transaction costs

Trading and Exchanges: Market Microstructure for Practitioners
by Larry Harris
Published 2 Jan 2003

We will examine both retrospective and prospective measures of transaction costs. We consider first retrospective measures of transaction costs. We then consider how traders use information about past transaction costs to predict future transaction costs. 21.1 TRANSACTION COST COMPONENTS Defining and measuring exactly what we mean by the term “transaction costs” is difficult. This entire book is about understanding what transaction costs are, where they come from, and how to measure them. We explore these questions in detail throughout this book. For our present purpose, transaction costs include all costs associated with trading.

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Accordingly, they try to trade more or less aggressively if, on a per unit basis, their missed trade opportunity costs are respectively greater or less than their transaction costs. Traders who are concerned about this issue should estimate their marginal transaction costs from the costs of executing the last trades that fill their orders. 21.7 TRANSACTION COST PREDICTION Traders need to predict transaction costs in order to evaluate active trading strategies. To this end, traders develop, estimate, and use transaction cost prediction models. Most transaction cost prediction analyses use explicit and implicit information to predict transaction costs. 21.7.1 Explicit Information About Future Transaction Costs Explicit information about future transaction costs consists of the contractual information about commissions and trading fees enumerated above.

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In chapter 22, we consider why superior selection/composition performance is difficult to achieve and even more difficult to predict. 21 Liquidity and Transaction Cost measurement Traders pay attention to their transaction costs because transaction costs make implementation of their trading strategies expensive. Transaction costs are most important to traders who trade frequently or who trade large sizes. For most active traders, transaction costs are the most significant determinants of their total returns. Speculators who perform poorly usually do so because their transaction costs exceed the values of their trading strategies. Traders measure their transaction costs to evaluate how well they and their brokers have implemented their trading strategies.

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined
by Lasse Heje Pedersen
Published 12 Apr 2015

These are noisy observations of the expected transaction costs. Assuming that the expected transaction cost is constant for all these trades, we can estimate the expected transaction cost as the average observed costs: This expected transaction cost is useful in deciding which trading strategy to use, how frequently to trade, and so on. Furthermore, our estimate of expected transaction costs tells us how to adjust a backtest for transaction costs. Of course, transaction costs differ across securities. Small stocks with low trading volume tend to have larger transaction costs than large stocks, for instance.

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Adjusting Backtests for Trading Costs Transaction costs reduce the returns of a trading strategy. A backtest is therefore much more realistic if it accounts for transaction costs. To adjust a backtest, we first need to have an estimate of the expected transaction costs for all securities and trading sizes. You can often obtain such estimates from brokers, or you can estimate the expected transaction costs, as discussed in section 5.3. Given these expected transaction costs, we can adjust the backtest in the following simple way. Each time a trade takes place in our backtest, we compute the expected transaction cost and subtract this cost from the backtest returns.

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However, the amount that can be traded at the bid or ask price is often small relative to what a large hedge fund needs to execute. Therefore, the main source of transaction costs for large traders is market impact in these markets. Since prices move more the larger position you trade, this kind of transaction cost increases with trade size. The way to deal with this type of transaction cost is to split up a trade into many small orders and trade these small orders patiently over time, as described in more detail below. • Constant transaction costs: Bid–ask spreads. (Also called proportional transaction costs, since total transactions costs are proportional to trade size when average costs are constant.)

Electronic and Algorithmic Trading Technology: The Complete Guide
by Kendall Kim
Published 31 May 2007

Brokerage commissions are at an all-time low, and a general reduction in trading personnel in favor of advanced electronic resources is further driving down transaction costs. Transaction cost research will play an increasingly important role in selecting the proper algorithm integrated with an order management system. Buy-side traders and money managers will view transaction cost research as another critical piece in making a trading decision with their national best bid or offer. The need to curb transaction costs and market impact for highvolume trades, direct market access, and front-end automation is starting to converge. Buy-side firms such as hedge funds are now starting to have greater access to algorithms from brokers via an order management system, as well as algorithmic trading capabilities provided by third-party software companies.

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Implementation shortfall or arrival price Manages the trade-off between impact and risk to execute as close as possible to the midpoint when the order is entered.5 5 Tom Middleton, ‘‘Understanding How Algorithms Work,’’ in Algorithmic Trading: A BuySide Handbook, 22–23 (London: The Trade Ltd., 2005). This page intentionally left blank Chapter 10 Transaction Cost Research 10.1 Introduction New technologies, such as utilizing algorithms and straight-through processing, result from the drive to lower transaction costs, as well as the associated research involved behind each execution. According to the TABB Group, Transaction Cost Research (TCR) is defined as the amount of money spent to open a new position or to close an existing position. Transaction cost analysis started with fulfilling regulatory requirements. It can significantly drag performance, especially for portfolio strategies that include high turnover.

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Basket analytics can judge the overall risk in a basket, its exposure to different industries, and the potential implicit costs of the basket. 10.5 Conclusion The interest in transaction cost research is widely attributable to increasing competition for lower transaction costs, and regulatory pressure. Investment managers are pushed to measure and manage transaction costs to increase investment returns, retain clients, attract new prospects, and satisfy regulators. When investment managers began to be judged by transaction costs, this began the push for algorithms and other advanced electronic execution tools. One universally known method of rating quality of execution is through achieving or exceeding the Volume-Weighted Average Price (VWAP).

Quantitative Trading: How to Build Your Own Algorithmic Trading Business
by Ernie Chan
Published 17 Nov 2008

This averaging over parameters will further help ensure that the actual trading performance of the model will not deviate too much from the backtest result. Sensitivity Analysis TRANSACTION COSTS No backtest performance is realistic without incorporating transaction costs. I discussed the various types of transactions costs P1: JYS c03 JWBK321-Chan September 24, 2008 13:52 Printer: Yet to come Backtesting 61 (commission, liquidity cost, opportunity cost, market impact, and slippage) in Chapter 2 and have given examples of how to incorporate transaction costs into the backtest of a strategy. It should not surprise you to find that a strategy with a high Sharpe ratio before adding transaction costs can become very unprofitable after adding such costs.

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Also, at the beginning of the maximum drawdown, the equity was about $2.3 × 104 , and at the end, about $0.5 × 104 . So the maximum drawdown is about $1.8 × 104 . How Will Transaction Costs Affect the Strategy? Every time a strategy buys and sells a security, it incurs a transaction cost. The more frequent it trades, the larger the impact of transaction costs will be on the profitability of the strategy. These transaction costs are not just due to commission fees charged by the broker. There will also be the cost of liquidity—when you buy and sell securities at their market prices, you are paying the bid-ask spread.

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Note that I count a round-trip transaction of a buy and then a sell as two transactions—hence, a round trip will cost 10 basis points in this example. If you are trading ES, the E-mini S&P 500 futures, the transaction cost will be about 1 basis point. Sometimes the authors whose strategies you read about will disclose that they have included transaction costs in their backtest performance, but more often they will not. If they haven’t, then you just to have to assume that the results are before transactions, and apply your own judgment to its validity. As an example of the impact of transaction costs on a strategy, consider this simple mean-reverting strategy on ES. It is based on Bollinger bands: that is, every time the price exceeds plus or minus 2 moving standard deviations of its moving average, short or buy, respectively.

Python for Algorithmic Trading: From Idea to Cloud Deployment
by Yves Hilpisch
Published 8 Dec 2020

Whenever a trade takes place, the proportional transaction costs are subtracted from the strategy’s log return on that day. Figure 10-5. Gross performance of EUR/USD exchange rate and algorithmic trading strategy (before and after transaction costs) Vectorized backtesting has its limits with regard to how close to market realities strategies can be tested. For example, it does not allow one to include fixed transaction costs per trade directly. One could, as an approximation, take a multiple of the average proportional transaction costs (based on average position sizes) to account indirectly for fixed transactions costs. However, this would not be precise in general.

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The driving factor in this regard is the relatively high frequency of trades that the strategy requires: In [90]: import MomVectorBacktester as Mom In [91]: mombt = Mom.MomVectorBacktester('XAU=', '2010-1-1', '2019-12-31', 10000, 0.0) In [92]: mombt.run_strategy(momentum=3) Out[92]: (20797.87, 7395.53) In [93]: mombt.plot_results() In [94]: mombt = Mom.MomVectorBacktester('XAU=', '2010-1-1', '2019-12-31', 10000, 0.001) In [95]: mombt.run_strategy(momentum=3) Out[95]: (10749.4, -2652.93) In [96]: mombt.plot_results() Imports the module as Mom Instantiates an object of the backtesting class defining the starting capital to be 10,000 USD and the proportional transaction costs to be zero. Backtests the momentum strategy based on a time window of three days: the strategy outperforms the benchmark passive investment. This time, proportional transaction costs of 0.1% are assumed per trade. In that case, the strategy basically loses all the outperformance. Figure 4-12. Gross performance of the gold price (USD) and the momentum strategy (last three returns, no transaction costs) Figure 4-13. Gross performance of the gold price (USD) and the momentum strategy (last three returns, transaction costs of 0.1%) Strategies Based on Mean Reversion Roughly speaking, mean-reversion strategies rely on a reasoning that is the opposite of momentum strategies.

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Executing the Python script in “Long-Only Backtesting Class” yields backtesting results, as shown in the following. The examples illustrate the influence of fixed and proportional transaction costs. First, they eat into the performance in general. In any case, taking account of transaction costs reduces the performance. Second, they bring to light the importance of the number of trades a certain strategy triggers over time. Without transaction costs, the momentum strategy significantly outperforms the SMA-based strategy. With transaction costs, the SMA-based strategy outperforms the momentum strategy since it relies on fewer trades: Running SMA strategy | SMA1=42 & SMA2=252 fixed costs 0.0 | proportional costs 0.0 ======================================================= Final balance [$] 56204.95 Net Performance [%] 462.05 ======================================================= Running momentum strategy | 60 days fixed costs 0.0 | proportional costs 0.0 ======================================================= Final balance [$] 136716.52 Net Performance [%] 1267.17 ======================================================= Running mean reversion strategy | SMA=50 & thr=5 fixed costs 0.0 | proportional costs 0.0 ======================================================= Final balance [$] 53907.99 Net Performance [%] 439.08 ======================================================= Running SMA strategy | SMA1=42 & SMA2=252 fixed costs 10.0 | proportional costs 0.01 ======================================================= Final balance [$] 51959.62 Net Performance [%] 419.60 ======================================================= Running momentum strategy | 60 days fixed costs 10.0 | proportional costs 0.01 ======================================================= Final balance [$] 38074.26 Net Performance [%] 280.74 ======================================================= Running mean reversion strategy | SMA=50 & thr=5 fixed costs 10.0 | proportional costs 0.01 ======================================================= Final balance [$] 15375.48 Net Performance [%] 53.75 ======================================================= Chapter 5 emphasizes that there are two sides of the performance coin: the hit ratio for the correct prediction of the market direction and the market timing (that is, when exactly the prediction is correct).

Kanban: Successful Evolutionary Change for Your Technology Business
by David J. Anderson
Published 6 Apr 2010

In economic terms, these setup and cleanup activities are referred to as transaction costs. Every value-added activity has associated transaction costs. These transaction cost activities are things that the customer may not see, most likely does not value, and to which they are ambivalent at best. The customer may be forced to pay the costs of these activities but would prefer not to. How often have you called a plumber to fix a washing machine or dishwasher and been asked for a $90 call out fee? This is a transaction cost. Would you prefer a lower fee? Would you choose a plumber who did not charge such a fee? The transaction costs do not add value.

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The driver actually picking up the machine at the warehouse, driving it to your home, and unpacking it for you is a transaction cost. Perhaps the same person, or another person, a plumber, installs it for you. The plumber takes time to drive to your home and yet more time to perform the installation. All of this time and effort for delivery and installation is part of the transaction cost of buying that washing machine. Economically, the retailer absorbs the cost of the credit card transaction. The other transaction costs for delivery and installation are often passed on to the consumer. Not all of the transaction costs are “seen” or “felt” by all the players in the value chain but they affect the economic performance of the system as a whole.

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How much time will it consume? What opportunity cost is incurred when people are distracted from their regular activities? Transaction Costs of Delivery With physical goods, it is easy to understand the transaction costs of making a delivery. First there is payment. The customer will arrange to pay the supplier with some monetary instrument, a credit card, for example. For the pleasure of taking payment via credit card, the leading vendors such as MasterCard and Visa charge the vendor a transaction cost, typically two to four percent of the value of the transaction. In addition to costs on the financial transaction between the consumer and vendor, there also may be delivery charges.

The Volatility Smile
by Emanuel Derman,Michael B.Miller
Published 6 Sep 2016

When there are transaction costs, you do not want to hedge continuously. 125 The Effect of Transaction Costs on P&L A PDE Model of Transaction Costs Hoggard, Whalley, and Wilmott (1994) have developed an intuitively attractive treatment of transaction costs within the traditional BSM no-arbitrage framework that provides a way to estimate the effect of transaction costs on the option price by adjusting the BSM volatility. As usual, let √ dS = 𝜇Sdt + 𝜎SZ dt (7.7) where Z is drawn from a standard normal distribution. The change in the value of a hedged position when transaction costs are included is given by d𝜋 = dC − ΔdS − [Transaction costs] 𝜕2C 2 𝜕C 1 𝜕C Z dt − ΔdS − |NS| k dt + dS + 𝜎 2 S2 𝜕t 2 𝜕S 𝜕S2 ( )( √ ) 1 𝜕2C 2 𝜕C 𝜕C 𝜇Sdt + 𝜎SZ dt + 𝜎 2 S2 Z dt − |NS| k dt + −Δ = 𝜕t 2 𝜕S 𝜕S2 ( ( ) ) ) ( √ 1 2 2 𝜕2C 2 𝜕C 𝜕C 𝜕C Z + 𝜇S 𝜎 S dt − Δ 𝜎SZ dt + −Δ + = 2 𝜕t 𝜕S 𝜕S 𝜕S2 = − |NS| k (7.8) If we choose our initial hedge so that Δ = 𝜕C/𝜕S, then ( d𝜋 = ) 1 2 2 𝜕 2 C 2 𝜕C Z + 𝜎 S dt − |NS| k 2 𝜕t 𝜕S2 (7.9) Using Equation 7.5 for the transaction cost, we have ( d𝜋 = ) | 𝜕2C | 2 √ 1 2 2 𝜕 2 C 2 𝜕C Z + Z|| 𝜎S k dt 𝜎 S dt − || 2 2 𝜕t 𝜕S | 𝜕S2 | (7.10) This is not a perfectly riskless hedge because it depends on Z and Z2 .

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This corresponds to a greater implied volatility in the BSM formula. Transaction costs, in short, introduce a natural bid-ask spread into option valuation. When there are no transaction costs, the value of a portfolio of two BSM options is equal to the sum of their individual values. This is not true when you have to pay a fee to buy or sell stocks. If you combine two options into a portfolio, their hedge ratios may partially cancel, and hence the transaction costs required to hedge two options together are not necessarily the sum of the transaction costs required to hedge each option separately. The transaction costs for a portfolio are nonlinear in the number of options, and you cannot unambiguously isolate the transaction costs for a single option if that option is part of a portfolio.

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You can assume that both dividends and the riskless rate are zero. Hint: Use a first-order Taylor expansion of the cumulative normal distribution around zero. CHAPTER 7 The Effect of Transaction Costs on P&L    Transaction costs make a long position worth less, a short position more. The tension between the accuracy and cost of hedging. The effective volatility of a hedged option. THE EFFECT OF TRANSACTION COSTS Though the Black-Scholes-Merton (BSM) model assumes that you can buy or sell stocks without incurring transaction fees, in the real world there are both explicit and implicit costs to trading.

Here Comes Everybody: The Power of Organizing Without Organizations
by Clay Shirky
Published 28 Feb 2008

When the small group is a bunch of teenage girls trying to get or remain dangerously thin, against the judgment of their horrified parents and friends, then we disapprove. But the basic mechanism of mutual support remains the same. Falling transaction costs benefit all groups, not just groups we happen to approve of. The thing that kept phenomena like the Pro-Ana movement from spreading earlier was cost. The transaction costs of gathering a group of like-minded individuals, especially in an anonymous fashion, has historically been large, and self-funded and socially approved groups like AA were the only ones that could take on those costs. Once the transaction costs fell, however, the difficulties of putting such groups together disappeared; the potential members of such a group can now gather and set their own goals without needing any sort of social sponsorship or approval.

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Every transaction it undertakes—every contract, every agreement, every meeting—requires it to expend some limited resource: time, attention, or money. Because of these transaction costs, some sources of value are too costly to take advantage of. As a result, no institution can put all its energies into pursuing its mission; it must expend considerable effort on maintaining discipline and structure, simply to keep itself viable. Self-preservation of the institution becomes job number one, while its stated goal is relegated to number two or lower, no matter what the mission statement says. The problems inherent in managing these transaction costs are one of the basic constraints shaping institutions of all kinds.

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Coase realized that workers could simply contract with one another, selling their labor, and buying the labor of others in turn, in a market, without needing any managerial oversight. However, a completely open market for labor, reasoned Coase, would underperform labor in firms because of the transaction costs, and in particular the costs of discovering the options and making and enforcing agreements among the participating parties. The more people are involved in a given task, the more potential agreements need to be negotiated to do anything, and the greater the transaction costs, as in the movie example above. A firm is successful when the costs of directing employee effort are lower than the potential gain from directing. It’s tempting to assume that central control is better than markets for arranging all sorts of group effort.

Modern Monopolies: What It Takes to Dominate the 21st Century Economy
by Alex Moazed and Nicholas L. Johnson
Published 30 May 2016

In economic terms, GitHub significantly reduces transaction costs for people collaborating on software projects. The term “transaction cost,” coined by the economist Ronald Coase, refers to any cost incurred in making an exchange. Another term for it is a “coordination cost.” In essence, a transaction or coordination cost is the cost of participating in an interaction. Transaction costs arise because markets and communities in the real world aren’t like the perfect markets you learn about in Economics 101. For one thing, they lack the perfect information that these perfect-market models assume to exist. Transaction costs arise out of this and other imperfections or deviations from the ideal market scenario.

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Information processing and storage costs are important parts of transaction costs. When these costs decline, the potential size of organizations increases. Intuitively this makes sense. With faster information processing and more information storage, you can manage a larger amount of information. But when processing costs fall, transaction costs also decline. Remember that transaction costs were the glue that held together a company’s value chain and determined what activities an organization internalized. As processing speeds radically increased and transaction costs fell at the end of the twentieth century, some value chains began to break up.

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Take advantage of what you’ve learned in this book, as well as the next tips, to use this knowledge to your benefit. 1. Look for Technology that Reduces Transaction Costs and Removes Gatekeepers Look for industries where technology can reduce high transaction costs or remove high-cost gatekeepers. In many cases, you’re looking for transactions that can be automated and run by algorithms. The more you can use technology to reduce transaction costs, the more opportunity you’ll have to add value to both sides. The ultimate goal is to remove entire steps from the transaction. Remember, transaction costs aren’t always about money. They also include time and effort, among other things.

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems
by Irene Aldridge
Published 1 Dec 2009

t=1 T
E[R p,t ] ≥ µ, t=1 I
xi = 1 (14.9) i=1 Portfolio Optimization in the Presence of Transaction Costs The portfolio optimization model considered in the previous section did not account for transaction costs. Transaction costs, analyzed in detail in Chapter 19, decrease returns and distort the portfolio risk profile; depending on the transaction costs’ correlation with the portfolio returns, transaction costs may increase overall portfolio risk. This section addresses the portfolio optimization solution in the presence of transaction costs. The trading cost minimization problem can be specified as follows: min E[TC] s.t.V [TC]≤K (14.10) where E[TC] is the average of observed trading costs, V[TC] is the variance of observed trading costs, and K is the parameter that specifies the maximum trading cost variance.

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Holding periods for positions in market microstructure trading can vary in duration from seconds to hours. The optimal holding period is influenced by the transaction costs faced by the trader. A gross average gain for a position held just several seconds will likely be in the range of several basis points (1 basis point = 1 bp = 1 pip = 0.01%), at most. To make such trading viable, the expected gain has Trading on Market Microstructure 129 to surpass the transaction costs. In an institutional setting (e.g., on a proprietary trading desk of a broker-dealer), a trader will often face transaction costs of 1 bp or less on selected securities, making a seconds-based trading strategy with an expected gain of at least 2 bps per trade quite profitable.

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Limit orders can be seen as pre-commitments to buy or sell a specified number of shares of a particular security at a prespecified price, whereas market orders are requests to trade the specified quantity of a given security as soon as possible at the best price available in the market. As a result, market orders execute fast, with certainty, at uncertain prices and relatively high transaction costs. Limit orders, on the other hand, have a positive probability of no execution, lower transaction costs, and Orders, Traders, and Their Applicability to High-Frequency Trading 63 Price Ask Price Depth Ap Resilience Breadth Depth Resilience Quantities Bp Bid Price A 0 Sale A´ Quantities Purchase FIGURE 6.1 Aspects of market liquidity (Bervas, 2006).

The Globalization Paradox: Democracy and the Future of the World Economy
by Dani Rodrik
Published 23 Dec 2010

The abolition of the East India Company following the Indian Mutiny of 1858, and its replacement by direct colonial rule from London, provides another perfect example of the transition. When the private firm and its armies were no longer up to the task, the sovereign had to step in with his own, more effective powers of persuasion. Overcoming Transaction Costs A contemporary economist would summarize the argument thus far by saying that the role played by the Hudson’s Bay Company, the East India Company, and other chartered trading companies was to reduce the “transaction costs” in international trade to enable some degree of economic globalization. It is worth spending some time on this concept, as it holds the key to understanding globalization—what restricts or deepens it—and will recur throughout our discussion.

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Economists like to think that the propensity to “truck, barter, and trade,” in Adam Smith’s evocative (but careful)13 phrasing, is such an ingrained element of human nature that it makes “free trade” the natural order of things. They even have coined a general term for different types of friction that prevent mutually beneficial trade or render it more difficult: “transaction costs.” Transaction costs are in fact rampant in the real world, and if we fail to see them all around us it is only because modern economies have developed so many effective institutional responses to overcome them. Think of all the things that we take for granted that are absolutely essential for trade to take place.

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When something goes wrong in these relationships—a Chinese subcontractor passes on the iPhone’s proprietary designs to a competitor or Citigroup’s borrower refuses to service his debt obligations—there may be precious little that the aggrieved parties can do. The fear that such things can and will go wrong acts as a considerable deterrent to the transactions in the first place. In economists’ language, these are trades with potentially quite significant transaction costs. Institutions—at least those that support markets—are social arrangements designed to reduce such transaction costs. These institutions come in three forms: long-term relationships based on reciprocity and trust; belief systems; and third-party enforcement. The first of these generate cooperation through repeated interaction over time. For example, a supplier is deterred from cheating his customer because he worries that he would lose future business.

High-Frequency Trading
by David Easley , Marcos López de Prado and Maureen O'Hara
Published 28 Sep 2013

Specific examples of constructing and using HFT signals are given later, after a brief discussion of the effect of adaptive algorithms on transaction cost. ALGORITHMS AND TRANSACTION COST In this section we discuss transaction cost at the client order level. Although this is not a high-frequency view of the trading process, we want to understand the general properties of price impact and also provide evidence that high-frequency signals reduce the total transaction cost. 28 i i i i i i “Easley” — 2013/10/8 — 11:31 — page 29 — #49 i i EXECUTION STRATEGIES IN EQUITY MARKETS Figure 2.2 Average arrival slippage by participation rate Arrival slippage (bp) 10 5 0 0 5 10 15 Participation rate (%) 20 25 Fully filled client orders of at least 1,000 shares and duration of at least one minute were used.

