other. Soon members of a trusting relationship become willing to not only cooperate with each other but sacrifice for each other. Trust reduces friction and lowers transaction costs. People in companies filled with trust move flexibly and cohesively. People who live in trusting cultures form more community organizations. People in more trusting cultures have wider stock market–participation rates. People in trusting cultures find it easier to organize and operate large corporations.


pages: 790 words: 150,875

Civilization: The West and the Rest by Niall Ferguson

Admiral Zheng, agricultural Revolution, Albert Einstein, Andrei Shleifer, Atahualpa, Ayatollah Khomeini, Berlin Wall, BRICs, British Empire, business cycle, clean water, collective bargaining, colonial rule, conceptual framework, Copley Medal, corporate governance, creative destruction, credit crunch, David Ricardo: comparative advantage, Dean Kamen, delayed gratification, Deng Xiaoping, discovery of the americas, Dissolution of the Soviet Union, Easter island, European colonialism, Fall of the Berlin Wall, financial engineering, Francisco Pizarro, full employment, Great Leap Forward, Gregor Mendel, guns versus butter model, Hans Lippershey, haute couture, Hernando de Soto, income inequality, invention of movable type, invisible hand, Isaac Newton, James Hargreaves, James Watt: steam engine, John Harrison: Longitude, joint-stock company, Joseph Schumpeter, Kickstarter, Kitchen Debate, land reform, land tenure, liberal capitalism, Louis Pasteur, Mahatma Gandhi, market bubble, Martin Wolf, mass immigration, means of production, megacity, Mikhail Gorbachev, new economy, Pearl River Delta, Pierre-Simon Laplace, power law, probability theory / Blaise Pascal / Pierre de Fermat, profit maximization, purchasing power parity, quantitative easing, rent-seeking, reserve currency, retail therapy, road to serfdom, Ronald Reagan, savings glut, Scramble for Africa, Silicon Valley, South China Sea, sovereign wealth fund, special economic zone, spice trade, spinning jenny, Steve Jobs, Steven Pinker, subprime mortgage crisis, Suez canal 1869, Suez crisis 1956, The Great Moderation, the market place, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, total factor productivity, trade route, transaction costs, transatlantic slave trade, undersea cable, upwardly mobile, uranium enrichment, wage slave, Washington Consensus, women in the workforce, work culture , World Values Survey

But the new nation-states were about more than just preserving the cherished privileges of Europe’s beleaguered landowning elites. Entities like Italy or Germany, composites of multiple statelets, offered all their citizens a host of benefits: economies of scale, network externalities, reduced transaction costs and the more efficient provision of key public goods like law and order, infrastructure and health. The new states could make Europe’s big industrial cities, the breeding grounds of both cholera and revolution, finally safe. Slum clearance, boulevards too wide to barricade, bigger churches, leafy parks, sports stadiums and above all more policemen – all these things transformed the capitals of Europe, not least Paris, which Baron Georges Haussmann completely recast for Napoleon III.


Sorting Things Out: Classification and Its Consequences (Inside Technology) by Geoffrey C. Bowker

affirmative action, business process, classic study, corporate governance, Drosophila, government statistician, information retrieval, loose coupling, Menlo Park, Mitch Kapor, natural language processing, Occam's razor, QWERTY keyboard, Scientific racism, scientific worldview, sexual politics, statistical model, Stephen Hawking, Stewart Brand, tacit knowledge, the built environment, the medium is the message, the strength of weak ties, transaction costs, William of Occam

If so, it would contribute both to infant mortality statistics and have a soul; if not, the miscarriage would simply be recorded under the morbidity tables . Conflicting Needs of Doctors, Epidemiologists, and Statisticians: Questions of Data Accuracy How accurate does information need to be? The question is not a trivial one as the opportunity and transaction costs involved in collect­ ing information multiply with precision . In the case of the ICD, clini­ cians saw the work of collecting data as trading off against patient resources, while statisticians wanted as much accurate information as possible. The task of filling in the death certificates ordinarily falls on the doctor who does not necessarily see the value in filling in a complex form to the degree of accuracy required.


pages: 660 words: 141,595

Data Science for Business: What You Need to Know About Data Mining and Data-Analytic Thinking by Foster Provost, Tom Fawcett

Albert Einstein, Amazon Mechanical Turk, Apollo 13, big data - Walmart - Pop Tarts, bioinformatics, business process, call centre, chief data officer, Claude Shannon: information theory, computer vision, conceptual framework, correlation does not imply causation, crowdsourcing, data acquisition, data science, David Brooks, en.wikipedia.org, Erik Brynjolfsson, Gini coefficient, Helicobacter pylori, independent contractor, information retrieval, intangible asset, iterative process, Johann Wolfgang von Goethe, Louis Pasteur, Menlo Park, Nate Silver, Netflix Prize, new economy, p-value, pattern recognition, placebo effect, price discrimination, recommendation engine, Ronald Coase, selection bias, Silicon Valley, Skype, SoftBank, speech recognition, Steve Jobs, supply-chain management, systems thinking, Teledyne, text mining, the long tail, The Signal and the Noise by Nate Silver, Thomas Bayes, transaction costs, WikiLeaks

Previous chapters (particularly Chapter 7) stressed the importance of thinking carefully about the business problem being solved in order to frame the evaluation. With this example we have not done such careful specification. If the purpose of this task were to trigger stock trades, we might propose an overall trading strategy involving thresholds, time limits, and transaction costs, from which we could produce a complete cost-benefit analysis.[60] But the purpose is news recommendation (answering “which stories lead to substantial stock price changes?”) and we’ve left this pretty open, so we won’t specify exact costs and benefits of decisions. For this reason, expected value calculations and profit graphs aren’t really appropriate here.


pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

"World Economic Forum" Davos, Alan Greenspan, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, bond market vigilante , book value, Boris Johnson, British Empire, capital controls, carbon credits, carbon footprint, carbon tax, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, Crossrail, currency risk, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, Eyjafjallajökull, financial deregulation, financial engineering, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, high-speed rail, hiring and firing, inflation targeting, Irish property bubble, junk bonds, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, low interest rates, margin call, market clearing, megacity, megaproject, Mikhail Gorbachev, mini-job, mittelstand, Money creation, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, tail risk, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, WikiLeaks, working-age population, zero-sum game

In Britain, the market is particularly thin given that transactions have halved since the go-go years. On top of all this, transactions in the housing market are costly. Estate agents’ fees in the UK can typically reach 3 per cent, and as high as 6 per cent in the USA, with stamp duty on top of that. These are the crucial features of a housing market: thin trading and high transaction costs. It is a recipe for dysfunction, distortion and inefficiency. Imagine the entire UK stock of property was called Ladder Street, with fifty houses on either side of the road. Despite demand for two extra houses every year over the next decade or so, it in fact takes two years to build just one extra house.


pages: 475 words: 149,310

Multitude: War and Democracy in the Age of Empire by Michael Hardt, Antonio Negri

"World Economic Forum" Davos, affirmative action, air traffic controllers' union, Berlin Wall, Bretton Woods, British Empire, business cycle, classic study, conceptual framework, continuation of politics by other means, David Graeber, Defenestration of Prague, deskilling, disinformation, emotional labour, Fall of the Berlin Wall, feminist movement, Francis Fukuyama: the end of history, friendly fire, global village, Great Leap Forward, Howard Rheingold, Howard Zinn, illegal immigration, Joseph Schumpeter, land reform, land tenure, late capitalism, liberation theology, means of production, military-industrial complex, Naomi Klein, new economy, Paul Samuelson, Pier Paolo Pasolini, post-Fordism, post-work, private military company, race to the bottom, RAND corporation, reserve currency, Richard Stallman, Slavoj Žižek, the Cathedral and the Bazaar, The Chicago School, The Structural Transformation of the Public Sphere, Thomas Malthus, Thorstein Veblen, Tobin tax, transaction costs, union organizing, War on Poverty, Washington Consensus

The markets we speak of today have also extended their domain to all aspects of economic life, encompassing now not only circulation but also the production of both material and immaterial goods, and even the social reproduction of populations. Furthermore, the regulation that the new lex mercatoria exerts over these markets is more extensive. Economic theories that focus on “transaction costs,” for example, that is, costs other than the money price incurred in trading goods or services, highlight the capacity of self-management of businesses in the field of international trade and detail the minimum conditions that make this possible. The elements of market cohesion that such theories identify as necessary conditions really become in this context rules of conduct or legal norms for interactions among businesses.


pages: 462 words: 150,129

The Rational Optimist: How Prosperity Evolves by Matt Ridley

"World Economic Forum" Davos, 23andMe, Abraham Maslow, agricultural Revolution, air freight, back-to-the-land, banking crisis, barriers to entry, Bernie Madoff, British Empire, call centre, carbon credits, carbon footprint, carbon tax, Cesare Marchetti: Marchetti’s constant, charter city, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, colonial exploitation, colonial rule, Corn Laws, Cornelius Vanderbilt, cotton gin, creative destruction, credit crunch, David Ricardo: comparative advantage, decarbonisation, dematerialisation, demographic dividend, demographic transition, double entry bookkeeping, Easter island, Edward Glaeser, Edward Jenner, electricity market, en.wikipedia.org, everywhere but in the productivity statistics, falling living standards, feminist movement, financial innovation, flying shuttle, Flynn Effect, food miles, Ford Model T, Garrett Hardin, Gordon Gekko, greed is good, Hans Rosling, happiness index / gross national happiness, haute cuisine, hedonic treadmill, Herbert Marcuse, Hernando de Soto, income inequality, income per capita, Indoor air pollution, informal economy, Intergovernmental Panel on Climate Change (IPCC), invention of agriculture, invisible hand, James Hargreaves, James Watt: steam engine, Jane Jacobs, Jevons paradox, John Nash: game theory, joint-stock limited liability company, Joseph Schumpeter, Kevin Kelly, Kickstarter, knowledge worker, Kula ring, Large Hadron Collider, Mark Zuckerberg, Medieval Warm Period, meta-analysis, mutually assured destruction, Naomi Klein, Northern Rock, nuclear winter, ocean acidification, oil shale / tar sands, out of africa, packet switching, patent troll, Pax Mongolica, Peter Thiel, phenotype, plutocrats, Ponzi scheme, precautionary principle, Productivity paradox, profit motive, purchasing power parity, race to the bottom, Ray Kurzweil, rent-seeking, rising living standards, Robert Solow, Silicon Valley, spice trade, spinning jenny, stem cell, Steve Jobs, Steven Pinker, Stewart Brand, supervolcano, technological singularity, Thales and the olive presses, Thales of Miletus, the long tail, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, Tragedy of the Commons, transaction costs, ultimatum game, upwardly mobile, urban sprawl, Vernor Vinge, Vilfredo Pareto, wage slave, working poor, working-age population, world market for maybe five computers, Y2K, Yogi Berra, zero-sum game

If I am to accept the IPCC’s estimate of temperature rise for the sake of this argument, then I should also accept its estimate of the cost of carbon rationing – which it puts at 5.5 per cent of GDP after about 2050, and that is after making highly unlikely assumptions of (quoting from the IPCC’s 2007 report) ‘transparent markets, no transaction costs, and thus perfect implementation of policy measures throughout the twenty-first century, leading to the universal adoption of cost-effective mitigations measures, such as carbon taxes or universal capand-trade programmes’. The world economy needs plentiful joules of energy if it is not to run on slaves, and at the moment by far the cheapest source of those joules is the burning of hydrocarbons.


pages: 598 words: 134,339

Data and Goliath: The Hidden Battles to Collect Your Data and Control Your World by Bruce Schneier

