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Author Topic: Zero sum games  (Read 4112 times)
Gavin Andresen
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May 14, 2012, 01:28:08 AM
 #1

It seems I touched a nerve when I said that getting better at playing a zero-sum game isn't a good way to make the world a better place.

I was thinking of day-traders at the time; people who don't care what asset they're buying and selling but just try to buy low and sell high to make a profit. Or high-frequency traders who try to be just a tiny bit faster executing transactions to take advantage of tiny inefficiencies in markets.

Probably I don't have a deep enough understanding of the value of liquidity in asset markets or a deep enough appreciation for their role in creating market prices, but it seems to me the world would get along just fine without them spending all their time and effort competing against each other.

I wasn't thinking of competition in general as being a zero-sum game, because in general it is not.  Competition drives efficiency, and efficiency (creating more by using less) is what makes the world a better place -- assuming that the thing you're making more efficient has a positive effect on the world.  Competing to build the most efficient bomb or assault rifle is not a world-improving activity.

To bring it back to Bitcoin: competition between Bitcoin miners is a zero-sum game for the miners, but if you think that Bitcoin will make the world a better place (I do) then the competition to be more efficient at mining is a net positive for the world as a whole.

How often do you get the chance to work on a potentially world-changing project?
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May 14, 2012, 01:39:22 AM
 #2

It seems I touched a nerve when I said that getting better at playing a zero-sum game isn't a good way to make the world a better place.

I was thinking of day-traders at the time; people who don't care what asset they're buying and selling but just try to buy low and sell high to make a profit. Or high-frequency traders who try to be just a tiny bit faster executing transactions to take advantage of tiny inefficiencies in markets.

Probably I don't have a deep enough understanding of the value of liquidity in asset markets or a deep enough appreciation for their role in creating market prices, but it seems to me the world would get along just fine without them spending all their time and effort competing against each other.

I wasn't thinking of competition in general as being a zero-sum game, because in general it is not.  Competition drives efficiency, and efficiency (creating more by using less) is what makes the world a better place -- assuming that the thing you're making more efficient has a positive effect on the world.  Competing to build the most efficient bomb or assault rifle is not a world-improving activity.

To bring it back to Bitcoin: competition between Bitcoin miners is a zero-sum game for the miners, but if you think that Bitcoin will make the world a better place (I do) then the competition to be more efficient at mining is a net positive for the world as a whole.


Nice post.  Actually, I question whether competition drives efficiency long-term.  To me, it seems that competition for profit is primary and that one means of obtaining this objective is to provide efficient products and services.  However, long-term, I think this actually hurts efficiency.  While a given product (e.g. I-Phone/I-Pad) may be more efficient than its competitors, competition also means that this product will be outdated in a very short period of time.  How efficient is a product or service if it is already behind the curve 3-6 months after its release?  While an I-phone/I-pad may be an efficient product relative to its competitors, the process by which the product was created seems extremely inefficient as a huge amount of resources is devoted to creating a product which will become outdated very shortly.

I need to do some thinking about how this applies to Bitcoin as it is still in its infancy.

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May 14, 2012, 01:47:01 AM
 #3

It seems I touched a nerve when I said that getting better at playing a zero-sum game isn't a good way to make the world a better place.

Your post and point of view reminds us that we should indeed not forget the big picture.

Several of us joined the Bitcoin adventure because we realise that something is not all right with our current monetary systems, regulations and markets; so while the general idea seems ok, we think we could do better, and thus Bitcoin is worth supporting.


The whole phenomenon of trading is a by product, and I think it is a neutral one. If the Idea of Bitcoin flourishes, trading might help to provide liquidity and stabilise prices. If it doesn -- becouse it remains an isolated system without connection to the real world -- then trading in Bitcoin is indeed a zero sum game.


If we just engage into our own isolated world of Bitcoin, and forget why we engaged into that endeavour, then we might end up just creating a carbon copy of the existing economy, with all its downsides and nothing for the better.

--Ichthyo
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May 14, 2012, 01:56:38 AM
 #4

Anyway, Bitcoinica builds a "interest rate signal" for the Bitcoin world , at least , that's something new.

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May 14, 2012, 01:58:23 AM
 #5

Speculators can provide moth stability and liquidity into a market. There is an economic role for them.

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May 14, 2012, 02:01:01 AM
 #6

If you sell $100,000 worth of bitcoin in the market right now, you'll push the price lower by at least $0.10.  That is not good for commerce.  So, I personally would like to see as much trading activity in Bitcoin as possible.  If leveraged trading brings in more speculators then I'm all for it.  I would love to see trading volumes increase 100x and exchange commissions get cut to 1/10th of what they currently are.

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May 14, 2012, 02:03:11 AM
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The problem is governments and media blaming speculators for the financial crisis. People believe the propaganda. Speculation per se was never the problem.

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May 14, 2012, 02:04:04 AM
 #8

The problem is governments and media blaming speculators for the financial crisis. People believe the propaganda. Speculation per se was never the problem.
+1
Manipulation is the problem, like the FED.

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May 14, 2012, 02:08:45 AM
 #9

The problem is governments and media blaming speculators for the financial crisis. People believe the propaganda. Speculation per se was never the problem.
+1
Manipulation is the problem, like the FED.
It's drives me nuts every time I hear some politician blaming speculators for the prices of this or that.

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May 14, 2012, 03:20:53 AM
 #10

Competing to create the most efficient bomb gave us nuclear energy, the safest and cheapest power source mankind has ever harnessed.

Regardless, your point is correct.  Here's Tim Geithner making the Treasury more "efficient" by debasing US coins:

http://blogs.wsj.com/economics/2012/03/28/treasury-to-cut-costs-by-remaking-coins-replacing-paper/

There is only one universal measure of virtue.  It's not "efficiency," but it's not too far off.

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May 14, 2012, 03:34:38 AM
 #11

It's a long shot and not all the dots are connected, but I see a potential hazard down the road if bitcoin ever prematurely attracts uninformed hedgies, quants, or any ex-prop desk traders.

