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Making Markets

Making Markets

I have been a student of markets since my best friend introduced me to the vagaries of supply and demand as the school’s preferred supplier of cannabis. I’ve traded currencies, commodities, equities and debt across listed and unlisted global markets. This is a collection of thoughts on what makes a market and what causes them to fail – and therein lies opportunity.


Of loose cannons on the world’s deck

Of loose cannons on the world’s deck

Back in 1998 as a part of a Masters in International Politics, I wrote an essay on monetary unions and the future of the Euro. At the time convergence trades were all the rage and the soon-to-be members were busy pretending they were complying with their Maastricht treaty obligations. The essay’s conclusion was that the Euro would not long survive its first test.

History clearly demonstrates that a monetary union will fail without a common political will. The Euro has never achieved political union.

So the Euro stumbled through the private debt crisis of 2008 on the back of central bank largesse. This lead to a global socialisation of the massive debt binge that had accumulated through the mortgage and credit markets. But while the ECB. like most its central banking peers, was busy engorging its balance sheet there was still no consolidation of debts, each nation-state remained it own issuer.

So now we are approaching the next debt crisis – a result of 10 years of zero interest rates where the private sector has been encouraged to re-leverage, valuation multiples are back to all-time highs, and now the central banks are carrying impossibly large balance sheets. The sensitivity of the system to rising interest rates is acute.

And we have a Euro-land dominated by one very large creditor and quite a few large debtors. To date, the creditor has won out, forcing ‘internal devaluation’ on their partners. But the next stage of the sovereign debt crisis is unlikely to play to that script. You can already see capital flight out of Italy through the Target2 balances. The only palatable way out of this mess is to inflate your way out of debt – and the Italians have the keys to that locker. Beware the vagaries of capital in a hurry to find an exit…

During this new stage of the depression, the refugee gold and the foreign government reserve deposits were constantly driven by fear hither and yon over the world. We were to see currencies demoralized and governments embarrassed as fear drove the gold from one country to another. In fact, there was a mass of gold and short-term credit which behaved like a loose cannon on the deck of the world in a tempest-tossed era.

Herbert Hoover, Memoirs, Volume II, Chapter 7, page 67

Co-operatively solving the prisoner’s dilemma

Co-operatively solving the prisoner’s dilemma

Listening to a back edition of Seth Godin’s Akimbo podcast “Game Theory & the Infinite Game”, it struck me that a co-operative is, by design, an attempt to collectively escape the prisoner’s dilemma.

To recap the parameters of the ‘game’, two people are caught red-handed for a crime. They are going to serve a year’s jail-time for this. But they are wanted for a bigger crime too. So they are each offered a way out of jail-time, rat on your partner for the bigger crime and you will go free but your partner will get 50 years. The trouble is that if they both sing, then they will both get 5 years.

The expectation is that the rational selfish response will be to rat on the other. In practice, humans have demonstrated a systemic bias to co-operate – we seem to understand that the pursuit of single-minded self-interest can lead to a bad outcome for all.

So now I have added The Evolution of Cooperation by Robert Axelrod to my reading list (here for the abridged version). This book reports on a Prisoner’s Dilemma tournament where he invited game theory experts to submit programs that would be paired off against each other to see which did best over repeated interactions.

“Amazingly enough, the winner was the simplest of all candidates submitted.
This was a strategy of simple reciprocity which cooperates on the
first move and then does whatever the other player did on the previous

He called it the Tit-for-Tat strategy.

By analysing the top-scoring strategies, Axelrod stated several conditions necessary for a strategy to be successful:

  • Nice – Almost all of the top-scoring strategies were nice, that is, it will not defect before its opponent does.
  • Retaliating – A successful strategy must not be a blind optimist. It must sometimes retaliate to avoid being exploited by others..
  • Forgiving – Though players will retaliate, a successful strategy will once again fall back to cooperating if the opponent does not continue to defect. This stops long runs of revenge and counter-revenge.
  • Non-envious – The best strategies did not strive to score more than the opponent.

Whether the players trust each other or not is less important in the long run than whether the conditions are ripe for them to build a stable pattern of cooperation with each other. The successful strategy learns through trial-and-error that it is better to co-operate than not.

Some lessons here for co-operative design!

When algorithms rule the world

When will homo sapiens be usurped at the top of the food chain? Or has it already happened?

The transition from big data to algorithm-driven AI is happening frightening quickly. In fields from medicine to movies to mass surveillance, smart machines have already proven to be quicker and more reliable than their human peers. It won’t be long before they know us better than we know ourselves…

The need to align data management with our collective and individual interests is urgent. Left to their own devices, government and private capital are ill-equipped to balance the common good with individual agency. We need to take ownership. Co-operative governance and ownership of the technologies that underpin the algorithm economy are key…