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In the US flash crash, the Waddell and Reed trader would surely have been well advised to defer trading rather than to sell, as they did, in a market experiencing historically high toxicity levels. Choice #3: join the herd Trade with volume bursts, such as at the opening and closing of the session, when your footprint is harder to detect. Transaction costs now largely consist of price impact costs, and astute LF traders must use transaction cost analysis products that are predictive, rather than simply reactive. Naive trading strategies are simply bait for predatory algorithms. 15 i i i i i i “Easley” — 2013/10/8 — 11:31 — page 16 — #36 i i HIGH-FREQUENCY TRADING Choice #4: Use “smart brokers”, who specialise in searching for liquidity and avoiding footprints As we have seen, HFT algorithms can easily detect when there is a human in the trading room, and take advantage.

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By summing over 185 i i i i i i “Easley” — 2013/10/8 — 11:31 — page 186 — #206 i i HIGH-FREQUENCY TRADING all child orders, we can thus measure the effect of the temporary component on overall trading costs. To be more precise, we extend the classic Perold (1988) “implementation shortfall” approach to decompose ex post transaction costs into various components, one of which accounts for the trading costs associated with transitory pricing errors. Because trading cost analysis is often performed on an institution’s daily trading, we first illustrate our transaction cost measurement approach at a daily frequency. However, our methods are much more precise when more disaggregated trading data are available. Using detailed information on the intra-day child order executions from a larger institutional parent order, we show how the transitory price component evolves with trading on a minute-by-minute basis, and we show how this transitory price component contributes to overall implementation shortfall.

Ghost Work: How to Stop Silicon Valley From Building a New Global Underclass
by Mary L. Gray and Siddharth Suri
Published 6 May 2019

See benefits; wages computers access to, 85, 122, 236 n26 algorithmic cruelty in, 67–69, 85–91 as executors of code, xiv–xv humans as, 39, 51–53, 54, 57 limitations of, 170–71, 231 n41 outsourcing, rise of, 54–56 consumer action, 193–94 content moderation, ix, x–xii, xxi, 19, 183 Contingent and Alternative Employment Arrangements, xxiv contingent work, xxii, xxiv, 8, 44, 46, 51, 53–55, 58–61 contract (temporary) work Amazon.com hiring of, 1–2 classification of, 57–63, 144–47 vs full-time work, 45–50, 159–60, 172–73, 185, 187–88 reliance on, 39 transaction costs, 68–69 See also on-demand employment corporate culture, transaction costs, 73 corporate firewalls, 16–21 cost-of-living allowance (COLA), 47 costs/expenses of employees, 39, 54 hiring, 32 outsourcing and, 55 platform fees, 144–47 shared workspaces, 180–81 social consequences, 68–69 transaction costs. see transaction costs up-front costs for workers, 108 See also double bottom line Craigslist, 4, 27, 32 creativity dependence on, xii, 31, 147, 170–71, 192 humans vs CPUs, xiv, 176, 231 n41 LeadGenius, 22 need for, 21, 161, 177–78 CrowdFlower, xv, 13, 34–35, 144–45 crowdsourcing.

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So the humans, on both sides of the market, are left with the task of resolving these complexities at their own expense, though the workers bear the heavier brunt of these costs. The Cost of Doing Business At the heart of the on-demand economy is the premise that relying on ghost work cuts transaction costs and, therefore, boosts profits. Transaction costs are those expenses associated with managing the production and exchange of goods or services. Nobel laureate Ronald Coase, a key contributor to modern economic theory, popularized the notion of transaction costs, though he did not coin the phrase itself. His seminal 1937 article “The Nature of the Firm” was published only two years after Wagner passed the National Labor Relations Act.

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For all the claims that ghost work can combine algorithms, artificial intelligence, and platform interfaces to replace the company’s function as “the entrepreneur-coordinator, who directs production,”3 there is evidence to the contrary. The transaction costs of ghost work don’t melt away. Instead they are shifted to the shoulders of requesters and workers. Requesters must juggle all the management that typically comes with scoping a new project and handing it to a new employee. They spend extra time and energy explaining tasks that they thought needed no explication once converted to code and relayed via APIs. Workers pay a disproportionately higher price: they lose their time, even their paychecks, with no opportunity to appeal any mistreatment. Many of the transaction costs passed on to requesters mirror those shouldered by workers.

Capital Ideas Evolving
by Peter L. Bernstein
Published 3 May 2007

In contrast to Capital Ideas, this book is almost completely about the implementation of theory and only incidentally about the development of new theory. * Just incidentally, in relation to how transactions costs on October 19 nearly buried portfolio insurance, Bob Merton has pointed out to me the wonderful paradox that there would be no Black-Scholes-Merton option pricing model without transactions costs. Transactions costs make the replicating portfolio impractical and options irreplaceable. bern_a03fpref.qxd xii 3/23/07 8:43 AM Page xii PREFACE It is interesting to note that this process is not unique to finance.

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The difficulty of executing transactions was overwhelming as panic transformed the whole market-making process into a disaster area. Because of the practical difficulties, especially the transactions costs of managing a replicating portfolio, investors are better off trading in a derivative instrument such as an option or a futures contract, if it is available. As Merton explains, “Black-Scholes has value because of the existence of transaction costs!” If there were no transactions costs to anyone, puts and calls would be useless, portfolio insurance would have been a glorious success, and Black, Scholes, and Merton would have had to find other ways to spend their time—and would they have won a Nobel anyway?

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All the pieces had to fit and join together. Three elements were the focus of all this work: low transactions costs, control of risk, and strategies derived from the index fund platform where scale was a plus instead of a drawback and source of weakness. Scale was where Wells Fargo’s products could develop their comparative advantage and run ahead of the competition, especially for managers whose business was in stock picking and market timing. Wells Fargo did not emphasize low transactions costs just because they were something nice for clients. Low transactions costs meant Wells Fargo could pursue strategies that were out of the ranges of typical active management firms.

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing
by Vijay Singal
Published 15 Jun 2004

Anomalies with high transactions costs may persist because large institutions or arbitrageurs may be reluctant to trade if large dollar positions cannot be taken without moving the price or if the bid-ask spreads are large. For example, the January effect has been known 15 16 Beyond the Random Walk for decades and is caused by tax-loss selling of small-size stocks. Nonetheless, the January effect persists because it is necessary to trade hundreds of small-size stocks. Small stocks have high bid-ask spreads and low liquidity, making the potential benefit insufficient to offset the transaction costs. PROFIT POTENTIAL IS INSUFFICIENT Certain anomalies may generate small profits that cannot be multiplied easily.

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Note, however, that the evidence presented does not account for transaction costs. Since those costs are high for small firms, and sometimes prohibitively high, it may be necessary to alter the above recommendations for implementation of a trading strategy. Though it is important to keep the practicability of a trading strategy in mind, evidence reveals that copying the large trades (more than 10,000 shares) of top executives is profitable. Outsiders can mimic these trades and earn a return of 7 percent for purchases and 4.9 percent for sales over a twelve-month period after adjusting for the market and accounting for transaction costs. If all trades (large and small) based on a six-month period are considered, the insider purchases outperform insider sales by 7.8 percent over the next twelve-month period.

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References for Further Reading Boehme, Rodney. 2002. Re-examining the Long-Run Stock Split Anomaly Puzzle. Working paper, Department of Finance, University of Houston. Brennan, M., and P. Hughes. 1991. Stock Splits, Stock Prices, and Transaction Costs. Journal of Finance 46, 1665–91. Brennan, M., and T. E. Copeland. 1988. Stock Splits, Stock Prices, and Transaction Costs. Journal of Financial Economics 22, 83–101. A Description of Other Possible Mispricings Byun, Jinho, and Michael S. Rozeff. 2003. Long-Run Performance After Stock Splits: 1927 to 1996. The Journal of Finance 58(3), 1063–86. Desai, H., and P.

Reinventing the Bazaar: A Natural History of Markets
by John McMillan
Published 1 Jan 2002

While the design does not control what happens in the market—as already noted, free decision-making is key—it shapes and supports the process of transacting.10 A workable market design keeps in check transaction costs—the various frictions in the process of making exchanges. These costs include the time, effort, and money spent in the process of doing business—both those incurred by the buyer in addition to the actual price paid, and those incurred by the seller in making the sale.11 Transaction costs are many and varied. Transaction costs can arise before any business is done. Locating potential trading partners may be costly and time-consuming. Comparing alternative sellers and choosing among them takes effort by the buyer.

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A manufacturer making components like computer chips or car seats may make a uniform item and sell it to several firms rather than customizing to a single firm’s specific needs, because customizing its production, though it would create more value, would leave it vulnerable to the sole customer’s whims. Transaction costs use up resources in ways that are unrelated to the actual value of the business to be done. In the extreme, transaction costs can cause markets to be dysfunctional. If market information is so inadequate that a buyer is unable to locate more than one seller, then that seller can exploit the fact that the buyer is locked in by charging an exorbitant price. A still more extreme market malfunction occurs if the costs of transacting are so high as to swamp any potential benefits from the deal. Transaction costs can thwart exchanges that would otherwise be worthwhile.

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The quality of the goods for sale is often not immediately apparent, and the buyer may have to go to some trouble to evaluate it. If it cannot be reliably checked, the buyer might be reluctant to purchase. In putting an agreement together, there are further transaction costs. Negotiations can be drawn out. Bargainers sometimes overreach in trying to squeeze out a good bargain, causing an impasse and spoiling what could have been a mutually beneficial deal. After the fact, there are still other transaction costs. Monitoring work costs time and money. The enforcement of contracts and the prevention and settling of disputes do not come for free. If agreements are not watertight, productive opportunities may be forgone.

Handbook of Modeling High-Frequency Data in Finance
by Frederi G. Viens , Maria C. Mariani and Ionut Florescu
Published 20 Dec 2011

Mariani, Marc Salas, and Indranil SenGupta 13.1 13.2 13.3 13.4 Introduction, 347 Method of Upper and Lower Solutions, 351 Another Iterative Method, 364 Integro-Differential Equations in a Lévy Market, 375 References, 380 14 Existence of Solutions for Financial Models with Transaction Costs and Stochastic Volatility 383 Maria C. Mariani, Emmanuel K. Ncheuguim, and Indranil SenGupta 14.1 Model with Transaction Costs, 383 14.2 Review of Functional Analysis, 386 14.3 Solution of the Problem (14.2) and (14.3) in Sobolev Spaces, 391 14.4 Model with Transaction Costs and Stochastic Volatility, 400 14.5 The Analysis of the Resulting Partial Differential Equation, 408 References, 418 Index 421 Preface This handbook is a collection of articles that describe current empirical and analytical work on data sampled with high frequency in the financial industry.

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Comput Meth Appl Mech Eng 1999;178:257–262. Chapter Fourteen Existence of Solutions for Financial Models with Transaction Costs and Stochastic Volatility MARIA C. MARIANI Department of Mathematical Sciences, University of Texas at El Paso, El Paso, TX EMMANUEL K. NCHEUGUIM Department of Mathematical Sciences, New Mexico State University, Las Cruces, NM I N D R A N I L S E N G U P TA Department of Mathematical Sciences, University of Texas at El Paso, El Paso, TX 14.1 Model with Transaction Costs In a complete financial market without transaction costs, the celebrated Black–Scholes model [1] provides not only a rational option pricing formula, but also a hedging portfolio that replicates the contingent claim.

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The second idea is to use the CRPs (Algoet and Cover, 1988) within the day in order to take advantage of market volatility without increasing risk. The third idea is to use limit orders rather than market orders to minimize transaction costs. The algorithm was profitable during the PLAT competition, and after the competition, the authors enhanced it by including a market maker component. They show that the constantly rebalanced portfolio can improve if a classifier can anticipate the direction of the market: up, down, or no change. Additionally, transaction costs play a central role to raise performance. Instead of an automatic rebalance of the 66 CHAPTER 3 Using Boosting for Financial Analysis and Trading portfolio, the results of the PLAT competition indicate that if the CRP strategy is implemented only with limit orders, its results improve because of the rebates.

Alpha Trader
by Brent Donnelly
Published 11 May 2021

I will go through this process again in the trade walkthrough at the end of this chapter. That should solidify your understanding. 5. EXECUTION Good execution reduces transaction costs and improves returns. This is important at all skill levels and in all trading businesses. Remember those charts that show the impact of transaction costs in Chapter 8? Transaction costs are important. It is lazy to ignore them or minimize their importance. Take TC seriously. Here are a few ways to reduce transaction costs and pay less spread. I discuss these approaches from the point of view of an equity trader, but these concepts apply to trading in most markets. 1.

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Is there plenty of liquidity all the time, or do you need to consider liquidity when you execute? Let’s drill into liquidity a bit so you can think about the specific features of your market. Transaction costs and bid /ask spread The difference between the bid and the ask in a market is called the spread.102 Transaction costs are the amount of spread you pay when you trade. (SPREAD) X (NUMBER OF UNITS) = TRANSACTION COST If AAPL is trading 350.00 / 350.08, the spread is eight cents. This is often expressed either as a percentage of the mid-price103 or in basis points: = 0.08 / 350.04 = 0.029% = 2.9bps104 2.9bps is one of the tightest bid/offer spreads you will see.

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Your estimate of bid/offer spreads does not have to be perfect, just eyeball it and multiply by your estimated number of trades per day to get a rough sense of your transaction costs (TC). TC is a slow and steady leak that adds up substantially. You need a significant edge to make money in any market because you don’t just need to generate alpha, you need to generate alpha net of transaction costs. Figure 8.1 and Figure 8.2 show the theoretical P&L for two different traders. The thinner gray line shows the P&L before transaction costs (known as “gross”) and the black line shows the P&L after TC (known as “net”). I used realistic bid/offer spreads to show the impact of trading costs on two realistic P&L streams so you can get a sense of the enormous strain TC exerts on performance.

Democratizing innovation
by Eric von Hippel
Published 1 Apr 2005

But what about manufacturers that specialize in custom products? Isn’t it their business to respond to special requests? To understand which way the innovate-or-buy choice will go, one must consider both transaction costs and information asymmetries specific to users and manufacturers. I will talk mainly about transaction costs in this chapter and mainly about information asymmetries in chapter 5. I begin this chapter by discussing four specific and significant transaction costs that affect users’ innovate-or-buy decisions. Next I review a case study that illustrates these. Then, I use a simple quantitative model to further explore when user firms will find it more cost-effective to develop a solution—a new product or service—for themselves rather than hiring a manufacturer to solve the problem for them.

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For example, they will have the same costs to monitor the performance of the designer employees they hire. In this way we simplify our innovate-or-buy problem to one of transaction costs only. If there are no transaction costs (for example, no costs to write and enforce a contract), then by Coase’s theorem a user will be indifferent between making or buying a solution to its problem. But in the real world there are transaction costs, and so a user will generally prefer to either make or buy. Which, from the point of view of minimizing overall costs of obtaining a problem solution, is the better choice under any given circumstances?

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Manufacturers, in turn, have an incentive to invest in understanding the nature of problems faced by users in the target market, the number of users affected, and the value that the users would attach to getting a solution in order to determine the potential profitability of markets from their point of view. 58 Chapter 4 We first consider the user’s payoff for solving a problem for itself. A user has no transaction costs in dealing with itself, so a user’s payoff for solving problem j will be Vij – Whj. Therefore, a user will buy a solution from an upstream manufacturer rather than develop one for itself if and only if Pj ≤ Whj. Next we consider payoffs to a manufacturer for solving problem j. In this case, transaction costs such as those discussed in earlier sections will be encountered. With respect to transaction costs assume first that t = 0 but T > 0. Then, the manufacturer’s payoff for solving problem j will be Vij – Whj, which needs to be positive in order for the manufacturer to find innovation attractive: Nj Pj – Whj – T > 0.

Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies
by Jeremy J. Siegel
Published 18 Dec 2007

Costs Return Risk % in Market No. of Switches 8.63% 17.3% 62.9% 350 Subperiods 1886 - 1925 9.08% 23.7% 9.77% 17.7% 8.11% 18.0% 57.1% 122 1926 - 1945 6.25% 31.0% 11.10% 21.8% 9.44% 22.7% 62.7% 60 1946 - 2006 11.23% 16.0% 10.21% 14.2% 8.70% 15.1% 67.4% 168 1990 - 2006 11.76% 14.7% 6.60% 16.9% 4.30% 18.3% 73.7% 74 11.30% 20.5% 10.80% 16.5% 9.23% 17.2% 64.2% 334 17.72% 25.9% 15.75% 14.24% 22.1% 71.2% 44 Excl. 1929 - 1932 Crash 1886 - 2006 1926 - 1945 21.3% years. In later years if this strategy is pursued with index futures or ETFs, the transactions costs would be lower. Each 0.1 percentage point increase of transactions costs lowers the compound annual returns by 29 basis points. Although the excess returns from the timing strategy disappear when transactions costs are considered, the major gain from the timing strategy is a reduction in risk. Since the market timer is in the market less than two-thirds of the time, the standard deviation of returns is reduced by about one-quarter.

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This means that on a risk-adjusted basis, the return on the 200-day moving-average strategy is quite impressive, even when transactions costs are included. Unfortunately, the timing strategy has broken down in the last 17 years. The year 2000 was particularly disastrous for the timing strategy. With the Dow Industrials meandering most of the year above and below the 200-day moving average, the investor pursuing the timing strategy was whipsawed in and out of the market, executing a record 16 switches in and out of stocks. Each switch incurs transactions costs and must overcome the 1 percent pricing band. As a result, even ignoring transactions costs, the timing strategist lost over 28 percent in 2000 while the buy-and-hold strategist lost less than 5 percent.

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Because of these costs, investors in earlier years purchased fewer stocks than in an index and were less diversified, thereby assuming more risk than implied by stock indexes. Alternatively, if investors attempted to buy all the stocks, their real returns could have been as low as 5 percent per year after deducting transactions costs. The collapse of transactions costs over the past two decades means that stockholders can now acquire and hold a completely diversified portfolio at an extremely low cost.11 It has been well established that liquid securities—that is, those assets that can be sold quickly and at little cost on short notice in the public market—command a premium over illiquid securities.

The Wealth of Networks: How Social Production Transforms Markets and Freedom
by Yochai Benkler
Published 14 May 2006

And yet, this is precisely what is happening in the software world. 120 Industrial organization literature provides a prominent place for the transaction costs view of markets and firms, based on insights of Ronald Coase and Oliver Williamson. On this view, people use markets when the gains from doing so, net of transaction costs, exceed the gains from doing the same thing in a managed firm, net of the costs of organizing and managing a firm. Firms emerge when the opposite is true, and transaction costs can best be reduced by [pg 60] bringing an activity into a managed context that requires no individual transactions to allocate this resource or that effort.

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It is enough that the net value of the information produced by commons-based social production processes and released freely for anyone to use as they please is no less than the total value of information produced through property-based systems minus the deadweight loss caused by the above-marginal-cost pricing practices that are the intended result of the intellectual property system. 211 The two scarce resources are: first, human creativity, time, and attention; and second, the computation and communications resources used in information production and exchange. In both cases, the primary reason to choose among proprietary and nonproprietary strategies, between marketbased systems--be they direct market exchange or firm-based hierarchical production--and social systems, are the comparative transaction costs of each, and the extent to which these transaction costs either outweigh the benefits of working through each system, or cause the system to distort the information it generates so as to systematically misallocate resources. 212 The first thing to recognize is that markets, firms, and social relations are three distinct transactional frameworks.

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To succeed, therefore, peer-production systems must also incorporate mechanisms for smoothing out incorrect self-assessments--as peer review does in traditional academic research or in the major sites like Wikipedia or Slashdot, or as redundancy and statistical averaging do in the case of NASA clickworkers. The prevalence of misperceptions that individual contributors have about their own ability and the cost of eliminating such errors will be part of the transaction costs associated with this form of organization. They parallel quality control problems faced by firms and markets. 219 The lack of crisp specification of who is giving what to whom, and in exchange for what, also bears on the comparative transaction costs associated with the allocation of the second major type of scarce resource in the networked information economy: the physical resources that make up the networked information environment--communications, computation, and storage capacity.

Frequently Asked Questions in Quantitative Finance
by Paul Wilmott
Published 3 Jan 2007

Although asymptotic analysis has been used in financial problems before, for example in modelling transaction costs, this was the first time it really entered mainstream quantitative finance. References and Further Reading Avellaneda, M, Levy, A & Parás, A 1995 Pricing and hedging derivative securities in markets with uncertain volatilities. Applied Mathematical Finance 2 73-88 Avellaneda, M & Parás, A 1994 Dynamic hedging portfolios for derivative securities in the presence of large transaction costs. Applied Mathematical Finance 1 165-194 Avellaneda, M & Parás, A 1996 Managing the volatility risk of derivative securities: the Lagrangian volatility model.

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Example The implied volatility of a call option is 20% but you think that is cheap, volatility is nearer 40%. Do you put 20% or 40% into the delta calculation? The stock then moves, should you rebalance, incurring some inevitable transactions costs, or wait a bit longer while taking the risks of being unhedged? Long Answer There are three issues, at least, here. First, what is the correct delta? Second, if I don’t hedge very often how big is my risk? Third, when I do rehedge how big are my transaction costs? What is the correct delta? Let’s continue with the above example, implied volatility 20% but you believe volatility will be 40%. Does 0.2 or 0.4 go into the Black-Scholes delta calculation, or perhaps something else?

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• In practice φ is not normally distributed: the fat tails, high peaks we see in practice will make the above observation even more extreme, perhaps a long gamma position will lose 80% of the time and win only 20%. Still the mean will be zero. How much will transaction costs reduce my profit? To reduce hedging error we must hedge more frequently, but the downside of this is that any costs associated with trading the underlying will increase. Can we quantify transaction costs? Of course we can. If we hold a short position in delta of the underlying and then rebalance to the new delta at a time δt later then we will have had to have bought or sold whatever the change in delta was.

Social Capital and Civil Society
by Francis Fukuyama
Published 1 Mar 2000

In addition to principal-agent problems, organizations suff er from other diseconomies of scale related to information-processing. Many transaction costs are internal to organizations and are created by the difficulties in passing information up and down a large hierarchy. W e have all worked in hierarchical organizations in which Department X doesn’t know what Department Y on the next floor is doing. Ideally, information ought to be processed as close to its source within the organization as possible. Some decisions require higher-level monitoring and therefore the transaction costs of that monitoring; in other cases, organizations assign monitoring responsibilities unnecessarily, incorrectly, or inefficiently.

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Professional education is consequently a major source of social capital in any advanced, postindustrial society and provides the basis for decentralized, flat organization. I would argue that social capital is important to certain sectors and certain forms of complex production precisely because exchange based on informal norms can avoid the internal transaction costs of large hierarchical organizations, as well as the external transaction costs of arms-length market transactions. The need for informal, norm-based exchange becomes more important as goods and services become more complex, difficult to evaluate, and differentiated. The increasing importance of social capital can be seen in the shift from low-trust to high-trust manufacturing, among other places.