Algos love zero-sum environments, even if the zero-sum environment is part of a larger, non-zero-sum environment.

The eventual quantity of bitcoins is known and fixed.

Are there other currencies and currency derivatives of which this is true?

No.

This aspect is unique to bitcoin.

This presents another dimension to the zero-sum miner dilemma.

Whether an algorithm is hedging with simple options neutrality (utilizing strangle or straddle trades, for instance) or utilizing more sophisticated trading techniques, trading using algo bots in bitcoin's environment would necessitate a reworking of nearly every algorithmic strategy I can think of. Why? Bitcoin is the only currency the eventual quantity of which is known. Quants have never had to consider anything like this within the confines of currencies. Unfortunately, I honestly can't foresee every quant reprogramming his algos to properly account for bitcoin's finite and known quantity when the allure of immediate arbitrage in a zero-sum mining environment with an already functioning algo is so tempting–––or if he simply doesn't understand the fundamentals of bitcoin's architecture and merely transplants his algo into a custom pool. For example, trading the output of an open-door pool back into the same pool is done regularly in finance (think of slush fund as a vague approximation) and, with a little modification, would work just as well with a bitcoin mining pool. Were a traditionally-programmed trading-turned-mining algo to come online, volume and liquidity could increase while masking the potential kamikaze endgame of this bitcoin-incompatible algorithm. For example, if an algo isn't designed to recognize asymptotic data, then it will only handle such data as well as it's programmed to. Does not compute. Divide by zero. Send all coins to genesis block. Open only out-of-the-money positions with infinitesimally small straddles. Reverse stops and carry decimal place. Strobe the bid and ask prices. etc. etc. Who knows how it'll respond when the future fixed quantity or finiteness inevitably becomes relevant to the trade. God forbid they're fundo algos that trade off of analyzing changes in human language. The unique degree of Bitcoin's decimal precision is another factor never considered by traditional algos. The people on the mining and technical side of bitcoin may scoff at these possibilities, because they already understand so well how the bitcoin network functions. But for finance professionals, a hash means nothing to us, because all we see is the market. Like moths to flame, heedless of just how different bitcoin is.
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May 14, 2012, 03:34:59 AM
 #12

The problem is governments and media blaming speculators for the financial crisis. People believe the propaganda. Speculation per se was never the problem.

Manipulation is the problem, like the FED.

I tend to disagree. Rather the problem is loosing the link to the original intention, the big picture.
Originally, all those regulatory mechanisms where created to protect society and bind the mere egoism of profit back to a larger goal.

This original reason is long forgotten, or became a shallow far fetched and remote goal. Finally we think regulation is just a value pre se, it is just good because it is good (and because we allways did it that way). Which allows requlation to be ursurped by shady, secondary and short-term goals like winning the next election.

--Ichthyo
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May 14, 2012, 03:39:13 AM
 #13

The problem is governments and media blaming speculators for the financial crisis. People believe the propaganda. Speculation per se was never the problem.
+1
Manipulation is the problem, like the FED.
It's drives me nuts every time I hear some politician blaming speculators for the prices of this or that.
+1

PS....  Undecided Gavin hates me

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May 14, 2012, 05:39:41 AM
 #14

Bitcoinica was a great service and day traders and speculators also add value to the economy.
I think where we all agree is that currently the bitcoin economy is extremely out of balance with
the majority wanting to day trade. That environment pits people against each other and there will
always be loosers.

Time and continued maturity of Bitcoin will be the only cure.


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May 14, 2012, 05:55:57 AM
 #15

Probably I don't have a deep enough understanding of the value of liquidity in asset markets or a deep enough appreciation for their role in creating market prices, but it seems to me the world would get along just fine without them spending all their time and effort competing against each other.

If you accept that there is a net benefit to more competition in mining, then you should be willing to accept that there is a net benefit to more competition in trading. (as you mentioned, mining is also a zero-sum game).

More competition does not necessarily protect against formation of cartels (some recent research shows that market cartels can arise naturally without collusion). But in any case, an inefficient market might "get along just fine" but the ones hurt the most by large spreads and volatility are the non-traders (consumers, merchants and investors). As I understand it, the more inefficient the market, the more the sharks can prey on the weak.

A relatively short and highly recommended overview is The Winners and Losers of the Zero-Sum Game: The Origins of Trading Profits, Price Efficiency, and Market Liquidity.

Quote
1.2.4 Trading is a positive zero-sum game
  Rational Traders will not play a true zero-sum game in which they only value trading profits. If all traders were all alike, all expected returns would be zero and no one would benefit from trading. If some traders are more skilled than others, the skilled traders would want to trade but the unskilled traders would not. No one would trade.
  To explain why rational traders trade, we must recognize that some people trade for more than just expected profits. People trade to hedge risk, to move funds from one point in time to another, to exchange assets, to earn an unconditional expected return, to learn whether they can expect to profit from trading and to take pleasure from gambling. These external benefits make trading a positive-sum game. If the external benefits to trading are great enough, traders will trade even though they expect to lose. Skilled traders will profit to the extent that unskilled traders are willing to trade for external reasons.

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May 14, 2012, 07:06:04 AM
 #16

Competing to create the most efficient bomb gave us nuclear energy, the safest and cheapest power source mankind has ever harnessed.

Until a single nuclear plant is hit by a tsunami and radiates half the planet.

Bitcoin combines money, the wrongest thing in the world, with software, the easiest thing in the world to get wrong.
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May 14, 2012, 07:40:21 AM
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Competing to create the most efficient bomb gave us nuclear energy, the safest and cheapest power source mankind has ever harnessed.

Until a single nuclear plant is hit by a tsunami and radiates half the planet.

I think you mean irradiate (bombard with radiation), not radiate (project in all directions). You'd need more than a single nuclear plant to actually radiate half the planet. Cheesy

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May 14, 2012, 07:44:11 AM
 #18

Competing to create the most efficient bomb gave us nuclear energy, the safest and cheapest power source mankind has ever harnessed.

Until a single nuclear plant is hit by a tsunami and radiates half the planet.