23andMe, Airbnb, airport security, AltaVista, Anne Wojcicki, AOL-Time Warner, augmented reality, behavioural economics, Benjamin Mako Hill, Black Swan, Boris Johnson, Brewster Kahle, Brian Krebs, call centre, Cass Sunstein, Chelsea Manning, citizen journalism, Citizen Lab, cloud computing, congestion charging, data science, digital rights, disintermediation, drone strike, Eben Moglen, Edward Snowden, end-to-end encryption, Evgeny Morozov, experimental subject, failed state, fault tolerance, Ferguson, Missouri, Filter Bubble, Firefox, friendly fire, Google Chrome, Google Glasses, heat death of the universe, hindsight bias, informal economy, information security, Internet Archive, Internet of things, Jacob Appelbaum, James Bridle, Jaron Lanier, John Gilmore, John Markoff, Julian Assange, Kevin Kelly, Laura Poitras, license plate recognition, lifelogging, linked data, Lyft, Mark Zuckerberg, moral panic, Nash equilibrium, Nate Silver, national security letter, Network effects, Occupy movement, operational security, Panopticon Jeremy Bentham, payday loans, pre–internet, price discrimination, profit motive, race to the bottom, RAND corporation, real-name policy, recommendation engine, RFID, Ross Ulbricht, satellite internet, self-driving car, Shoshana Zuboff, Silicon Valley, Skype, smart cities, smart grid, Snapchat, social graph, software as a service, South China Sea, sparse data, stealth mode startup, Steven Levy, Stuxnet, TaskRabbit, technological determinism, telemarketer, Tim Cook: Apple, transaction costs, Uber and Lyft, uber lyft, undersea cable, unit 8200, urban planning, Wayback Machine, WikiLeaks, workplace surveillance , Yochai Benkler, yottabyte, zero day

And users will be less likely: Chris Jay Hoofnagle and Jan Whittington (28 Feb 2014), “Free: Accounting for the costs of the Internet’s most popular price,” UCLA Law Review 61, http://papers.ssrn.com/sol3/papers.cfm? abstract_id=2235962. Notice, choice, and consent: Kirsten Martin (2 Dec 2013), “Transaction costs, privacy, and trust: The laudable goals and ultimate failure of notice and choice to respect privacy online,” First Monday 18, http://firstmonday.org/ojs/index.php/fm/article/view/4838/3802. We need information fiduciaries: Near as I can tell, this idea has been independently proposed by two law professors.


pages: 470 words: 148,730

Good Economics for Hard Times: Better Answers to Our Biggest Problems by Abhijit V. Banerjee, Esther Duflo

3D printing, accelerated depreciation, affirmative action, Affordable Care Act / Obamacare, air traffic controllers' union, Airbnb, basic income, behavioural economics, Bernie Sanders, Big Tech, business cycle, call centre, Cambridge Analytica, Capital in the Twenty-First Century by Thomas Piketty, carbon credits, carbon tax, Cass Sunstein, charter city, company town, congestion pricing, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, decarbonisation, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, endowment effect, energy transition, Erik Brynjolfsson, experimental economics, experimental subject, facts on the ground, fake news, fear of failure, financial innovation, flying shuttle, gentrification, George Akerlof, Great Leap Forward, green new deal, high net worth, immigration reform, income inequality, Indoor air pollution, industrial cluster, industrial robot, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, Jean Tirole, Jeff Bezos, job automation, Joseph Schumpeter, junk bonds, Kevin Roose, labor-force participation, land reform, Les Trente Glorieuses, loss aversion, low skilled workers, manufacturing employment, Mark Zuckerberg, mass immigration, middle-income trap, Network effects, new economy, New Urbanism, no-fly zone, non-tariff barriers, obamacare, off-the-grid, offshore financial centre, One Laptop per Child (OLPC), open economy, Paul Samuelson, place-making, post-truth, price stability, profit maximization, purchasing power parity, race to the bottom, RAND corporation, randomized controlled trial, restrictive zoning, Richard Thaler, ride hailing / ride sharing, Robert Gordon, Robert Solow, Ronald Reagan, Savings and loan crisis, school choice, Second Machine Age, secular stagnation, self-driving car, shareholder value, short selling, Silicon Valley, smart meter, social graph, spinning jenny, Steve Jobs, systematic bias, Tax Reform Act of 1986, tech worker, technology bubble, The Chicago School, The Future of Employment, The Market for Lemons, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, total factor productivity, trade liberalization, transaction costs, trickle-down economics, Twitter Arab Spring, universal basic income, urban sprawl, very high income, War on Poverty, women in the workforce, working-age population, Y2K

One of them interviewed twelve hundred households throughout India about their preferences for cash versus food. Overall two-thirds of the households preferred food transfers to cash. In states where the food distribution system worked well (mainly in South India), this preference was even stronger. When asked why, 13 percent of households mentioned transaction costs (the bank and market are far, so it’s hard to turn cash into food). But one-third of the households who prefer food argued that getting foodstuff protects them against the temptation to misuse cash. In Dharmapuri in Tamil Nadu, one respondent said, “Food is much safer. Money gets spent easily.”


pages: 807 words: 154,435

Radical Uncertainty: Decision-Making for an Unknowable Future by Mervyn King, John Kay

Airbus A320, Alan Greenspan, Albert Einstein, Albert Michelson, algorithmic trading, anti-fragile, Antoine Gombaud: Chevalier de Méré, Arthur Eddington, autonomous vehicles, availability heuristic, banking crisis, Barry Marshall: ulcers, battle of ideas, Bear Stearns, behavioural economics, Benoit Mandelbrot, bitcoin, Black Swan, Boeing 737 MAX, Bonfire of the Vanities, Brexit referendum, Brownian motion, business cycle, business process, capital asset pricing model, central bank independence, collapse of Lehman Brothers, correlation does not imply causation, credit crunch, cryptocurrency, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, DeepMind, demographic transition, discounted cash flows, disruptive innovation, diversification, diversified portfolio, Donald Trump, Dutch auction, easy for humans, difficult for computers, eat what you kill, Eddington experiment, Edmond Halley, Edward Lloyd's coffeehouse, Edward Thorp, Elon Musk, Ethereum, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, fear of failure, feminist movement, financial deregulation, George Akerlof, germ theory of disease, Goodhart's law, Hans Rosling, Helicobacter pylori, high-speed rail, Ignaz Semmelweis: hand washing, income per capita, incomplete markets, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Jeff Bezos, Jim Simons, Johannes Kepler, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Snow's cholera map, John von Neumann, Kenneth Arrow, Kōnosuke Matsushita, Linda problem, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, market bubble, market fundamentalism, military-industrial complex, Money creation, Moneyball by Michael Lewis explains big data, Monty Hall problem, Nash equilibrium, Nate Silver, new economy, Nick Leeson, Northern Rock, nudge theory, oil shock, PalmPilot, Paul Samuelson, peak oil, Peter Thiel, Philip Mirowski, Phillips curve, Pierre-Simon Laplace, popular electronics, power law, price mechanism, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, railway mania, RAND corporation, reality distortion field, rent-seeking, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Solow, Ronald Coase, sealed-bid auction, shareholder value, Silicon Valley, Simon Kuznets, Socratic dialogue, South Sea Bubble, spectrum auction, Steve Ballmer, Steve Jobs, Steve Wozniak, Suez crisis 1956, Tacoma Narrows Bridge, Thales and the olive presses, Thales of Miletus, The Chicago School, the map is not the territory, The Market for Lemons, The Nature of the Firm, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Davenport, Thomas Malthus, Toyota Production System, transaction costs, ultimatum game, urban planning, value at risk, world market for maybe five computers, World Values Survey, Yom Kippur War, zero-sum game

They cited not only the osotua practices of those Maa speakers in Africa, but the potlatches of native tribes in the American north-west (ceremonies involving massive and sometimes destructive exchanges of gifts), and the modern American – and European – practice of marking a proposal of marriage with a costly engagement ring. The economists found an altogether different explanation for a round of drinks. The practice minimised transaction costs, reducing the number of occasions on which money needed to be handed across the bar, and the frequency with which the bartender made change. They drew an analogy with Ronald Coase’s famous analysis of when it made sense to deal through markets and when it was better to internalise the transaction within the firm. 6 It was an economist, of course, who proposed an empirical test of the alternative hypotheses.


pages: 554 words: 168,114

Oil: Money, Politics, and Power in the 21st Century by Tom Bower

"World Economic Forum" Davos, addicted to oil, Alan Greenspan, An Inconvenient Truth, Ayatollah Khomeini, banking crisis, bonus culture, California energy crisis, corporate governance, credit crunch, energy security, Exxon Valdez, falling living standards, fear of failure, financial engineering, forensic accounting, Global Witness, index fund, interest rate swap, John Deuss, Korean Air Lines Flight 007, kremlinology, land bank, LNG terminal, Long Term Capital Management, margin call, megaproject, Meghnad Desai, Mikhail Gorbachev, millennium bug, MITM: man-in-the-middle, Nelson Mandela, new economy, North Sea oil, offshore financial centre, oil shale / tar sands, oil shock, Oscar Wyatt, passive investing, peak oil, Piper Alpha, price mechanism, price stability, Ronald Reagan, shareholder value, short selling, Silicon Valley, sovereign wealth fund, transaction costs, transfer pricing, zero-sum game, éminence grise

Recruited in 1982 from J. Aron & Co., a commodities trader owned by Goldman Sachs, to start a metal-trading business to compete with his former employer, Shear envied the easy profits Hall and Rich were making. Compared to gold, he realized, oil trading was much more sophisticated and profitable. Without transaction costs or retail customers, and blessed by general ignorance about differing prices in Cushing and elsewhere in America, traders could pocket huge profits. In economists’ jargon, oil trading was “an inefficient market.” Shear’s business plan was original: “Our concept is not to be long or short but flat, to profit from transport, location, timing and quality specifications.”


pages: 467 words: 503

The omnivore's dilemma: a natural history of four meals by Michael Pollan

additive manufacturing, back-to-the-land, clean water, cognitive dissonance, Community Supported Agriculture, double entry bookkeeping, food desert, Gary Taubes, Haber-Bosch Process, index card, informal economy, invention of agriculture, means of production, military-industrial complex, new economy, off-the-grid, Steven Pinker, the scientific method, transaction costs, Upton Sinclair, Whole Earth Catalog

It's simply more cost-efficient to buy from one thousand-acre farm than ten hundred-acre farms. That's not because those big farms are necessarily any more productive, however. In fact, study after study has demonstrated that, measured in terms of the amount of food produced per acre, small farms are actually more productive than big farms; it is the higher transaction costs involved that makes dealing with them impractical for a company like Kahn's—that and the fact that they don't grow tremendous quantities of any one thing. As soon as your business involves stocking the frozen food case or produce section at a national chain, whether it be Wal-Mart or Whole Foods, the sheer quantities of organic produce you need makes it imperative to buy from farms operating on the same industrial scale you are.


pages: 552 words: 168,518

MacroWikinomics: Rebooting Business and the World by Don Tapscott, Anthony D. Williams