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There is a large law-and-economics literature using game theoretic methods to describe the emergence of spontaneously generated informal norms regulating economic behavior. Much of this literature originates from the so-called Coase theorem, which states that when transaction costs are zero, a change in the formal rules of liability will have no effect on the allocation of resources.2 Put differently, in a zero-transaction-cost world it is not necessary 1 Robert Axelrod, The Evolution of Cooperation (New York: Basic Books, 1984). 2 Strictly speaking, Coase himself did not postulate a “Coase theorem”: Ronald H. Coase, “The Problem of Social Cost,” Journal of Law and Economics 3 (1960) : 1-44.

The Innovation Illusion: How So Little Is Created by So Many Working So Hard
by Fredrik Erixon and Bjorn Weigel
Published 3 Oct 2016

Firms, after all, are complex social constructs, permeated with operational slack and inefficiencies that a perfectly functioning market could root out. Companies are hardly seamlessly connected and easily managed entities as described in glossy corporate presentations. Companies that fail often do so because internal transaction costs are too high. Yet firms also exist because of high market-transaction costs. And, in a way, the higher they are, the better it is to have companies, because the transaction costs partly set the value of a firm. Firms, if you want to be provocative, exist because markets fail, at least in a theoretical way. And the greater the failure, the more space there is for an upward valuation of companies.

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They still operate, for want of a better word, on “the Coasean principle,” the source code of corporate behavior that we introduced in the previous chapter. The beauty of globalization was that it cut market transaction costs – and, as a consequence, allowed for a reorganization of production. That change also created new conditions for how companies balance internal and external transaction costs. Companies could contract away a larger part of production because falling trade and transmission costs also cut market transaction costs. What is more, they could now define and bundle their core assets in new ways, and change their strategies for how to make money. Globalization, then, helped companies to “marketize” their supply and value chains, and benefit from taking selected parts of them out of their own organizations.

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Coase put it slightly more dryly: “The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism.”18 A successful firm can bank on the value of its unique combination of ideas, management, capital, and labor – or of what it has that cannot easily be reproduced by the market, or copied by another firm. Companies exist because they reduce market transaction costs. Yet if this is the case, why has the process of capitalist competition not coalesced all firms into a single gigantic unit? Why is there not just one company in a country, let alone the world, which rules the market? It is not just markets that have transaction costs; companies have them too. Companies can grow but there is a limit to the scale benefits received. Big companies that invest in expansion will sooner or later reach a point where it no longer saves costs and makes them more competitive.

Big Business: A Love Letter to an American Anti-Hero
by Tyler Cowen
Published 8 Apr 2019

But you also can pick up on some significant hints of the fourth feature of how I view corporations, especially in chapter 3, on CEO pay, and in the chapter on finance.2 Still, I wish to push back against the focus on transactions costs in explaining modern business activity. If firms were mainly about lowering transactions costs, they would be loved much more than is the case. Firms do have low enough transactions costs to get the job done, at least compared with the other feasible alternatives. That said, firms do not have especially low or favorable transactions costs, and so we are frustrated with them often, including in our roles as employees. Unless we are working in a very small enterprise, we so often hate the bureaucracies in the companies we work in (even if we enforce comparable bureaucratic strictures when on the other side of the relationship).

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You might be tempted to suggest that viewing companies as carriers of social and legal reputation ultimately boils down to transaction-costs-minimizing theories of the firm. To be sure, the firm as a carrier of reputation does minimize transaction costs to some extent, but it also increases transaction costs by making the firm more of a target. I would say the carrier-of-reputation element is not fundamentally a choice a firm makes at the margin, resulting in minimal transaction costs, but rather part of what a firm is required to be (with room for adjustment at the margins), and in this regard it still differs significantly from the Coase and Williamson models.

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I agree that sometimes corporations reduce transactions costs, but they don’t always, and I am not sure they do on average. Ask yourself a simple question. Let’s say you want to buy a work computer for your desk. Which method involves lower transactions costs: going online with Amazon (or driving to Best Buy) or trying to get an order for a new computer through your company’s purchasing department? Of course, it depends on the company in question, but most of us already know the likely answer. A lot of markets today involve very, very low transactions costs. The purchasing department may get you a better price if they buy in bulk, but dealing with them probably is more of a pain.

Why Information Grows: The Evolution of Order, From Atoms to Economies
by Cesar Hidalgo
Published 1 Jun 2015

On the contrary, transaction cost theory and economic sociology are complementary, since the economic effects of preexisting social networks can be interpreted in terms of the cost of links. In the words of Fukuyama: “Certain societies can save substantially on transaction costs because economic agents trust one another in their interactions and therefore can be more efficient than low trust societies, which require detailed contracts and enforcement mechanisms.”12 James Coleman, a sociologist well known for his work on social capital, has also emphasized the ability of trust to reduce transaction costs. In his seminal paper on social capital Coleman described the transactions between Jewish diamond merchants in New York, who have the tradition of letting other merchants inspect their diamonds in private before executing a transaction.

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It is analogous to the personbyte, but instead of requiring the distribution of knowledge and knowhow among people, it requires them to be distributed among a network of firms.3 The factors that limit the size of firms—and imply a second quantization threshold—have been studied extensively in a branch of the academic literature known as transaction cost theory or new institutional economics. Additionally, the factors that limit the size of the networks humans form—whether firms or not—have been studied extensively by the sociologists, political scientists, and economists working on social capital and social networks. Since this is an extensive literature, I will review the basics of the new institutional economics in this chapter and leave the discussion of social capital theories for the next chapter. Transaction cost theory, or new institutional economics, is the branch of economics that studies the costs of transactions and the institutions that people develop to govern them.

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Coase dedicated much of his academic career to explaining the existence and boundaries of these islands of power. His answers become known as the transaction cost theory of the firm. Coase’s explanation of the boundaries of a firm was brilliant and simple. It was based on the idea that economic transactions are costly and not as fluid as the cheerleaders of the price mechanism religiously believed. Often, market transactions require negotiations, drafting of contracts, setting up inspections, settling disputes, and so on. These transaction costs can help us understand the boundary of the firm, since according to Coase, a parsimonious way of understanding the islands of central planning that we know as firms is to search for the point at which the cost of transactions taking place internally within the firm equals the cost of market transactions.

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies
by Jeremy Siegel
Published 7 Jan 2014

These changes include a decrease in the cost of investing in equity indexes, a lower discount rate, and an increase in knowledge about the advantages of equity versus fixed-income investments. A Fall in Transaction Costs Chapter 5 confirmed that the real return on equity as measured by stock indexes was between 6 and 7 percent after inflation over the past two centuries. But over the nineteenth century and the early part of the twentieth century, it was extremely difficult, if not impossible, for an investor to replicate these stock returns because of transactions costs. Charles Jones of Columbia University has documented the decline in stock trading costs over the last century.18 These costs include both the fees paid to brokers and the bid-asked spread, or the difference between the buying and selling price for stocks.

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If that period is excluded, the returns of the timing strategy are 68 basis points per year behind the holding strategy, although the timing strategy has lower risk. TABLE 20-1 Annualized Returns of Timing and Holding Strategies, 1886–2012 Moreover, if the transaction costs of implementing the timing strategy are included in the calculations, the excess returns over the whole period, including the 1929-to-1932 Great Crash, more than vanish. Transaction costs include brokerage costs and bid-asked spreads, as well as the capital gains tax incurred when stocks are sold, and are assumed to be on average half a percent when buying or selling the market. This number probably underestimates such costs, especially in the earlier years, but likely overstates these costs in more recent years.

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But in 2010, 2011, and 2012, these investors were whipsawed, switching in and out of stocks 20 times, which caused about 20 percentage points to be clipped from the investors’ returns before transaction costs. Distribution of Gains and Losses The 200-day moving-average strategy does avoid large losses, but it suffers many small declines. Figure 20-3 shows the distribution of yearly gains and losses (after transaction costs) of the timing and the holding strategy for the Dow Industrials for every year from 1886 through 2012. The timing strategist participates in most bull markets and avoids bear markets, but the losses suffered when the market fluctuates with little trend are significant.

Before Babylon, Beyond Bitcoin: From Money That We Understand to Money That Understands Us (Perspectives)
by David Birch
Published 14 Jun 2017

In chapter 14 I suggested that in the future all money will be local, belonging to the community in which it is used; it’s just that ‘community’ will mean something different in the connected world. Whether the community is Totnes or the Chinese diaspora or World of Warcraft won’t matter, but the shared desire to minimize transaction costs for ‘us’ at the possible expense of transactions costs with ‘them’ will. Since the overwhelming majority of retail transactions are local, most people’s transactions most of the time will be in their local currency, with minimal transaction costs. A small number of transactions will be in ‘foreign’ currencies (i.e. someone else’s local currency). From this perspective, the widespread view that ‘alternative’ money can work in isolated local environments but not at scale is wrong, because both locality and globalization will mean something different in the networked world and there’s no reason why interconnection between local money of one form or another (via markets) cannot operate globally.

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He says that as a ‘concession to the poor’ we should keep a limited number of low-denomination notes and coins in circulation, but this doesn’t seem right to me. Cash isn’t a concession to the poor: it forces them to pay higher transaction costs than their better-off neighbours. And if the amount of cash falls, then the cost of the whole infrastructure of ATMs and cash registers, armoured vans and night safes will fall on the poor, thus further raising their transaction costs. It is clear, then, that cash plays a major role in facilitating crime, so cashlessness ought to tackle crime in useful ways: at least by making it more expensive, even if it is unable to eliminate it.

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By and large, the retailers seemed positive (Leighton 2014). The shops and pubs didn’t particularly want to mess around with change or take bags of coins to the bank for deposit. Many of the retailers were enthusiastic because there was no transaction charge and for some of them the costs of cash handling and management were high for non-transaction cost reasons. I can remember talking to a hairdresser who was keen to get rid of cash because it was dirty and she had to keep washing her hands, a baker who was worried about staff ‘shrinkage’, and so on. But while ‘from a retailer’s point of view it’s very good’, news-stand manager Richard Jackson said, ‘less than one per cent of my actual customers use it’.

Trade Your Way to Financial Freedom
by van K. Tharp
Published 1 Jan 1998

For example, my active trading system generated a 30 percent return in 2004 after transaction costs, but the transaction costs were still about 20 percent of the initial account value. Thus, I got 60 percent of the total profit, while my broker got 40 percent in transaction costs. If you are in and out of the market all the time, then such transaction costs can eat your profits down to nothing. This becomes a major factor if you are trading small size because your cost per trade is very high. I often see systems that over a number of years produce profits that are not much bigger than the transaction costs they generate. Losing much less money when you abort a trade is probably an exciting prospect to most of you.

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Trend following is probably one of the easiest techniques for the new trader or investor to understand and use. The longer term the indicators, the less that total transaction costs will affect profits. Short-term models tend to have difficulty overcoming the costs of many transactions. Costs include not only commissions but also slippage on the trades. The fewer trades you make, provided you have the patience for it, the less you spend in transaction costs and the easier it is for you to make a profit. There are numerous examples where trend following is not appropriate. Floor traders who are scalping ticks are not likely to use a trend-following concept.

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Second, tight stops dramatically increase your transaction costs because market professionals have developed a system to make sure they profit no matter what you do with your account. Transaction costs are a major part of doing business. Market makers get the benefit of the bid-ask spread. Your brokerage firm gets its commissions. And should you invest in any sort of fund, they get paid a fee based on the size of your investment. In fact, I often see systems that over a number of years produce profits that are not much bigger than the transaction costs they generate. For example, my active trading system generated a 30 percent return in 2004 after transaction costs, but the transaction costs were still about 20 percent of the initial account value.

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns
by John C. Bogle
Published 1 Jan 2007

They pick funds based on the recent performance superiority—or even the long-term superiority—of a fund manager, and often hire advisers to help them achieve the same goal (Warren Buffett’s “Helpers,” described in the next chapter). But as I explain in Chapter 12, the advisers do it with even less success. Oblivious of the toll taken by costs, too many fund investors willingly pay heavy sales loads and incur excessive fund fees and expenses, and are unknowingly subjected to the substantial but undisclosed transaction costs incurred by funds as a result of their hyperactive portfolio turnover. Fund investors are confident that they can consistently select superior fund managers. They are wrong. Mutual fund investors are confident that they can easily select superior fund managers. They are wrong. Contrarily, for those who invest and then drop out of the game and never pay a single unnecessary cost, the odds in favor of success are awesome.

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Here’s what he had to say in a 2004 BusinessWeek interview: “The investment business is a giant scam. Most people think they can find managers who can outperform, but most people are wrong. I will say that 85 to 90 percent of managers fail to match their benchmarks. Because managers have fees and incur transaction costs, you know that in the aggregate they are deleting value.” When asked if private investors can draw any lessons from what Harvard does, Mr. Meyer responded, “Yes. First, get diversified. Come up with a portfolio that covers a lot of asset classes. Second, you want to keep your fees low. That means avoiding the most hyped but expensive funds, in favor of low-cost index funds.

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Malkiel, author of A Random Walk Down Wall Street, expresses these views: “Index funds have regularly produced [annual] rates of return exceeding those of active managers by close to 2 percentage points. Active management as a whole cannot achieve gross returns exceeding the market as a whole, and therefore they must, on average, underperform the indexes by the amount of these expense and transaction costs. “Experience conclusively shows that index-fund buyers are likely to obtain results exceeding those of the typical fund manager, whose large advisory fees and substantial portfolio turnover tend to reduce investment yields. . . . The index fund is a sensible, serviceable method for obtaining the market’s rate of return with absolutely no effort and minimal expense.”

Licence to be Bad
by Jonathan Aldred
Published 5 Jun 2019

Finally, once a deal has been done, there are costs involved in monitoring the outcome to be sure that the other party has stuck to the agreement. And if they haven’t, there are further costs in trying to enforce the deal, perhaps through the courts. Transaction costs imply that the thing being argued over may not go to the individual, firm or organization which values it the most. This is because transaction costs often prevent deals being done, even when the deal is beneficial to all parties. If, for any of the parties involved, the overall transaction costs involved in arranging and enforcing a deal exceed the expected benefits from doing so, then the deal will not happen. But if a deal beneficial to all parties does not happen, then the outcome is in a sense wasteful: it wastes an opportunity to make all parties better off.

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Coase was preoccupied with how previous economists had analysed problems such as pollution. The standard analysis assumed there were no transaction costs but nevertheless called for government intervention. Coase wanted to show that in this strictly blackboard world of zero transaction costs, government intervention would be unnecessary because the polluter and pollutee would make a deal. So, given Coase’s backward-looking gaze, his starting point of a zero transaction cost world made sense. But it helped entrench a disastrous misinterpretation of his ideas by future generations. By the 1970s Coase had begun to refer tentatively to such a misinterpretation, but he did not shout loudly enough and was drowned out by influential Chicago voices including Becker, Friedman and Stigler.

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Coase regarded his story as obviously fiction, a kind of thought experiment to show the fantastic conclusions that follow from the story’s fictitious assumption: that there are no costs or other obstacles to private deal-making or, in Coase’s words, the assumption of ‘zero transaction costs’. While this style of reasoning is familiar to philosophers as a reductio ad absurdum, the Chicago economists missed the point: they treated the zero-transaction-costs assumption as essentially realistic, and as a result duly embraced the absurd conclusion. Their mistaken interpretation of Coase’s argument rapidly became hard to dislodge because it was elevated to the status of a ‘theorem’.

Governing the Commons: The Evolution of Institutions for Collective Action
by Elinor Ostrom
Published 29 Nov 1990

To distinguish between the successful and unsuccessful instances of self-organization to solve CPR problems, one must take account of how the strategies of external actors affect the costs and benefits of CPR appropriators. A third problem with current theories relates to the way that information and transactions costs are assumed away. To assume that complete in­ formation is freely available and that transactions costs can be ignored does not generate theoretical explanations that can be used in a setting where information is scant, potentially biased, and expensive to obtain and where most transactions are costly.2 Why individuals monitor each other's rule conformance would be difficult to explain using the assumption of com­ plete information.

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Assum­ 190 191 1 the need to reflect the incremental, self-transforming nature of institu­ tional change, 2 the importance of the characteristics of external political regimes in an analysis of how internal variables affect levels of collective provision of rules, and 3 the need to include information and transaction costs. Governing the commons A framework for analysis of CPRs ing zero-cost monitoring does not push the analyst to examine cost and effectiveness for various monitoring rules. Assuming fixed structure does not push the analyst to examine whether or not and how individuals change their own rules and how the surrounding political regime enhances or inhibits institutional change.

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The theoretical enterprise requires social scientists to engage in model-building,1° but not theoretical inquiry to that specific level of discourse. We need to appreciate the analytical power that can be derived from the prior in­ tellectual efforts of important contributors such as Hobbes, Montesquieu, Madison, Hamilton, Tocqueville, and many others.21 Con­ temporary studies in the theory of public and social choice, the economics of transactions costs, the new institutional economics, law and economics, game theory, and many related fields22 are making important contributions that need to be carried forward in theoretically informed empirical in­ quiries in both laboratory and field settings. 216 Notes 1. REFLECTIONS ON THE COMMONS 1 Attributed to Merrill M.

Advances in Financial Machine Learning
by Marcos Lopez de Prado
Published 2 Feb 2018

At a particular horizon h = 1, …, H, we have a forecasted mean μh, a forecasted variance Vh and a forecasted transaction cost function τh[ω]. This means that, given a trading trajectory ω, we can compute a vector of expected investment returns r, as where τ[ω] can adopt any functional form. Without loss of generality, consider the following: , for h = 2, …, H ω*n is the initial allocation to instrument n, n = 1, …, N τ[ω] is an Hx1 vector of transaction costs. In words, the transaction costs associated with each asset are the sum of the square roots of the changes in capital allocations, re-scaled by an asset-specific factor Ch = {cn, h}n = 1, …, N that changes with h.

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Be certain about the timestamp for each data point. Take into account release dates, distribution delays, and backfill corrections. Storytelling: Making up a story ex-post to justify some random pattern. Data mining and data snooping: Training the model on the testing set. Transaction costs: Simulating transaction costs is hard because the only way to be certain about that cost would have been to interact with the trading book (i.e., to do the actual trade). Outliers: Basing a strategy on a few extreme outcomes that may never happen again as observed in the past. Shorting: Taking a short position on cash products requires finding a lender.

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In words, the transaction costs associated with each asset are the sum of the square roots of the changes in capital allocations, re-scaled by an asset-specific factor Ch = {cn, h}n = 1, …, N that changes with h. Thus, Ch is an Nx1 vector that determines the relative transaction cost across assets. The Sharpe Ratio (Chapter 14) associated with r can be computed as (μh being net of the risk-free rate) 21.4 The Problem We would like to compute the optimal trading trajectory that solves the problem This problem attempts to compute a global dynamic optimum, in contrast to the static optimum derived by mean-variance optimizers (see Chapter 16). Note that non-continuous transaction costs are embedded in r. Compared to standard portfolio optimization applications, this is not a convex (quadratic) programming problem for at least three reasons: (1) Returns are not identically distributed, because μh and Vh change with h. (2) Transaction costs τh[ω] are non-continuous and changing with h. (3) The objective function SR[r] is not convex.

Trust: The Social Virtue and the Creation of Prosperity
by Francis Fukuyama
Published 1 Jan 1995

Coase’s original thesis has been vastly elaborated, particularly by Oliver Williamson, into a broad theory of the modern corporation.12 In Williamson’s words, “The modern corporation is mainly to be understood as the product of a series of organizational innovations that have had the purpose and effect of economizing on transaction costs.”13 Transaction costs can be substantial, in turn, because human beings are not completely trustworthy. That is, if people pursued their economic self-interest and were at the same time completely honest, it might be possible to build cars by subcontracting. Suppliers could be relied on to provide their best price, not to renege on deals or give competitors proprietary information, to meet delivery schedules and maintain quality to the best of their ability, and so on.

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But human beings are, in Williamson’s words, “opportunistic” and characterized by “bounded rationality” (meaning that they do not always make optimally rational decisions); integrated corporations are necessary because outside suppliers cannot be relied on to do what they contract to do.14 Firms integrate vertically, then, in order to reduce transaction costs. They continue to expand until the costs of large size begin to exceed the savings from these transaction costs. That is, large organizations suffer from diseconomies of scale: the free rider problem becomes more severe the larger the organization becomes;15 they are prone to agency costs, where the firm’s bureaucracy develops a stake in its own survival rather than profit maximization; and they suffer from information costs when managers lose track of what is happening in their own organizations.

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In Williamson’s view, the multidivisional corporation, which was pioneered by American corporations at the beginning of the twentieth century, was an innovative response to this problem that combined the transaction cost economies of integration with decentralized, independent profit centers.16 It should be clear, however, that the Japanese keiretsu is another innovative solution to the problem of scale. The long-term relationships between keiretsu partners are a substitute for vertical integration, one that achieves similar efficiencies in terms of transaction cost savings. Toyota could have purchased outright one of its large subcontractors, Nippondenso, just as General Motors acquired Fisher Body in the 1920s.

Money, Real Quick: The Story of M-PESA
by Tonny K. Omwansa , Nicholas P. Sullivan and The Guardian
Published 28 Feb 2012

Cash is the enemy of governments, which must replace ripped notes by printing and distributing new currency; it is the enemy of bill payers, who must waste half days queuing to pay water and electric bills, or getting bank checks to pay school tuitions; it is the enemy of businesses, which have no easy and verifiable way to offer credit to customers or pay suppliers in advance, or to pay their workers in cash, which restricts them to doing business in small geographic circles. But cash is the most formidable enemy of the poor. Cash is difficult to store and certainly to save; and the transaction costs are prohibitive. That’s why, in many parts of the developing world, the idea of interest on savings is irrelevant; people often pay as much as 30% to get others to safely store money for them. That is a lower transaction cost than the alternative, which might mean seeing the money disappear altogether. The poor depend on cash but it is the enemy; the poor have little money but lead complex financial lives; the poor have low cash balances but move large amounts of cash every day, week and month.

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Many of those phones are being used to, send, receive and save money. People who first used a phone five or 10 years ago and never had a bank account are now transferring money by phone. In countries where money means cash and cash typically moves by bus or post, the move to mobile is reducing transaction costs, and increasing the velocity and productivity of money. For the banked, mobile money provides superior speed, convenience and safety. For the unbanked, mobile money forms the beginning of a shadow banking system. For everyone, cash is the enemy—expensive to print, hard to store and move. Dematerializing money is good for people rich and poor, businesses, and governments.

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M-PESA appeals to all segments of society—rich and poor, banked and un-banked, housed and un-housed, farmers and pastoralists, CEOs and janitors, street hawkers and shop merchants, small businesses and big businesses. The transactional platform for mobile money transfers is connecting the unbanked to the financial grid, and reducing transaction costs for every financial actor in society. Businesses run better, entrepreneurship is unleashed (Nairobi is becoming a leading innovation hub in Africa), productivity is increased, bills are paid instantaneously, money is redistributed from urban centers and market towns to rural villages, cash flow is smoothed during disruptions in income, just-in-time financing allows economic opportunism, domestic and international remittances are more regular, and the unbanked are slowly integrated into the formal financial system.