Coal kills many many thousands per year, Fukashima killed no-one.
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May 14, 2012, 07:45:45 AM
 #19

If you sell $100,000 worth of bitcoin in the market right now, you'll push the price lower by at least $0.10.  That is not good for commerce.  So, I personally would like to see as much trading activity in Bitcoin as possible.  If leveraged trading brings in more speculators then I'm all for it.  I would love to see trading volumes increase 100x and exchange commissions get cut to 1/10th of what they currently are.

Absolutely.

It doesn't matter if the traders care about what they are trading their offers can only help us.


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May 14, 2012, 07:56:43 AM
 #20

It seems I touched a nerve when I said that getting better at playing a zero-sum game isn't a good way to make the world a better place.

I was thinking of day-traders at the time; people who don't care what asset they're buying and selling but just try to buy low and sell high to make a profit. Or high-frequency traders who try to be just a tiny bit faster executing transactions to take advantage of tiny inefficiencies in markets.

Probably I don't have a deep enough understanding of the value of liquidity in asset markets or a deep enough appreciation for their role in creating market prices, but it seems to me the world would get along just fine without them spending all their time and effort competing against each other.

I wasn't thinking of competition in general as being a zero-sum game, because in general it is not.  Competition drives efficiency, and efficiency (creating more by using less) is what makes the world a better place -- assuming that the thing you're making more efficient has a positive effect on the world.  Competing to build the most efficient bomb or assault rifle is not a world-improving activity.

To bring it back to Bitcoin: competition between Bitcoin miners is a zero-sum game for the miners, but if you think that Bitcoin will make the world a better place (I do) then the competition to be more efficient at mining is a net positive for the world as a whole.


Nice post.  Actually, I question whether competition drives efficiency long-term.  To me, it seems that competition for profit is primary and that one means of obtaining this objective is to provide efficient products and services.  However, long-term, I think this actually hurts efficiency.  While a given product (e.g. I-Phone/I-Pad) may be more efficient than its competitors, competition also means that this product will be outdated in a very short period of time.  How efficient is a product or service if it is already behind the curve 3-6 months after its release?  While an I-phone/I-pad may be an efficient product relative to its competitors, the process by which the product was created seems extremely inefficient as a huge amount of resources is devoted to creating a product which will become outdated very shortly.

I need to do some thinking about how this applies to Bitcoin as it is still in its infancy.

This doesn't sound right to me unless we are defining efficiency differently.

When that iPad is behind the curve 3-6 months after release this usually means that it will now likely be cheaper (same power for less money) or that another product with more power can be bought for a price similar to what that iPad was originally sold for (more power for same money).  How would the same iPad with no successor be more efficient in your example?  That iPad is the same whether or not another product puts it behind the curve, so I don't see how the lack of competition would change it's efficiency positively.

We could all be using 386s right now due to less or no competition and not have had to upgrade for a long time.  Through competition we efficiently produce ever more efficient products, faster and more cheaply than we would otherwise.  The faster technology improves, the faster this new technology can be leveraged to produce ever more powerful technology through a process of accelerating returns (link: http://en.wikipedia.org/wiki/Accelerating_change).

Powerful technology seems to me to be the quintessential example of efficiency since it literally allows us to do more with less effort.

In terms of bitcoin I think it is very possible that the improved efficiency to many processes directly tied to bitcoin as well as those from other technologies derived from the bitcoin concept will greatly outweigh the apparent gross inefficiencies of the mining process.  Just my opinion though, as you said it's still in it's infancy.
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May 14, 2012, 08:53:55 AM
 #21

The problem is governments and media blaming speculators for the financial crisis. People believe the propaganda. Speculation per se was never the problem.

You are right: speculation per se may not be the problem..
The problem is then that the tools of speculations are in the hands of a few displacing value from the real economy to the "financial" sector.

The search for efficiency is totally destructive when the definition of efficiency is disconnected from the social and environmental good.

Now can someone explain to me how I can speculate on par with JP Morgan using high frequency trading, commodity margin trading and what not ?
Oh, maybe THAT explains why Jamie Dimon paid himself 23 million dollars in 2011, in the midst of the biggest financial crisis since 1929.
This kind of paycheck is a tax on the real economy. Unlike state taxes it is not imposed by a democratically elected government but by a cynical group of people that can be best described as "speculators".

I certainly did not embrace the cause of bitcoin to see it  associated even remotely to words like "margin trading".

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May 14, 2012, 10:11:07 AM
 #22

Bitcoinica was a very important platform and the Bitcoin world took a serious hit now that it is gone.

It's true that day-traders add price stability and depth, which is beneficial to everyone involved in Bitcoin. But that's not the only thing Bitcoinica did.

Let's start with short-selling. People think of it as a speculative bet (against the currency), and it can be that. But it can also be the opposite - it can be used as a hedge to avoid speculating. Suppose a service takes Bitcoin payments and pays with bitcoins, but in between it doesn't want to be exposed to currency risk. They will need some Bitcoin reserve to operate smoothly, and they can lose if those bitcoins decrease in value. With a margin trading platform, they can take a short position that exactly negates the bitcoins they're holding at the time. This way they have bitcoins to use but don't care at all what the price will do.

They don't need to want a neutral position necessarily. Personally my overall BTC position is long, but within reason; and I have use for more bitcoins than my position. So I bought bitcoins on one hand, and took a short position on Bitcoinica on the other; this way I had bitcoins available to be used, but with not as much risk.

Even when short-selling and leveraged buying are used speculatively, it can be as a long-term investments. People who don't believe the current Bitcoin price is justified can signal this with a short position; this helps prevent bubbles as the one we saw in June 2011. People who do believe in the future growth of Bitcoin can take a leveraged long position; this allows more money to enter the Bitcoin economy, which eventually finds its way to the establishment of new Bitcoin businesses.

Put differently, even if Bitcoinica is a "zero-sum game", it's a game where value flows from the wrong people to the right people. If Bitcoin needs to succeed, the platform moves money from the people who don't understand it to the visionary people who can use the money to further build it; if Bitcoin needs to fail, the platform moves money from the crazy people who are obsessed with it to more reasonable people who will use the funds to create actually necessary businesses. So whatever the fate of Bitcoin is, margin trading (and other "speculative" instruments) are a net positive for the world.