"World Economic Forum" Davos, accounting loophole / creative accounting, airport security, Andrew Keen, augmented reality, Ayatollah Khomeini, barriers to entry, Ben Horowitz, bioinformatics, blood diamond, Bretton Woods, business climate, business process, buy and hold, car-free, carbon footprint, carbon tax, Charles Lindbergh, citizen journalism, Clayton Christensen, clean water, Climategate, Climatic Research Unit, cloud computing, collaborative editing, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, commoditize, corporate governance, corporate social responsibility, creative destruction, crowdsourcing, death of newspapers, demographic transition, digital capitalism, digital divide, disruptive innovation, distributed generation, do well by doing good, don't be evil, en.wikipedia.org, energy security, energy transition, Evgeny Morozov, Exxon Valdez, failed state, fault tolerance, financial innovation, Galaxy Zoo, game design, global village, Google Earth, Hans Rosling, hive mind, Home mortgage interest deduction, information asymmetry, interchangeable parts, Internet of things, invention of movable type, Isaac Newton, James Watt: steam engine, Jaron Lanier, jimmy wales, Joseph Schumpeter, Julian Assange, Kevin Kelly, Kickstarter, knowledge economy, knowledge worker, machine readable, Marc Andreessen, Marshall McLuhan, mass immigration, medical bankruptcy, megacity, military-industrial complex, mortgage tax deduction, Netflix Prize, new economy, Nicholas Carr, ocean acidification, off-the-grid, oil shock, old-boy network, online collectivism, open borders, open economy, pattern recognition, peer-to-peer lending, personalized medicine, radical decentralization, Ray Kurzweil, RFID, ride hailing / ride sharing, Ronald Reagan, Rubik’s Cube, scientific mainstream, shareholder value, Silicon Valley, Skype, smart grid, smart meter, social graph, social web, software patent, Steve Jobs, synthetic biology, systems thinking, text mining, the long tail, the scientific method, The Wisdom of Crowds, transaction costs, transfer pricing, University of East Anglia, urban sprawl, value at risk, WikiLeaks, X Prize, Yochai Benkler, young professional, Zipcar

Indeed, while developed countries worry about growing dependency ratios, most of the increase in world population and consumer demand will take place in developing nations. What’s more, many of the brightest talents want to work outside the confines of traditional corporations, in small enterprises or as freelance contractors and consultants. Conventional wisdom says firms should find those people, hire them, and retain them by way of money or perks. When transaction costs were high, this made sense. But today, the Web provides a feature-rich platform that radically drops collaboration costs and thus makes accessing the global marketplace of ideas, innovations, and uniquely qualified minds increasingly cost-effective. Companies that do intensive R&D—like P&G, for example—can leverage a platform like InnoCentive or NineSigma to tap into global scientific and engineering communities using the Web.


pages: 574 words: 164,509

Superintelligence: Paths, Dangers, Strategies by Nick Bostrom

agricultural Revolution, AI winter, Albert Einstein, algorithmic trading, anthropic principle, Anthropocene, anti-communist, artificial general intelligence, autism spectrum disorder, autonomous vehicles, backpropagation, barriers to entry, Bayesian statistics, bioinformatics, brain emulation, cloud computing, combinatorial explosion, computer vision, Computing Machinery and Intelligence, cosmological constant, dark matter, DARPA: Urban Challenge, data acquisition, delayed gratification, Demis Hassabis, demographic transition, different worldview, Donald Knuth, Douglas Hofstadter, driverless car, Drosophila, Elon Musk, en.wikipedia.org, endogenous growth, epigenetics, fear of failure, Flash crash, Flynn Effect, friendly AI, general purpose technology, Geoffrey Hinton, Gödel, Escher, Bach, hallucination problem, Hans Moravec, income inequality, industrial robot, informal economy, information retrieval, interchangeable parts, iterative process, job automation, John Markoff, John von Neumann, knowledge worker, Large Hadron Collider, longitudinal study, machine translation, megaproject, Menlo Park, meta-analysis, mutually assured destruction, Nash equilibrium, Netflix Prize, new economy, Nick Bostrom, Norbert Wiener, NP-complete, nuclear winter, operational security, optical character recognition, paperclip maximiser, pattern recognition, performance metric, phenotype, prediction markets, price stability, principal–agent problem, race to the bottom, random walk, Ray Kurzweil, recommendation engine, reversible computing, search costs, social graph, speech recognition, Stanislav Petrov, statistical model, stem cell, Stephen Hawking, Strategic Defense Initiative, strong AI, superintelligent machines, supervolcano, synthetic biology, technological singularity, technoutopianism, The Coming Technological Singularity, The Nature of the Firm, Thomas Kuhn: the structure of scientific revolutions, time dilation, Tragedy of the Commons, transaction costs, trolley problem, Turing machine, Vernor Vinge, WarGames: Global Thermonuclear War, Watson beat the top human players on Jeopardy!, World Values Survey, zero-sum game

Such an equilibrium might be bolstered by some of our evolved dispositions and cultural programming: a common preference for fairness could, assuming we succeed in transferring our values into the post-transition era, bias expectations and strategies in ways that lead to an attractive equilibrium.44 In any case, the upshot is that with the possibility of strong and flexible forms of precommitment, outcomes of negotiations might take on an unfamiliar guise. Even if the post-transition era started out multipolar, it might be that a singleton would arise almost immediately as a consequence of a negotiated treaty that resolves all important global coordination problems. Some transaction costs, perhaps including monitoring and enforcement costs, might plummet with the new technological capabilities available to advanced machine intelligences. Other costs, in particular costs related to strategic bargaining, might remain significant. But however strategic bargaining affects the nature of the agreement that is reached, there is no clear reason why it would long delay the reaching of some agreement if an agreement were ever to be reached.


pages: 598 words: 172,137

Who Stole the American Dream? by Hedrick Smith

Affordable Care Act / Obamacare, Airbus A320, airline deregulation, Alan Greenspan, anti-communist, asset allocation, banking crisis, Bear Stearns, Boeing 747, Bonfire of the Vanities, British Empire, business cycle, business process, clean water, cloud computing, collateralized debt obligation, collective bargaining, commoditize, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Deng Xiaoping, desegregation, Double Irish / Dutch Sandwich, family office, financial engineering, Ford Model T, full employment, Glass-Steagall Act, global supply chain, Gordon Gekko, guest worker program, guns versus butter model, high-speed rail, hiring and firing, housing crisis, Howard Zinn, income inequality, independent contractor, index fund, industrial cluster, informal economy, invisible hand, John Bogle, Joseph Schumpeter, junk bonds, Kenneth Rogoff, Kitchen Debate, knowledge economy, knowledge worker, laissez-faire capitalism, Larry Ellison, late fees, Long Term Capital Management, low cost airline, low interest rates, manufacturing employment, market fundamentalism, Maui Hawaii, mega-rich, Michael Shellenberger, military-industrial complex, MITM: man-in-the-middle, mortgage debt, negative equity, new economy, Occupy movement, Own Your Own Home, Paul Samuelson, Peter Thiel, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ponzi scheme, Powell Memorandum, proprietary trading, Ralph Nader, RAND corporation, Renaissance Technologies, reshoring, rising living standards, Robert Bork, Robert Shiller, rolodex, Ronald Reagan, Savings and loan crisis, shareholder value, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Solyndra, Steve Jobs, stock buybacks, tech worker, Ted Nordhaus, The Chicago School, The Spirit Level, too big to fail, transaction costs, transcontinental railway, union organizing, Unsafe at Any Speed, Vanguard fund, We are the 99%, women in the workforce, working poor, Y2K

The Mutual Fund Bite But ordinary 401(k) and mutual fund investors don’t reap the full benefit of those long-term results, Bogle said, because of the large bite taken out of 401(k) plans by the financial industry—the mutual funds and banks that manage 401(k) accounts. According to Bogle, their fees and transaction costs average 2 percent a year. Subtracting that from the average 5 percent gain leaves individual investors with a net gain of 3 percent. Over the long term, the mutual fund bite has a compounding effect. That means, Bogle said, that over forty years, the projected gain from $1 to $7.04 gets cut way down—to $3.26.


pages: 614 words: 174,226

The Economists' Hour: How the False Prophets of Free Markets Fractured Our Society by Binyamin Appelbaum

90 percent rule, airline deregulation, Alan Greenspan, Alvin Roth, Andrei Shleifer, anti-communist, battle of ideas, Benoit Mandelbrot, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, Celtic Tiger, central bank independence, clean water, collective bargaining, Corn Laws, correlation does not imply causation, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, desegregation, Diane Coyle, Donald Trump, Dr. Strangelove, ending welfare as we know it, financial deregulation, financial engineering, financial innovation, fixed income, flag carrier, floating exchange rates, full employment, George Akerlof, George Gilder, Gini coefficient, greed is good, Greenspan put, Growth in a Time of Debt, Ida Tarbell, income inequality, income per capita, index fund, inflation targeting, invisible hand, Isaac Newton, It's morning again in America, Jean Tirole, John Markoff, Kenneth Arrow, Kenneth Rogoff, land reform, Les Trente Glorieuses, long and variable lags, Long Term Capital Management, low cost airline, low interest rates, manufacturing employment, means of production, Menlo Park, minimum wage unemployment, Mohammed Bouazizi, money market fund, Mont Pelerin Society, Network effects, new economy, Nixon triggered the end of the Bretton Woods system, oil shock, Paul Samuelson, Philip Mirowski, Phillips curve, plutocrats, precautionary principle, price stability, profit motive, public intellectual, Ralph Nader, RAND corporation, rent control, rent-seeking, Richard Thaler, road to serfdom, Robert Bork, Robert Gordon, Robert Solow, Ronald Coase, Ronald Reagan, Sam Peltzman, Savings and loan crisis, Silicon Valley, Simon Kuznets, starchitect, Steve Bannon, Steve Jobs, supply-chain management, The Chicago School, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, trickle-down economics, ultimatum game, Unsafe at Any Speed, urban renewal, War on Poverty, Washington Consensus, We are all Keynesians now

Philip Mirowski and Dieter Plehwe (Cambridge: Harvard University Press, 2009), 155. 36. Edmund W. Kitch, “The Fire of Truth: A Remembrance of Law and Economics at Chicago, 1932–1970,” Journal of Law and Economics 26, no. 1. Coase’s comments are particularly interesting because his 1961 paper on transaction costs is often identified as the beginning of “law and economics” analysis. Another popular candidate is a similar 1961 paper by Guido Calabresi, a Yale Law School professor. By then, Director had been teaching the approach for more than a decade. 37. The evidence of Director’s influence is preserved in the memoirs and oral histories of his students, and sometimes more explicitly in the papers that he inspired.


pages: 614 words: 168,545

Rentier Capitalism: Who Owns the Economy, and Who Pays for It? by Brett Christophers

"World Economic Forum" Davos, accounting loophole / creative accounting, Airbnb, Amazon Web Services, barriers to entry, Big bang: deregulation of the City of London, Big Tech, book value, Boris Johnson, Bretton Woods, Brexit referendum, British Empire, business process, business process outsourcing, Buy land – they’re not making it any more, call centre, Cambridge Analytica, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, cloud computing, collective bargaining, congestion charging, corporate governance, data is not the new oil, David Graeber, DeepMind, deindustrialization, Diane Coyle, digital capitalism, disintermediation, diversification, diversified portfolio, Donald Trump, Downton Abbey, electricity market, Etonian, European colonialism, financial deregulation, financial innovation, financial intermediation, G4S, gig economy, Gini coefficient, Goldman Sachs: Vampire Squid, greed is good, green new deal, haute couture, high net worth, housing crisis, income inequality, independent contractor, intangible asset, Internet of things, Jeff Bezos, Jeremy Corbyn, Joseph Schumpeter, Kickstarter, land bank, land reform, land value tax, light touch regulation, low interest rates, Lyft, manufacturing employment, market clearing, Martin Wolf, means of production, moral hazard, mortgage debt, Network effects, new economy, North Sea oil, offshore financial centre, oil shale / tar sands, oil shock, patent troll, pattern recognition, peak oil, Piper Alpha, post-Fordism, post-war consensus, precariat, price discrimination, price mechanism, profit maximization, proprietary trading, quantitative easing, race to the bottom, remunicipalization, rent control, rent gap, rent-seeking, ride hailing / ride sharing, Right to Buy, risk free rate, Ronald Coase, Rutger Bregman, sharing economy, short selling, Silicon Valley, software patent, subscription business, surveillance capitalism, TaskRabbit, tech bro, The Nature of the Firm, transaction costs, Uber for X, uber lyft, vertical integration, very high income, wage slave, We are all Keynesians now, wealth creators, winner-take-all economy, working-age population, yield curve, you are the product

