Michael Perelman wrote:
Of course, all this nonsense is a zero-sum game.
Yes, but people have different attitudes towards risk. Some are willing to give up money for some peace of mind. And others are happy to risk their shirts (or someone else's shirts) to tap the money the cautious folks are willing to spare. It's zero-sum but not symmetric. My understanding is that the large players benefit from transaction costs and arbitrage (as riskless as humanly possible). If they are as clever as we think they are, then they must engineer all sorts of composite securities to exploit very narrow misalignments in asset prices. In principle, other things equal, if you have more computational power than your adversaries, you can exploit virtually any quirk in the stochastic behavior of option prices (up to the n-th degree) as long as the quirk exhibits some measure of stability. As a would-be physicist, I have interest in these matters. Merely academic. I have never traded directly (my negative savings are invested in a TIAA-CREF mutual fund) nor am I on top of the cutting edge stuff. But I find finance theory fascinating. I enjoy reading the classic papers -- e.g. Merton (1973), Black-Scholes (1973), Cox-Ross-Rubinstein (1979), etc. So, when (if) I retire (assuming my TIAA-CREF balance compounds to the CNY millions figure I have in mind), I'll try and write something about the (large) implications of uncertainty on political economy and socialism. In collaboration with Michael Perelman, of course.