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May 14, 2012, 10:16:56 AM
 #23

Bitcoinica was a very important platform and the Bitcoin world took a serious hit now that it is gone.

It's not gone. They will be back, some people have invested real money on it.

Will people trust them again? well I don't know, but they still trust MtGox, don't they... so maybe they will.

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May 14, 2012, 10:19:32 AM
 #24

Bitcoinica was a very important platform and the Bitcoin world took a serious hit now that it is gone.

It's not gone. They will be back, some people have invested real money on it.

Will people trust them again? well I don't know, but they still trust MtGox, don't they... so maybe they will.
My impression is that if they do come back it will be months from now.

If they repay my deposit now I'll have no problem trusting them in the future.

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May 14, 2012, 10:30:48 AM
 #25

The problem is governments and media blaming speculators for the financial crisis. People believe the propaganda. Speculation per se was never the problem.

You are right: speculation per se may not be the problem..
The problem is then that the tools of speculations are in the hands of a few displacing value from the real economy to the "financial" sector.

The search for efficiency is totally destructive when the definition of efficiency is disconnected from the social and environmental good.

Now can someone explain to me how I can speculate on par with JP Morgan using high frequency trading, commodity margin trading and what not ?
Oh, maybe THAT explains why Jamie Dimon paid himself 23 million dollars in 2011, in the midst of the biggest financial crisis since 1929.
This kind of paycheck is a tax on the real economy. Unlike state taxes it is not imposed by a democratically elected government but by a cynical group of people that can be best described as "speculators".

I certainly did not embrace the cause of bitcoin to see it  associated even remotely to words like "margin trading".


Nicely put.  Couldn't have been more succinct.
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May 14, 2012, 10:59:57 AM
 #26

The problem is governments and media blaming speculators for the financial crisis. People believe the propaganda. Speculation per se was never the problem.

You are right: speculation per se may not be the problem..
The problem is then that the tools of speculations are in the hands of a few displacing value from the real economy to the "financial" sector.

The search for efficiency is totally destructive when the definition of efficiency is disconnected from the social and environmental good.

Now can someone explain to me how I can speculate on par with JP Morgan using high frequency trading, commodity margin trading and what not ?
Oh, maybe THAT explains why Jamie Dimon paid himself 23 million dollars in 2011, in the midst of the biggest financial crisis since 1929.
This kind of paycheck is a tax on the real economy. Unlike state taxes it is not imposed by a democratically elected government but by a cynical group of people that can be best described as "speculators".

I certainly did not embrace the cause of bitcoin to see it  associated even remotely to words like "margin trading".


Nicely put.  Couldn't have been more succinct.

Except it means fuck-all. It's just liberal mantras that have zip to do with market efficiency and are used by governments as an excuse to racketeer in every private human transaction.

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May 14, 2012, 12:48:14 PM
 #27

The problem is governments and media blaming speculators for the financial crisis. People believe the propaganda. Speculation per se was never the problem.

Manipulation is the problem, like the FED.

I tend to disagree. Rather the problem is loosing the link to the original intention, the big picture.
Originally, all those regulatory mechanisms where created to protect society and bind the mere egoism of profit back to a larger goal.

This original reason is long forgotten, or became a shallow far fetched and remote goal. Finally we think regulation is just a value pre se, it is just good because it is good (and because we allways did it that way). Which allows requlation to be ursurped by shady, secondary and short-term goals like winning the next election.

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So you think as long as the central planners somehow remember to "protect society and bind the mere egoism of profit back to a larger goal" (which is the propaganda used in the socialist media) we will all be better off than if we had free markets?

An interesting thing happens when people begin to trust the government to regulate. The government doesn't do as people expect it to and therefore people buy into scams more easily. For example look at the rigged futures markets. Why do people still trust the the futures markets? No sane person would but people are led into insanity by having blind faith in the government regulators.

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May 14, 2012, 12:51:01 PM
 #28

Bitcoinica was a very important platform and the Bitcoin world took a serious hit now that it is gone.

It's true that day-traders add price stability and depth, which is beneficial to everyone involved in Bitcoin. But that's not the only thing Bitcoinica did.

Let's start with short-selling. People think of it as a speculative bet (against the currency), and it can be that. But it can also be the opposite - it can be used as a hedge to avoid speculating. Suppose a service takes Bitcoin payments and pays with bitcoins, but in between it doesn't want to be exposed to currency risk. They will need some Bitcoin reserve to operate smoothly, and they can lose if those bitcoins decrease in value. With a margin trading platform, they can take a short position that exactly negates the bitcoins they're holding at the time. This way they have bitcoins to use but don't care at all what the price will do.

They don't need to want a neutral position necessarily. Personally my overall BTC position is long, but within reason; and I have use for more bitcoins than my position. So I bought bitcoins on one hand, and took a short position on Bitcoinica on the other; this way I had bitcoins available to be used, but with not as much risk.

Even when short-selling and leveraged buying are used speculatively, it can be as a long-term investments. People who don't believe the current Bitcoin price is justified can signal this with a short position; this helps prevent bubbles as the one we saw in June 2011. People who do believe in the future growth of Bitcoin can take a leveraged long position; this allows more money to enter the Bitcoin economy, which eventually finds its way to the establishment of new Bitcoin businesses.

Put differently, even if Bitcoinica is a "zero-sum game", it's a game where value flows from the wrong people to the right people. If Bitcoin needs to succeed, the platform moves money from the people who don't understand it to the visionary people who can use the money to further build it; if Bitcoin needs to fail, the platform moves money from the crazy people who are obsessed with it to more reasonable people who will use the funds to create actually necessary businesses. So whatever the fate of Bitcoin is, margin trading (and other "speculative" instruments) are a net positive for the world.

+1

Short selling for hedging purposes is a pillar of mature markets.

I can't even mention 'short selling' to most people without their giving me a pavlovian 'evil speculators' response.

Naked short selling? That's different.