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton
by Colin Read
Published 16 Jul 2012

Ever since this formulation of the CAPM, we call this relative variance the beta , and interpret it as a relative measure of the required return of the asset over the market return, commensurate with its risk. Embedded in this elegant approach to pricing an individual security are a number of assumptions. First, we assume that the market is perfect. By this we mean that there are no transactions costs or taxes, that no trader has the power to influence prices and all are equally and costlessly informed, that assets can be traded in infinitely divisible amounts, and that expectations are homogenous while investors are rational maximizers in the domain of security means and variances. In addition, the market portfolio must contain all securities in proportion to their relative capitalization, and each security is efficiently priced according to its risk.

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In fact, there is likely to be a different set of expectations of probabilities between current and future shareholders. This asymmetry has been treated by financial behaviorists who have developed psychologically based asset pricing models as an alternative to the CAPM.2 Extensions of the CAPM More complicated versions of the CAPM, including the subsequent work by John Lintner, included taxes and transactions costs that were originally omitted from the CAPM model. Perhaps less problematic is that the CAPM model also assumes that shares can be infinitely divisible, even if there are often premiums to be paid when securities are purchased in lots smaller than 100, and there cannot be fractional shares. The CAPM was initially developed as a static model, not an intertemporal and dynamic model, with a securities price determined at each instant over a dynamic time path.

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Certainly, no one would deny that past observed measures of risk ought to influence expected returns, even if one can imagine other forces that could impinge as well. Of course, expected returns are not an observable variable. Our regressions are based on realized returns, with all their attendant noise from other unrelated factors. Indeed, the CAPM has constantly evolved to include other factors. Taxes, dividend yields, transactions costs, and intertemporal versions have all augmented its conceptual usefulness. Certainly, the CAPM’s principal ambassador, William Sharpe, and the only surviving academician of its founding four developers has always held faith in the utility of his model. When asked if he thought the model was something big, he responded: I didn’t know how important it would be, but I figured it was probably more important than anything else I was likely to do.

Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors
by Wesley R. Gray and Tobias E. Carlisle
Published 29 Nov 2012

The situation is similar, although less trading intensive, if we use a market capitalization–weighting scheme. In practice, all of this rebalancing incurs transaction costs. Investment simulations must take into account these transaction costs from the rebalancing. The more frequently the portfolio is rebalanced, the better the returns in the investment simulation, but the higher the transaction costs in the real world. It's possible that the transaction costs are so great as to erode all the expected return. Incorporating transaction costs into an investment simulation is difficult. Different investors will have different cost structures, tax statuses, and trading and execution skills.

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Only in 1995 and 2004 to 2006, when strong economic growth generated earnings that caught up with earlier predictions, do forecasts actually hit the mark. When economic growth accelerates, the size of the forecast error declines; when economic growth slows, it increases. Transaction Costs We must decide at the outset of the investment simulation how we will manage the weight of each stock in the portfolio, and how this will affect rebalancing and transaction costs. Even simple methods of weighting introduce complexity and will require substantial rebalancing and incur transaction costs. If, for example, we employ a constant equal-weighting scheme, and the portfolio holds 100 stocks in equal weights and at the next rebalancing, 20 stocks are sold off and replaced by 20 new stocks.

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Different investors will have different cost structures, tax statuses, and trading and execution skills. Cost assumptions for one group of investors will be a degree of magnitude larger (or smaller) for another set of investors. We try to minimize the distortions caused by transaction costs in our analysis by limiting ourselves to a yearly rebalance and trading in only relatively large, liquid stocks. Unless we explicitly state otherwise, we report all returns throughout this book without fees and transactions costs. Our philosophy is that investors are better able to gauge the expected costs of running their own portfolio than we are. THE PARAMETERS OF THE UNIVERSE For complete transparency, we outline in this section the details of the universe that we draw from to ensure that the back-test is repeatable and has integrity.

Nerds on Wall Street: Math, Machines and Wired Markets
by David J. Leinweber
Published 31 Dec 2008

Slow computers, sending information to slow humans over slow lines, were easy marks for early algo warriors willing to buy faster machinery and smart enough to code the programs to use it. This aspect of the arms race continues unabated today. Algos for the Buy Side: Transaction Cost Control It didn’t take long to notice that these new electronic trading techniques had something to offer to the buy side. Financial journals offered a stream of opinion, theory, and analysis of transaction costs. Firms like Wayne Wagner’s Plexus Group—now part of Investment Technology Group, Inc. (ITG)—made persuasive, well-supported arguments about the importance of transaction costs. Pension plan sponsors, sitting at the top of the financial food chain, were convinced in large numbers.

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It is a hot A Gentle Intr oduction to Computerized Investing 133 topic in algo trading, so a search may be overwhelming. Perold was the first to demonstrate the significance of trading costs in such a persuasive manner. The transaction cost measurement industry, which followed, was really originated by one firm, Plexus Group, founded by Wayne Wagner and now part of Investment Technology Group, Inc. (ITG). Wayne’s personal perspective is found in “The Incredible Story of Transaction Cost Management: A Personal Recollection,” Journal of Trading 3, no. 3 (Summer 2008). 8. See “Founders of Modern Finance” ((c) 1991, Research Foundation of the Institute of Chartered Financial Analysts, www.aimr.org) for the goods from the founders themselves, or Capital Ideas by Peter Bernstein for the salient points, intellectual history, and best stories. 9.

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Source: Paul Tetlock, Maytal Saar-Tsechansky, and Sofus Macskassy, “More Than Words: Quantifying Language (in News) to Measure Firms’ Fundamentals,” Journal of Finance 63 ( June 2008): 1437–1467. discussion of overcoming the transaction cost hurdle in Chapter 5. When the authors factor in the cost of trading, they find that the positive 21 percent drops below zero when round-trip trading costs rise over 9 basis points. Round-trip costs of only 9 basis points would be truly spectacular trading. Most studies of actual transaction costs, including commissions and market impact, show one-way costs in the neighborhood of 50 basis points. This means that additional filtering of news would be needed for a profitable real-world strategy. eAnalyst: “Can Computerized Language Analysis Predict the Market?”

Finding Alphas: A Quantitative Approach to Building Trading Strategies
by Igor Tulchinsky
Published 30 Sep 2019

It can be treated as a proxy for the predictive ability of a model. The higher the Sharpe ratio, the more reliable the alpha tends to be. Turnover is a measure of the volume of trading required to reach the alpha’s desired positions over the simulation period. Each trade in or out of a position carries transaction costs (fees and spread costs). If the turnover number is high – for example, over 40% – the transaction costs may eradicate some or all of the PnL that the alpha generated during simulation. The other performance metrics and their uses in evaluating alpha performance are discussed in more detail in the WebSim user guides and in videos in the educational section of the website.

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There are different ways to do this mapping, but the simplest is to assume the prediction strength of an alpha is the dollar position taken by the trading strategy. One issue with this mapping method is that alphas often will not map to good strategies on their own because they are designed to predict returns, not to make profitable trades net of costs. One way to address this issue is by charging reduced transaction costs in the simulation. Once the simulation has been constructed, some useful measurements that can be taken are: •• Information ratio. The mean of the alpha’s returns divided by the standard deviation of the returns, this measures how consistently the alpha makes good predictions. Combining the information ratio with the length of the observation period can help us determine our level of confidence that the alpha is better than random noise.

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In practice, alphas have some fitting and some correlation to existing alphas, so the information ratio is typically a bit higher than this. •• Margin is the amount of profit the alpha made in the simulation divided by the amount of trading that was done. This is an indicator of how sensitive the alpha is to transaction costs. A higher margin means the alpha is not much affected by trading costs. Alphas with low margins won’t add value unless they are very different from the other alphas in the strategy. For an average daily alpha, a margin of 5 basis points typically is acceptable. •• Correlation measures the uniqueness of an alpha and often is measured against the most correlated alpha that exists in the alpha pool. 

Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World
by Don Tapscott and Alex Tapscott
Published 9 May 2016

In fact, another Nobel Prize–winning economist (yes, there do seem to be a lot of them in this story), Joseph Stiglitz, argued that the sheer size and seeming complexity of these firms have increased agency costs even as a firm’s transaction costs have plummeted. Hence, the huge pay gap between CEO and front line. So where does blockchain technology come in and how can it change how firms are managed and coordinated internally? With smart contracts and unprecedented transparency, the blockchain should not only reduce transaction costs inside and outside of the firm, but it should also dramatically reduce agency costs at all levels of management. These changes will in turn make it harder to game the system. So firms could go beyond transaction cost to tackle the elephant in the boardroom—agency cost.

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These platforms hold promise for protecting user identity, respecting user privacy and other rights, ensuring network security, and dropping transaction costs so that even the unbanked can take part. Unlike incumbent firms, they don’t need a brand to convey the trustworthiness of their transactions. By giving away their source code for free, sharing power with everyone on the network, using consensus mechanisms to ensure integrity, and conducting their business openly on the blockchain, they are magnets of hope for the many disillusioned and disenfranchised. As such, blockchain technology offers a credible and effective means not only of cutting out intermediaries, but also of radically lowering transaction costs, turning firms into networks, distributing economic power, and enabling both wealth creation and a more prosperous future. 1.

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In the financial system, however, the problem is compounded because there has been no clean transition from one technology to the next; there are multiple legacy technologies, some hundreds of years old, never quite living up to their full potential. Why? In part, because finance is a monopoly business. In his assessment of the financial crisis, Nobel laureate Joseph Stiglitz wrote that banks “were doing everything they could to increase transaction costs in every way possible.” He argued that, even at the retail level, payments for basic goods and services “should cost a fraction of a penny.” “Yet how much do they charge?” he wondered. “One, two, or three percent of the value of what is sold or more. Capital and sheer scale, combined with a regulatory and social license to operate allows banks to extract as much as they can, in country after country, especially in the United States, making billions of dollars of profits.”11 Historically, the opportunity for large centralized intermediaries has been enormous.

Flash Boys: Not So Fast: An Insider's Perspective on High-Frequency Trading
by Peter Kovac
Published 10 Dec 2014

Here’s what Vanguard, the world’s largest single mutual fund manager, wrote to the SEC on the topic: “While the data universally demonstrate a significant reduction in transaction costs over the last ten to fifteen years, the precise percentages vary (estimates have ranged from a reduction of 35% to more than 60%). Vanguard estimates are in this range, and we conservatively estimate that transaction costs have declined 50 bps, or 100 bps round trip. This reduction in transaction costs provides a substantial benefit to investors in the form of higher net returns. For example, if an average actively managed equity mutual fund with a 100% turnover ratio would currently provide an annual return of 9%, the same fund would have returned 8% per year without the reduction in transaction costs over the past decade.

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For example, if an average actively managed equity mutual fund with a 100% turnover ratio would currently provide an annual return of 9%, the same fund would have returned 8% per year without the reduction in transaction costs over the past decade. Today's investor with a 30 year time horizon would see a $10,000 investment in such a fund grow to approximately $132,000 in 30 years, compared to approximately $100,000 with the hypothetical return of 8% associated with the higher transaction costs. This roughly 25% decrease in the end value of the investment demonstrates the impact of reduced transaction costs on long-term investors. Thus, any analysis of "high frequency trading" must recognize the corresponding benefits that long-term investors have experienced through tighter spreads and increased liquidity.”[45] It’s worth reading this a second time.

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The counter-argument is that high-frequency traders, specifically electronic market-makers, by competing with a fair set of rules, have dramatically reduced the cost of trading over the past decade, by five times or more. TD Ameritrade, the largest online retail broker, estimates that in the last ten years transaction costs have declined 80% for retail investors; Vanguard, the largest U.S. mutual fund manager, estimated that they now save $1 on every $100 of stock bought and sold. In short, everyone – retail investors, mutual funds, pension funds, whoever – has benefited significantly. In this version of the story, the only casualties of this increased efficiency are the old intermediaries who have been displaced by the computers – the Wall Street equities traders who, now, incidentally, allege this front-running conspiracy.

The Concepts and Practice of Mathematical Finance
by Mark S. Joshi
Published 24 Dec 2003

A trading bank will typically have a team of research quantitative analysts working purely on the pricing 90 Practicalities of vanilla options in order to better understand these issues, to which we return in Chapter 18. 4.6 Transaction costs Although transaction costs are a reality, they tend not to be modelled explicitly when developing pricing models. There is a simple reason for this: transaction costs can never create arbitrages. In other words, if a price cannot be arbitraged in a world free of transaction costs, it cannot be arbitraged in a world with them either. The proof of this result is very simple. Suppose a price is arbitrageable in the world with transaction costs. Then we can set up a portfolio taking into account transaction costs at zero or negative cost today, which will be of non-negative and possibly positive value in the future.

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Then we can set up a portfolio taking into account transaction costs at zero or negative cost today, which will be of non-negative and possibly positive value in the future. If we neglect to take into account transaction costs then the initial set-up cost of the portfolio will be even lower and thus still be negative or zero. The final value of the portfolio will however be at least as high as there will be no cash drain from any transaction costs during the portfolio's life. We therefore conclude that the portfolio is also an arbitrage portfolio in a world free of transaction costs. Thus the existence of arbitrage in the world with transaction costs implies arbitrage in a world free of them. A second reason they tend to be neglected is that hedging is carried out on a portfolio basis.

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Whilst one can clearly not do this in the markets, when one is dealing in quantities of millions, which trading banks generally do, this is not so unreasonable the smallest unit one can hold is a millionth of the typical amount held, so any error is pretty small in comparison. 2.4.5 No transaction costs The fifth assumption is that there are no transaction costs. That is one can buy and sell assets without any costs. In the market, there are two typical ways to incur transaction costs. The first is just that doing something costs money. The second is that typically buy and sell prices differ slightly (or in the case of high street foreign exchange differ greatly.) This is called the bid-offer spread.

Risk Management in Trading
by Davis Edwards
Published 10 Jul 2014

For example, in addition to just looking at profits, traders might examine: ■ ■ ■ ■ ■ ■ ■ What percentage of trades is expected to be profitable? Does this percentage vary over time or is it stable? What is the expected return on each trade? Has this been declining over time or holding steady? How quickly should a trade make money on average? How sensitive are profits to transaction costs? If transaction costs are higher than expected, does this make the strategy unprofitable? Are losses randomly distributed or correlated? What kind of losses can be expected, on average, once a month? What is the worst case scenario for a drawdown? (A drawdown is a peak to trough decline in profitability).

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Simulating and testing the strategy as it would be executed once actual trading begins allows the strategy developer to identify implementation problems. For example, with historical testing, pricing data already exists. Backtesting and Trade Forensics 101 KEY CONCEPT: TRANSACTIONS COSTS AND TIMING Two items that are hard to model from historical data are the costs associated with making trades and timing of when market data arrives. Transaction Costs. Many strategies look profitable in simulation because no trades have occurred to bring prices back to equilibrium. The only way to fully determine if a price represents a transaction opportunity is to find someone willing to transact at that price during actual trading.

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It is common for reallife problems that did not show up in historical testing to appear when trading is attempted in real life. TRANSACTION COSTS AND SLIPPAGE Models of trading strategies rarely work as well in practice as they do in simulation. A common reason for underperformance is the inability to get an execution at the desired market price. The root problem is that the market price is typically a historical price (perhaps the price of a recent transaction). 102 TABLE 4.1 RISK MANAGEMENT IN TRADING Transaction Costs and Slippage Type of Problem Description Bad Market Price If the market price was set by a mistake, made under duress, or news has just been released, the previous market price may not represent the market view as to a fair price.

Beat the Market
by Edward Thorp
Published 15 Oct 1967

Figures E.2, E.3, and E.4 show the average monthly percentage change for various hedged positions. 205 Figure E.1. Percentage gain from shorting warrant and covering in one month assuming 100% margin and no transaction costs. Figure E.2. Percentage gain for a 1 to 1 hedge held for one month, assuming 100% margin and no transaction costs. Figure E.3. Percentage gain for 2 to 1 hedge held for one month, assuming 100% margin and no transaction costs. Figure E.4. Percentage gain from 3 to 1 hedge held for one month, assuming 100% margin and no transaction costs. REFERENCES [1] [2] [3] [4] [5] [6] Bladen, Ashby, Techniques for Investing in Convertible Bonds. Salomon Bros. and Hutzler, New York, 1966.

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To protect the warrant holder’s original rights, for each 100 warrants he holds he is allowed to buy, after the stock dividend, 102 shares of common; one warrant buys 1.02 new shares, still for $25. An anti-dilution provision to thus adjust the warrant’s terms after stock splits and dividends was made for the protection of the Sperry warrant holders when the warrants were issued. * Commissions are not a factor because some traders have virtually no transaction costs and are ready to exploit such opportunities. 24 There was another 2% stock dividend on September 28, 1961. The warrant was adjusted so that after the dividend one warrant plus $25 bought 1.02 times as many shares as before this second dividend. Since it could buy 1.02 shares before this second dividend, it became the right to buy 1.02 x 1.02 = 1.0404 shares after the dividend.

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Exercise price is 10. Warrants are sold short and common is purchased at these prices, with the plan of liquidating the entire position just before expiration. Initial margin of 3 for the warrant and 5 for the common are assumed. Gains from intermediate decisions or from reinvesting profits are ignored, as are transactions costs. as roughly equal to the short-sale proceeds of about $300. (This happens, for instance, if the common at expiration is unchanged in price.) We have put up $300 initial margin for the 100 warrants short at 3. For 100 common long at 6, we ned $420 if initial margin is 70%, for a total original investment of $720.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing
by Burton G. Malkiel
Published 10 Jan 2011

If you ask me what this means, I cannot tell you, but I think the technician probably had the following in mind: “If the market does not go up or go down, it will remain unchanged.” Even the weather forecaster can do better than that. Obviously, I’m biased. This is not only a personal bias but a professional one as well. Technical analysis is anathema to much of the academic world. We love to pick on it. We have two main reasons: (1) after paying transactions costs and taxes, the method does not do better than a buy-and-hold strategy; and (2) it’s easy to pick on. And while it may seem a bit unfair, just remember that it’s your money we’re trying to save. Although the computer perhaps enhanced the standing of the technician for a time, and while charting services are widely available on the Internet, technology has ultimately proved to be the technician’s undoing.

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Last week’s price change bears little relationship to the price change this week, and so forth. Whatever slight dependencies have been found between stock-price movements in different time periods are extremely small and economically insignificant. Although there is some short-term momentum in the stock market, as will be described more fully in chapter 11, any investor who pays transactions costs and taxes cannot benefit from it. Economists have also examined the technician’s thesis that there are often sequences of price changes in the same direction over several days (or several weeks or months). Stocks are likened to fullbacks who, once having gained some momentum, can be expected to carry on for a long gain.

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Again, the investor following such a system is likely to be disappointed in the results. The buy and sell signals generated by the strategy contain no information useful for predicting future price movements. As with all technical strategies, however, the investor is obliged to do a great deal of in-and-out trading, and thus his transactions costs and taxes are far in excess of those necessitated in a buy-and-hold strategy. After accounting for these costs, the investor does worse than he would by simply buying and holding a diversified group of stocks. Reading Chart Patterns Perhaps some of the more complicated chart patterns, such as those described in the preceding chapter, are able to reveal the future course of stock prices.

The End of Power: From Boardrooms to Battlefields and Churches to States, Why Being in Charge Isn’t What It Used to Be
by Moises Naim
Published 5 Mar 2013

He observed that modern firms faced numerous costs that were lower when the firm brought the functions in-house than they would have been when dealing at arms’ length with another enterprise. Included among such costs are those for drafting and enforcing sales contracts—expenses that Coase initially called “marketing costs” and later redubbed “transaction costs.” Specifically, transaction costs helped explain why some firms grew by vertically integrating—that is, by buying their suppliers or distributors—while others didn’t. Large oil producers, for example, prefer to own the refineries where their oil is processed, as this tends to be less risky and more efficient than relying on a commercial relationship with independent refiners whose actions the oil companies can’t control.

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The propensity to operate through a vertically integrated firm is driven by the structure of the market of buyers and sellers active in the different stages of the industry and by the kinds of investments needed to enter the business. In short, transaction costs determine the contours, growth patterns, and, ultimately, the very nature of firms.21 Although Coase’s insight became an important underpinning of economics in general, its main initial impact was in the field of industrial organization, which focuses on factors that stimulate or hinder competition among firms. The idea that transaction costs determine the size and even the nature of an organization can be applied to many other fields beyond industry to explain why not just modern corporations but also government agencies, armies, and churches became large and centralized.

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The idea that transaction costs determine the size and even the nature of an organization can be applied to many other fields beyond industry to explain why not just modern corporations but also government agencies, armies, and churches became large and centralized. In all such cases, it has been rational and efficient to do so. High transaction costs create strong incentives to bring critical activities controlled by others inside the organization, thereby growing it. And by the same token, the more the pattern of transaction costs made it rational for organizations to grow large by integrating vertically, the more daunting an obstacle this growth represented for new rivals trying to gain a foothold. It is harder for a new rival to challenge an existing company that also controls the main source of raw materials, for example, or has internalized the main distribution channels or retail chain.

Mathematics for Finance: An Introduction to Financial Engineering
by Marek Capinski and Tomasz Zastawniak
Published 6 Jul 2003

Theorem 8.2 The expectation of the discounted payoff computed with respect to the riskneutral probability is equal to the present value of the contingent claim,   (8.3) D(0) = E∗ (1 + r)−1 f (S(1)) . 176 Mathematics for Finance Proof This is an immediate consequence of (8.1): f (S u ) − f (S d ) (1 + u)f (S d ) − (1 + d)f (S u ) + u−d (u − d) (1 + r) u 1 (r − d)f (S ) (u − r)f (S d ) = + 1+r (u − d) u−d  1  p∗ f (S u ) + (1 − p∗ )f (S d ) = 1+r   = E∗ (1 + r)−1 f (S(1)) , D(0) = as claimed. Exercise 8.3 Find the initial value of the portfolio replicating a call option if proportional transaction costs are incurred whenever the underlying stock is sold. (No transaction costs apply when the stock is bought.) Compare this value with the case free of such costs. Assume that S(0) = X = 100 dollars, u = 0.1, d = −0.1 and r = 0.05, admitting transaction costs at c = 2% (the seller receiving 98% of the stock value). Exercise 8.4 Let S(0) = 75 dollars and let u = 0.2 and d = −0.1. Suppose that you can borrow money at 12%, but the rate for deposits is lower at 8%.

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In practice it is impossible to hedge in a perfect way by designing a single portfolio to be held for the whole period up to the exercise time T . The hedging portfolio will need to be modified whenever the variables affecting the option change with time. In a realistic case of non-zero transaction costs these modifications cannot be performed too frequently and some compromise strategy may be required. Nevertheless, here we shall only discuss hedging over a single short time interval, neglecting transaction costs. 9.1.1 Delta Hedging The value of a European call or put option as given by the Black–Scholes formula clearly depends on the price of the underlying asset. This can be seen in a slightly broader context.

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The choice between them depends on individual aims and preferences. We have not touched upon questions related to transaction costs or long term hedging. Nor have we discussed the optimality of the choice of an additional derivative instrument. Portfolios based on three Greek parameters would require yet another derivative security as a component. They could provide comprehensive cover, though their performance might deteriorate if the variables remain unchanged. In addition, they might prove expensive if transaction costs were included. 9.2 Hedging Business Risk We begin by introducing an alternative measure of risk, related to an intuitive understanding of risk as the size and likelihood of a possible loss. 202 Mathematics for Finance 9.2.1 Value at Risk Let us present the basic idea using a simple example.

