According to Quantum Finance, asset valuations are unknowable until fixed by a market transation

CorporateNature No 151

The world of finance bears a striking resemblance to the quantum world, which has led to the emergence of a new discipline: Quantum Finance. Here are three examples:

A) CONTINUOUS VS. DISCRETE

A beam of light may seem continuous but is actually a stream of photons, which are discrete packets of energy. Similarly, an organisation's cash flows appear to be a constant trickle but each payment forms a distinct chunk.

B) CHANGE THROGH MEASUREMENT

Just like the position of a particle in quantum uncertainty is unknown until the moment of measuring it, the real price of an asset is unknowable until it is measured through a market transaction. Yet, this very transaction changes the valuation, just like pinning down the particle to measure it changes its characteristics.

C) UNCERTAINTY IN THE SYSTEM 

Uncertainty in the quantum world and Risk in the finance world are not a peripheral source of error, but are a fundamental feature of the system.

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Canadian mathematician and writer David Orrell has a forthcoming book on this subject: “Money, Magic, and How to Dismantle a Financial Bomb” in which he models markets using the toolbox of quantum mechanics. A summary has been published in The Economist ("A quantum walk down Wall Street")

Charts of the most probable locations of finding an electron in a hydrogen atom

(Source: Wikipedia)

Human systems are rife with unintended consequences

CorporateNature No 129

As the name suggests, the sociological term “unintended consequences” refers to unforeseen  outcomes of purposeful actions. They occur in complex social systems due to the large number of variables involved in the functioning of these systems.

In the simplified world of Newtonian physics, for every action in nature, there is an equal and opposite reaction (Newton's 3rd Law of Motion). In such a system, outcomes are easy to predict.

In contrast, human social systems are complex, sometimes bordering on chaotic, so the action-reaction equation does not necessarily hold true. More often than not, there are unintended consequences.

A classic source of unintended consequences is the Peltzman Effect. The Peltzman Effect, or risk compensation, occurs after the implementation of safety measures intended to reduce injury or death (e.g. bike helmets, seat belts, etc.). While people may feel safer than they really are, they take additional risks which they would not have taken without the safety measures in place. This may result in an increase in mortality, rather than the decrease that was initially intended.

Here are some examples of the Peltzman Effect:

1. Anti-lock brakes

Anti-lock brakes were introduced in Germany in the late 1970s. Contrary to government expectations, instead of decreasing fatal car accidents by 10-15%, the drivers of cars fitted with anti-lock brakes became more likely to engage in risky driving. Studies found that drivers would trust their new braking technology too much and as a result would curves at a higher speed, which increased rollovers and accidents.

2. American football helmets 

Helmets became mandatory in American football in 1943 and the risk of injury was expected to go down. Indeed, the helmets decreased the number of broken noses, teeth and jaws. However, concussion and spinal injuries actually increased and broken necks saw a staggering rise by 400%. The reason for these counterintuitive statistics was the better protection that helmets gave to players, so the players actually started using the helmets as an offensive weapon, just like battering rams.

3. Airbags and children left in cars

Airbags are another pertinent example of the Peltzman Effect. Passenger-side airbags were intended to increase safety but actually started hurting and killing child passengers as children were vulnerable to being hit by a deploying airbag during a collision. This led to the child seat being moved to the back of cars, which in turn resulted in another unexpected consequence: an increase in the number of babies and children inadvertently left behind in locked vehicles.

1959 Volvo 122, the first mass-produced car with seatbelts as standard equipment
(image source: Wikipedia) 

Animals can be more or less employed - just like humans

By George ILIEV
CorporateNature Metaphor Series, No 96

Muhammad Yunus, the founder of microfinance and Nobel Peace Prize winner, once asked a question during a talk: "Have you seen an unemployed animal?" His point was everybody deserves a livelihood and it is simply human nature to find employment by being entrepreneurial. 

Yet, employment in animals comes in different shades and sizes. Herbivores that depend on grazing low-calorie cellulose-heavy plants such as grass (antelopes) or bamboo (pandas) spend most of their day eating or ruminating. While predators spend only a small percentage of their time eating, as they eat high-calorie meat; yet they dedicate the majority of their time recovering from unsuccessful hunting sallies.

The animal spectrum resembles the hunter-gatherer societies of early humans: the gatherers were the herbivores, looking for lower-calorie plants; while the hunters were the predators attempting the occasional high-calorie kill.

Similarly, the risk profile of entrepreneurs determines to a degree the characteristics of their startups: more risk-averse entrepreneurs focus on businesses that can generate stable (even if small) cash flows, while the less risk-averse ones may work on an idea for years without pay (sometimes even a decade) in order to build up a business and sell it.

So, unemployed animals don't exist, but variably-employed animals do!

San tribesman from Namibia (Source: Wikipedia)