The persistent high levels of theoretical spatial arbitrage I see in the bitcoin market reflects both the immaturity of bitcoin as well as the need for short-selling to hedge against currency risk.

Market risk is a no brainer and especially interesting considering the irreversibility of bitcoin transactions.

I would love to see data showing what percentage of new coins miners keep for themselves, so as to further understand currency risk vis-a-vis operational risk.

Moreover, there's so much potential for bitcoin to transform traditional finance.
Traditional finance is deeply flawed and desperately needs this transformation.

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May 14, 2012, 01:00:42 PM
 #29

Stossel is always good: http://www.youtube.com/watch?v=GhS0cjvdPfk

The problem with futures market is that people don't realise it all paper and based on fiat currency. Naked shorting doesn't even require anyone to touch any of the commodity the market is supposed to be based on. People don't realise this and trust the regulators that naked short selling doesn't get out of control. Well naked short selling is indeed used on a massive scale and the regulators do nothing about it. In a free market at least people will be forced to figure this out for themselves and there would be competition with exchanges and not monopoly exchanges.

And of course the markets are manipulated by fiat currency that can be created out of nothing. Fiat is just arbitrary numbers, arbitrary numbers are perfect for manipulating/distorting markets.

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May 14, 2012, 01:18:12 PM
 #30

Quote
1.2.4 Trading is a positive zero-sum game
  Rational Traders will not play a true zero-sum game in which they only value trading profits. If all traders were all alike, all expected returns would be zero and no one would benefit from trading. If some traders are more skilled than others, the skilled traders would want to trade but the unskilled traders would not. No one would trade.
This assumes that traders are rational, and in particular that they're able to rationally assess their own skill level and correctly attribute any gains to either luck or skill. The available evidence rather suggests that isn't true. It also fails to account for the principal-agent problem - if traders are getting large bonuses for making profitable trades with their employer's money, they have an incentive to make trades that would make no rational sense if they were the one that stood to gain or lose directly.

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May 14, 2012, 01:20:08 PM
 #31

Let's start with short-selling. People think of it as a speculative bet (against the currency), and it can be that. But it can also be the opposite - it can be used as a hedge to avoid speculating. Suppose a service takes Bitcoin payments and pays with bitcoins, but in between it doesn't want to be exposed to currency risk. They will need some Bitcoin reserve to operate smoothly, and they can lose if those bitcoins decrease in value. With a margin trading platform, they can take a short position that exactly negates the bitcoins they're holding at the time. This way they have bitcoins to use but don't care at all what the price will do.

Sadly I never used Bitcoinica other than a token deposit and "bet" (and now likely will never get the chance).  However if my plan to offer Bitcoin funded prepaid cards takes off I will need some way to hedge my long exposure to BTC.  

While I intend to keep a personal stash the amount of BTC I am long at any particular time may be ecessive.  Bitcoinica (or a similar service) would have the option of providing a > 0 sum benefit.

The currency risk is a cost of doing business and that cost becomes part of the price of goods and services.  Mechanisms which reduce that cost make Bitcoin businesses more competitive.  End users (even those who never open a Bitcoinica acct)  will benefit by having lower costs for the services they wish to use.

Just because Bitcoinica can be used for only zero sum transactions doesn't mean it can only be.  Obviously investors/speculators are going to reach for the low hanging fruit but that can lead to larger positive sum systems.

Mining <- the start of it all and the ultimate zero sum game (between miners)
 leads to:
Currency exchange
 which allows:
Trading/Speculation  
 which provides liquidity and hedging for:
Enterprise sized merchants and service providers

Good discussion in this thread.  Initially I found myself thinking the same thing as Gavin.  Some people in the thread got this wrong implying Gavin (and others indicating zero sum) are demonizing speculators, falling for mass media, etc.  Not true.  It is possible to believe BOTH that speculation is valid AND still zero sum.

Comments by Meni and others made it clear to me that speculation is more than zero sum because hedging is impossible without speculators.  Hedging most certainly is + sum as it lowers cost, risk and capital requirements.
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May 14, 2012, 01:50:56 PM
 #32

I'm definitely not in the "speculators are evil" camp.  Speculation for the right reasons (hedging risk, for example) is a very good thing.

I personally think speculation for the thrill of gambling is not a good thing, but I'm also not in the "Every Bad Thing (where I get to decide what Bad and Good is) Should Be Illegal" camp. If you want to gamble you should be free to do so; I think it is stupid that we let rich people on Wall Street gamble with other people's money and yet have laws that make it illegal for not-so-rich people to gamble with their own money.

From his post, Tong thought about Bitcoinica and decided that he could be more effective at making the world a better place by working on something else that is more obviously positive-sum. Good for him!

How often do you get the chance to work on a potentially world-changing project?
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May 14, 2012, 02:02:01 PM
 #33

IMHO, unless you are these traders' parents, you have no right telling them what they should or should not be doing with their time and money.

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May 14, 2012, 02:04:10 PM
 #34

How efficient is a product or service if it is already behind the curve 3-6 months after its release? 

Euh... wtf? A product is behind the curve because there are already others products better that were releasd. How more efficient can it be?
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May 14, 2012, 02:29:24 PM
 #35

Yes you have to laugh a bit at the joint's logic there.

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May 14, 2012, 02:50:01 PM
 #36

Stossel is always good: http://www.youtube.com/watch?v=GhS0cjvdPfk

The problem with futures market is that people don't realise it all paper and based on fiat currency. Naked shorting doesn't even require anyone to touch any of the commodity the market is supposed to be based on. People don't realise this and trust the regulators that naked short selling doesn't get out of control. Well naked short selling is indeed used on a massive scale and the regulators do nothing about it. In a free market at least people will be forced to figure this out for themselves and there would be competition with exchanges and not monopoly exchanges.

And of course the markets are manipulated by fiat currency that can be created out of nothing. Fiat is just arbitrary numbers, arbitrary numbers are perfect for manipulating/distorting markets.

Therefore I'm 100% positive that Bitcoin's financial arena will flourish... Just imagine, no bullshit games from FED, everything is transparent and accountable...

