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BenFRayfield October 28th, 2013 05:53 PM

How to gamble half on both sides of a coin and still win
My recent theory of simplifying economics to its most basic level has turned out to be very useful. I now understand hedge funds, meaning to balance a risk with something that tends to pay off when your other gamble loses, so on average whatever happens you haven't gained or lost much.

I was surprised by the realization that trying to hold the real value of your total assets constant, then anyone who buys from or sells to you has probably made a mistake, and that this can be accomplished most effectively, while not good publicity or legal, by shorting your own stock.

In my far simpler model of general economic theory, the reason for this is clear...

There are many games where many agents play at once. Each round of the game, agents can choose to gamble any amount of money above some constant (the ante, lets define it as 1 dollar) on heads or tails. Many agents do this. Then whichever of heads or tails got the least money gambled on it, those agents win all the money gambled on that coin.

That's my model of how economics works, and I think it's accurate enough to predict very advanced things. Shorting your own stock is the same as gambling half your money on heads and half on tails of the same coin, so you can't ever lose money but if slightly more is gambled on heads or tails, a fraction of it goes to you.

I thought about banning such an action from the game, but that wouldn't be a model of real value, because the amount of value does not increase or decrease when things are bought and sold. Dollars can be an instantaneous measure of real value, if you convert something you value into dollars, then convert the dollars into something else you value, but over time dollars are just another kind of number. Since my model of economics is a statement about real value, trading it must not create or destroy this energy-like concept.

If I removed the ability to gamble on both sides of the coin (like destroying/taxing the larger of heads/tails so they equal and everyone either loses or wins exactly 2 times as much), then the market would just find another way to hedge funds.

The only real solution is to not gamble on games where you lose more money than you win, and unless you get lucky, the best way to do that is, paradoxically, by trying to not make any money but not lose any money either, as a combination of the most bizarre stock picks or other form of gambling, such that it looks random to others playing the market but you know it stays in balance in total, even while some parts go up and others down.

Economic regulation is pointless, and shorting your own stock should be allowed, but only a fool would buy or short your stock while knowing that anyone is hedging it. Shorting your own stock is the same as hedge funds. It's just different scales.

Theres another important example of hedging. ETrade gambles on both sides of every stock bought or sold through them. This is called a fee. All governments and systems are hedging on both sides of the coin, so it is important to the future of the global economy (and by economy I mean real value, not any specific measure of it) to make all these parts of the world optional. This is called competition, and governments hate it, because tax is the ultimate form of hedge fund. There are new kinds of ways people can organize their efforts toward common goals, the true purpose of money, than these existing hedges which are not a good buy or sell. What if my coin gambling econ simulation (in progress) scaled up like Bitcoin did? I think it's a very accurate model that generates economies. We live in a world where theres no hard line between simulation and reality, at least in the counting of value.

In advance, I confess to the crime of helping people agree with each other which things are more or less valuable without requiring that their perception of value flow into government pockets, and if government lawyers can wrestle that into the category of tax without implicating every bit calculation in artificial intelligence then I will be very surprised, but please go ahead and try, because I'm hedged that artificial intelligence products have enough market force to balance opposition to new ways of calculating bits and value.

I think hedging is great, because it's a recursive strategy that someone hedging on you or your doings in the world costs you, and you hedging them costs them, but there is a balance where the world works together toward common goals, and most will not hedge to balance that.

I imagined this new simpler model of econ because I realized the need for hedging on scales as varied from streaming bits in computers to global strategy. I imagined a kind of math that does general computing, a set of bit variables which are held to have half 0s and half 1s, but it can be any combination of those variables. This turned out to be a view of soliton waves as horizontally (permutations) and another way vertically (time), and lots of math I discovered related to it. More to the point of economics, to hold your amounts of buys and sells, as measured in real value at the time, to be equal (half 0s and half 1s) is the definition of hedging. There are theories that soliton waves flow through economies. That happens because every part of a soliton wave hedges on the others moving in opposite directions.

CRGreathouse October 28th, 2013 09:09 PM

Re: How to gamble half on both sides of a coin and still win
I don't think that works.

Suppose your stock is presently valued at $1 per share and you own a thousand shares. If clinical trials go well, your stock will jump to $2 per share; if badly, $0.50 per share. Either way you plan to cash out afterward, paying $0 in the bad case (total take-home: $500) and $150 in the good case in tax (take-home: $1850). You can short your stock by buying 1000 put options for $333; if the stock slides you get $1000 less tax ($25, so take-home is $642), otherwise take-home is $1517.

So you mitigated risk, but dropped your expected take-home from $950 to $933 because of increased tax exposure. Now maybe there are good ways to reduce taxes in this kind of scenario, but it seems that the better approach all around is just sell the stock in the first place, netting $1000. (In these examples I taxed only the capital gains over the original $1000 value; you can redo calculations if you want to assume a different capital structure.)

In the absence of taxation and other Modigliani-Miller costs you'd be no better off shorting your own stock, aside from reducing risk. That is, even without taxes this doesn't make you money, and with taxes it makes you poorer.

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