Beyond Diversification: What Every Investor Needs to Know About Asset Allocation
by Sebastien Page
Published 4 Nov 2020

The regime-switching model in Kritzman, Page, and Turkington (2012) combines turbulence, GDP, and inflation regimes. Regarding transaction costs, Fleming, Kirby, and Ostdiek (2001, 2003) assume execution via futures contracts and estimate transaction costs in the 10–20-bps range. Moreira and Muir (2017) report transaction costs in the 56–183-bps range for physicals. Dreyer and Hubrich (2019) use a 3-bps bid-ask spread for every futures trade, based on the actual trading pattern of the strategy. They show a 10–20% deterioration in results when adding these transaction costs to the simulation. However, they more than recover these costs when they also add caps on trading behavior: they only trade if the proposed trade is >10%, and they only implement up to 50% same day.

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I prefer to focus on our process, because too many academics and practitioners explain how to forecast returns or build TAA strategies with sophisticated statistical studies and backtests, yet barely account for real-world, practical considerations. For example, the editors of the Financial Analysts Journal now reject any empirical study that doesn’t include transaction costs. The paper is not deemed worth the referees’ time—it goes straight back to the author(s) with a request to add transaction costs. In our case, we apply this process to tactically manage asset class exposures on more than $250 billion in assets. As practitioners, we sometimes sacrifice “rigor” for simplicity and transparency. We don’t want to overfit historical data, and we obsess over whether factor models, backtests, and other useful statistical analyses are relevant given the current environment and going forward.

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Similarly, in their ubiquitous textbook Modern Portfolio Theory and Investment Analysis, Edwin Elton and Martin Gruber (1995) describe it as “one of the most important discoveries in the field of finance.” However, there are issues with the CAPM. Its derivation relies on a long list of questionable assumptions: investors are rational; taxes and transactions costs do not exist; all investors have the same information; etc. Even Harry Markowitz, father of portfolio theory, has expressed misgivings about the widespread use of the CAPM. In a paper titled “Market Efficiency: A Theoretical Distinction and So What?” published in the Financial Analysts Journal in 2005, he writes about the model’s “convenient but unrealistic assumptions.”

Capital Without Borders
by Brooke Harrington
Published 11 Sep 2016

This offers privacy for the transaction participants and lower transaction costs compared to the open market, providing more room for profit.78 This last point is crucial, and often overlooked: one way to get rich and stay that way is to keep transaction costs to a minimum. As the well-known American mutual fund manager Bill Miller is known for saying, “Lowest average cost wins.”79 That is, the way to make the most money—to “win”—isn’t just by earning the highest returns but also by minimizing costs. This is consistent with the observations of the Nobel Prize–winning political theorist Douglass North, who argued that transaction costs are the most significant determinant of wealth (and poverty) worldwide.80 Figure 5.1.

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For many clients from civil-law jurisdictions, this combination of traits would seem to make the foundation a best-of-both-worlds proposition. As Parvita—a Mauritius practitioner—put it, “The foundation is dressed like a corporation yet has the soul of a trust.” However, foundations do have four significant downsides compared to trusts. For one thing, there is greater administrative complexity and thus higher transaction costs, which create a drain on the wealth held in the structure. Much like corporations, foundations are required to establish bylaws and articles, to create regular financial statements for the managing council to review, and to provide for audits.138 Second, in many jurisdictions, foundations are subject to taxation, and transfers of assets into noncharitable foundations can be taxed.139 Third, as a legal person that owns assets, foundations can be sued and go bankrupt.140 This is in contrast to a trust arrangement, in which there is no legal personality, but only a “natural person” (the fiduciary) who holds only partial ownership rights; this makes it difficult to access the trust assets through lawsuits.

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However, a succession of further corporate crises, particularly in the past thirty years, has attracted even more regulatory attention to firms, again restricting their management and activities.147 This certainly has not eliminated the use of firms or the occurrence of fraud, but it has raised the transaction costs attached to corporate profits. The form remains popular for three reasons. First, it is universally recognized: unlike the trust, which is a product of England’s unique ecclesiastical equity courts and their rulings based on moral right, the corporation was created by statute law, which exists worldwide.148 This has made corporations an excellent vehicle for global trading, as exemplified by the multinational corporation.

The Darwin Economy: Liberty, Competition, and the Common Good
by Robert H. Frank
Published 3 Sep 2011

The whole process could be dramatically streamlined, he argued, by forming organizations in which employees simply did the bidding of supervisors. PERPETRATORS AND VICTIMS 91 In the wake of the 1937 paper’s publication, a new field in economics emerged and prospered. Called transaction cost economics, it tries to explain organizational forms and behavior as implicit or explicit consequences of attempts to economize on transaction costs.11 In the light of his intellectual history, there is no question that Coase was well aware of practical impediments that often make it prohibitively costly for private parties to negotiate agreements. His intended message simply cannot have been that government has no useful role to play in the regulation of activities that cause harm to others.

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But defending that right means denying others the right to limit the amount of risk they permit themselves to take. Libertarians need to explain why the first right is more important to defend than the second. If rational libertarians would indeed have chosen to join the larger group that wanted safety regulation in a world with zero transaction costs, how can they then insist that safety regulation robs them of an essential right? The high transaction costs of the world we live in mean that one group or the other will not be able to get what it wants. What argument can libertarians offer to explain why wishes of the larger group should be discounted? How could a group that claims to celebrate freedom above all else argue for a result that people never would have endorsed in an environment in which everyone had complete freedom of choice?

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But it’s not sufficient. The profession, after all, has incorporated numerous other forms of market failure into its arsenal of policy recommendations. Even the most ardent market enthusiasts, for example, are quick to concede a productive role for government intervention to curb pollution when transaction costs are high. A final possibility I consider is the one that strikes me as most plausible. In the more than thirty years I have been writing about positional concerns, the most frequent response of libertarians and others on the right has been to accuse me of trying to incite class warfare. They dismiss positional concerns for the same reason they dismiss the preferences of sadists.

State-Building: Governance and World Order in the 21st Century
by Francis Fukuyama
Published 7 Apr 2004

For example, many of the new technologies of the later nineteenth century, such as railroads, coal-powered energy sources, steel, and heavy manufacturing, benefited from extensive economies of scale and thus encouraged centralization.4 By contrast, Malone, Yates et al. (1989), building on Coase’s thesis about the relationship between transaction costs and hierarchy, have speculated that with the advent of inexpensive information technology, transaction costs would fall across the board and hierarchies would increasingly give way to either markets or to more decentralized forms of organization in which cooperating units did not stand in a hierarchical relationship to one another. Information technology creating lower transaction costs has provided the theoretical justification for many firms to flatten their managerial hierarchies, outsource, or “virtualize” their structures.

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Institutional Economics and the Theory of Organizations Economic theories about organizations1 begin with Ronald Coase’s (1937) theory of the firm, which established the basic For overviews of the intellectual history of the economists’s approach to organizational theory, see Furubotn and Richter (1997, chapter 8) and Moe (1984). 1 46 state-building distinction between markets and hierarchies and argued that certain resource allocation decisions were made within hierarchical organizations because of a need to economize on transaction costs. The costs of finding information about products and suppliers, negotiating contracts, monitoring performance, and litigating and enforcing contracts in decentralized markets often meant that it was more efficient to bring all of these activities within the boundaries of a single hierarchical organization that could make decisions on the basis of an authority relationship.

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The costs of finding information about products and suppliers, negotiating contracts, monitoring performance, and litigating and enforcing contracts in decentralized markets often meant that it was more efficient to bring all of these activities within the boundaries of a single hierarchical organization that could make decisions on the basis of an authority relationship. Coase’s theory of the firm was actually not a theory of organizations but rather a theory of why the boundary between markets and organizations was drawn the way it was. Williamson (1975, 1985, 1993) used Coase’s transaction cost framework and filled in many of the details about why hierarchies were used in preference to markets. According to Williamson, bounded rationality meant that parties to a contract could never fully anticipate all possible future contingencies and enact formal safeguards against possible forms of opportunism.

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It
by Stephen Davis , Jon Lukomnik and David Pitt-Watson
Published 30 Apr 2016

“The propensity to truck, barter or exchange one thing for another,” he wrote, “is common to all men.”29 But our ability to do so requires, at the least, that “transaction costs” be kept low. These are the costs involved in ensuring that the buyer gets the service he requires and that the supplier receives proper compensation. Where transaction costs are high, it is difficult to get markets to work. For example, lighthouses find it hard to charge passing ships for their service. Traditional economists had bundled these into a separate sort of product, known as “public goods,” where markets will fail and the goods must be purchased by the state. But as the Chicago economist Ronald Coase pointed out, the difference between the transaction costs involved in the provision of lighthouses and other goods is one of degree, not of quality.

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We could allow the charlatan to compete with the ethical drug producer, and individual patients could all ask to review the clinical studies on competing drugs before deciding whether to follow their doctor’s prescription. But the cost for each of us to find and to assess those studies would be huge. An economist would say that the “transaction costs” would be high.4 It is less costly to pass legislation to require that when a drug maker makes claims about a drug’s benefits and safety, those claims have passed a certain level of scrutiny. Some, of course, argue that we should regulate less. As we write this, the British government has a significant program to lessen what it terms the “burden” of regulation.5 Often regulations can seem foolish and trivial.

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He noted that the first lighthouses were privately provided by the operators of nearby ports, and concluded that by dividing the world into “private goods,” where markets would regulate prices effectively, and “public goods,” where they would not, economists had posed the wrong question.30 The issue was not about whether there should be state or private provision, but how best to manage transaction costs so that the buyer and seller could easily strike a good deal. For example, if you buy a pension or take out a loan from a bank, how can you know that it will provide you with what you want? How you can be sure that the seller will deliver? These are profound issues.31 If we knew the answers to them, it would give us some important clues about improving the productivity of financial services.

Matchmakers: The New Economics of Multisided Platforms
by David S. Evans and Richard Schmalensee
Published 23 May 2016

That’s the sort of problem that an important, but until recently overlooked, type of business sets out to solve by helping parties who have something valuable to exchange find each other, get together, and do a deal. Multisided Platforms In 1998, this important type of business didn’t have a name. That’s surprising, in retrospect. Many businesses had been built to reduce these sorts of market frictions, which economists tend to call transaction costs. Their basic business model had been around for thousands of years. But business schools didn’t teach classes on how to start or run businesses that help different parties get together to exchange value. Economists didn’t have a clue how these businesses worked. In fact, the companies that reduced these market frictions charged prices and adopted other strategies that economic textbooks insisted no sensible business would do.

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Then smartphones and advances in the speed and reliability of wireless networks have put connected computing devices into the hands of almost two billion people around the world.20 More countries are getting wireless networks that can support Internet-connected devices, so that number will increase considerably in the coming years. The birth of the commercial Internet in the mid-1990s and mobile broadband in the early 2000s, combined with the earlier invention of personal computers and programming languages, has sent forth armies of multisided platforms working to reduce transaction costs of all sorts in most countries on the planet. Some stay within their own national borders. Others use the power of global connectivity to try to conquer the world. The pace has been frenetic for the last two decades and is quickening. The Internet and smartphones have turbocharged the ancient matchmaker business model.

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We focus on six critical issues that multisided platforms must address. The opportunity for a multisided platform ordinarily arises when frictions keep market participants from dealing with each other easily and directly. Entrepreneurs can identify opportunities for starting a matchmaker by looking for significant transaction costs that keep willing buyers and sellers apart and that a well-designed matchmaker can reduce. Multisided platforms have to secure critical mass in order to ignite. They have to solve the chicken-and-egg problem of getting both sides on board, in adequate numbers, to create value. If they don’t, they will implode.

Smarter Investing
by Tim Hale
Published 2 Sep 2014

However, always remember that even in markets where information is deemed to be less than perfect, if the anomalies cannot be exploited to exceed the transaction costs involved with investing in them, then active management for you or me is worthless. Transaction costs are significantly higher in smaller, less efficient, markets, negating much of the benefit. Remember that they are still playing in a zero-sum game, but with higher costs. What does the research tell us? The reality is that research suggests that few investors outperform the market portfolio consistently over time, especially after transaction costs and taxes are taken into account. The magnitude and consistency of this research, from a wide number of angles, supports this emphatically.

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Replication methods affect tracking error The way in which the investment manager chooses to copy the index is important. There are three common methods that are used. Full replication: As its name suggests, each company in the index is purchased by the fund. This would give you zero tracking error in a world where transaction costs are zero, but it is not the world we live in. Inevitably, transaction costs will create some tracking error. In addition, smaller funds may suffer from having to buy odd lots of stock that cannot be split as the amount being purchased is too small. Corporate actions and dividend payments also create activity that may generate tracking error.

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First, though, consider the following logical argument that immediately puts the active manager’s case on the back foot, with the probabilities favouring a passive (index) approach. Passive investors will beat the majority of active investors As we have discovered in the zero-sum game above, all investors are the market. So, the average investor will generate the market return before fees, transaction costs and taxes. In the real world these costs cannot be avoided so the average active investor must inevitably be below the market by the amount of these costs. If index funds have lower costs than the average active investor, which is most often the case, then they will beat the average active manager by the difference between these costs.

The Clash of the Cultures
by John C. Bogle
Published 30 Jun 2012

State and local government officials, pressed by labor unions for higher wages and pensions, not only did the same, but failed to provide financial disclosure that revealed—or even hinted at—the dire long-term financial consequences that are already beginning to emerge. The Decline in Unit Transaction Costs It wasn’t just the rise in institutional ownership that fueled the rise of speculation. Speculation was also fueled by the dramatic decline in transaction costs. Simply put, trading stocks got a whole lot cheaper. Taxes virtually disappeared as a limiting factor in stock sales. The lion’s share of the assets managed by these now-dominant, powerful investment institutions were in accounts managed for tax-deferred investors such as pension plans and thrift plans, and in tax-exempt accounts such as endowment funds.

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Contents Foreword Acknowledgments About This Book Chapter 1: The Clash of the Cultures The Rise of Speculation High-Frequency Trading Mission Aborted Futures and Derivatives The Wall Street Casino How Speculation Overwhelmed Investment The Decline in Unit Transaction Costs Hedge Fund Managers and Other Speculators We Can’t Say We Weren’t Warned The Wisdom of John Maynard Keynes Speculation Will Crowd Out Investment Fixing the Social Contract Compensation Issues Creating Value versus Subtracting Value Restoring Balance in Our Investment Sector Tax Policies and Financial Transactions Develop Limits on Leverage, Transparency for Derivatives, and Stricter Punishments for Financial Crimes The Rules of the Game The Goal: Stewardship Capitalism Chapter 2: The Double-Agency Society and the Happy Conspiracy The Development of the Double-Agency Society Examining the Conflict Agency Costs and Managerial Behavior The Ownership Revolution Changing Leadership Renters and Owners The Creation of Corporate Value Time Horizons and the Sources of Investment Return “Short-Termism” and Managed Earnings The Failure of the Gatekeepers Conclusion Chapter 3: The Silence of the Funds Why Mutual Funds Are Passive Participants in Corporate Governance The Picture Begins to Change Reporting Proxy Votes Mobilizing Institutional Investors The Rights and Responsibilities of Ownership Acting Like Owners “The Proof of the Pudding” Executive Compensation How Did It Happen?

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The Big Picture In Chapter 1, I begin with the ideas that culminated in the “Clash of the Cultures,” an essay I wrote for the Journal of Portfolio Management in the spring of 2011, itself a product of my lecture at Wall Street’s Museum of American Finance just a few months earlier. The essay focused on how a culture of short-term speculation came to dominate a culture of long-term investment. One example: In recent years, annual trading in stocks—necessarily creating, by reason of the transaction costs involved, negative value for traders—averaged some $33 trillion. But capital formation—that is, directing fresh investment capital to its highest and best uses, such as new businesses, new technology, medical breakthroughs, and modern plant and equipment for existing business—averaged some $250 billion.

The Smartest Investment Book You'll Ever Read: The Simple, Stress-Free Way to Reach Your Investment Goals
by Daniel R. Solin
Published 7 Nov 2006

Stated differently, Hyperactive Investors buy and sell stocks and/or mutual funds frequently. I ask you, what could be sillier than frequently buying and selling mutual funds? Mutual funds were originally conceived on the idea that small investors should not be buying and selling individual stocks frequently because transaction costs would eat up any potential profit. Instead, small investors should pool their money into a mutual fund, where a "professional" money manager buys and sells the stocks for them, in large blocks, 28 Your Broker or Advisor Is Keeping You from Being a Smart Investor with much lower commissions than an individual investor could get.

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. • Many hyperactive brokers and advisors in this system have successfully avoided being held to a fiduciary standard because they know they cannot meet that standard in their relationships with investors. 38 Your Broker or Advisor Is Keeping You from Being a Smart Investor In short, being a Hyperactive Investor is a fool's errand. It is a zero-sum game (or worse, when you consider transaction costs), except from the perspective of the hyperactive brokers and advisors. They make out just fine. Chapter 11 Brokers Aren't on Your Side It [is} a fundamental dishonesty, a fundamental problem that cuts to the core of the lack of integrity on Wall Street. -Eliot L. Spitzer, attorney general of New York.

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"lI] n 2000 and 2001. the least recommended stocks earned an average abnormal return of 13%. while the most highly recommended stocks earned average abnormal returns of -7%." Ouch! Even studies that demonstrate that there can be value in analyst recommendations note that, in order to take advantage of them. such heavy trading is required that the transaction costs incurred essentially offset the benefits obtained by relying on these recommendations. If this is true, it is difficult to understand what value these recommendations really have--even when they are correct. Finally. given the number of analyst recommendations. and the conflicting studies about their reliabililY. how do Hyperactive lnvesfOrs know which oncs have value and which ones don't?

Wall Street: How It Works And for Whom
by Doug Henwood
Published 30 Aug 1998

Conventional economics still treats the market as essentially self-regulating: the system, outside the firm, still works itself. But in reality there are substantial costs of time and money devoted to making the system work. Sellers must seek buyers, and buyers must weigh the competence and honesty of sellers. Transactions costs are far from trivial — as much as half U.S. GDP, according to one estimate cited by Coase (quoted in Williamson and Winter 1993, p. 63). Though Coase didn't make the point, the transaction cost argument for the existence of the firm can be applied to the provision of capital. Con- WALL STREET ventional theory assumes that entrepreneurs can raise capital for their projects effortlessly and costlessly, when in fact they cannot; even the most seasoned corporation has to pay commissions to the bankers underwriting its paper, and for less established and virginal ventures, capital can be expensive to raise, if it's available at all.

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See shareholder(s) stocks vs. flows, 58 Strategic Investing, 104 Stronach, Frank, 113 Stuart, John Mill, 199 stub stock, 270 Sumitomo, 299 Summers, Lawrence, 177, 186 in the real world, 179 supply-side economics, 47, 103, 274 Survey of Consumer Finances, 64, 69, 79, 114, 115 Survey of Current Business, 136 Swann, Bob, 314 swaps, 34-37 swaptions, 36 Sweden, 235 taxes on brokerage services, 318 wage-earner funds, 306-307 wealth tax, 316 Sweezy, Paul, 258, 261 Switzerland, wealth tax, 316 Syntex, 129 System of National Accounts, 114 taxes break for municipal bond interest, 27 consumption, 70 inheritance, 3l6 investment tax credits, 184 on securities transactions, 317-319 wealth, 315-316 technical vs. fundamental trading. 105 technostructure CGalbraith.), 259 Templeton, Sir John, 311 Thatcher, Margaret. 108. 311 Third Worid debt crisis, 110 political uses of, 294-295 development finance and capital flows, 110 stock markets, 15 inexplicability of returns, 125 TTiomas, Michael, 286 thrift campaigns, Keynes's denunciation of, 196; see also austerity thrifts (S&Ls), 81 crisis, 1980s, 86, 101 and early-1990s credit crunch, 158 Wall Street fleecing of, 180-181, 186 tobacco, 311 Tobias, Andrew, 81 Tobin, James, 143, 318-319; see also q ratio 371 WALL STREET Tompkins, Doug, 245 trade, merchandise, and currency trading, 42 traders vs. investors, 104-105 trading prowess, 32 trading strategies, 104-106 trading week, 127-135 transactions-cost economics, 248-251 financial applications, 249 transactions costs and efficient market theory, l64 estimate of, 249 international comparisons, 317 transactions taxes, 317-319 Treasury bonds. See bond markets Triad, 111 triumphalism, capitalist, 187 Trump, Donald, 100, 239 truth, Wall Street, 127 Turner, Philip, 108-110 Twentieth Century Fund, 144, 260, 293, 300, 319 uncertainty.

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.^ the technique of economics Charles Plosser (1984) listed some of the basic assumptions on which modern financial theory is based: Most of the fundamental contributions to financial economics, including portfolio theory, the Modigliani-Miller Theorem, efficient markets, and virtually all of the asset-pricing models, have been developed under the assumption of a perfect market by which I mean (1) no transaction costs, (2) complete and costless information, and (3) competition. As Plosser noted, "theorists, especially of the Keynesian variety, are quick to assume the existence of arbitrary constraints and/or market failures," such as "institutional and/or wage-price rigidities, nonmarket clearing, exogenously determined long-term contracts, and the money illusion, to which you may add your favorites."

New Market Wizards: Conversations With America's Top Traders
by Jack D. Schwager
Published 28 Jan 1994

One day somebody will be standing next to you in the pit, the next day they’re gone. It happens all the time. I also learned a lot about Monroe Trout / 153 transaction costs. I’m able to estimate transaction costs fairly accurately on various types of trades. This information is essential in evaluating the potential performance of any trading model I might develop. Give me a practical example. Let’s take bonds. The average person off the floor might assume that the transaction costs beyond commissions is at least equal to the bid/ask spread, which in the bond market is one tick [$31.25]. In reality, if you have a good broker, it’s only about half a tick, because if he’s patient, most of the time he can get filled at the bid.

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The undisciplined use of leverage is the single most important reason why most traders lose money in the futures markets. In generals, futures prices are no more volatile than the underlying cash prices or, for that matter, many stocks. The high-risk reputation of futures is largely a consequence of the leverage factor. 5. Low transaction costs—Futures markets provide very low transaction costs. For example, it is far less expensive for a stock portfolio manager to reduce market exposure by selling the equivalent dollar amount of stock index futures contracts than by selling individual stocks. 6. Ease of offset—A futures position can be offset at any time during market hours, providing prices are not locked at limit-up or limit-down.

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Is that, in fact, what you think? I think that the execution edge was probably the primary reason for my success as a floor trader. The major factor that whittles down small customer accounts is not that the small traders are so inevitably wrong, but simply that they can’t beat their own transaction costs. By transaction costs I mean not only commissions but also the skid in placing an order. As a pit trader, I was on the other side of that skid. As a former Ph.D. candidate in mathematics, did you miss the intellectual challenge in what you were doing? Initially, yes. But I eventually got into serious research on prices, and that was as tough a problem as anything I ever came across in academia. 