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May 14, 2012, 03:01:37 PM
 #37

I'm definitely not in the "speculators are evil" camp.  Speculation for the right reasons (hedging risk, for example) is a very good thing.

Is not the "reason", it's the "talent/ability/knowledge/etc". A good speculator, i.e., one that guesses right, will help stabilize the price. A bad speculator (one that guesses wrong), will provoke the opposite effect. Free markets reward the former with profits and punish the latter with losses.

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May 14, 2012, 03:17:27 PM
 #38

The search for efficiency is totally destructive when the definition of efficiency is disconnected from the social and environmental good.

Economic growth, or improvements in "economic efficiency" is, by definition, a better usage of scarce resources in the goal of attending agents (= those who "act") desires.
It is, though, by definition, connected to "social and environmental good", as long as you don't consider that "environmental good" = human sacrifice to the "benefit" of other species (how do you even define what's beneficial to species who can't even express their opinions is an open question...) .
If environmental good is the better usage of scarce resources to attend mankind's needs/wishes, then that's precisely what economic growth means too.

Oh, maybe THAT explains why Jamie Dimon paid himself 23 million dollars in 2011, in the midst of the biggest financial crisis since 1929.
This kind of paycheck is a tax on the real economy. Unlike state taxes it is not imposed by a democratically elected government but by a cynical group of people that can be best described as "speculators".

Err, such tax was imposed by a democratically elected government. The same government which created central banking, which inflated the money supply creating cheap credit and malinvestments all over, and which decided that some companies are "too big to fail" and rescued them with money taken from society.

These distributions of wealth from large and disperse groups to small and organized groups are inherent to governments, particularly democratic ones. Patri Friedman explains it in 2 minutes: https://www.youtube.com/watch?v=mgJ644LPL6g

I certainly did not embrace the cause of bitcoin to see it  associated even remotely to words like "margin trading".

Well, it will be associated, and not just "remotely".
I suggest you learn more why there's nothing wrong with margin trading and where the actual problems are, or you'll end up "unembracing" bitcoin soon, unfortunately...

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May 14, 2012, 03:31:27 PM
 #39

I certainly did not embrace the cause of bitcoin to see it  associated even remotely to words like "margin trading".

This is when zero-sum becomes positive sum. We get rid of the looniest of liberals. Good riddance.

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May 14, 2012, 03:33:31 PM
 #40

I'm definitely not in the "speculators are evil" camp.  Speculation for the right reasons (hedging risk, for example) is a very good thing.

I personally think speculation for the thrill of gambling is not a good thing, but I'm also not in the "Every Bad Thing (where I get to decide what Bad and Good is) Should Be Illegal" camp. If you want to gamble you should be free to do so; I think it is stupid that we let rich people on Wall Street gamble with other people's money and yet have laws that make it illegal for not-so-rich people to gamble with their own money.

From his post, Tong thought about Bitcoinica and decided that he could be more effective at making the world a better place by working on something else that is more obviously positive-sum. Good for him!


+1
Well said.
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May 14, 2012, 03:40:55 PM
 #41

Competing to create the most efficient bomb gave us nuclear energy, the safest and cheapest power source mankind has ever harnessed.

Until a single nuclear plant is hit by a tsunami and radiates half the planet.

Coal kills many many thousands per year, Fukashima killed no-one.

Except for all the people slowly dying of cancer, all the wildlife affected similarly and the fact that it has created another uninhabitable zone. I suppose you think Chernobyl wasn't anything to worry about either.

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May 14, 2012, 05:19:42 PM
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It seems I touched a nerve when I said that getting better at playing a zero-sum game isn't a good way to make the world a better place.

I was thinking of day-traders at the time; people who don't care what asset they're buying and selling but just try to buy low and sell high to make a profit. Or high-frequency traders who try to be just a tiny bit faster executing transactions to take advantage of tiny inefficiencies in markets.

Probably I don't have a deep enough understanding of the value of liquidity in asset markets or a deep enough appreciation for their role in creating market prices, but it seems to me the world would get along just fine without them spending all their time and effort competing against each other.

I think an important extra characteristic of free markets apart from being zero-sum is (and at this point, deep understanding of speculation etc. becomes less important) that the market only provides the framework - people choose their own games. Which means that the profit one can make from day trading, margin trading, high frequency trading or whatever is only possible because someone else also engaged in the same game, resulting in him to pay for the profit. Which leaves two possibilities:

1. He engaged into the game because he was misinformed. In this case, he has the opportunity to learn from the mistake. And I think by not being debt-based, bitcoin makes this case less dangerous because people will be more likely only "gamble" with what they have, and not with their future earnings.

2. He knew what he did, so the possibility of loss was accepted in favour of some greater goal which the "game" (in this case, some kind of speculation market) serves.

Going away from the abstract argument above, I think high performance markets serve one important goal (the achievement of which was improved by bitcoinica): They allow liquidity to move even faster to that locations on the world where they are likely to be profitable. And by the argument above, on the long run profit will only be gained by doing something useful for the society.

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May 14, 2012, 05:26:44 PM
 #43

Competing to create the most efficient bomb gave us nuclear energy, the safest and cheapest power source mankind has ever harnessed.

Until a single nuclear plant is hit by a tsunami and radiates half the planet.

Coal kills many many thousands per year, Fukashima killed no-one.

I can only imagine that that was a joke.

I have to agree with LightRider: there are definitely arenas (nuclear power, microbiology, etc.) that show that humanity needs to balance its (natural) pursuit of efficiency, development and growth with caution and a common-sense approach to risks. Considering its potential, I would think this applies to Bitcoin as well.

Bitcoin is the ultimate freedom test. It tells you who is giving lip service and who genuinely believes in it.
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May 14, 2012, 05:45:32 PM
 #44

It's helped bring down volatility.

These past months have been more stable than anything, and thats partly because of the volume and speed of the market I'd say.

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May 14, 2012, 06:01:56 PM
 #45

Competing to create the most efficient bomb gave us nuclear energy, the safest and cheapest power source mankind has ever harnessed.

