A stock operator's thoughts and ideas about market principles
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Dec/21/2006
The Resistance to Equilibrium Change
The last summer was mild enough for the oaks in my garden to grow even faster than the Norway spruces. If there really is a trend that the summers will be longer, the eco system is in danger of changing from spruce to oak forests. I made a simple model which can be used for economics and the stock market as well.
These variables influence a tree's success:
G - Growth rate
T - Length of growth season
L - Annual cost of producing leaves
E - The effect the kind of forest has on the individual tree's growth
The fittest species will have the highest value of
GT - L + E
I am not a botanist but will use these assumptions:
Goak > Gspruce
Toak < Tspruce
Loak > Lspruce
Eoak > Espruce if oak forest
Eoak < Espruce if spruce forest
The E is what sets this apart from a simple comparison. The oaks don't only have to be the fittest (GT - L), they must also overcome the ecosystem's support of the spruce (E). I am thinking about all the species which support the spruce, like for example the ants collecting the dead spruce needles and cleaning the forest floor.
First Mover Advantage
The scenario I have discussed here is just the very common first mover advantage. However, E could have been negative too, just as large as the difference in GT - L. But that would destabilize the equilibrium. I will write about some cases of resistance in equilibrium change.
Private Companies
Profit maximizing companies spend money on lobbying and funding politicians' campaigns. This, of course, is something only worth doing if it's in a large enough scale to be influential. The reason to do so is that money spent on influencing the political system gives a higher return than on an ordinary investment. The difference in return on this money is the company's E. PR campaigns, charities, and all other non-ordinary-investments of money add to the E as well.
Gambling
Say you have not reached the critical point where you invest some of your money. Then an additional dollar made is a dollar spent. The only way of possibly reaching the investing equilibrium is by gambling. This will make gambling rational for a risk neutral person as long as the negative expectancy is not greater then the E if the equilibrium is changed. The E is the additional income from the return of the investments. I will come back to this in a later article.
Stock Trading
If you do have an edge in the market, your actions will reduce the edge. This will make it less rewarding for others to develop the same strategy as you use. Since you then get fewer competitors - and you only need to out bid the second best in your niche - the inefficiencies will get bigger. This is a paradox, which I will come back to when I've reflected some more. The clue here is that E is negative, but the difference in the fitness part of the equation increases.
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