But data are not often sold, even by Facebook: as the New York Times pointed out to its readers in the wake of the Cambridge Analytica scandal – in which the political data firm hired by Donald Trump’s 2016 election campaign controversially gained access to private information on more than 50 million Facebook users – Facebook does not allow user data ‘to be sold or transferred “to any ad network, data broker or other advertising or monetization-related service” ’.20 This, Facebook argued, was exactly what Dr Aleksandr Kogan, an academic at Cambridge University, had done in providing the information to Cambridge Analytica. And as the Economist also noted, the reasons why platform operators, for all their expertise in making markets, have generally not been making markets in data, are readily explicable: This absence of markets is the result of the same factors that have given rise to firms. All sorts of ‘transaction costs’ on markets – searching for information, negotiating deals, enforcing contracts and so on – make it simpler and more efficient simply to bring these activities in-house. Likewise, it is often more profitable to generate and use data inside a company than to buy and sell them on an open market.


pages: 1,239 words: 163,625

The Joys of Compounding: The Passionate Pursuit of Lifelong Learning, Revised and Updated by Gautam Baid

Abraham Maslow, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, Albert Einstein, Alvin Toffler, Andrei Shleifer, asset allocation, Atul Gawande, availability heuristic, backtesting, barriers to entry, beat the dealer, Benoit Mandelbrot, Bernie Madoff, bitcoin, Black Swan, book value, business process, buy and hold, Cal Newport, Cass Sunstein, Checklist Manifesto, Clayton Christensen, cognitive dissonance, collapse of Lehman Brothers, commoditize, corporate governance, correlation does not imply causation, creative destruction, cryptocurrency, Daniel Kahneman / Amos Tversky, deep learning, delayed gratification, deliberate practice, discounted cash flows, disintermediation, disruptive innovation, Dissolution of the Soviet Union, diversification, diversified portfolio, dividend-yielding stocks, do what you love, Dunning–Kruger effect, Edward Thorp, Elon Musk, equity risk premium, Everything should be made as simple as possible, fear index, financial independence, financial innovation, fixed income, follow your passion, framing effect, George Santayana, Hans Rosling, hedonic treadmill, Henry Singleton, hindsight bias, Hyman Minsky, index fund, intangible asset, invention of the wheel, invisible hand, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, Jeff Bezos, John Bogle, Joseph Schumpeter, junk bonds, Kaizen: continuous improvement, Kickstarter, knowledge economy, Lao Tzu, Long Term Capital Management, loss aversion, Louis Pasteur, low interest rates, Mahatma Gandhi, mandelbrot fractal, margin call, Mark Zuckerberg, Market Wizards by Jack D. Schwager, Masayoshi Son, mental accounting, Milgram experiment, moral hazard, Nate Silver, Network effects, Nicholas Carr, offshore financial centre, oil shock, passive income, passive investing, pattern recognition, Peter Thiel, Ponzi scheme, power law, price anchoring, quantitative trading / quantitative finance, Ralph Waldo Emerson, Ray Kurzweil, Reminiscences of a Stock Operator, reserve currency, Richard Feynman, Richard Thaler, risk free rate, risk-adjusted returns, Robert Shiller, Savings and loan crisis, search costs, shareholder value, six sigma, software as a service, software is eating the world, South Sea Bubble, special economic zone, Stanford marshmallow experiment, Steve Jobs, Steven Levy, Steven Pinker, stocks for the long run, subscription business, sunk-cost fallacy, systems thinking, tail risk, Teledyne, the market place, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, time value of money, transaction costs, tulip mania, Upton Sinclair, Walter Mischel, wealth creators, Yogi Berra, zero-sum game

. $13,000—though, admittedly, it would have to wait for its money.13 In both cases, the investment doubles annually, but in the end, we have a staggering twenty-seven times difference. No wonder Munger says, “The first rule of compounding: Never interrupt it unnecessarily.”14 The way to wealth is to buy right and hold on. By doing so, an investor minimizes paperwork, transaction costs, and capital gains taxes. To reap genuine riches, one needs to invest in long-term winners and hold on for compounded, tax-free growth. No more effective tax haven exists than unrealized appreciation in a long-lived, soundly growing company. Compounding, combined with patience, is an incredible force over time.


pages: 505 words: 161,581

The Founders: The Story of Paypal and the Entrepreneurs Who Shaped Silicon Valley by Jimmy Soni

activist fund / activist shareholder / activist investor, Ada Lovelace, AltaVista, Apple Newton, barriers to entry, Big Tech, bitcoin, Blitzscaling, book value, business logic, butterfly effect, call centre, Carl Icahn, Claude Shannon: information theory, cloud computing, Colonization of Mars, Computing Machinery and Intelligence, corporate governance, COVID-19, crack epidemic, cryptocurrency, currency manipulation / currency intervention, digital map, disinformation, disintermediation, drop ship, dumpster diving, Elon Musk, Fairchild Semiconductor, fear of failure, fixed income, General Magic , general-purpose programming language, Glass-Steagall Act, global macro, global pandemic, income inequality, index card, index fund, information security, intangible asset, Internet Archive, iterative process, Jeff Bezos, Jeff Hawkins, John Markoff, Kwajalein Atoll, Lyft, Marc Andreessen, Mark Zuckerberg, Mary Meeker, Max Levchin, Menlo Park, Metcalfe’s law, mobile money, money market fund, multilevel marketing, mutually assured destruction, natural language processing, Network effects, off-the-grid, optical character recognition, PalmPilot, pattern recognition, paypal mafia, Peter Thiel, pets.com, Potemkin village, public intellectual, publish or perish, Richard Feynman, road to serfdom, Robert Metcalfe, Robert X Cringely, rolodex, Sand Hill Road, Satoshi Nakamoto, seigniorage, shareholder value, side hustle, Silicon Valley, Silicon Valley startup, slashdot, SoftBank, software as a service, Startup school, Steve Ballmer, Steve Jobs, Steve Jurvetson, Steve Wozniak, technoutopianism, the payments system, transaction costs, Turing test, uber lyft, Vanguard fund, winner-take-all economy, Y Combinator, Y2K

“I called it the ‘war on credit card funding,’ ” said board member Tim Hurd. “I was obsessed with it.” * * * Musk’s grand vision of building a financial services empire offered one solution. If enough customers kept money in their X.com accounts, the team realized, then the company could transfer dollars between users at no cost. “The internal transaction… costs like a millicent,” Musk explained. “Basically zero. And this is why you want to maintain balances.” To that end, Musk pursued X.com’s broader “X-Finance” product portfolio, including its savings and brokerage accounts. To compel users to move money onto the platform, the company set a 5 percent interest rate on its savings accounts, among the highest in the nation.


Economic Origins of Dictatorship and Democracy by Daron Acemoğlu, James A. Robinson

Andrei Shleifer, British Empire, business cycle, colonial rule, conceptual framework, constrained optimization, Corn Laws, declining real wages, Edward Glaeser, European colonialism, Gunnar Myrdal, income inequality, income per capita, invisible hand, Jean Tirole, John Markoff, Kenneth Rogoff, land reform, minimum wage unemployment, Nash equilibrium, Nelson Mandela, oil shock, open economy, Pareto efficiency, rent-seeking, seminal paper, strikebreaker, total factor productivity, transaction costs, Washington Consensus, William of Occam, women in the workforce

Fortin, and Thomas Lemieux (1996) “Labor Market Institutions and the Distribution of Wages, 1973–1992: A Semiparametric Approach,” Econometrica, 65, 1001–44. 386 Bibliography Di Palma, Giuseppe (1990) To Craft Democracies; Berkeley: University of California Press. di Tella, Guido, and Rudiger Dornbusch (1989) The Political Economy of Argentina, 1946–83; Pittsburgh: University of Pittsburgh Press. Dixit, Avinash K. (1996) The Making of Economic Policy: A Transaction Cost Politics Perspective; Cambridge, MA: MIT Press. Dixit, Avinash K., and John B. Londregan (1995) “Redistributive Politics and Economic Efficiency,” American Political Science Review, 89, 856–866. Dixit, Avinash K., and John B. Londregan (1996) “The Determinants of Success of Special Interest in Redistributive Politics,” Journal of Politics, LVIII, 1132–55.


When Cultures Collide: Leading Across Cultures by Richard D. Lewis

Ayatollah Khomeini, British Empire, business climate, business process, colonial exploitation, corporate governance, Easter island, global village, haute cuisine, hiring and firing, invention of writing, Kōnosuke Matsushita, lateral thinking, Mahatma Gandhi, mass immigration, Nelson Mandela, new economy, oil shale / tar sands, old-boy network, open borders, profit maximization, profit motive, Scramble for Africa, Silicon Valley, trade route, transaction costs, upwardly mobile, urban sprawl, women in the workforce

When ROMANIA 327 no more don't ideology Romania please talk down to us is show special us the way to profit attentive but suspicious charisma, hyperbole, even flexible truth are OK feedback be personal, is quick, not official but “weighted” Figure 34.1 Romanian Listening Habits you sense this is happening, bring in a Romanian go-between. Such “transaction costs” are generally laid at your door as the foreigner, unless you maintain vigilance. It is important to establish parameters at the outset of any business discussion, fixing procedures, limits and ultimate positions. Romanians will not be deterred from attempting to gain advantage, but once they have understood your position, they can behave in a constructive, creative and charming manner.


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

"there is no alternative" (TINA), Adam Curtis, Alan Greenspan, Alvin Roth, An Inconvenient Truth, Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, bond market vigilante , bread and circuses, Bretton Woods, Brownian motion, business cycle, capital controls, carbon credits, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, democratizing finance, disinformation, do-ocracy, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, Flash crash, full employment, George Akerlof, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Greenspan put, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, information asymmetry, invisible hand, Jean Tirole, joint-stock company, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kickstarter, knowledge economy, l'esprit de l'escalier, labor-force participation, liberal capitalism, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, Pareto efficiency, Paul Samuelson, payday loans, Philip Mirowski, Phillips curve, Ponzi scheme, Post-Keynesian economics, precariat, prediction markets, price mechanism, profit motive, public intellectual, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, savings glut, school choice, sealed-bid auction, search costs, Silicon Valley, South Sea Bubble, Steven Levy, subprime mortgage crisis, tail risk, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, tontine, too big to fail, transaction costs, Tyler Cowen, vertical integration, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

It would indeed have been noteworthy if Stiglitz or his co-workers had provided a general impossibility theorem, say, along the lines of Gödel’s incompleteness theorem or Turing’s computability theorem, but Stiglitz has explicitly rejected working with full Walrasian general equilibrium, or Chicago’s resort to transactions costs, and doesn’t seriously consider the game theorists’ versions of strategic cognition. Indeed, it seems a rather heroic task to derive any blanket general propositions from any one of his individual toy models. Stiglitz himself admits this when he is not engaged in wholesale promotion of his information program.75 Take, for instance, the famous Grossman-Stiglitz model.