Tyler Cowen-Discover Your Inner Economist Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist-Plume (2008)
by Unknown
Published 20 Sep 2008

Our culture is not very good at constraining or regulating vanity. MAR K E T S N EVE ReO V E R or offer all options, if only because of economic and legal constraints. Economists refer to "transaction costs" and "fixed costs." Most of these constraints are weakening over time, and thus we witness an intensifying proliferation of markets, including those cited above. That places a greater burden on our faculties of self-control. Transaction costs reflect the difficulty of bringing together buyers and sellers and getting them to agree on terms. For instance, I continue to look for an extra copy of the CD The Kampala Sound, a collection of top Ugandan tunes from the 1960s.

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It has been estimated that all the synthetic economies put together, with about 10 million players, are in value terms about equal to the size of the economies of Bosnia and Herzegovina. Ten years ago, these games did not exist. The "fixed costs" idea-another limit on markets-is a little more difficult to define than transaction costs, but we all understand it intuitively through our Inner Economist. Fixed costs are the reason why we don't see many walk-in, quirky bohemian bookshops in rural Nebraska. There just aren't enough buyers to cover the basic expenses of operation. But like transaction costs, fixed costs have been falling rapidly, and for many of the same reasons. Even though more markets are possible than ever before, our legislators have decided that there should not be markets in everything.

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For instance, I continue to look for an extra copy of the CD The Kampala Sound, a collection of top Ugandan tunes from the 1960s. The Web fails me, and even Original Music, the issuer, claims to have no back copies. But finding a seller may just be a matter of time. The Internet is causing transaction costs to fall to ever-lower levels. FedEx, fax machines, credit bureaus, eBay buyer ratings, and cheaper air travel all make it easier to cut deals and move the goods. Sometimes the parties to an exchange come together quite easily and through established channels. For $430 a square foot, a person can buy the air rights for an unfettered view of Central Park. That means no one can build to block the current view.

Misbehaving: The Making of Behavioral Economics
by Richard H. Thaler
Published 10 May 2015

His wife, Gertrude (also an economist), was in the crowd as well and asked a question about the mugs study. Couldn’t the low trading of the mugs be explained by transaction costs? I explained that the tokens experiment had ruled out this explanation—after all, the tokens had the same transaction costs as the mugs, and the tokens did trade as much as the theory predicted. She seemed satisfied, but then Lott jumped in to “help.” “Well,” he asked, “couldn’t we just call the endowment effect itself a transaction cost?” I was shocked by this comment; transaction costs are supposed to be the cost of doing a transaction—not the desire to do a transaction. If we are free to re-label preferences as “costs” at will so that behavior appears to be consistent with the standard theory, then the theory is both untestable and worthless.

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A reader who claims that an alleged anomaly is actually the rational response to taxes should be willing to make some prediction based on that hypothesis; for example, the anomaly will not be observed in a country with no taxes, or for non-taxed agents, or in time periods before the relevant tax existed. Someone offering an explanation based on transaction costs might suggest an experimental test in which the transaction costs could be eliminated, and should be willing to predict that the effect will disappear in that environment. I wrote a column in every issue, that is, quarterly, for nearly four years. The articles were about ten to twelve published pages, short enough to make them a quick read, but long enough to give a fair amount of detail.

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This ploy will make each bottle he drinks render considerable transaction utility. Another letter came from well-known University of Chicago accounting professor Roman Weil. Roman, who became a friend when I became his colleague at Chicago, comes as close to being an Econ as anyone I have encountered. “You left out the right answer. I feel the loss is $75 less the transaction costs of selling it (which are about $15). So, I think of the bottle as costing about $60. Since I do have plenty of wine in lifetime inventory, net realizable value is correct. If I did not have sufficient lifetime inventory, I’d use replacement cost, $75 plus commission, plus shipping—about $90.

How I Became a Quant: Insights From 25 of Wall Street's Elite
by Richard R. Lindsey and Barry Schachter
Published 30 Jun 2007

At each point in time, the stock portfolio has two costs associated with it: a risk cost and a market impact cost. The risk cost is the theoretical cost associated with holding a risky position that you do not want to be holding. The transaction cost is the cost associated with the market impact of the position’s changing through time. The total cost is the sum of the transaction costs and the risk cost appropriately adjusted by a risk aversion parameter, which controls for how urgently you want to reduce the risk. When you look at the problem this way, it naturally fits into the mathematical framework of the calculus of variations.

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Furthermore, with an integrated process, actual portfolio results can be used to evaluate security selection and provide input to the research process. Insights can also be eroded by transaction costs, but we hold several advantages in the trading arena. First, because of our disentangling JWPR007-Lindsey 274 May 28, 2007 15:46 h ow i b e cam e a quant approach, we can profit from multiple inefficiencies for each security that we trade. Second, with our integrated systems, transaction costs are estimated and fed back to the portfolio construction process, helping to ensure that only economical trades are made. Third, we were early advocates and users of low-cost electronic trading venues.

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Due to the fundamental law, quantitative active strategies tend to take many small bets as opposed to a few concentrated bets. The goal, based on this framework, is to deliver consistent performance. Beyond these basics, the book provided considerable guidance into how to build and test investment strategies, how to properly optimize portfolios, how to model and account for transactions costs, and how to analyze performance ex post. The book did not provide alpha ideas—as such, ideas only work if the market doesn’t already understand them. Active Portfolio Management has played an important role in legitimizing the science of investing. While the consistent investment performance of quantitative managers like Barclays Global Investors was critically important, the flow of institutional assets into quantitatively JWPR007-Lindsey 44 May 7, 2007 16:30 h ow i b e cam e a quant managed investments also required intellectual legitimacy, which Active Portfolio Management has helped provide.

Unconventional Success: A Fundamental Approach to Personal Investment
by David F. Swensen
Published 8 Aug 2005

If the stock performs poorly relative to the market, the overweighters lose and the underweighters win. Before considering transaction costs, active management appears to be a zero-sum game, a contest in which the winners’ gains exactly offset the losers’ losses. Unfortunately for active portfolio managers, investors incur significant costs in pursuit of market-beating strategies. Stock pickers pay commissions to trade and create market impact with buys and sells. Mutual-fund purchasers face the same market-related transactions costs in addition to management fees paid to advisory firms and distribution fees paid to brokerage firms.

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In 2002, value-stock commissions amounted to 0.16 percent of assets, falling well below the equity fund average of 0.20 percent and the growth fund average of 0.28 percent. Market impact impedes value funds to a far lesser degree than growth funds. Value-fund traders accommodate the market, buying what others want to sell and selling what others want to buy. From a transactions-cost perspective, value trumps growth. Size matters in transactions costs. Small-cap growth funds lead the pack in commissions with a charge of 0.41 percent of assets, well above the large-cap growth commission level of 0.25 percent of assets. The same phenomenon exists in the value arena, with small-cap value posting commissions of 0.26 percent of assets relative to the large-cap value level of 0.13 percent.

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Passive investors who select Russell style-based indices lose a substantial share of the transactions-cost benefits of index-fund investing. The shortcomings of the Russell indices as vehicles for investment translate into shortcomings as benchmarks for performance measurement. Year-to-year changes in composition cause active managers to face a changing benchmark. Quite unfairly from the manager’s perspective, the index changes composition without facing the real-world performance drag of transactions costs. Counterbalancing (and likely overwhelming) the lack of a fair cost accounting, reconstitution arbitrage activity pulls in the opposite direction.

Stock Market Wizards: Interviews With America's Top Stock Traders
by Jack D. Schwager
Published 1 Jan 2001

Even if you were somehow able to find one of the remaining inefficiencies without going through an extremely expensive, long-term research effort of the sort we've conducted over the past eleven years, you'd probably find that one such inefficiency wouldn't be enough to cover your transaction costs. As a result, the current barriers to entry in this field are very high. A firm like ours that has identified a couple dozen market inefficiencies in a given set of financial instruments may be able to make money even in the presence of transaction costs. In contrast, a new DAVID SHAW entrant into the field who has identified only one or two market inefficiencies would typically have a much harder time doing so. What gives you that edge? It's a subtle effect. A single inefficiency may not be sufficient to overcome transaction costs. When multiple inefficiencies happen to coincide, however, they may provide an opportunity to trade with a statistically expected profit that exceeds the associated transaction costs.

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When multiple inefficiencies happen to coincide, however, they may provide an opportunity to trade with a statistically expected profit that exceeds the associated transaction costs. Other things being equal, the more inefficiencies you can identify, the more trading opportunities you're likely to have. How could the use of multiple strategies, none of which independently yields a profit, be profitable? As a simple illustration, imagine that there are two strategies, each of which has an expected gain of $100 and a transaction cost of $110. Neither of these strategies could be applied profitably on its own. Further assume that the subset of trades in which both strategies provide signals in the same direction has an average profit of $180 and the same $110 transaction cost.

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Further assume that the subset of trades in which both strategies provide signals in the same direction has an average profit of $180 and the same $110 transaction cost. Trading the subset could be highly profitable, even though each individual strategy is ineffective by itself. Of course, for Shaw's company, which trades scores of strategies in many related markets, the effect of strategy interdependencies is tremendously more complex. As the field matures, you need to be aware of more and more inefficiencies to identify trades, and it becomes increasingly harder for new entrants. When we started trading eleven years ago, you could have identified one or two inefficiencies and still beat transaction costs. That meant you could do a limited amount of research and begin trading profitably, which gave you a way to fund future research.

Capital Ideas: The Improbable Origins of Modern Wall Street
by Peter L. Bernstein
Published 19 Jun 2005

Efforts to do so—and regulation has come in many different forms—impair the efficiency with which financial assets perform the broad social function of serving as a store of value. Liquidity, low transaction costs, and the freedom of investors to act on information are essential to that function. ••• If individual investors had dominated the financial markets during the 1970s and 1980s, the revolution we have been describing would in all likelihood never have taken place; the ingenious journal articles would have stimulated more ingenious journal articles, but little change would have occurred on Wall Street. In any case, tax constraints and high transaction costs would have prevented individual investors from transforming their portfolios to accord with the new theories.

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Although the owners of a company that borrows money are in a riskier position than the owners of a debt-free company, the value of the company’s bonds and stock, taken as a totality, will still depend on the company’s overall expected earning power and the basic risks the company faces. That is the essence of Williams’s law of the Conservation of Investment Value. Under these conditions, and ignoring just for the moment transactions costs, taxes, and the possible lack of sufficient information, the market will place the same valuation on all companies with equal earning power and equal risk. No other outcome is possible when the market is functioning as Samuelson theorized that it should and as research into the efficiency of capital markets has demonstrated that it does.

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If the only thing that matters is the fundamental earning power of the corporations’s underlying assets, why are all those corporate finance officers and their investment bankers spending so much time fine-tuning and modulating the firm’s financial structure? MM theory was admittedly an abstraction when it was originally presented. Like all economists, Modigliani and Miller tried to run their experiments with clean test tubes. In their antiseptic world there are no taxes, no transaction costs, information is freely available to everyone, growth is treated in simplified fashion, and corporations make investment decisions first and then worry about how to finance them. No one—least of all Modigliani and Miller—would claim that the real world looks like this. But by starting with immaculate laboratory equipment, they can test their hypotheses, analyze the consequences of their assumptions, and determine how closely their theory accords with the real world.

Statistical Arbitrage: Algorithmic Trading Insights and Techniques
by Andrew Pole
Published 14 Sep 2007

While the technicalities are important for understanding and analysis, the practical value for application in the late 1980s and early 1990s was minimal: Reversion was evident on such a large scale and over such a wide range of stocks that it was impossible not to make good returns except by deliberate bad practice! That rich environment has not existed for several years. As volatility in some industries declined—the utilities sector is a splendid example (Gatev, et al.)—raw standard deviation rules were rendered inadequate as the expected rate of return on a trade shrank below transaction costs. Implementing a minimum rate of return lower bound on trades solved that, and in later years provided a valuable risk management tool. 2.3 POPCORN PROCESS The trading rules exhibited thus far make the strong statement that a spread will systematically vary from substantially above the mean to substantially below the mean and so forth.

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This net gain can be realized if one can make a sufficient number of bets. The latter caveat is crucial because averages are reliable indicators of performance only in the aggregate. Guaranteeing that 2% of one’s bets is the net outcome of a strategy is not sufficient, by itself, to guarantee making a profit: Those bets must cover transaction costs. And remember, it is not the 1 The situation is actually more complicated in a manner that is advantageous to a fund manager. Symmetry on gains and losses makes for a simple presentation of the point that a small bias can drive a successful strategy; one can readily live with relative odds that would cause a physician nightmares.

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A few periods of glee before inevitable catastrophe supplanted with prolonged, ulcer inducing negativity, despondency, despair, and (if you can stand the wait) possible vindication! It is still an uncertain game. Just different rules. There are many kinds of randomness. Structural Models 61 average transaction cost that must be covered by the net gain. It is the much larger total cost of all bets divided by the small percentage of net gain bets that must be covered. For example, if my model wins 51 percent of the time, then the net gain is 51 − 49 = 2 percent of bets. Thus, out of 100 bets (on average) 51 will be winners and 49 will be losers.

The Bogleheads' Guide to Investing
by Taylor Larimore , Michael Leboeuf and Mel Lindauer
Published 1 Jan 2006

FEES NOT COVERED BY THE PROSPECTUS Now we come to the costs of mutual fund ownership we seldom find in the prospectus. Hidden Transaction Costs A mutual fund incurs a cost every time it buys or sells a security. Transaction costs, caused by fund turnover, include brokerage commissions, bid-offer spreads, and market impact costs. Together, they may easily exceed the expense ratio and other costs disclosed in the prospectus. Brokerage Commissions In a study titled, "Portfolio Transaction Costs at U.S. Equity Mutual Funds," researchers Jason Karceski, Miles Livingston, and Edward O'Neal found that the average brokerage commission cost for mutual fund managers was 0.38 percent of fund assets.

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We are talking about advisory fees, brokerage commissions, customer fees, legal fees, marketing expenditures, sales loads, securities processing expenses, and transaction costs. Not included in the $300 billion figure is the cost of taxes. We will discuss taxes in Chapters 10 and 11. FEES COVERED BY THE PROSPECTUS It's important that we understand the different mutual fund fees and expenses that are listed in every mutual fund prospectus. Later, we will investigate mutual fund transaction costs that are little known and seldom reported. Stephen Schutt, senior editor of TheStreet.com, writes: "Death by a thousand fees isn't going to show up in a quarterly fund statement."

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Richard Ferri, author of Protecting Your Wealth in Good Times and Bad: "When you are finished choosing a bond index fund, a total U.S. stock market index fund, and a broad international index fund, you will have a very simple, yet complete portfolio." Walter R. Good and Roy W. Hermansen, authors of Index Your Way to Investment Success: "Index funds save on management and marketing expenses, reduce transaction costs, defer capital gain, and control risk-and in the process, beat the vast majority of actively managed mutual funds!" Arthur Levitt, former chairman of the Securities Exchange Commission and author of Take on the Street: "The fund industry's dirty little secret: Most actively managed funds never do as well as their benchmark."

The Power of Passive Investing: More Wealth With Less Work
by Richard A. Ferri
Published 4 Nov 2010

The following is Carhart’s conclusion: The evidence of the article suggests three important rules-of-thumb for wealth-maximizing mutual fund investors: (1) Avoid funds with persistently poor performance; (2) funds with high returns last year have higher-than-average expected returns next year, but not in the years thereafter; and (3) the investment costs of expense ratios, transaction costs, and load fees all have a direct, negative impact on performance. While the popular press will no doubt continue to glamorize the best-performance mutual fund managers, the mundane explanations of strategy and investment costs account for almost all of the important predictability in mutual fund returns. One caveat of Carhart’s study is transaction costs. His study was conducted with no penalty for the additional costs from sales loads or brokerage commissions. In addition, Carhart made no exception for funds closed to new investment.

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Sharpe found sufficient evidence that all three ratios had some predictability for selecting funds relative to each other, although no one method isolated funds that consistently outperformed the market as measured by the DJIA (Sharpe doesn’t disclose why he chose this limited market indicator when the more comprehensive S&P 500 existed). Sharpe acknowledged that the DJIA had no transaction cost or administrative expenses; however, he also noted that the fund returns were calculated without deducting their sales commission, which for most was 8.5 percent. Here are the results: The market as measured by the DJIA was less than 11 active funds and better than the remaining 23 funds.

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Since it is defined as the 1001st through 3000th stocks ranked by market cap, and since it is the most widely used small-cap index, savvy traders can easily predict which stocks will be added and dropped from the index, bidding these stocks up or down before June 30, adversely impacting the indexers who must buy or sell these stocks after June 30, lest they incur increased tracking error.13 There has been significant analysis conducted on the reconstitution of the Russell 2000 index and the tough issues that index managers face.b Tracking the Russell 2000 is “the equivalent of an Army obstacle course, complete with water hazards, balance beams and hand-to-hand combat” according to one New York Times journalist.14 Vanguard fund managers were able to deftly outperform the Russell 2000 index because of the way they traded around the reconstitution period as mutual fund industry insider Gary Gastineau explains: For the ten years ending in 2001, the Vanguard Small Cap Index Fund beat its Russell 2000 benchmark index by an average of 76 basis points or 0.76% per year. . . . The outperformance that Vanguard achieved came largely from recapturing part of these embedded transaction costs. It did this by making annual reconstitution transactions at a time other than the market close on the last trading day of June when Russell index rebalancing is formally implemented.15 Kudos to Vanguard for smart trading practices that reduced some costs, but this didn’t solve the big issue of the Russell index.

The Essays of Warren Buffett: Lessons for Corporate America
by Warren E. Buffett and Lawrence A. Cunningham
Published 2 Jan 1997

But we do believe that the listing will reduce transaction costs for Berkshire's shareholders-and that is important. Though we want to attract shareholders who will stay around for a long time, we also want to minimize the costs incurred by shareholders when they enter or exit. In the long run, the aggregate pre-tax rewards to our owners will equal the business gains achieved by the company less the transaction costs imposed by the marketplace-that is, commissions charged by brokers plus the net realized spreads of 1997] THE ESSAYS OF WARREN BUFFETT 121 market-makers. Overall, we believe these transaction costs will be reduced materially by a NYSE listing. . . .

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Cunningham All Rights Reserved Includes Previously Copyrighted Material Reprinted with Permission TABLE OF CONTENTS INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 PROLOGUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 I. CORPORATE GOVERNANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . A. B. C. D. E. II. I. COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. A. B. C. D. E. F. IV. The Bane of Trading: Transaction Costs..... . . . . .. Attracting the Right Sort of Investor. . . . . . . . . . . . . .. Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Stock Splits and Trading Activity Shareholder Strategies Berkshire's Recapitalization MERGERS AND ACQUISITIONS. . . . . . . . . . . . . . . . . . . . . . . ..

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Long-term investment success depends not on studying betas and maintaining a diversified portfolio, but on recognizing that as an investor, one is the owner of a business. Reconfiguring a portfolio by buying and selling stocks to accommodate the desired beta-risk profile defeats long-term investment success. Such "flitting from flower to flower" imposes huge transaction costs in the forms of spreads, fees and commissions, not to mention taxes. Buffett jokes that calling someone who trades actively in the market an investor "is like calling someone who repeatedly engages in one-night stands a romantic." Investment knitting turns modern finance theory's folk wisdom on its head: instead of "don't put all your eggs in one basket," we get Mark Twain's advice from Pudd'nhead Wilson: "Put all your eggs in one basket-and watch that basket." 1997] THE ESSAYS OF WARREN BUFFETT 15 Buffett learned the art of investing from Ben Graham as a graduate student at Columbia Business School in the 1950s and later working at Graham-Newman.

No Slack: The Financial Lives of Low-Income Americans
by Michael S. Barr
Published 20 Mar 2012

Unfortunately, families often have only limited access to the sound financial products that could help them generate financial slack. In fact, higher-cost financial services can reduce the slack available to households. For example, many lowwage individuals see their take-home pay reduced by the high transaction costs they face when using check-cashing services to obtain their income. Moreover, inadequate access to financial services—such as direct deposit to a bank account or its functional equivalent—can contribute to taxpayers’ using refund anticipation loans and expensive check-cashing services that diminish the value of the earned-income tax credit.

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High fees for tax preparation and filing, check cashing, and refund anticipation loans can reduce the value of earned-income tax credits by over 10 percent (Barr 2004; Berube and others 2002). Bringing low- and moderate-income families into the banking system, if key changes were made to financial products, could help reduce these high transaction costs, substantially increasing the purchasing power of these families. Second, without a bank account, low-income households face key barriers to saving. Promoting low-income household savings is critical to reducing reliance on high-cost, short-term credit; lowering the risk of financial dislocation resulting from job loss or injury; and improving prospects for longer-term asset building through home ownership, skills development, and education.

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Thus, this survey can provide a more nuanced and textured understanding of LMI households than can be gained solely with aggregated national data (see, for example, FDIC 2009). The results presented in chapter 2 suggest that existing financial services, credit, and payment systems impose high transaction costs on lower-income households, increase their costs of credit, and reduce their opportunities to save. Like their higher-income counterparts, lower-income households regularly conduct financial transactions, but the financial services system is not designed to serve them well. About 30 percent of the adults surveyed were unbanked.

The Future of Ideas: The Fate of the Commons in a Connected World
by Lawrence Lessig
Published 14 Jul 2001

First advanced by Edward Kitch, the prospect theory says there is good reason to hand out broad, strong patents because then others will know with whom they should negotiate if they want to build upon a certain innovation.91 This in turn will create incentives for people to invent, and as information is a by-product of invention, it will induce “progress” in the “useful arts.”92 The problem with this theory, however, is its very strong assumption (in some contexts, at least) that the parties will know enough to properly license the initial foundational invention, or that other issues won't muck up the incentives to license.93 Both limitations on the ability to license are what economists would call transaction costs.94 The transaction cost from ignorance is similar to the insight the founders of the Net had when they embraced an end-to-end architecture: rather than architecting a system of control from which changes could be negotiated, they were driven by humility to a system of noncontrol to induce many others to experiment with ways of using the technology that the experts wouldn't get.95 The transaction cost affecting incentives to license is in part a problem of ignorance, but in part the problem of strategic behavior that we've seen in many different contexts.

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But because this research plan would not be protectable as intellectual property, the competitor might fear that the patent holder would appropriate the information for its own use, with no compensating benefit to the competitor. Even if these difficulties did not lead to bargaining breakdown, they would create transaction costs that reduced the cooperative surplus to be gained from a license and would thus deter at least some inventors and improvers from negotiating in the first instance. Transaction costs would be compounded by the likelihood that the would-be follow-on improver would likely have to negotiate licenses not simply with one owner of basic research but with many such owners. For example, in order to develop a commercial treatment for a genetic disease (particularly a polygenic disease), it may be necessary to have access to a large number of ESTs and SNPs, each conceivably patented by a different entity.

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Scarcity is the nature of all valuable resources; but not all valuable resources are allocated by the government—at least, not in a free society. 14 Rather than a regime of licensing, Coase argued, spectrum should be allocated into property rights and sold to the highest bidder.15 A market for spectrum would better and more efficiently allocate spectrum than a system of government-granted licenses. History has been kinder to Coase than to the regulators of the early FCC. In 1991, he won a Nobel Prize for his work on transaction cost economics. And long before the Nobel committee recognized his genius, many policy makers in the United States came to believe that Coase's system was better than the FCC's. A market in spectrum would more efficiently allocate spectrum than any system controlled by the government. This is the debate I described at the start of the book.