Until a single nuclear plant is hit by a tsunami and radiates half the planet.

Coal kills many many thousands per year, Fukashima killed no-one.

I can only imagine that that was a joke.

I have to agree with LightRider: there are definitely arenas (nuclear power, microbiology, etc.) that show that humanity needs to balance its (natural) pursuit of efficiency, development and growth with caution and a common-sense approach to risks. Considering its potential, I would think this applies to Bitcoin as well.


The only joke is people have been evacuated from a reasonably safe environment because people are hysterical about radiation. The evacuation itself is probably more dangerous than the radiation.

People should have the choice to live in the radiation affected zones if they wish, just as they can smoke cigarettes death tax sticks if they wish. They would harm no-one in doing so. The great thing about Bitcoin is Bitcoinica harmed no-one, all costs were born by the speculators themselves. With Fiat money speculators pump up the money supply, inflating asset prices and make tonnes of money for themselves. Free markets don't have these problems.
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May 14, 2012, 06:09:07 PM
 #46

Adding liquidity to markets, which speculators do, is not zero-sum.

... Probably I don't have a deep enough understanding of the value of liquidity in asset markets or a deep enough appreciation for their role in creating market prices, but it seems to me the world would get along just fine without them spending all their time and effort competing against each other. ...

Let me explain the value of liquidity then, but first establish that you agree capitalism is a good thing? I would imagine you do. I also imagine you believe legitimate goods and service producing businesses are a good thing, both economically and for the world in general. If this is also true then the stock market, with its intended function of providing capital to promote business opportunity, is also a good thing.

Let's use as example Starbuck's coffee. Starbuck's utilized the stock market to grow a good local idea and establish a worldwide presence. In fact, one of their incentives for employees is owning stock in the company.

Starbuck's stock was hit hard by the economic downturn as the belief was people in recession would scoff at $5 coffee.

Imagine the majority of stock was held by mom and pop investors and speculation didn't exist at all. The likely result would have probably been a total crash of the stock's price as sellers wouldn't find any buyers. Many amateur investors would be wiped out with little chance of recovering their investment.

While investors do accept some risk of loss by investing in stocks, such harsh market conditions would likely scare off most mom and pop types. Such a market would be more rigid, less friendly and appealing, and therefore smaller.

Speculators, on the other hand, look for such pricing opportunities. Speculators would (and did) help establish a floor to the falling share price by offering a 'buy' side. Starbuck's stock has not only recovered but is now at all time highs.

This is a real world example of how speculators' liquidity can allow the stock market to be more appealing, and therefore larger. That's not zero-sum.

Could the world and market get along without speculators? Certainly, but that wasn't the question. Your argument is only having a "positive-effect" on the world, and that speculators do.

note: currently the stock market does not operate in true free market and is distorted by artificial money inflation, which reduces the need for speculators' liquidity.

... I wasn't thinking of competition in general as being a zero-sum game, because in general it is not.  Competition drives efficiency, and efficiency (creating more by using less) is what makes the world a better place -- assuming that the thing you're making more efficient has a positive effect on the world.  Competing to build the most efficient bomb or assault rifle is not a world-improving activity. ...

Would being the (smarter) side with better bombs and assault rifles be considered preferable and world-improving if they are used to stop a Hitler?
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May 14, 2012, 06:18:12 PM
 #47

I certainly did not embrace the cause of bitcoin to see it  associated even remotely to words like "margin trading".

This is when zero-sum becomes positive sum. We get rid of the looniest of liberals. Good riddance.
I am not going anywhere but I suggest you put me on your ignore list: I will happily reciprocate.

Nah, just kidding: we all know we are not going to build a base for bitcoin if it's craked by the political divide. By the way, I have absolutely no idea who "liberals" are.

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May 14, 2012, 06:33:18 PM
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Quote
note: currently the stock market does not operate in true free market and is distorted by artificial money inflation, which reduces the need for speculators' liquidity.



True, and is implicit in the Fed's new mandate to support the stock market.
Most stock market volume consists of robots trading with robots.
Further, we have the President's Group on Financial Markets.
http://en.wikipedia.org/wiki/Working_Group_on_Financial_Markets


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May 14, 2012, 06:38:03 PM
 #49

Now can someone explain to me how I can speculate on par with JP Morgan using high frequency trading, commodity margin trading and what not ?
Oh, maybe THAT explains why Jamie Dimon paid himself 23 million dollars in 2011, in the midst of the biggest financial crisis since 1929.

I can.  First you need to become a FED Primary Dealer.  This gives you access to the discount window and the FED's various swap lines and other money at 0% interest.  With this oligopoly position, you can then obtain dollars and bonds at a discount, to sell to others at guaranteed profit.

Then the great thing is that this profit goes up during crises, when the Federal Reserve prints money in order to "bail out" the economy.  So all you need to do is create an artificial crisis via risky gambling with this free money, and you will get more free money and a huge salary.

Quote
This kind of paycheck is a tax on the real economy. Unlike state taxes it is not imposed by a democratically elected government but by a cynical group of people that can be best described as "speculators".

It is a tax.  But the tax is imposed by the Federal Reserve via inflation of the money supply, not the "speculators" at large banks who benefit from it.  The Federal Reserve is a quasi-government agency, and absolutely does wield government powers.  Without special legal exceptions, nearly everything they do would be considered fraud.

But this certainly has nothing to do with small speculators who don't have access to the Federal Reserve, Bitcoin speculators for instance.

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May 14, 2012, 09:42:16 PM
 #50

Coal kills many many thousands per year, Fukashima killed no-one.

I can only imagine that that was a joke.

I have to agree with LightRider: there are definitely arenas (nuclear power, microbiology, etc.) that show that humanity needs to balance its (natural) pursuit of efficiency, development and growth with caution and a common-sense approach to risks. Considering its potential, I would think this applies to Bitcoin as well.


The only joke is people have been evacuated from a reasonably safe environment because people are hysterical about radiation. The evacuation itself is probably more dangerous than the radiation.

Well, clearly we have differing views on the magnitude of the Fukashima disaster and how widespread its effects have been. No point in harping on it in this thread.

