Settle Down – We are all Traders at Heart

If you are feeling seasick they tell you it helps to look at the horizon. If these astonishingly bad economic times are making you feel sick the equivalent of looking at the horizon is to take a long range historic view of the world. That is what William J. Bernstein does in his book, ‘A Splendid Exchange – How Trade Shaped the World’. Bernstein goes back 15,000 years to the origins of trade and tracks it all the way through to the present day. This fabulous book thoroughly entertains the reader with fascinating insights and perspectives on how trade developed. It explains what drove trade throughout the ages, who the key players were, both nations and individuals, the set-backs and the unintended consequences, the evolution of trading routes and value add exports. As the author says “Globalization, it turns out, was not one event or even a sequence of events; it is a process that has slowly been evolving for a very, very long time”.

But how does it help with economic sea-sickness? What comes though very clearly is that we are all born traders. Our natural instinct is to exchange goods, services and of course ideas. Nothing ever has, nor will ever, change that. However bad it feels right now, the global trading community has weathered much worse storms. One unintended consequence of trade was the spread of disease. The Conquistadors brought small pox to South America and wiped out the Aztecs. Trade with Asia brought the Black Plague to Europe and wiped out an estimated 100 million people. Toxic debt has spread financial instability and wiped out a few banks but it feels pretty insignificant in a historic context. It will prove to be a temporary blip in the progress of global trade.

Columbus and Vasco de Gama opened up mind blowing trading possibilities as a consequence of their explorations respectively West and East  – all achieved at a time when most of the world, aside from the educated few, thought the world was flat. The internet is doing the same thing right now, at a time when most of the world thinks it is analogue.

You can’t trade without banks and a monetary system so we can stop worrying about their collapse. They will never collapse they will just evolve – albeit with painful consequences for some in the process. And without wishing to stray into dangerous waters we can stop worrying about the growing schism between the West and Islam. The prophet Muhammad was born into a tribe of traders and Islam was the engine behind global trade up to the 17th century – it may well become so again. The Infidels and Islam will find an accommodation eventually because they want to trade with each other. We should, of course, learn the lessons of history. Bernstein quotes Frederic Bastiat, “When goods are not allowed to cross borders, soldiers will”.

Protectionism is never the answer. The Great Depression of the 1920’s resulted in congress passing the short-sighted Smoot-Hawley Tariffs only to replace them 4 years later with The Reciprocal Trade Agreements under the free trader, Roosevelt.

The evolution of trade when looked in retrospect has been incredible – literally incredible since at any point in history no-one would have believed what was going to happen had they been told. From exchanging animal skins to exchanging perfumes and oils to exchanging silk then cotton to exchanging human labour and slaves to oil and now to buying books over the internet from amazon. From the Greeks to the Persians to the Spanish, Dutch, English, Americans – with the Chinese there throughout. From mules to ships to trains to planes to the ether. The evolution of trade has been both remarkable and relentless.

We are all traders at heart and we will continue to find new things to trade in new ways. Columbus faced worse storms than this – just focus on the horizon.

Game Theory and the Retailers’s dilemma

As Christmas approaches a number of retailers, whether they realize it or not, will participate in a game of “Prisoner’s Dilemma”. They will have to decide whether to hold their nerve and their prices until after the main holiday season, when traditionally the ‘sales’ period starts, or whether to introduce discounts before Christmas in an effort to hit top-line targets and steal a march on competition. The decision they take has to take account of what they think their competitors will do. If every retailer holds their nerve everyone will enjoy a higher bottom line, if everyone launches their ‘sales’ early everyone loses (except the consumer) because it is a zero sum game. But if one retailer moves ahead of the others they win relative to their competitors.

This kind of strategic decision is inter-dependant – the outcome depends on the actions or inaction of others –  and is the basis of Game Theory developed in the 1940’s by Neumann and Morgenstern for economics. In 1950 Flood and Dresher developed the example of the prisoner’s dilemma to illustrate the use of Game Theory. You can read the full version of this in Wiki but the basic idea is that 2 prisoners are held in separate cells accused of a crime. If both confess they get a 5 years sentence. If neither confess they get 6 months. If one betrays the other he goes free and the other guy gets 10 years. On the assumption that less prison time is better and there is no honour among thieves it is better for both to choose to confess. If the game is repeated eventually people can figure out that it is better to ‘co-operate’ and stay silent.

In 1995 Harvard Business Review carried an article by Brandenburger and Nalebuff (crazy names, crazy guys) which tried to re-launch the use of Game Theory in business strategy since so many business decisions have outcomes that depend on the decisions of others – like the prisoners dilemma. There don’t seem to be many takers for this very mathematical branch of business science. Decisions are discussed taking into account opinions on what competitors may or may not do, but it is rare for this to involve the kind of complex matrices and algorithms advanced by the purest disciples of Game Theory.

So you can expect the ‘sales’ to start early this year as every retailer takes the pre-emptive retaliation route. The retailers and their shareholders will lose out, consumers will win and no-one will learn. When the Prisoner’s Dilemma scenario was tried out among a sample of ‘ordinary people’ 40% took the ‘say nothing’ option. In other words they assumed that everyone realizes it is better to co-operate. Suckers.

1 36 37 38 39 40 41 42 43