The Sovereign Individual: How to Survive and Thrive During the Collapse of the Welfare State
by James Dale Davidson and William Rees-Mogg
Published 3 Feb 1997

Nobel Prize-winning economist Ronald Coase helped launch a new direction in economics by asking some of these important questions. The answers he helped to frame hint at the revolutionary consequences of information technology for the structure of business. Coase argued that firms were an efficient way to overcome information deficits and high transaction costs.26 Information and Transaction Costs To see why, consider the obstacles you would have faced in trying to operate an industrial-era assembly line without a single firm to coordinate its activities. In principle, an automobile could have been produced without production being centralized under the oversight of a single firm.

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As Putterman and Kroszner observe, this tends to imply that organizations like firms have no inherent "economic raison d'etre."27 In this sense, firms are mainly artifacts of information and transaction costs, which information technologies tend to reduce drastically. Therefore, the Information Age will tend to be the age of independent contractors without "jobs" with long-lasting "firms." As technology lowers transaction costs, the very process that will enable individuals to escape from domination by politicians will also prevent "rule by corporations." Corporations will compete with "virtual corporations" from across the globe to a degree that will disturb and threaten all but a few.

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Yet its consequences will not be imaginary, but real. To a far greater extent than many now understand, the instantaneous sharing of information will be like a solvent dissolving large institutions. It will not only alter the logic of violence, as we have already explored; it will radically alter information and transaction costs that determine how businesses organize and the way the economy functions. We expect microprocessing to change the economic organization of the world. 144 "It is today possible, to a greater extent than at any time in the worlds' history, for a company to locate anywhere, to use resources from anywhere to produce a product that can be sold anywhere."

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition)
by Burton G. Malkiel
Published 5 Jan 2015

If you ask me what this means, I cannot tell you, but I think the technician probably had the following in mind: “If the market does not go up or go down, it will remain unchanged.” Even the weather forecaster can do better than that. Obviously, I’m biased. This is not only a personal bias but a professional one as well. Technical analysis is anathema to much of the academic world. We love to pick on it. We have two main reasons: (1) after paying transactions costs and taxes, the method does not do better than a buy-and-hold strategy; and (2) it’s easy to pick on. And while it may seem a bit unfair, just remember that it’s your money we’re trying to save. Although the computer perhaps enhanced the standing of the technician for a time, and while charting services are widely available on the Internet, technology has ultimately proved to be the technician’s undoing.

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While the market does exhibit some momentum from time to time, it does not occur dependably, and there is not enough persistence in stock prices to make trend-following strategies consistently profitable. Although there is some short-term momentum in the stock market, as will be described more fully in chapter 11, any investor who pays transactions costs and taxes cannot benefit from it. Economists have also examined the technician’s thesis that there are often sequences of price changes in the same direction over several days (or several weeks or months). Stocks are likened to fullbacks who, once having gained some momentum, can be expected to carry on for a long gain.

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Again, the investor following such a system is likely to be disappointed in the results. The buy and sell signals generated by the strategy contain no information useful for predicting future price movements. As with all technical strategies, however, the investor is obliged to do a great deal of in-and-out trading, and thus his transactions costs and taxes are far in excess of those necessitated in a buy-and-hold strategy. After accounting for these costs, the investor does worse than he would by simply buying and holding a diversified group of stocks. Reading Chart Patterns Perhaps some of the more complicated chart patterns, such as those described in the preceding chapter, are able to reveal the future course of stock prices.

Humans as a Service: The Promise and Perils of Work in the Gig Economy
by Jeremias Prassl
Published 7 May 2018

Regulatory Arbitrage Professor Julia Tomassetti is highly critical of the suggestion that platforms’ primary value creation is achieved through better matching and lower transaction cost: ‘What happens when we actually subject the Uber narra- tive to scrutiny under Coasian theory? It does not hold up. From the Coasian perspective, Uber does not write the epitaph of the firm.’32 Platforms, she argues, speak the language of markets—but they operate like old- fashioned employers, relying on technology to exercise tight control over their workforce. Tomassetti doesn’t deny that gig-economy platforms have dramatically lowered transaction cost in comparison with established competitors. Lowering transaction cost alone, however, cannot account for platforms’ phenomenal valuations and claims to disruptive innovation: there is, despite all claims to the contrary, little that is genuinely novel as far as platforms’ production pro- cesses are concerned.

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The platform economy, breathless futurologists assure us, is the future of work: with ‘freelancing [as] the new normal’,12 it will fundamentally reshape the organization of businesses, the economy, and our working lives. Not everyone agrees. Frank Kalman, editor of Talent Economy magazine, is ‘not buying it’.13 The gig economy, he argues, represents a tiny fraction of our labour markets, goes against the grain of corporate work culture, and imposes a host of hidden coordination and transaction costs on traditional businesses. In short, ‘gig work is likely to remain a small part of the overall labor force, both from an economic perspective and a cultural, performance and man- agement perspective’.14 How big, then, is the gig economy? Depending on where we look, we are faced with wildly different numbers—especially when trying to deter- mine what proportion of the overall workforce are engaged in the gig economy.15 Very little, some argue: economists Lawrence Katz of Harvard University and Alan Krueger of Princeton University, for example, esti- mated in 2016 that a mere 0.5 per cent of the US workforce worked for on-demand platforms—that is, no more than 800,000 workers.16 US Senator Mark Warner, meanwhile, cites a much larger (if hardly credible) range of estimates: ‘I've seen it range from 3 million to 53 million.’17 The truth lies somewhere in between those extremes.

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In an open-market transaction with an independent entrepreneur, consumers would have to spend significant amounts of time and effort to find out information about the service provider’s background and experi- ence, control the quality of the work, and negotiate prices. This is the real value of digital work intermediation: gig-economy operators also provide information about how reliable a worker is, take care of invoicing and pay- ments, and provide a (digital) infrastructure within which the entire exchange can take place. With transaction cost so drastically reduced, the narrative continues, the traditional firm as described by Ronald Coase becomes obsolete; instead, we move into a hybrid world between markets and hierarchies. According to Coase’s theory of the firm, companies exist because the control exercised by an entrepreneur-coordinator over her workforce and other factors of pro- duction is much cheaper than the cost involved in going out to the market and haggling over each individual transaction.31 On the other hand, once an app has taken all of the hassle out of such transactions, Coase’s entrepreneur will no longer need to strike long-term bargains with workers, let alone invest in assets; she can replace her workforce with an external crowd, ready to complete individual tasks as and when required.

What's Wrong With Economics: A Primer for the Perplexed
by Robert Skidelsky
Published 3 Mar 2020

Coase’s answer is that they exist to reduce the costs to individuals of doing business separately. His argument is that people organise production in firms when the transaction costs of coordinating production through market exchange are greater than internalising them within the firm. The costs of transacting in markets include discovering relevant prices, negotiating and writing enforceable contracts, and haggling about the division of the surplus.4 What gives rise to transaction costs is incomplete information about relevant prices and the costs of monitoring and enforcing good performance. It is because production has a time-element that production transactions are not typically like those which take place in a fruit and vegetable market, where both buyer and seller know the prices of all the products.

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Rather than presupposing the direction of causality and performing a revisionist exercise to provide a semi-coherent interpretation of apparently disconfirming facts, such as Becker and Murphy’s theory of rational addiction, ontological enquiry should be a normal part of economic practice.21 That is, in attempting to answer any given problem, economists should think seriously about the structures and elements involved, and whether or when reduction to a lower level adds or subtracts from explanatory power. 8 INSTITUTIONAL ECONOMICS The nature of the firm is not simply a minimizer of transaction costs, but a kind of protective enclave from the potentially volatile and sometimes destructive, ravaging speculation of a competitive market. Geoffrey Hodgson, Economics and Institutions Anglo-American thinkers of the Enlightenment had an intense suspicion of institutions, which they saw as impediments to the flowering of individual liberty.

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So the assumption of profit maximisation can be retained: in setting up firms owners (shareholders) cede technical authority to managers to maximise profits on their behalf. Though somewhat of an intruder on the map of individual maximisation, the firm fulfils the neoclassical criterion of rational choice. The economic historian Douglass North (1920–2015) received a Nobel prize for using the theory of transaction costs to explain the institutional innovations which led to economic growth in the eighteenth century. The institution ‘is an arrangement between economic units which defines and specifies the ways by which they can cooperate and compete’.5 Economic institutions, like products, are innovated when the gains from the innovation exceed the costs of innovating.

Just Keep Buying: Proven Ways to Save Money and Build Your Wealth
by Nick Maggiulli
Published 15 May 2022

If you can’t meet all of these conditions, then you should probably be renting. Let me explain. Given that the transaction costs of buying a home are 2%–11% of the home’s value, you will want to ensure that you stay in the home long enough to make up for these costs. For practical purposes let’s choose the middle of this range and assume that the transaction cost of buying a home is 6%. Using Shiller’s estimate for real U.S. housing returns of 0.6% per year, this means it would take ten years for the typical U.S. home to appreciate enough to offset this 6% transaction cost. On a similar note, if you plan to stay in an area for ten years but your personal or professional life isn’t stable, then buying a home may not be the right choice.

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In full, the one-time costs of buying a home can range anywhere from 5.5%–31% of the value of the home depending on the down payment, closing costs, and real estate agents employed. If we ignore the down payment, the transaction cost associated with buying a home ranges from 2%–11% of the home’s value. This is why buying a home usually only makes sense for people who will stay in it for the long term. The transaction costs alone can eat away any expected price appreciation if you buy and sell too often. In addition to the one-time costs of buying a home, the ongoing costs can be significant as well. After paying for the home itself you will also need to pay property taxes, maintenance, and insurance.

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Think of it like a snowball rolling down a hill. Just keep buying and watch that ball grow. In fact, Just Keep Buying is easier to follow today than at any point throughout history. Why is that? Because if you had implemented this advice just two decades ago, you would have racked up some hefty fees and transaction costs along the way. At $8 per trade in the 1990s, Just Keep Buying would’ve gotten very expensive, very fast. But things have since changed. With free trading on many major investment platforms, the rise of fractional share ownership, and the availability of cheap diversification, Just Keep Buying has an edge like never before.

The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism
by Arun Sundararajan
Published 12 May 2016

In a world with no “frictions,” that is, in a world where you could buy or sell instantaneously and without regard to transaction costs, you might freely adjust your ownership at any time to match your current needs, buying a Porsche when you feel like taking a drive down the beach, and then selling it and buying a minivan later that day to pick up your kids from soccer. In practice, of course, this isn’t possible because durable goods are “illiquid”—you can’t just simply buy and sell them instantly. There are significant and large transaction costs associated with buying and selling. As soon as you buy a car, it loses a lot of its value.

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Now, not everyone agreed with MYB’s unilateral prediction. Several years later Vijay Gurbaxani and Seungjin Whang acknowledged that “recent advances in IT have obviously introduced a great deal of operational efficiency in the market economy by providing more efficient market mechanisms and thus lowering the associated market transaction costs,” but they noted some additional tradeoffs.9 Apart from the “external coordination costs” associated with transacting through the market, there is a set of “internal coordination costs” that hierarchies bear. These grow as the organization scales; as the management structure gets more bloated, the interests and incentives of workers are increasingly misaligned or disconnected from the broader objectives of the firm.

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The coin provides returns to early contributors—of human capital, of risky early participation, of effort publicizing the marketplace and facilitating critical mass—a new breed of purpose-driven investors. Value Creation and Capture in Decentralized Exchange There are a number of new forms of economic activity that new decentralized peer-to-peer marketplaces will facilitate simply because they lower transaction costs. Other decentralized systems, either independent or embedded in traditional privately owned corporations or markets, may emerge in contexts where there was previously insufficient trust for digital exchange, where the potential market was too small to attract private capital in the past, or where the blockchain lowers operating costs.

The Signal and the Noise: Why So Many Predictions Fail-But Some Don't
by Nate Silver
Published 31 Aug 2012

Had the investor pursued his Manic Momentum strategy for ten years beginning in January 2000, his $10,000 investment would have been whittled down to $4,000 by the end of the decade even before considering transaction costs.40 If you do consider transaction costs, the investor would have had just $141 left over by the end of the decade, having lost almost 99 percent of his capital. In other words: do not try this stuff at home. Strategies like these resemble a high-stakes game of rock-paper-scissors at best,* and the high transaction costs they entail will deprive you of any profit and eat into much of your principal. As Fama and his professor had discovered, stock-market strategies that seem too good to be true usually are.

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No investor can beat the stock market over the long run relative to his level of risk. No investor can beat the stock market over the long run relative to his level of risk and accounting for his transaction costs. No investor can beat the stock market over the long run relative to his level of risk and accounting for his transaction costs, unless he has inside information. Few investors beat the stock market over the long run relative to their level of risk and accounting for their transaction costs, unless they have inside information. It is hard to tell how many investors beat the stock market over the long run, because the data is very noisy, but we know that most cannot relative to their level of risk, since trading produces no net excess return but entails transaction costs, so unless you have inside information, you are probably better off investing in an index fund.

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Our investor, using a very basic strategy that exploited a simple statistical relationship in past market prices, substantially beat the market average, seeming to disprove the efficient-market hypothesis in the process. But there is a catch. We ignored this investor’s transaction costs. This makes an enormous difference. Suppose that the investor had pursued the Manic Momentum strategy as before but that each time he cashes into or out of the market, he paid his broker a commission of 0.25 percent. Since this investor’s strategy requires buying or selling shares hundreds of times during this period, these small costs will nickel-and-dime him to death. If you account for his transaction costs, in fact, the $10,000 investment in the Manic Momentum strategy would have been worth only about $1,100 ten years later, eliminating not only his profit but also almost all the money he put in originally.

file:///C:/Documents%20and%...
by vpavan

Both cases— the cost of not finding the best match for your order and the cost exacted by the exchange and its various middlemen who handle your trade— are called transaction costs. They are costs over which you have little control. But that is changing. Transaction costs are the cause of much debate and controversy today, and the root of an immense struggle pitting the NYSE against Nasdaq; both established exchanges against new electronic networks; large investment banking firms against the exchanges; and small investors against institutional investors. In this chapter, you'll learn all about transaction costs and how they affect you. You'll also learn about recent structural changes in the stock markets, some of which have been revolutionary, that affect trading costs.

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And 2001 was one of the better years for managed funds. For years, experts have debated whether index funds are superior to managed funds. Index-fund proponents argue that actively managed funds waste money by paying higher salaries for top-flight analysts and stock pickers to put together a winning portfolio. They also incur higher transaction costs because they engage in frequent trading. But after all that, most managed funds still can't beat the passive index funds. On the other hand, managed-fund backers say that index funds don't always perform better, such as in the twelve months following the March 2000 technology bust. And managed-fund aficionados say index funds are, well, boring.

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So why do managers persist with their frenetic buying and selling? Because they are convinced that they can add value by outsmarting the market on a day-to-day basis rather than buying and holding for the long term. "Short-term speculation is what they're doing," gripes Vanguard founder Bogle. "All this thrashing around hits investors with higher transaction costs and higher taxes, but no observable improvement in fund performance." Too many fund managers also buy stocks when they think the market is about to move up and sell when they believe the market is getting ready to swoon. In other words, they try to time the market, a strategy most experts warn is a foolish attempt at achieving the impossible.

Topics in Market Microstructure
by Ilija I. Zovko
Published 1 Nov 2008

Variations in patience might be explained by a rationality-based explanation in terms of information arrival, or a behavioral-based explanation driven by emotional response, but in either case it suggests that patience is a key factor. These results have several practical implications. For market practitioners, understanding the spread and the market impact function is very useful for estimating transaction costs and for developing algorithms that minimize their effect. For regulators they suggest that it may be possible to make prices less volatile and lower transaction costs, if this is desired, by creating incentives for limit orders and disincentives for market orders. These scaling laws might also be used to detect anomalies, e.g. a higher than expected spread might be due to improper market maker behavior.

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Our analysis looks at the price placement of limit orders across a much wider range of prices. Since placing orders out of the market carries execution and adverse selection risk, our work is relevant in understanding the fundamental dilemma of limit order placement: execution certainty vs. transaction costs (see, e.g., Cohen, et al. (1981); Harris (1997); Harris and Hasbrouck (1996); Holden and Chakravarty (1995); Kumar and Seppi (1992); Lo, et al. (2002)). In addition to the above, our work relates to the literature on clustered volatility. It is well known that both asset prices and quotes display ARCH or GARCH effects (Engle (1982); Bollerslev (1986)), but the origins of these phenomena are not well understood.

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The solid line is a regression; the dashed line is the diagonal, representing the model’s prediction with A = 1 and B = 0. spread, R2 = 0.76, so the model still explains most of the variance. 3.3 Average market impact Market impact is practically important because it is the dominant source of transaction costs for large trades, and conceptually important because it provides a convenient probe of the revealed supply and demand functions in the limit order book (see SM Section 3.5.7). When a market order of size ω arrives, if it removes all limit orders at the best bid or ask it will immediately change the midpoint price m ≡ (a + b)/2.

Restarting the Future: How to Fix the Intangible Economy
by Jonathan Haskel and Stian Westlake
Published 4 Apr 2022

Daron Acemoglu and James Robinson (2019, 126ff) draw attention to this fresco as an example of an institutional system whereby the state had sufficient power to provide communal goods (supervisors of public buildings and weights and measures, six “good men” who oversaw taverns and prevented swearing) but not too much power to become autocratic. 2. North 1993. 3. Smith 1904, 1:xxxv. 4. Marx and Engels 2002 [1848]. 5. Acemoglu, Johnson, and Robinson 2004, 395. 6. Kling and Schultz 2009. 7. North 1993, 97. 8. The “transactions costs” approach to exchange notes that exchange is affected by the transactions costs in each situation. This analysis is often, but not always, applied to a situation in which two parties are trading but face the problems that the assets they bring to the match are specific, there is uncertainty, and exchange might be infrequent (Milgrom and Roberts 2009; Williamson 2009).

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We wish to step back from this approach and make sure we include in the process of exchange the finding of a partner in the first place. We also think that, following Milgrom and Roberts (2009), treating the exchange as the unit of analysis, rather than the transactions costs of the matched transaction, helps us be more specific about what the transactions costs are. In conditions of incomplete contracts with asset specificity, uncertainty and infrequent trade arise because these conditions induce high bargaining costs, problems of commitment and information, and the like. 9. Milgrom and Roberts 1990. 10.

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We have assigned its own institutional heading to trust and reciprocity, given its historical and anthropological importance. 15. Regarding transactions costs, Mançur Olson (1965) (discussed in more detail below) pointed out that the benefits of many policies are concentrated, whereas the costs are dispersed. So, for example, all London taxi drivers benefit from regulators setting a high price for a taxi ride. This benefit is concentrated in comparison with the dispersed benefit of low prices for the much broader community of taxi riders. But it’s very expensive for the taxi riders to arrange themselves in a coalition and push for low taxi prices; in economists’ language, the transactions costs of organising the large community who benefit from such low prices are simply too high.

Company: A Short History of a Revolutionary Idea
by John Micklethwait and Adrian Wooldridge
Published 4 Mar 2003

In an article called “The Nature of the Firm,” he argued that the main reason why a company exists (as opposed to individual buyers and sellers making ad hoc deals at every stage of production) is because it minimizes the transaction costs of coordinating a particular economic activity. Bring all the people in-house, and you reduce the costs of “negotiating and concluding a separate contract for each exchange transaction.” But the gains from reducing transaction costs that companies deliver have to be balanced against “hierarchy costs”—the costs of central managers ignoring dispersed information. In the nineteenth century, the gains to be had from integrating mass production with mass distribution were enormous—as Alfred Chandler, the doyen of business historians, puts it, the “visible hand of managerial direction” replaced “the invisible hand of market mechanisms.”

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Five years later, Ronald Coase published his ideas in a paper in Economica called “The Nature of the Firm.” Coase tried to explain why the economy had moved beyond individuals selling goods and services to each other. The answer, he argued, had to do with the imperfections of the market and particularly to do with transaction costs—the costs sole traders might incur in getting the best deal and coordinating processes such as manufacturing and marketing. The history of the company since 1850 validated Coase’s point. General Motors, for instance, reaped enormous economies of scale by bundling together plenty of transactions that had previously been done independently.

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In the last three decades of the twentieth century, the cost of computing processing power tumbled by 99.99 percent—or 35 percent a year.22 Computers thrust ever more power down the corporate hierarchy—to local area networks, to the desktop, and increasingly to outside the office altogether. Meanwhile, the Internet reduced transaction costs. By the end of the century, General Electric and Cisco were forcing their suppliers to bid for their business in on-line auctions; and eBay, the main independent on-line auction house, had 42 million users around the world. In the last three months of 2001, those eBay customers listed 126 million items and spent $2.7 billion.

Empirical Market Microstructure: The Institutions, Economics and Econometrics of Securities Trading
by Joel Hasbrouck
Published 4 Jan 2007

Similar events do not, however, characterize the government bond and foreign exchange markets. Models of these markets, therefore, must rely on a broader concept of private information. This important point has been stressed by Lyons (2001). 5.4.2 Fixed Transaction Costs Suppose that in addition to asymmetric information considerations, the dealer must pay a transaction cost c on each trade (as in the Roll model). The modification is straightforward. The ask and bid now are set to recover c as well as the information costs: A = E[V |Buy ] + c and B = E[V |Sell] − c. The ask quote sequence may still be expressed as a sequence of conditional expectations: Ak = E[V |
k ] + c, where
k is the information set that includes the direction of the kth trade.

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The dealer’s bid is set as B = E[V |Sell] = V (1 + µ) δ + V (1 − µ)(1 − δ) . 1 + µ(1 − 2δ) (5.6) The bid-ask spread is A−B = 4(1 − δ)δµ(V − V ) . 1 − (1 − 2δ)2 µ2 (5.7) In the symmetric case of δ = 1/2, A − B = (V − V )µ. In many situations the midpoint of the bid and ask is taken as a proxy for what the security is worth absent transaction costs. Here, the midpoint is equal to the unconditional expectation EV only in the symmetric case (δ = 1/2). More generally, the bid and ask are not set symmetrically about the efficient price. Exercise 5.1 As a modification to the basic model, take δ = 1/2 and suppose that immediately after V is drawn (as either V or V ), a broker is randomly drawn.

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If the size of the incoming order is in fact q = 2, the limit order is profitable: P(q = 2) > E[X |q = 2]. The limit order will also execute, however, if q = 8, in which case P(q = 2) < E[X |q = 8], the limit order incurs a loss. Finally, limq→0+ P(q) > µX = 5, that is, even a infinitesimal purchase will incur a transaction cost. Another way of putting this is that the bid-ask spread is positive even for arbitrarily small quantities. (In the competitive dealer model, in contrast, limq→0+ P(q) = limq→0− P(q) = µX .) The pricing schedule is sufficiently discriminatory that a ω considerably greater than µX is necessary before the customer will consider an even an infinitesimal purchase. 