pages: 654 words: 191,864

Thinking, Fast and Slow by Daniel Kahneman

Albert Einstein, Atul Gawande, availability heuristic, Bayesian statistics, behavioural economics, Black Swan, book value, Cass Sunstein, Checklist Manifesto, choice architecture, classic study, cognitive bias, cognitive load, complexity theory, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, delayed gratification, demand response, endowment effect, experimental economics, experimental subject, Exxon Valdez, feminist movement, framing effect, hedonic treadmill, hindsight bias, index card, information asymmetry, job satisfaction, John Bogle, John von Neumann, Kenneth Arrow, libertarian paternalism, Linda problem, loss aversion, medical residency, mental accounting, meta-analysis, nudge unit, pattern recognition, Paul Samuelson, peak-end rule, precautionary principle, pre–internet, price anchoring, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, Robert Metcalfe, Ronald Reagan, Shai Danziger, sunk-cost fallacy, Supply of New York City Cabdrivers, systematic bias, TED Talk, The Chicago School, The Wisdom of Crowds, Thomas Bayes, transaction costs, union organizing, Walter Mischel, Yom Kippur War

Several studies have reported substantial discrepancies between buying and selling prices in both hypothetical and real transactions (Gregory 1983; Hammack and Brown 1974; Knetsch and Sinden 1984). These results have been presented as challenges to standard economic theory, in which buying and selling prices coincide except for transaction costs and effects of wealth. We also observed reluctance to trade in a study of choices between hypothetical jobs that differed in weekly salary (S) and in the temperature (T) of the workplace. Our respondents were asked to imagine that they held a particular position (S1, T1) and were offered the option of moving to a different position (S2, T2), which was better in one respect and worse in another.


pages: 612 words: 187,431

The Art of UNIX Programming by Eric S. Raymond

A Pattern Language, Albert Einstein, Apple Newton, barriers to entry, bioinformatics, Boeing 747, Clayton Christensen, combinatorial explosion, commoditize, Compatible Time-Sharing System, correlation coefficient, David Brooks, Debian, Dennis Ritchie, domain-specific language, don't repeat yourself, Donald Knuth, end-to-end encryption, Everything should be made as simple as possible, facts on the ground, finite state, Free Software Foundation, general-purpose programming language, George Santayana, history of Unix, Innovator's Dilemma, job automation, Ken Thompson, Larry Wall, level 1 cache, machine readable, macro virus, Multics, MVC pattern, Neal Stephenson, no silver bullet, OSI model, pattern recognition, Paul Graham, peer-to-peer, premature optimization, pre–internet, publish or perish, revision control, RFC: Request For Comment, Richard Stallman, Robert Metcalfe, Steven Levy, the Cathedral and the Bazaar, transaction costs, Turing complete, Valgrind, wage slave, web application

The demand for cheap Internet was created by something else: the 1991 invention of the World Wide Web. The Web was the “killer app” of the Internet, the graphical user interface technology that made it irresistible to a huge population of nontechnical end users. The mass-marketing of the Internet both increased the pool of potential developers and lowered the transaction costs of distributed development. The results were reflected in efforts like XFree86, which used the Internet-centric model to build a more effective development organization than that of the official X Consortium. The first XFree86 in 1992 gave Linux and the BSDs the graphical-user-interface engine they had been missing.


pages: 816 words: 191,889

The Long Game: China's Grand Strategy to Displace American Order by Rush Doshi

"World Economic Forum" Davos, American ideology, anti-communist, Asian financial crisis, autonomous vehicles, Black Lives Matter, Bretton Woods, capital controls, coronavirus, COVID-19, crony capitalism, cross-border payments, cryptocurrency, defense in depth, deindustrialization, Deng Xiaoping, deplatforming, disinformation, Dissolution of the Soviet Union, Donald Trump, drone strike, energy security, European colonialism, eurozone crisis, financial innovation, George Floyd, global pandemic, global reserve currency, global supply chain, global value chain, Great Leap Forward, high-speed rail, Internet Archive, Internet of things, Kickstarter, kremlinology, Malacca Straits, middle-income trap, Mikhail Gorbachev, MITM: man-in-the-middle, Monroe Doctrine, Network effects, Nixon triggered the end of the Bretton Woods system, offshore financial centre, positional goods, post-truth, purchasing power parity, RAND corporation, reserve currency, rolodex, Ronald Reagan, South China Sea, special drawing rights, special economic zone, TikTok, trade liberalization, transaction costs, UNCLOS, UNCLOS, undersea cable, zero-sum game

Research in psychology suggests that “people do not readily alter their beliefs about the world and do not easily confront their own mistakes,” and that “once they are committed to a particular perspective, judgment, or course of action, it is difficult to get them to change their mind.”9 Organizational research finds that “resource constraints, transaction costs, internal politics, and the domestic environment in which organizations operate,” combined with formal rules and standard-operating-procedures, together help explain “why decision makers will typically feel pressure not to deviate radically from the status quo.”10 Together, these factors lock in grand strategy.


pages: 593 words: 183,240

An Economic History of the Twentieth Century by J. Bradford Delong

affirmative action, Alan Greenspan, Andrei Shleifer, ASML, asset-backed security, Ayatollah Khomeini, banking crisis, Bear Stearns, Bretton Woods, British Empire, business cycle, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, centre right, collapse of Lehman Brothers, collective bargaining, colonial rule, coronavirus, cotton gin, COVID-19, creative destruction, crowdsourcing, cryptocurrency, cuban missile crisis, deindustrialization, demographic transition, Deng Xiaoping, Donald Trump, en.wikipedia.org, ending welfare as we know it, endogenous growth, Fairchild Semiconductor, fake news, financial deregulation, financial engineering, financial repression, flying shuttle, Ford Model T, Ford paid five dollars a day, Francis Fukuyama: the end of history, full employment, general purpose technology, George Gilder, German hyperinflation, global value chain, Great Leap Forward, Gunnar Myrdal, Haber-Bosch Process, Hans Rosling, hedonic treadmill, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, housing crisis, Hyman Minsky, income inequality, income per capita, industrial research laboratory, interchangeable parts, Internet Archive, invention of agriculture, invention of the steam engine, It's morning again in America, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, land reform, late capitalism, Les Trente Glorieuses, liberal capitalism, liquidity trap, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, means of production, megacity, Menlo Park, Mikhail Gorbachev, mortgage debt, mutually assured destruction, Neal Stephenson, occupational segregation, oil shock, open borders, open economy, Paul Samuelson, Pearl River Delta, Phillips curve, plutocrats, price stability, Productivity paradox, profit maximization, public intellectual, quantitative easing, Ralph Waldo Emerson, restrictive zoning, rising living standards, road to serfdom, Robert Gordon, Robert Solow, rolodex, Ronald Coase, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, Simon Kuznets, social intelligence, Stanislav Petrov, strikebreaker, structural adjustment programs, Suez canal 1869, surveillance capitalism, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, The Great Moderation, The Nature of the Firm, The Rise and Fall of American Growth, too big to fail, transaction costs, transatlantic slave trade, transcontinental railway, TSMC, union organizing, vertical integration, W. E. B. Du Bois, Wayback Machine, Yom Kippur War

Harvard economist Martin Weitzman liked to point out that there was no deep theoretical reason why providing the information that firms needed via a price target—produce if you can make it for a fully amortized unit cost of less than $X—should be more efficient than via a quantity target—produce Y units.3 But Hayek’s colleague Ronald Coase, at the University of Chicago, pointed out that one of the market economy’s great strengths was that it allowed firms to decide whether to use a bureaucratic command-and-control-style system or a system based on transaction costs (of buying and selling) to make decisions: the fact that firms could choose was key.4 Plus the fact that firms were always subject to the discipline of the marketplace, with those that lost money shrinking and vanishing in a way that state-run bureaucracies that lost money did not.5 But before Friedrich von Hayek’s word could become flesh, and dwell among us, there were three prerequisites.


pages: 670 words: 194,502

The Intelligent Investor (Collins Business Essentials) by Benjamin Graham, Jason Zweig

3Com Palm IPO, accounting loophole / creative accounting, air freight, Alan Greenspan, Andrei Shleifer, AOL-Time Warner, asset allocation, book value, business cycle, buy and hold, buy low sell high, capital asset pricing model, corporate governance, corporate raider, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, George Santayana, hiring and firing, index fund, intangible asset, Isaac Newton, John Bogle, junk bonds, Long Term Capital Management, low interest rates, market bubble, merger arbitrage, Michael Milken, money market fund, new economy, passive investing, price stability, Ralph Waldo Emerson, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, shareholder value, sharing economy, short selling, Silicon Valley, South Sea Bubble, Steve Jobs, stock buybacks, stocks for the long run, survivorship bias, the market place, the rule of 72, transaction costs, tulip mania, VA Linux, Vanguard fund, Y2K, Yogi Berra

The intelligent investor never dumps a stock purely because its share price has fallen; she always asks first whether the value of the company’s underlying businesses has changed. 6 Just 12 months later, Juno’s shares had shriveled to $1.093. 7 A ticker symbol is an abbreviation, usually one to four letters long, of a company’s name used as shorthand to identify a stock for trading purposes. 8 This was not an isolated incident; on at least three other occasions in the late 1990s, day traders sent the wrong stock soaring when they mistook its ticker symbol for that of a newly minted Internet company. 9 In 2000 and 2001, Amazon.com and Qualcomm lost a cumulative total of 85.8% and 71.3% of their value, respectively. 10 Schwert discusses these findings in a brilliant research paper, “Anomalies and Market Efficiency,” available at http://schwert.ssb.rochester.edu/papers.htm. 11 See Plexus Group Commentary 54, “The Official Icebergs of Transaction Costs,” January, 1998, at www.plexusgroup.com/fs_research.html. 12 James O’Shaughnessy, What Works on Wall Street (McGraw-Hill, 1996), pp. xvi, 273–295. 13 In a remarkable irony, the surviving two O’Shaughnessy funds (now known as the Hennessy funds) began performing quite well just as O’Shaughnessy announced that he was turning over the management to another company.


pages: 650 words: 203,191

After Tamerlane: The Global History of Empire Since 1405 by John Darwin

agricultural Revolution, Atahualpa, Berlin Wall, Bretton Woods, British Empire, Cape to Cairo, classic study, colonial rule, Columbian Exchange, cuban missile crisis, deglobalization, deindustrialization, European colonialism, failed state, Francisco Pizarro, Great Leap Forward, invisible hand, Isaac Newton, joint-stock company, Khartoum Gordon, laissez-faire capitalism, land reform, Mahatma Gandhi, Malacca Straits, military-industrial complex, mutually assured destruction, new economy, New Urbanism, oil shock, open economy, price mechanism, reserve currency, Ronald Reagan, Scramble for Africa, South China Sea, South Sea Bubble, spice trade, Suez canal 1869, Suez crisis 1956, The Wealth of Nations by Adam Smith, trade route, transaction costs, transatlantic slave trade

Much of their overseas commercial activity was risky and unprofitable,27 as the misfortunes of the Royal Africa Company, the South Seas Company and the Dutch West India and East India companies revealed.28 Commercial competition outside Europe, with its accompanying infrastructure of fortresses, convoys and mercantilist regulation, imposed huge, sometimes ruinous, transaction costs on them.29 Commercial and military operations at long range were hazardous and often ineffective: despite naval and financial superiority, neither the British nor the Dutch were able to blast open completely the Spanish commercial system in the Americas. The financial apparatus of the maritime powers was also highly vulnerable to the effects of war and political uncertainty: as late as 1745–6 the invasion of the Stuart claimant to the British throne, Bonnie Prince Charlie, created a financial panic in London.


pages: 1,060 words: 265,296

Wealth and Poverty of Nations by David S. Landes

Admiral Zheng, affirmative action, agricultural Revolution, Atahualpa, Ayatollah Khomeini, Bartolomé de las Casas, book value, British Empire, business cycle, Cape to Cairo, classic study, clean water, colonial rule, Columbian Exchange, computer age, David Ricardo: comparative advantage, deindustrialization, deskilling, European colonialism, Fellow of the Royal Society, financial intermediation, Francisco Pizarro, germ theory of disease, glass ceiling, high-speed rail, illegal immigration, income inequality, Index librorum prohibitorum, interchangeable parts, invention of agriculture, invention of movable type, invisible hand, Isaac Newton, it's over 9,000, James Watt: steam engine, John Harrison: Longitude, joint-stock company, Just-in-time delivery, Kenneth Arrow, land tenure, lateral thinking, Lewis Mumford, mass immigration, Mexican peso crisis / tequila crisis, MITM: man-in-the-middle, Monroe Doctrine, Murano, Venice glass, new economy, New Urbanism, North Sea oil, out of africa, passive investing, Paul Erdős, Paul Samuelson, Philip Mirowski, rent-seeking, Right to Buy, Robert Solow, Savings and loan crisis, Scramble for Africa, Simon Kuznets, South China Sea, spice trade, spinning jenny, Suez canal 1869, The Wealth of Nations by Adam Smith, trade route, transaction costs, transatlantic slave trade, Vilfredo Pareto, zero-sum game

Almost all o f this "commercial revolution" came from the mercantile community, bypassing where necessary the rules of this or that city or state, inventing and improvising new venues for encounter and exchange (ports and outports, faubourgs, local markets, international fairs), creating in short a world of its own like an overlay on the convoluted, inconvenient mosaic of political units. They got thereby substantially enhanced security, a sharp reduction in the cost o f doing business (what the economist calls "transaction costs"), a widening o f the market that promoted specialization and di­ vision o f labor. It was the world of Adam Smith, already taking shape five hundred years before his time. The Invention of Invention W hen Adam Smith came to write about these things in the eigh­ teenth century, he pointed out that division o f labor and widening of the market encourage technological innovation.

