Gambling

Falkenblog has a post called: Why Do People Gamble?

This includes the often-stated “problem” that the same people both:

• pay for insurance
• pay to gamble

Maybe I’m being thick, but I don’t see any problem.  I see both these activities as buying positive skewness: paying a little now for an uncertain but big positive effect in the future.

What I find interesting about gambling is that it is addictive for some people.  That a behavior (as opposed to a substance) is addictive seems like an indication of an evolutionary advantage for the behavior — at least some form of it.

So what could be the advantage to taking risk?

It encourages a dispersal of actions.  Some of the actions will fail (perhaps fatally so), but others may turn out to be better than the status quo.  A species of plant will do better if it has a good mechanism for dispersing its seeds — even though wide dispersal means some seeds will utterly fail.

In this light perhaps we should encourage people to gamble in more important ways than playing stupid games.

Hedge fund speech

AllAboutAlpha has a post entitled: Could the latest twist in the Goldstein case help shine “disinfecting sunlight” on hedge funds?

This is about a court case over the restriction of hedge funds giving information to people other than qualified investors.  Basically the U.S. government is enforcing non-transparency.  Interesting legal arguments.

Financial ecology

This week’s New Scientist has a short piece The economic jungle: How ecologists could save banking that points to a Nature article Systemic risk in banking ecosystems by Andrew Haldane and Robert May.

The Nature article is behind a paywall, but the Financial Times has Bank official calls on biology lessons.

The FT piece says that the article has two main prescriptions:

• increase diversity
• increase modularity

The latter point is reminiscent of Normal market accidents.

As in the discussion above (which, by the way, was written before I knew about the Haldane and May article) increasing diversity might ironically be considered to be increasing risk.

If I’m a bank, then it is less risky for me to be like all the other banks than to look different.  At least that will be my perception.  But that injects a lot of risk into the system as a whole.