Quote
People should have the choice to live in the radiation affected zones if they wish, just as they can smoke cigarettes death tax sticks if they wish. They would harm no-one in doing so. The great thing about Bitcoin is Bitcoinica harmed no-one, all costs were born by the speculators themselves. With Fiat money speculators pump up the money supply, inflating asset prices and make tonnes of money for themselves. Free markets don't have these problems.

Believe me, I'm not in favor of any sort of forceful intervention when it comes to peaceful people making poor choices. And yes, from what I know (never used it,) I do believe Bitcoinica was a legitimate way to interact with the market.

My call for caution goes beyond Bitcoinica though. What happens if naked short-selling becomes a sizeable portion of Bitcoin's markets? What if the desire to prevent such a thing leads to calls for government intervention? Should people take unwarranted risks just because they've been led to believe something is properly regulated by "authorities?" Taking a second to think these sorts of things through is simply a wise thing to do when it comes to a technology as potent as Bitcoin.

Bitcoin is the ultimate freedom test. It tells you who is giving lip service and who genuinely believes in it.
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In the future, books that summarize the history of money will have a line that says, “and then came bitcoin.” It is the economic singularity. And we are living in it now. - Ryan Dickherber
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ATTENTION BFL MINING NEWBS: Just got your Jalapenos in? Wondering how to get the most value for the least hassle? Give BitMinter a try! It's a smaller pool with a fair & low-fee payment method, lots of statistical feedback, and it's easier than EasyMiner! (Yes, we want your hashing power, but seriously, it IS the easiest pool to use! Sign up in seconds to try it!)
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May 14, 2012, 09:58:00 PM
 #51


But this certainly has nothing to do with small speculators who don't have access to the Federal Reserve, Bitcoin speculators for instance.

I do not speculate about who the bitcoin speculators are because I don't know.  Wink

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May 14, 2012, 10:03:10 PM
 #52

Competing to create the most efficient bomb gave us nuclear energy, the safest and cheapest power source mankind has ever harnessed.

Until a single nuclear plant is hit by a tsunami and radiates half the planet.

Coal kills many many thousands per year, Fukashima killed no-one.

http://www.washingtonsblog.com/2011/12/study-fukushima-radiation-has-already-killed-14000-americans.html
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May 14, 2012, 11:10:30 PM
 #53

Competing to create the most efficient bomb gave us nuclear energy, the safest and cheapest power source mankind has ever harnessed.

Until a single nuclear plant is hit by a tsunami and radiates half the planet.

Coal kills many many thousands per year, Fukashima killed no-one.

http://www.washingtonsblog.com/2011/12/study-fukushima-radiation-has-already-killed-14000-americans.html

Yep.  The problem with nuclear radiation is that it follows the laws of probability.

Let's say exposure to 20 rem will give 1 person cancer.  Interestingly, if 20 people are exposed to 1 rem, then 1 person will still get cancer.  If 200 people are exposed to .1 rem, then 1 person will still get cancer.  If 2000 people are exposed to .01 rem, then 1 person will still get cancer.

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May 15, 2012, 06:45:46 AM
 #54

Yep.  The problem with nuclear radiation is that it follows the laws of probability.

Let's say exposure to 20 rem will give 1 person cancer.  Interestingly, if 20 people are exposed to 1 rem, then 1 person will still get cancer.  If 200 people are exposed to .1 rem, then 1 person will still get cancer.  If 2000 people are exposed to .01 rem, then 1 person will still get cancer.

The distribution is different though. Regardless of the expected value of the number of cancer cases (originated from radiation) being the same, the possibilities of having more than exactly 1 case are a lot higher in the latter cases in your example than in the former ones.

When risk is inherently high (we are talking about cancer, not about something trivial) maximisation is done not for the average case but for a near-to-worst case. It's a non-trivial mistake many people make when programming betting bots or designing probabilistic strategies. You have to take into account high risk outcomes are not optimized towards purely an expected value (central average). For instance, in the case of a betting bot, risk increases exponentially as we over-leverage the bot - entering a betting sequence that can lead to bankruptcy has to be modeled after an exponential distribution and not a normal or a T-student one, since once you bankrupt it, it cannot possibly recover (it's a "fatal outcome"). The same scheme mathematically applies to investment strategies.

So no, the cases you expose are really not equivalent.

--------------------- Boring part you can skip follows. -----------------------

Taken to an extreme, you generally don't go all-in as soon as odds are slightly on your favour. This is a mathematically proven losing strategy and it's a classical naive mistake. You don't even maximise bernoulli squares or the Kelly criterion, typically.

Two trivial counter-examples:

- the loss is potentially much bigger than simply the lack of a win (like when risking cancer, one would possibly rather not play at all, it's a possible "move"). Mathematical models implying bernoulli trials assume an N-length sample, not a variable length sample up to a probabilistic end (a loss would follow a Poisson rather than a Binomial, which despite related is not equivalent).

- there might be players with bigger bank rolls capable of "martingaling" you out (Martingale is trivial a winning strategy when your bank is an order of magnitude bigger than that of your opponent, otherwise it's a quickly losing strategy). PS never use Martingale, it's retarded even when you have the bank to do it, this was just a trivial example. Rather than that you do the mathematically right thing by over-betting to the expected factor to almost ensure your smaller opponent is taken away by volatility.

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May 15, 2012, 07:04:50 AM
 #55

I think traders are good for bitcoin. They lose money (because it's not a zero-sum game for them, its negative sum game if you take exchange commissions into account). The money they lose goes to the exchange, which can invest into better infrastructure, security, and to lower the commission. It also works to reduce bid-ask spread, meaning better terms for "normal" buyers and sellers.

Gamblers also get something for their money, namely satisfy their speculating urges, we can regard that as entertainment value. Of course, it's bad if taken to the extreme (taking on debt, spending too much time on gambling).
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May 15, 2012, 07:15:41 AM
 #56


This is very questionable. See http://blogs.scientificamerican.com/observations/2011/12/20/researchers-trumpet-another-flawed-fukushima-death-study/

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