In the effort to have things both ways, or every way, to appease old interests, to encourage new, to keep the foreigner away while bringing him in, most Latin nations have re­ sorted to the manipulation o f trade and money: import barriers and quotas, differential rates of exchange, a carapace of restrictions that some have called the "inward-looking model"—and, of course, to bor­ rowing. Such measures can provide temporary relief, but at a heavy price: constant adjustments, currency black markets, runaway inflations, high transaction costs, a chilling of foreign investment. Even so, some Latin American countries were able to borrow ridiculously large sums from 2 494 T H E W E A L T H AND POVERTY OF N A T I O N S official international lenders (World Bank, I M F ) and from private com­ mercial banks, acting with the encouragement of their governments and, no doubt, tacit assurances o f a rescue safety net.


pages: 725 words: 221,514

Debt: The First 5,000 Years by David Graeber

Admiral Zheng, Alan Greenspan, anti-communist, back-to-the-land, banks create money, behavioural economics, bread and circuses, Bretton Woods, British Empire, carried interest, cashless society, central bank independence, classic study, colonial rule, commoditize, corporate governance, David Graeber, delayed gratification, dematerialisation, double entry bookkeeping, financial innovation, fixed income, full employment, George Gilder, informal economy, invention of writing, invisible hand, Isaac Newton, joint-stock company, means of production, microcredit, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, oil shock, Panopticon Jeremy Bentham, Paul Samuelson, payday loans, place-making, Ponzi scheme, Post-Keynesian economics, price stability, profit motive, reserve currency, Right to Buy, Ronald Reagan, scientific management, seigniorage, sexual politics, short selling, Silicon Valley, South Sea Bubble, subprime mortgage crisis, Thales of Miletus, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transatlantic slave trade, tulip mania, upwardly mobile, urban decay, working poor, zero-sum game

Economists like Karl Menger and Stanley Jevons later improved on the details of the story, most of all by adding various mathematical equations to demonstrate that a random assortment of people with random desires could, in theory, produce not only a single commodity to use as money but a uniform price system. In the process, they also substituted all sorts of impressive technical vocabulary (i.e., “inconveniences” became “transaction costs”). The crucial thing, though, is that by now, this story has become simple common sense for most people. We teach it to children in schoolbooks and museums. Everybody knows it. “Once upon a time, there was barter. It was difficult. So people invented money. Then came the development of banking and credit.”


pages: 740 words: 217,139

The Origins of Political Order: From Prehuman Times to the French Revolution by Francis Fukuyama

Admiral Zheng, agricultural Revolution, Andrei Shleifer, Asian financial crisis, Ayatollah Khomeini, barriers to entry, Berlin Wall, blood diamond, California gold rush, cognitive dissonance, colonial rule, conceptual framework, correlation does not imply causation, currency manipulation / currency intervention, Day of the Dead, demographic transition, Deng Xiaoping, double entry bookkeeping, endogenous growth, equal pay for equal work, European colonialism, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, Francisco Pizarro, Garrett Hardin, Hernando de Soto, hiring and firing, invention of agriculture, invention of the printing press, John Perry Barlow, Khyber Pass, land reform, land tenure, means of production, offshore financial centre, out of africa, Peace of Westphalia, principal–agent problem, RAND corporation, rent-seeking, Right to Buy, Scramble for Africa, selective serotonin reuptake inhibitor (SSRI), spice trade, Stephen Hawking, Steven Pinker, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, trade route, Tragedy of the Commons, transaction costs, Washington Consensus, zero-sum game

They can remember past behavior as a guide to future cooperation; they pass on information about trustworthiness through gossip and other forms of information sharing; they have acute perceptual faculties for detecting lies and untrustworthy behavior through vocal and visual cues; and they have common modes for sharing information through language and nonverbal forms of communication. The ability to make and obey rules is an economizing behavior in the sense that it greatly reduces the transaction costs of social interaction and permits efficient collective action. The human instinct to follow rules is often based in the emotions rather than in reason, however. Emotions like guilt, shame, pride, anger, embarrassment, and admiration are not learned behaviors in the Lockean sense of being somehow acquired after birth through interaction with the empirical world outside the individual.


The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

addicted to oil, air freight, airline deregulation, Alan Greenspan, Albert Einstein, asset-backed security, bank run, Berlin Wall, Black Monday: stock market crash in 1987, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, carbon tax, central bank independence, collateralized debt obligation, collective bargaining, compensation consultant, conceptual framework, Corn Laws, corporate governance, corporate raider, correlation coefficient, cotton gin, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, currency risk, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Glass-Steagall Act, Hernando de Soto, income inequality, income per capita, information security, invisible hand, Joseph Schumpeter, junk bonds, labor-force participation, laissez-faire capitalism, land reform, Long Term Capital Management, low interest rates, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, new economy, North Sea oil, oil shock, open economy, open immigration, Pearl River Delta, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, Reminiscences of a Stock Operator, reserve currency, Right to Buy, risk tolerance, Robert Solow, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, special economic zone, stock buybacks, stocks for the long run, Suez crisis 1956, the payments system, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tipper Gore, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, We are all Keynesians now, working-age population, Y2K, zero-sum game

The high cost of developing software and the negligible production and, if online, distribution costs tend to suggest a natural monopoly—a good or service that is supplied most efficiently by one firm. A stock exchange is an obvious example. It is most efficient to have all the trading of a stock concentrated in one market. Bid-asked spreads narrow and transaction costs decline. In the 1930s, Alcoa was the sole U.S. producer of raw aluminum. It kept its monopoly by passing on, in ever-lower prices, almost all its 493 More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright.


pages: 761 words: 231,902

The Singularity Is Near: When Humans Transcend Biology by Ray Kurzweil

additive manufacturing, AI winter, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Albert Einstein, anthropic principle, Any sufficiently advanced technology is indistinguishable from magic, artificial general intelligence, Asilomar, augmented reality, autonomous vehicles, backpropagation, Benoit Mandelbrot, Bill Joy: nanobots, bioinformatics, brain emulation, Brewster Kahle, Brownian motion, business cycle, business intelligence, c2.com, call centre, carbon-based life, cellular automata, Charles Babbage, Claude Shannon: information theory, complexity theory, conceptual framework, Conway's Game of Life, coronavirus, cosmological constant, cosmological principle, cuban missile crisis, data acquisition, Dava Sobel, David Brooks, Dean Kamen, digital divide, disintermediation, double helix, Douglas Hofstadter, en.wikipedia.org, epigenetics, factory automation, friendly AI, functional programming, George Gilder, Gödel, Escher, Bach, Hans Moravec, hype cycle, informal economy, information retrieval, information security, invention of the telephone, invention of the telescope, invention of writing, iterative process, Jaron Lanier, Jeff Bezos, job automation, job satisfaction, John von Neumann, Kevin Kelly, Law of Accelerating Returns, life extension, lifelogging, linked data, Loebner Prize, Louis Pasteur, mandelbrot fractal, Marshall McLuhan, Mikhail Gorbachev, Mitch Kapor, mouse model, Murray Gell-Mann, mutually assured destruction, natural language processing, Network effects, new economy, Nick Bostrom, Norbert Wiener, oil shale / tar sands, optical character recognition, PalmPilot, pattern recognition, phenotype, power law, precautionary principle, premature optimization, punch-card reader, quantum cryptography, quantum entanglement, radical life extension, randomized controlled trial, Ray Kurzweil, remote working, reversible computing, Richard Feynman, Robert Metcalfe, Rodney Brooks, scientific worldview, Search for Extraterrestrial Intelligence, selection bias, semantic web, seminal paper, Silicon Valley, Singularitarianism, speech recognition, statistical model, stem cell, Stephen Hawking, Stewart Brand, strong AI, Stuart Kauffman, superintelligent machines, technological singularity, Ted Kaczynski, telepresence, The Coming Technological Singularity, Thomas Bayes, transaction costs, Turing machine, Turing test, two and twenty, Vernor Vinge, Y2K, Yogi Berra

Today's deflation is a completely different phenomenon, caused by rapidly increasing productivity and the increasing pervasiveness of information in all its forms. All of the technology trend charts in this chapter represent massive deflation. There are many examples of the impact of these escalating efficiencies. BP Amoco's cost for finding oil in 2000 was less than one dollar per barrel, down from nearly ten dollars in 1991. Processing an Internet transaction costs a bank one penny, compared to more than one dollar using a teller. It is important to point out that a key implication of nanotechnology is that it will bring the economics of software to hardware—that is, to physical products. Software prices are deflating even more quickly than those of hardware (see the figure below).


pages: 556 words: 46,885

The World's First Railway System: Enterprise, Competition, and Regulation on the Railway Network in Victorian Britain by Mark Casson

banking crisis, barriers to entry, Beeching cuts, British Empire, business cycle, classic study, combinatorial explosion, Corn Laws, corporate social responsibility, David Ricardo: comparative advantage, Garrett Hardin, gentrification, high-speed rail, independent contractor, intermodal, iterative process, joint-stock company, joint-stock limited liability company, Kickstarter, knowledge economy, linear programming, low interest rates, megaproject, Network effects, New Urbanism, performance metric, price elasticity of demand, railway mania, rent-seeking, strikebreaker, the market place, Tragedy of the Commons, transaction costs, vertical integration

Gentlemanly capitalism is related to, though not identical with, what Chandler (1990) calls ‘personal capitalism’. But while Chandler emphasizes the negative aspects of personal capitalism, Cain and Hopkins emphasize its positive features. Investment in social networks, they suggest, reduces transaction costs. Gentlemanly capitalism was particularly well adapted to the conduct of maritime trade, because merchants required a network of trusted agents in all the major ports with which they were connected. While some cultures were forced to rely on kinship ties to sustain trust, gentlemanly capitalists could rely on regimental loyalty and ‘the old school tie’ instead (Jones 1998, 2000).


