de Tocqueville: Trust in Self-Interest

And I assure you that all the peoples and populations who are subject to his rule are perfectly willing to accept these papers in payment, since wherever they go they pay in the same currency, whether for goods or for pearls or precious stones or gold or silver. With these pieces of paper they can buy anything and pay for anything.
 

(The Travels of Marco Polo)

A Culture of Trust

When thirteenth century Western travellers reached the Chinese border they were forced to exchange their precious bags of gold and silver for apparently worthless paper notes. This created a certain amount of angst amongst the traders which was relieved only when, as Marco Polo recounted, they discovered that their paper was happily accepted by merchants within China, was backed by hard currency redeemable on request, was easily exchanged, easily transported and thus promoted commerce.

These exchanges encapsulate the nature and importance of trust, and the difficulties of establishing trust between different cultures. Why would you trust paper money if you’d never seen it before? Underlying this, though, is a deeper question: how can trust thrive if we’re all self-interested egotists, as modern economics expects?

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Trading at the Speed of Light

Time is Money

Special relativity doesn’t generally figure high on the agenda of your average trader. Or even your far from average trader, come to that. For most of us, for most of all of time, the speed of light hasn’t ever really figured as an important investment constraint.

However, this is finance and time is money. Quite literally, it seems, as the arms race between the high frequency terminators of the automated trading industry reaches the limits of the known universe. Welcome to where arbitrage meets Einstein. And wins.

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Fooled By Fluency

Q: How many animals of each kind did Moses take on the Ark?

Mere Exposure is Not Enough

In 1968 Robert Zajonc identified an odd behavioral bias, known as the mere exposure effect. This predicts that people will prefer items that they’re familiar with over those which they’re not – and that repeatedly exposing people to something will increase their preference for it. Cue a thousand feeble advertising campaigns.

There’s more than a hint of suspicion that behind mere exposure lies a more fundamental bias, one that spills over into all sorts of apparently irrational behaviour, some connected to money and others not. The idea is that familiarity breeds fluency, or ease of neural processing. So if you’re thinking that Moses had an Ark, that you should name your company q@l&tee or that your favorite whacky font type doesn't affect people's financial I.Q. then think again.

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3D Printing Is Not Exogenous

Disruption on Demand

The advent of 3D printing, a technology that will allow you to print your own office furniture – in your office – threatens to overturn the whole basis of the global economy. When you can make anything, anywhere, anytime then the advantage of a pool of low cost labour, no matter how well trained, is vastly reduced. Indeed, capital, knowledge and basic commodities become the only constraints on world markets: the death of distance is nearly complete.

Such disruptive advances in technology occur from time to time and have the power to change pretty much everything. Yet the study of finance regards these events as exogenous: external to the economy and therefore outside of its purview. This is like arguing that medicine shouldn’t take biological research into account in developing treatments: all we need is a better leech. It's just not true: echnology and economics are linked at the hip, whatever the theories tell us.

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Deep Time and the Fallacy of Frequency

Ice Age 6?

There was a time when geologists reckoned that we’d never see another Ice Age. This was when our understanding stretched back only as far as the last one. Then they discovered that there’d been not one Ice Age, but five, stretching away back into countless hundreds of millions of years.

One-off events, even ones as apocalyptic as the general freezing of the world, tend to be ignored: but repetitive ones are viewed very differently. Things that have happened multiple times before may happen again: frequency changes perspectives. Unfortunately the geological view of Deep Time isn’t shared by investors, whose event horizons rarely reach beyond the next quarter.

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