Markets are like highways

Construction Traffic on I-376

Originally uploaded by daveynin

Whenever I drive I realize how much people behave differently when driving their little mobile avatars than when walking or bicycling. I’m for instance amazed to see people trying to get ahead of a single car in a 5mph traffic. I think there is a lot to learn from these behaviors.

Driving a car on a highway is quite efficient from the perspective of going from point A to point B, at least when and where efficient public transportation options are not available. In addition, driving a car has the advantage of anonymity: other drivers don’t know your who you are, only the car you drive and how you drive it. This implies that any legal but aggressive behavior, or illegal but uncaught by the police, has little consequence unless you get into an accident. Knowing that your name won’t be publicly tainted by your bad behavior is an incentive to behave aggressively.

When you walk or bicycle, it’s harder to get away anonymously. People can easily catch up with you and ask you about your behavior. This I think leads to more courteous behaviors.

To me this is similar to a market. In a market that’s completely anonymous and driven only by numbers and mediated by computers, aggressiveness can be expected to be high. In comparison markets that assume conversations between buyer and seller, haggling, behavior is likely to be more subtle. The main reason is that information about a dishonest participant will circulate very quickly in a human-driven market where anonymity is difficult than in a computer and broker-mediated market.

One option of course is to increase the regulation of the markets, which in highway terms is to have more police cars around: drivers stay anonymous to each other but completed naked to a few policemen. This implies that the monopoly of moral superiority is given to one small group, something I think is prone to corruption.

Another option is to limit anonymity and to facilitate sharing information on market participants. On the highway, this would mean dash applications that gives the ability to rate other drivers, directly from your steering wheel, but also that display right away warnings when a badly rated driver is approaching.

Limiting anonymity is much harder in financial markets, since it is easy to conceal a trade behind a chain of intermediaries. In a way, it’s the intermediaries job to help participants conceal their real intentions, especially those participants with the biggest impact on markets. Our financial markets are like high-speed highways with little police and very fast cars remotely driven by participants, in which many small investors drive their little car.

How can “social” improve the morality of markets, without succumbing to either a monopoly of moral superiority or a wild jungle with no morality?

2 thoughts on “Markets are like highways”

  1. I have often thought that navigating traffic is very similar to trading financial markets. In traffic you move quickly by jumping into the lane that is moving and then getting out just before that lane stops and the other lane starts moving. Likewise, when trading financial instruments the goal is to accurately judge the momentum of a given security, ride that momentum for a period of time and then trade out before that security loses momentum.

    One additional consideration is that both of these situations are zero sum games. If I jump ahead of you in traffic then I am advancing by putting an additional obstacle in front of you. Likewise, in financial markets I make money when the counterparties to my trades lose money. So does zero sum games engender anonymity or does anonymity result in zero sum games (or are they unrelated)?

    In either case I fully agree that adding transparency is one of the best solutions. One point of difficulty in the financial markets is the degree of aggregation. So much trading is conducted by intermediaries that it is difficult to identify that “prime mover” behind any suspicious behavior. Within any given organization the decision making dynamics may be so convoluted that it is nearly impossible to identify a given party as responsible for a given action. Therefore the first step in transparency may be to enforce more granular accountability from the outside…enable the market to communicate to individual participants that “I was just doing my job” is not sufficient justification.

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