The Art of Scalability: Scalable Web Architecture, Processes, and Organizations for the Modern Enterprise by Martin L. Abbott, Michael T. Fisher

always be closing, anti-pattern, barriers to entry, Bernie Madoff, business climate, business continuity plan, business intelligence, business logic, business process, call centre, cloud computing, combinatorial explosion, commoditize, Computer Numeric Control, conceptual framework, database schema, discounted cash flows, Dunning–Kruger effect, en.wikipedia.org, fault tolerance, finite state, friendly fire, functional programming, hiring and firing, Infrastructure as a Service, inventory management, machine readable, new economy, OSI model, packet switching, performance metric, platform as a service, Ponzi scheme, power law, RFC: Request For Comment, risk tolerance, Rubik’s Cube, Search for Extraterrestrial Intelligence, SETI@home, shareholder value, Silicon Valley, six sigma, software as a service, the scientific method, transaction costs, Vilfredo Pareto, web application, Y2K

You might decide that you need to spend 30% to 50% of your engineering time and a significant amount of capital to fix a majority of these issues in the first M EASUREMENT , M ETRICS , AND G OAL E VALUATION two to 24 months of your job. However, something is wrong if you can’t slowly start giving more time back to the business for business initiatives (customer features) over time. We recommend measuring the cost of scale as both a percentage of total engineering spending and as a cost per transaction. Cost of scale as a percentage of engineering time should go down over time. But it’s easy to “game” this number. If in year 1 you have a team of 20 engineers and dedicate 10 to scalability initiatives, you are spending 50% of your engineering headcount related budget on scalability. If in year 2 you hire 10 more engineers but still only dedicate the original 10 to scale, you are now spending only 33% of your budget.


pages: 976 words: 235,576

The Meritocracy Trap: How America's Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite by Daniel Markovits

8-hour work day, activist fund / activist shareholder / activist investor, affirmative action, algorithmic management, Amazon Robotics, Anton Chekhov, asset-backed security, assortative mating, basic income, Bernie Sanders, big-box store, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, carried interest, collateralized debt obligation, collective bargaining, compensation consultant, computer age, corporate governance, corporate raider, crony capitalism, David Brooks, deskilling, Detroit bankruptcy, disruptive innovation, Donald Trump, Edward Glaeser, Emanuel Derman, equity premium, European colonialism, everywhere but in the productivity statistics, fear of failure, financial engineering, financial innovation, financial intermediation, fixed income, Ford paid five dollars a day, Frederick Winslow Taylor, fulfillment center, full employment, future of work, gender pay gap, gentrification, George Akerlof, Gini coefficient, glass ceiling, Glass-Steagall Act, Greenspan put, helicopter parent, Herbert Marcuse, high net worth, hiring and firing, income inequality, industrial robot, interchangeable parts, invention of agriculture, Jaron Lanier, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, junk bonds, Kevin Roose, Kiva Systems, knowledge economy, knowledge worker, Kodak vs Instagram, labor-force participation, Larry Ellison, longitudinal study, low interest rates, low skilled workers, machine readable, manufacturing employment, Mark Zuckerberg, Martin Wolf, mass incarceration, medical residency, meritocracy, minimum wage unemployment, Myron Scholes, Nate Silver, New Economic Geography, new economy, offshore financial centre, opioid epidemic / opioid crisis, Paul Samuelson, payday loans, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, precariat, purchasing power parity, rent-seeking, Richard Florida, Robert Gordon, Robert Shiller, Robert Solow, Ronald Reagan, Rutger Bregman, savings glut, school choice, shareholder value, Silicon Valley, Simon Kuznets, six sigma, Skype, stakhanovite, stem cell, Stephen Fry, Steve Jobs, stock buybacks, supply-chain management, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, The Theory of the Leisure Class by Thorstein Veblen, Thomas Davenport, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, traveling salesman, universal basic income, unpaid internship, Vanguard fund, War on Poverty, warehouse robotics, Winter of Discontent, women in the workforce, work culture , working poor, Yochai Benkler, young professional, zero-sum game

The gains that elite workers produce in a meritocratic world—where inequality-induced innovation has biased production toward their peculiar skills—should therefore be discounted by the reduced productivity that these innovations impose on non-elite workers. The precise balance between gain and loss of course remains speculative. But the best evidence suggests that the elite’s true product may be near zero. For all its innovations, modern finance seems not to have reduced the total transaction costs of financial intermediation or to have reduced the share of fundamental economic risk borne by the median household, for example. And modern management seems not to have improved the overall performance of American firms (although it may have increased returns specifically to investors). More generally, rising meritocratic inequality has not been accompanied by accelerating economic growth or increasing productivity.


pages: 492 words: 70,082

Immigration worldwide: policies, practices, and trends by Uma Anand Segal, Doreen Elliott, Nazneen S. Mayadas

affirmative action, Asian financial crisis, Berlin Wall, borderless world, British Empire, Celtic Tiger, centre right, conceptual framework, credit crunch, demographic transition, deskilling, en.wikipedia.org, European colonialism, export processing zone, Fall of the Berlin Wall, financial independence, full employment, global village, guest worker program, illegal immigration, immigration reform, income inequality, income per capita, informal economy, it's over 9,000, knowledge economy, labor-force participation, labour mobility, language acquisition, longitudinal study, low skilled workers, mass immigration, minimum wage unemployment, moral panic, Nelson Mandela, New Urbanism, open borders, phenotype, scientific management, South China Sea, structural adjustment programs, Suez canal 1869, trade route, transaction costs, upwardly mobile, urban planning, women in the workforce

The relatively liberal citizenship policy, as well as granting noncitizens the right to vote in local and provincial elections initially showed good results, but just like the labor market integration, showed over time a lower voting participation by immigrants. Human capital and personal skills, occupational transferability, structural changes in the labor market, various types of discrimination, integration policies toward immigrants and labor market policies in general are all factors that can be seen as increasing the transaction costs for immigrants relative to natives to adjust in the labor market. Especially the structural change of the Swedish labor market into a service society demanding higher general skills and stressing language skills are likely to increase the cost for new immigrants to acquire these skills. Potential employers are placed in a position of increasing hiring costs and this affects the discrimination toward certain groups of immigrants.


pages: 918 words: 260,504

Nature's Metropolis: Chicago and the Great West by William Cronon

active transport: walking or cycling, book value, British Empire, business cycle, City Beautiful movement, classic study, conceptual framework, credit crunch, gentleman farmer, it's over 9,000, Lewis Mumford, machine readable, New Urbanism, Ralph Waldo Emerson, refrigerator car, Robert Gordon, short selling, The Chicago School, Thorstein Veblen, trade route, transaction costs, transcontinental railway, traveling salesman, Upton Sinclair, vertical integration, zero-sum game

As the Wisconsin Lumberman reported to its readers in 1874, “Chicago is not only the largest lumber market in the world, but it has always had an eminent reputation as a market upon which almost any amount of lumber could be placed at any time and sold for cash.”87 For lumber vessels whose owners and captains were eager to return to the mills as soon as possible for another shipment, there were enormous advantages in being able to sell large quantities quickly. A rapid sale meant reducing the amount of time a ship sat idle (and paying dock charges) in port. It lowered the transaction costs that came with each additional buyer. It avoided the need to unload lumber onto the docks so that potential purchasers could inspect it piecemeal. And it eliminated the very real possibility that at the end of several sales low-quality lumber might remain that no one would buy at any price. Being able in one transaction to sell everything a ship contained allowed lumbermen from Chicago’s hinterland to shift these costs and risks onto the shoulders of the city’s merchants.


pages: 1,104 words: 302,176

The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War (The Princeton Economic History of the Western World) by Robert J. Gordon

3D printing, Affordable Care Act / Obamacare, airline deregulation, airport security, Apple II, barriers to entry, big-box store, blue-collar work, business cycle, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Charles Lindbergh, classic study, clean water, collective bargaining, computer age, cotton gin, creative destruction, deindustrialization, Detroit bankruptcy, discovery of penicillin, Donner party, Downton Abbey, driverless car, Edward Glaeser, en.wikipedia.org, Erik Brynjolfsson, everywhere but in the productivity statistics, feminist movement, financial innovation, food desert, Ford Model T, full employment, general purpose technology, George Akerlof, germ theory of disease, glass ceiling, Glass-Steagall Act, Golden age of television, government statistician, Great Leap Forward, high net worth, housing crisis, Ida Tarbell, immigration reform, impulse control, income inequality, income per capita, indoor plumbing, industrial robot, inflight wifi, interchangeable parts, invention of agriculture, invention of air conditioning, invention of the sewing machine, invention of the telegraph, invention of the telephone, inventory management, James Watt: steam engine, Jeff Bezos, jitney, job automation, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, labor-force participation, Les Trente Glorieuses, Lewis Mumford, Loma Prieta earthquake, Louis Daguerre, Louis Pasteur, low skilled workers, manufacturing employment, Mark Zuckerberg, market fragmentation, Mason jar, mass immigration, mass incarceration, McMansion, Menlo Park, minimum wage unemployment, mortgage debt, mortgage tax deduction, new economy, Norbert Wiener, obamacare, occupational segregation, oil shale / tar sands, oil shock, payday loans, Peter Thiel, Phillips curve, pink-collar, pneumatic tube, Productivity paradox, Ralph Nader, Ralph Waldo Emerson, refrigerator car, rent control, restrictive zoning, revenue passenger mile, Robert Solow, Robert X Cringely, Ronald Coase, school choice, Second Machine Age, secular stagnation, Skype, Southern State Parkway, stem cell, Steve Jobs, Steve Wozniak, Steven Pinker, streetcar suburb, The Market for Lemons, The Rise and Fall of American Growth, Thomas Malthus, total factor productivity, transaction costs, transcontinental railway, traveling salesman, Triangle Shirtwaist Factory, undersea cable, Unsafe at Any Speed, Upton Sinclair, upwardly mobile, urban decay, urban planning, urban sprawl, vertical integration, warehouse robotics, washing machines reduced drudgery, Washington Consensus, Watson beat the top human players on Jeopardy!, We wanted flying cars, instead we got 140 characters, working poor, working-age population, Works Progress Administration, yellow journalism, yield management

The U.S. patent system was revolutionary “in its extension of effective property rights in to an extremely wide spectrum of the population. Moreover, it was exceptional in recognizing that it was in the public interest that patent rights, like other property rights, should be clearly defined and well enforced, with low transaction costs.”17 The democratic nature of the U.S. patent system may help to explain why so many of the Great Inventions of the late nineteenth century happened in the United States rather than in Europe. In a famous example discussed in chapter 6, on February 14, 1876, both Elisha Gray and Alexander Graham Bell arrived at the patent office to register their competing telephone technologies.


pages: 992 words: 292,389

Conspiracy of Fools: A True Story by Kurt Eichenwald

"World Economic Forum" Davos, Alan Greenspan, Asian financial crisis, Bear Stearns, book value, Burning Man, California energy crisis, computerized trading, corporate raider, currency risk, deal flow, electricity market, estate planning, financial engineering, forensic accounting, intangible asset, Irwin Jacobs, John Markoff, junk bonds, Long Term Capital Management, margin call, Michael Milken, Negawatt, new economy, oil shock, price stability, pushing on a string, Ronald Reagan, transaction costs, value at risk, young professional

With Chewco, Kopper was already way ahead on the financial rewards from secret side deals. The numbers Kopper kept in the file on his laptop left no doubt this fund should go Fastow’s way. With the fund, Fastow told Skilling, there wouldn’t be a need for investment bankers. That meant a higher purchase price and lower transaction costs. “Well, yeah,” Skilling said. “But it’s got a conflict-of-interest issue.” Fastow nodded eagerly. “Yeah, that’s true,” he said. “But the whole issue is, is it cheaper, are we getting more benefit to shareholders by doing it this way.” Skilling thought about that. “Yeah, that’s right,” he said.


pages: 1,373 words: 300,577

The Quest: Energy, Security, and the Remaking of the Modern World by Daniel Yergin

"Hurricane Katrina" Superdome, "World Economic Forum" Davos, accelerated depreciation, addicted to oil, Alan Greenspan, Albert Einstein, An Inconvenient Truth, Asian financial crisis, Ayatollah Khomeini, banking crisis, Berlin Wall, bioinformatics, book value, borderless world, BRICs, business climate, California energy crisis, carbon credits, carbon footprint, carbon tax, Carl Icahn, Carmen Reinhart, clean tech, Climategate, Climatic Research Unit, colonial rule, Colonization of Mars, corporate governance, cuban missile crisis, data acquisition, decarbonisation, Deng Xiaoping, Dissolution of the Soviet Union, diversification, diversified portfolio, electricity market, Elon Musk, energy security, energy transition, Exxon Valdez, facts on the ground, Fall of the Berlin Wall, fear of failure, financial innovation, flex fuel, Ford Model T, geopolitical risk, global supply chain, global village, Great Leap Forward, Greenspan put, high net worth, high-speed rail, hydraulic fracturing, income inequality, index fund, informal economy, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), It's morning again in America, James Watt: steam engine, John Deuss, John von Neumann, Kenneth Rogoff, life extension, Long Term Capital Management, Malacca Straits, market design, means of production, megacity, megaproject, Menlo Park, Mikhail Gorbachev, military-industrial complex, Mohammed Bouazizi, mutually assured destruction, new economy, no-fly zone, Norman Macrae, North Sea oil, nuclear winter, off grid, oil rush, oil shale / tar sands, oil shock, oil-for-food scandal, Paul Samuelson, peak oil, Piper Alpha, price mechanism, purchasing power parity, rent-seeking, rising living standards, Robert Metcalfe, Robert Shiller, Robert Solow, rolling blackouts, Ronald Coase, Ronald Reagan, Sand Hill Road, Savings and loan crisis, seminal paper, shareholder value, Shenzhen special economic zone , Silicon Valley, Silicon Valley billionaire, Silicon Valley startup, smart grid, smart meter, South China Sea, sovereign wealth fund, special economic zone, Stuxnet, Suez crisis 1956, technology bubble, the built environment, The Nature of the Firm, the new new thing, trade route, transaction costs, unemployed young men, University of East Anglia, uranium enrichment, vertical integration, William Langewiesche, Yom Kippur War

For the work of a Nobel Prize winner in economics, both articles were strikingly devoid of any mathematics save simple arithmetic. But they were very powerful in their arguments. In one, “The Nature of the Firm” published in 1937, Coase took on a very basic question—why do people coalesce into companies in a market economy rather than remain as freelancers in a sea of the self-employed? The answer, he said, was “transaction costs”—costs are lower within companies, things are easier to get done, and efficiency is higher. The second article, the result of a friendly debate with Milton Friedman, was “The Problem of Social Costs.” Published in The Journal of Law and Economics , it ended up one of the most cited articles in the history of economics.


J.K. Lasser's Your Income Tax 2022: For Preparing Your 2021 Tax Return by J. K. Lasser Institute

accelerated depreciation, Affordable Care Act / Obamacare, airline deregulation, anti-communist, asset allocation, bike sharing, bitcoin, business cycle, call centre, carried interest, collective bargaining, coronavirus, COVID-19, cryptocurrency, distributed generation, distributed ledger, diversification, employer provided health coverage, estate planning, Home mortgage interest deduction, independent contractor, intangible asset, medical malpractice, medical residency, mortgage debt, mortgage tax deduction, passive income, Ponzi scheme, profit motive, rent control, ride hailing / ride sharing, Right to Buy, sharing economy, TaskRabbit, Tax Reform Act of 1986, transaction costs, zero-coupon bond

The following intangible assets are not Section 197 intangibles. (1) interests in a corporation, partnership, trust, or estate; (2) interests under certain financial contracts; (3) interests in land; (4) certain computer software (see the Filing Tip on this page); (5) certain separately acquired rights and interests; (6) interests under existing leases of tangible property; (7) interests under existing indebtedness; (8) sports franchises; (9) certain residential mortgage servicing rights; and (10) certain corporate transaction costs. Loss limitations. A person who disposes of an amortizable Section 197 intangible at a loss and at the same time retains other Section 197 intangibles acquired in the same transaction may not deduct the loss. The disallowed loss is added to the basis of the retained Section 197 intangibles. The same rule applies if a Section 197 intangible is abandoned or becomes worthless and other Section 197 intangibles acquired in the same transaction are kept.

The main object of a closing agreement is to protect the individual against the reopening of an agreed matter at some later date by the IRS. It also stops an individual from suing or filing other claims for refund. A closing agreement also may be used to fix tax liability for a year barred or arguably barred by the statute of limitations. You may want a closing agreement for recurring transactions. Cost, fair market value, or adjusted basis as of a given date in the past may be established. Establishing tax liability may facilitate a transaction such as the sale of stock. A corporation in the process of liquidation or dissolution may want an agreement to wind up its affairs. In estate tax proceedings, a closing agreement can assure the fiduciary that the estate is closed for federal tax purposes.


pages: 1,157 words: 379,558

Ashes to Ashes: America's Hundred-Year Cigarette War, the Public Health, and the Unabashed Triumph of Philip Morris by Richard Kluger

air freight, Albert Einstein, book value, California gold rush, cognitive dissonance, confounding variable, corporate raider, desegregation, disinformation, double entry bookkeeping, family office, feminist movement, full employment, ghettoisation, independent contractor, Indoor air pollution, junk bonds, medical malpractice, Mikhail Gorbachev, plutocrats, power law, publication bias, Ralph Nader, Ralph Waldo Emerson, RAND corporation, rent-seeking, risk tolerance, Ronald Reagan, selection bias, stock buybacks, The Chicago School, the scientific method, Torches of Freedom, trade route, transaction costs, traveling salesman, union organizing, upwardly mobile, urban planning, urban renewal, vertical integration, War on Poverty

While the Cullmans were hardly known as predatory, the possibility could not be discounted altogether. One solution, of course, would have been to buy B&H outright instead of merging the smaller outfit into the larger one. But McComas preferred the approximately 5 percent dilution of Philip Morris stock that the transaction cost him to the heavy cash payment of $22.4 million in PM stock that the Cullmans were asking. There was no haggling over the terms, as it was made clear to McComas that B&H was not about to be shopped around the industry to the highest bidder. The Cullmans knew and liked Philip Morris and its people; they had something of value to offer the larger company; and that was the price—take it or leave it.


pages: 1,993 words: 478,072

The Boundless Sea: A Human History of the Oceans by David Abulafia

Admiral Zheng, Alfred Russel Wallace, Bartolomé de las Casas, British Empire, colonial rule, computer age, Cornelius Vanderbilt, dark matter, David Ricardo: comparative advantage, discovery of the americas, domestication of the camel, Easter island, Edmond Halley, Eratosthenes, European colonialism, Fellow of the Royal Society, John Harrison: Longitude, joint-stock company, Kickstarter, land reform, lone genius, Malacca Straits, mass immigration, Maui Hawaii, megacity, new economy, out of africa, p-value, Peace of Westphalia, polynesian navigation, Scramble for Africa, South China Sea, spice trade, Suez canal 1869, Suez crisis 1956, trade route, transaction costs, transatlantic slave trade, transcontinental railway, undersea cable, wikimedia commons, yellow journalism

It was easy to hide coins in the hold or simply to wait for the customs officers to disappear before taking the cash on board.8 This passion for Chinese coins was stimulated by a simple, obvious feature of cash: copper coins did not deteriorate, whereas payment in silk, common earlier, involved the use of material that could be soiled, torn or burned; and an alternative to silk was rice, which was far more bulky and no less likely to deteriorate. The use of coin reduced transaction costs for itinerant merchants, as it was no longer necessary to shift bulk goods around in order to make payment.9 Besides, there was a sense of connecting to Chinese culture when using Chinese coins, and this was felt as much in Korea or Vietnam as it was in Japan; these coins may have been plentiful, but they possessed prestige.


pages: 2,045 words: 566,714

J.K. Lasser's Your Income Tax by J K Lasser Institute

accelerated depreciation, Affordable Care Act / Obamacare, airline deregulation, asset allocation, book value, business cycle, collective bargaining, distributed generation, employer provided health coverage, estate planning, Home mortgage interest deduction, independent contractor, intangible asset, medical malpractice, medical residency, money market fund, mortgage debt, mortgage tax deduction, passive income, Ponzi scheme, profit motive, rent control, Right to Buy, telemarketer, transaction costs, urban renewal, zero-coupon bond

(1) interests in a corporation, partnership, trust, or estate; (2) interests under certain financial contracts; (3) interests in land; (4) certain computer software (42.18); (5) certain separately acquired rights and interests; (6) interests under existing leases of tangible property; (7) interests under existing indebtedness; (8) sports franchises; (9) certain residential mortgage servicing rights; and (10) certain corporate transaction costs. Loss limitations. A person who disposes of an amortizable Section 197 intangible at a loss and at the same time retains other Section 197 intangibles acquired in the same transaction may not deduct the loss. The disallowed loss is added to the basis of the retained Section 197 intangibles.


pages: 1,845 words: 567,850

J.K. Lasser's Your Income Tax 2014 by J. K. Lasser

accelerated depreciation, Affordable Care Act / Obamacare, airline deregulation, asset allocation, book value, business cycle, collective bargaining, distributed generation, employer provided health coverage, estate planning, Home mortgage interest deduction, independent contractor, intangible asset, medical malpractice, medical residency, mortgage debt, mortgage tax deduction, obamacare, passive income, Ponzi scheme, profit motive, rent control, Right to Buy, telemarketer, transaction costs, urban renewal, zero-coupon bond

The following intangible assets are not Section 197 intangibles (1) interests in a corporation, partnership, trust, or estate; (2) interests under certain financial contracts; (3) interests in land; (4) certain computer software (42.18); (5) certain separately acquired rights and interests; (6) interests under existing leases of tangible property; (7) interests under existing indebtedness; (8) sports franchises; (9) certain residential mortgage servicing rights; and (10) certain corporate transaction costs. Loss limitations A person who disposes of an amortizable Section 197 intangible at a loss and at the same time retains other Section 197 intangibles acquired in the same transaction may not deduct the loss. The disallowed loss is added to the basis of the retained Section 197 intangibles.


J.K. Lasser's Your Income Tax 2016: For Preparing Your 2015 Tax Return by J. K. Lasser Institute

accelerated depreciation, Affordable Care Act / Obamacare, airline deregulation, asset allocation, book value, business cycle, collective bargaining, distributed generation, employer provided health coverage, estate planning, Home mortgage interest deduction, independent contractor, intangible asset, medical malpractice, medical residency, mortgage debt, mortgage tax deduction, passive income, Ponzi scheme, profit motive, rent control, Right to Buy, transaction costs, urban renewal, zero-coupon bond

The following intangible assets are not Section 197 intangibles. (1) interests in a corporation, partnership, trust, or estate; (2) interests under certain financial contracts; (3) interests in land; (4) certain computer software (42.18); (5) certain separately acquired rights and interests; (6) interests under existing leases of tangible property; (7) interests under existing indebtedness; (8) sports franchises; (9) certain residential mortgage servicing rights; and (10) certain corporate transaction costs. Loss limitations. A person who disposes of an amortizable Section 197 intangible at a loss and at the same time retains other Section 197 intangibles acquired in the same transaction may not deduct the loss. The disallowed loss is added to the basis of the retained Section 197 intangibles.