Cogs and Monsters: What Economics Is, and What It Should Be
by Diane Coyle
Published 11 Oct 2021

These chapters use material from a lecture at the Oxford Martin School in June 2019, https://www.oxfordmartin.ox.ac.uk/events/changing-technology-changing-economics-with-prof-diane-coyle/ and at Nottingham Trent University in February 2020, https://www.ntu.ac.uk/about-us/events/events/2020/02/professor-diane-coyle-cbe. 5 Changing Technology, Changing Economics My first book on the digital economy was published almost a quarter of a century ago (Coyle 1997). Engrossed in the research and writing in the year or so prior to its publication, I enthused about the revolutionary prospects of the internet to a very distinguished economist. He replied, ‘It’s going to reduce transactions costs a bit, but we already know how to handle transactions costs in our models. Why are you wasting your time on this?’ He was—obviously with hindsight—wrong. The distinctive economic characteristics of digital technology mean that the way we think about economics itself has to change. Digital Is Different ‘Digital’ has become shorthand for ICTs or information and communication technologies.

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It recognises that people have different interests and that politics (with either a small or a large ‘p’), history, and culture will have an important effect on economics. Economic history and sociology generally are exerting greater influence on mainstream economics. Research is alive to issues such as asymmetries of information and transactions costs affecting economic choices. This means that much of the framework that academic economists now habitually use bears little relation to the everyday economics debated in politics and applied in public policy. Paradoxically, commentators who are very critical of ‘economics’ often celebrate leading economists practising in this eclectic modern mainstream.

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It is a useful inoculation against the temptation to indulge in social engineering, because it is so hard to think through all the possible consequences of any action or policy. General equilibrium as a specific theory is an abstract, ideal world of identical individuals making their own choices according to pre-determined preferences, with no transactions costs or externalities. With these assumptions, it is possible to prove that competitive equilibrium will replicate the decisions of an omniscient and benign central planner. In these abstract conditions, the market—a series of trades between individuals regulated by price—is the most efficient way of discovering and satisfying individual preferences.

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor
by John Kay
Published 24 May 2004

I described in the last chapter how neoclassical economics was enhanced both by game theory and by transactions costs economics. But neoclassical rationality assumptions were imposed on both. The transactions costs solution to the wilderness dilemma is that the economist should optimize within constraints. He should do just the amount of calculation needed to find the best strategy in the light of his knowledge that every second devoted to calculation increases the chances ofbeing caught by the bear. 18 Borrowing Herbert Simon's term (but for a very different concept), Oliver Williamson calls this optimization under constraints-bounded rationality. 19 In this vein, transactions costs economics often degenerates into a Panglossian view of the world: institutions that exist must be the solution to some constrained-optimization problem.

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The Arrow-Debreu results are the culmination of a long tradition in economics that emphasizes supply and demand, perfectly competitive markets, and the search for market equilibrium, conducted by independent, self-regarding agents. Economic research since Arrow and Debreu has drawn game theory, transactions costs, and most recently behavioral economics into the mainstream of economic theory. In the Arrow-Debreu framework, interactions are anonymous and every market has many buyers and sellers. In game theory, the players are few and not anonymous. In the Arrow-Debreu framework, institutions do not exist or are dealt with in a reductionist way. Institutional, or transactions costs, economics recognizes that economic lives are lived in and through economic institutions. Behavioral economics contemplates alternative assumptions about motives and the nature of economic behavior.

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John Nash was author of the principal solution concept in game theory-the Nash equilibrium-but his productive career was ended by schizophrenia. His health partially restored, he was awarded the Nobel Prize in 1994. 21 Nash was played by Russell Crowe in an Oscar-winning film of his life, A Beautiful Mind. Institutional (or transactions cost) economics regards as its founder Ronald Coase,n a British economist who spent most of his career at the University of Chicago. His claim to fame rests mainly on two articles, published almost twenty-five years apart. The first was concerned with the theory of the firm. In the perfectly competitive world of Part III, firms played little or no role.

Order Without Design: How Markets Shape Cities
by Alain Bertaud
Published 9 Nov 2018

The use of spreadsheets soon became common in all sectors of the economy, but the spillover occurred first in large cities, spreading from MIT in Cambridge, Massachusetts, where it was originally invented. Knowledge spillovers are responsible for agglomeration economies (i.e., economies that increase productivity due to the rapid dissemination of new ideas because of large numbers of workers in close contact).2 Agglomeration economies also result from a lowering of transaction costs in larger cities because of the proximity of competing suppliers and consumers. Economic literature linking the wealth of cities to spatial concentration is quite abundant and is no longer controversial in academic circles. National accounts show that the output share of large cities is always much higher than their share of the national population.

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If we agree that consumption is a market issue, then planners could consider several possible solutions based on market mechanisms that would increase consumption. For instance, planners could increase the supply of developed land by increasing the speed of transport so that more land could be opened for development; they could lower the cost of construction by increasing the productivity of the building industry or by decreasing the transactions costs linked to building permits and land acquisition. Planners could also use a demand side approach, stimulating demand by increasing access to mortgage credit or even by indirectly causing an increase in salaries by opening the city to outside investments in manufacturing or services. All these measures are likely to contribute to an increase in housing consumption per household.

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Planners should therefore fully understand market mechanisms. Every planning department should monitor the spatial distribution of changes in real estate prices. Attention should be given to the supply side, including the elasticity of land supply, the productivity of the real estate industries, and the reduction of transaction costs imposed on building permits and property title transfers. Planners Can Influence Consumption by Using Markets, Not by Imposing Norms Clearly separating markets from design in the development of cities does not mean that planners should just passively monitor markets. For instance, planners should certainly be concerned by very low housing consumption among lower-income households and should act to increase it.

Remix: Making Art and Commerce Thrive in the Hybrid Economy
by Lawrence Lessig
Published 2 Jan 2009

Indeed, to the extent that the hybrid is spreading the right to innovate, the dynamic is again following the very old principle I described above: shifting innovation out of the core of the corporation where transaction costs permit. The hybrid teaches us that this strategy will increase as technologies for reducing transaction costs proliferate. And conversely, it would be checked by changes that increase the transaction costs of the hybrid. Perceptions of Fairness Will in Part Mediate the Hybrid Relationship Between Sharing and Commercial Economies We are not far into the history of these hybrid economies. And early enthusiasm will no doubt soon give way to a more measured, 80706 i-xxiv 001-328 r4nk.indd 231 8/12/08 1:55:55 AM 232 REMI X perhaps skeptical view.

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Why weren’t firms built like free markets? The answer was “transaction costs.” It cost money to go to the market: time, bargaining costs, costs of capital, etc. Coase reasoned that this cost would help explain the size of a firm. A firm would go 80706 i-xxiv 001-328 r4nk.indd 139 8/12/08 1:55:21 AM REMI X 140 to the market to obtain a product when doing so was cheaper than producing the product inside the firm. It would produce the product in house when the costs of the market were too high. Yochai Benkler summarizes the point: [P]eople use markets when the gains from doing so, net of transaction costs, exceed the gains from doing the same thing in a managed firm, net of the costs of organizing and managing a firm.

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Yochai Benkler summarizes the point: [P]eople use markets when the gains from doing so, net of transaction costs, exceed the gains from doing the same thing in a managed firm, net of the costs of organizing and managing a firm. Firms emerge when the opposite is true, and transaction costs can best be reduced by bringing an activity into a managed context that requires no individual transactions to allocate this resource or that effort.31 It follows from this insight that as transaction costs fall, all things being equal, the amount of stuff done inside a firm will fall as well. The firm will outsource more. It will focus its internal work on the stuff it can do best (meaning more efficiently than the market). LEGO-ized innovation is simply the architectural instantiation of this economic point.

Derivatives Markets
by David Goldenberg
Published 2 Mar 2016

Further, the synthetic strategies are (economically) equivalent to their corresponding natural strategies. Therefore, except for transactions costs, they should have the same prices. Otherwise, there would be arbitrage opportunities. If there are transactions costs, then there could be infinitely more synthetic strategies that would not be arbitrage strategies if their execution prices differ by more than the transactions costs of executing the arbs, depending on by how much they differ. If the difference between the cost of executing the synthetic strategies and the cost of executing the natural strategies is less than the transaction costs involved, then these could be arbitrage strategies.

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If a bank borrows at one rate, LIBID3, in this case and lends at a higher rate, LIBOR3, then that has the appearance of an arbitrage strategy. However, there are transactions costs to the bank of arranging these transactions, and these costs can eat up the apparent arbitrage profits. What looks like arbitrage profits are just compensation for the services provided. The same thing happens in many markets in which there is a bid-asked spread, and that includes most markets. The spread represents transactions costs and the dealer offering the ability to transact is just earning those transactions costs. Concept Check 10 The dealer would have to go out, at time T, into the spot market for 3-month Eurodollar time deposits and purchase it for the going spot price As shown in Chapter 5, section 5.8.1, he would still effectively pay the futures price he contracted at for the investment vehicle, due to his long ED futures position.

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Zero in both cases. So we have matched up the natural instrument (a long forward position) with the synthetic instrument (a 100% leveraged position in the underlying commodity) exactly. To all intents and purposes, the natural position and the synthetic position are economically equivalent (we ignore transactions costs). What then is a long forward position? It is a 100% leveraged long position in the underlying commodity. That’s the economics. The difference between a fully paid for long position in the underlying commodity and a fully financed long position in the underlying commodity is the zero-coupon bond issuance.

The Missing Billionaires: A Guide to Better Financial Decisions
by Victor Haghani and James White
Published 27 Aug 2023

This thought experiment reminds us that it takes a really long time to analyze an investment with this kind of risk/reward by track record alone, even with the assumption that the investment opportunity has not changed over that time. Even if we accept that both risk‐based and behavior‐based factors are expected to deliver excess returns in the future, we worry that transactions costs and frictions involved in harvesting them render the net excess return too meager in most cases to warrant holding portfolios with large factor tilts. Factor‐focused portfolios require more active rebalancing than market‐cap‐weighted portfolios, leading to higher turnover, transaction costs, and tax inefficiency. A detailed study by researchers at the investment manager AQR18 using nearly $1 trillion of actual transaction data estimated that the cost of trading was equal to about 40% of the gross historical extra factor return.

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In Haghani and Dewey (2016), we found that dynamic asset allocation applied to a portfolio including US and non‐US equity markets had a simulated return 2.5% per annum higher than the relevant static portfolio (1975–2015).e Over the same period, the dynamic approach using only the US equity market had a return of about 1% per annum higher than its static portfolio baseline, and about 1.5% lower than the return on the international dynamic strategy. The internationally diversified portfolio had a Sharpe ratio of 0.78 versus 0.58 for the US‐only portfolio. Turnover and Tax Efficiency A dynamic strategy is very likely to experience higher turnover than a static weight strategy and, hence, may incur higher transaction costs and possibly a higher tax cost as well. In the simulations we presented in Exhibits 5.4 and 5.6 with monthly rebalancing, the average turnover of the dynamic strategies were 30% and 65% per annum, respectively, versus 10% for the static weight strategy. The strategies can be much more tax efficient than one might guess based on these turnover figures.

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Also, if we capped his equity exposure at 100%, i.e., using no leverage at all, he could get about one third of the total improvement available. In any case, before implementing such a strategy, an investor should decide just how correlated his human capital is with major asset classes, especially the stock market, and work through the cost of leverage implied by the options, transaction costs, additional taxes, and other risks.b In particular, the investor should also take account of the uncertainty, including large negative tail risks, to the value of his human capital, separate from its potential correlation with the economy and stock market returns. A novel approach that might be available in the future is to implicitly sell some of your human capital through an instrument called an “income share agreement,” or ISA.

Stigum's Money Market, 4E
by Marcia Stigum and Anthony Crescenzi
Published 9 Feb 2007

In a study, Sack found that the arbitrage opportunities between coupon-bearing Treasury securities and the reconstitutable portfolio of STRIPS is limited and that most of the price differences likely fall within the range of transaction costs. The study found that, under the typical transaction cost (a bid-offer spread of about of a point), only about 15% of the study’s 57,084 observations presented a stripping arbitrage opportunity. The actual profit potential may be smaller than that because the actual transaction costs could be greater than is apparent. This results from slight differences in the taxation of these instruments, although this seems to have a trivial effect.

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The dealer might put on a 5-year swap for maybe $100 million and then let that 5-year become a 4-year and then a 3-year, and then maybe get rid of it. This approach reduces not only spread (basis) risk, but transaction costs as well. Every time a dealer shorts a Treasury and then has to buy it back, she loses as much as a 32nd. For a shop that maintains ongoing positions in MTNs, a cheaper way (from the point of view of transaction costs) to hedge that core position may be to book an interest rate: be the payer of fixed and receiver of floating to hedge fixed-rate MTNs. MTNs VERSUS CORPORATE BONDS In the beginning and in its purest form, the MTN market dealt in unsecured, fixed-rate, medium-term paper, typically sold on a continuous basis by several dealers who acted on an agency basis.

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Buying securities and rolling them involves more work than some people sometimes care to do or have time for, and having a bank or broker do the job may involve high transaction costs. Also, for some instruments, yields on small denominations are lower than those on large denominations. Finally, an investor with limited funds can’t easily reduce risk by diversifying: by buying a mix of different names or instruments. None of these difficulties exists for mutual funds such as money funds, which pool the resources of many investors. Because such a fund handles large sums of money, high minimum denominations pose no problem. FIGURE 26.1 Assets of mutual funds, January 1984–August 2000 (in billions of dollars) Transaction costs in terms of both money and time spent per dollar invested are minuscule compared to the costs that small investors incur.

The End of Ownership: Personal Property in the Digital Economy
by Aaron Perzanowski and Jason Schultz
Published 4 Nov 2016

In the language of economists, property rights increase efficiency by lowering transaction costs. Transaction costs are all of the costs aside from the sticker price that we incur when we buy a product or engage in some transaction.22 Let’s say you want to buy a newly released bestseller. The retail price for the book is $25. But that price doesn’t take into account all of the relevant costs of acquiring the book. You have to drive to the bookstore; you have to spend time looking for the book on the shelf; in some cultures, you may have to haggle over the price. These are all transaction costs. Even information about the book comes at a cost.

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To go back to a requirement of individualized contracts, he says, would “return transactions to the horse-and-buggy era.” Standardized mass contracts, in contrast, hold out the promise of drastically reducing transaction costs for sellers. Easterbrook is right that standardized contracts lower costs for software makers. They draft one license, likely cobbled together from existing terms, and use it in thousands or even millions of transactions. No messy negotiations, no discussions, no explanations. Undoubtedly, that reduces costs within the software industry. And while it is generally true that reducing transaction costs is a good thing, here those costs are not eliminated. They are just shifted from sellers to buyers.

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They are just shifted from sellers to buyers. In a world governed by EULAs, life is easier for software companies and much harder for all of us. We are the ones expected to read and understand page after page of license text. And those costs add up. The failure to account for them shows that Easterbrook is keenly concerned with transaction costs when they harm software makers, but remarkably insensitive to those costs when they are imposed on individuals. Next, Easterbrook gestures toward competition as a check on abusive license terms. If people are unhappy with a term that restricts how they can use a product, he speculates, surely competitors will offer more attractive terms to win them over.

The Truth Machine: The Blockchain and the Future of Everything
by Paul Vigna and Michael J. Casey
Published 27 Feb 2018

All these solutions worked for those who could afford them. But, inevitably, the added transaction costs translated into barriers to entry that helped the largest incumbents ward off competitors, limiting innovation and denying billions of financially excluded people the opportunity to fully exploit the Internet’s many possibilities for advancement. It’s how we’ve ended up with Internet monopolies. Those with first-mover advantages have not only enjoyed the benefits of network effects; they’ve been indirectly protected by the hefty transaction costs that competitors face in trying to grow to the same scale. In a very tangible way, then, the high cost of trust management has fed the economic conditions that allow the likes of Amazon, Netflix, Google, and Facebook to keep squashing competitors.

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It was another jury-rigged solution that meant that the banking system, the centralized ledger-keeping solution with which society had solved the double-spend problem for five hundred years, would be awkwardly bolted onto the ostensibly decentralized Internet as its core trust infrastructure. With customers now sufficiently confident they wouldn’t be defrauded, an explosion in online shopping ensued. But the gatekeeping moneymen now added costs and inefficiencies to the system. The result was high per-transaction costs that made it too expensive, for example, to sustain micropayments—extremely low payments, maybe as little as pennies, that otherwise promised to open up a whole new world of online business models. That nixed a dream of early Internet visionaries, who saw that idea feeding into a global marketplace where software, storage, media content, and processing power would be bought and sold in fractional amounts to maximize efficiency.

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He raised $5 million, partially with tokens, to launch a startup called Lykke, whose mission, he says, is to “build a matching engine that can offer a fair market price across any digital coin, whatever its nature.” Confident that the scaling problems of blockchains will be resolved one way or another, he is convinced that open data and middleman-free blockchain-based asset markets will trend toward zero transaction costs for cross-trading in all securitized digital assets. He plans to deploy into that efficient market setting a network of high-speed, computerized trading machines. Much like Wall Street bond traders, these will “make markets” to bring financial liquidity to every countervailing pair of tokens—buying some here and selling others there—so that if anyone wants to trade 100 BATs for a third of a Jackson Pollock, they can be assured of a reasonable market price.

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory
by Kariappa Bheemaiah
Published 26 Feb 2017

Menu costs can prevent firms from setting their prices optimally, thus causing private profit losses which are, however, lower than these menu costs. By engaging in “near-rational behaviour” these firms deviate from the optimal price (wage) setting. and reduce their transaction costs associated with searching information about demand (labor supply) changes. In such case, profit losses caused by deviations of prices (wages) from their optimal value can be offset by reductions of their transaction costs. Such behaviour cab be optimal from the firm’s perspective but causes significant losses of aggregate output and employment. The extensive use of DSGE models in the past few decades have not been without strife.

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Owing to uncertainty, opportunism and limited information (bounded rationality), the lack of trust between agents limits the number of interactions and bonds that are formed in a network. This hesitation to form links based on lack of trust has been extensively studied in the field of transaction cost theory (also called new institutional economics) which was developed by Ronal Coase in 1937. Transactional cost theory (TCT) is the branch of economics that deals with the costs of transactions and the institutions that are developed to govern them. It studies the cost of economic links and the ways in which agents organize themselves to deal with economic interactions.

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At about the same time that SWIFT was putting a call out for papers, Earthport partnered with Ripple, a company that helps construct quasi-private Blockchains for clients, to implement an instant cross-border payment system. Using Ripple’s blockchain-based RTGS**, Earthport launched the Distributed Ledger Hub (DLH), which provides its clients instant payments and liquidity, transaction cost efficiencies, a high standard of compliance control, and elimination of counter-party risk via pre-funding (Earthport, 2015). As stated by Jonathan Lear, Earthport’s President, “The world is getting smaller and payments needs to move faster… The legacy way of making cross-border payments, well there is only one way to describe it—it’s a real bloody mess….

Investment: A History
by Norton Reamer and Jesse Downing
Published 19 Feb 2016

Contemporary Views of Usury Currently, credit markets now mostly operate free of religious criteria, and this has created more economically appropriate pricing of borrowing in today’s sophisticated markets. Overall, even though usury laws never entirely ruled out commercial lending, they did have substantial influence on the development of the financial system. In raising the transaction cost of lending and suppressing the growth of debt financing, usury implicitly encouraged equity financing and innovative business contracts and structures in societies that took strong stances against the practice.100 In recent decades, attitudes toward usurious interest rates seem to have changed completely—at times, it may appear that an insufficient premium and an unduly relaxed attitude is being taken toward higher-risk and lower-quality borrowers.

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The third development was the construction of a means to connect empowered savers with these investment projects, which was accomplished through the emergence of public markets. The public market was, in the long term, the mechanism to join the two sides of the coin. Public markets offered liquidity, publicized value, broadcast availability, lowered transaction costs, and permitted investors to gain wide diversification with relative ease. Public markets, furthermore, aided in initiating the opportunity and need for regulation. The democratization of investment is not a finished project. Just as the political democratization of the eighteenth and nineteenth centuries is still playing out (it left key demographics still disenfranchised and has not yet spread to all corners of the world), the project of democratization of investment is incomplete.

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Privately held equity stakes in business organizations and firms became publicly traded entities on what eventually evolved into high-volume public securities exchanges in the modern era. The emergence of public markets connected savers with investment projects all around the world, all the while providing liquidity, publicized value, broadcast availability, asset diversification potential, and lowered transaction costs. Publicly traded companies arose largely as a result of the Industrial Revolution, drawing on the experience of the joint-stock companies that preceded them. They aided the pace and scale of growth in the era of nineteenth-century railroads and the twentieth century’s automobiles, computers, airplanes, and industry.

The Little Book That Still Beats the Market
by Joel Greenblatt
Published 2 Jan 2010

But their sales fees and expenses were way too high. Then came no-load funds, which were better. They eliminated the sales fee, but were still burdened with management fees and with the tax and transactional burden that comes from active management. Then came “index funds,” which cut fees, taxes, and transaction costs to the bone. Very, very good. What Joel would have you consider, in effect, is an index-fund-plus, where the “plus” comes from including in your basket of stocks only good businesses selling at low valuations. And he has an easy way for you to find them. Not everyone can beat the averages, of course—by definition.

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The study was biased because the database used in the study had been “cleaned up” and excluded companies that later went bankrupt, making the study results look better than they really were (a.k.a. survivorship bias). 3. The study included very small companies that couldn’t have been purchased at the prices listed in the database and uncovered companies too small for professionals to buy. 4. The study did not outperform the market by a significant amount after factoring in transaction costs. 5. The study picked stocks that were in some way “riskier” than the market, and that’s why performance was better. 6. The stock selection strategy was based on back-testing many different stock selection strategies until one was found that worked (a.k.a. data mining). 7. The stock selection strategies used to beat the market included knowledge gained from previous “market-beating” studies that was not available at the time the stock purchases were made in the study.

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By using only this special database, it was possible to ensure that no look-ahead or survivorship bias took place. Further, the magic formula worked for both small-and large-capitalization stocks, provided returns far superior to the market averages, and achieved those returns while taking on much lower risk than the overall market (no matter how that risk was measured). Consequently, small size, high transaction costs, and added risk do not appear to be reasonable grounds for questioning the validity of the magic formula results. As for data mining and using academic research not available at the time of stock selection, this did not take place, either. In fact, the two factors used for the magic formula study were actually the first two factors tested.

Giving the Devil His Due: Reflections of a Scientific Humanist
by Michael Shermer
Published 8 Apr 2020

The Hidden Costs of Market Failures and Moral Hazards Moving from examples to analysis, Frank employs a technical model developed by the economist Ronald Coase that shows precisely how economists can take into account such transaction costs in order to better understand macroeconomic phenomena and correct for market failures. Here Frank claims that the transaction costs of keeping up with the Joneses are not presently included in the price of homes, suits, shoes, and parties in terms of the real benefit to the owners, so this is an example of a market failure (and, he opines, a moral hazard) that he suggests can be remedied through a progressive consumption tax wherein these newfound liabilities would not only adjust the transaction costs to account for the hedonic treadmill while simultaneously curtailing needless consumptive behavior, it would also generate additional tax revenues from the rich that could be used to shore up our crumbling Social Security and Medicare accounts.

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In order to make money they must use available resources in a way that creates more value than anyone else and with lower costs. In fact, most profit is made from reducing the transactions costs associated with getting products to consumers, which means lower prices. When some guy willingly works 80 hours a week managing the distribution system of a moderately sized corporation everyone else benefits from that hard, and probably dull, work in the form of low prices and increasing quality of goods and services. So, eliminating the “yacht” incentive to reduce transactions costs will just … increase transaction costs, making us all poorer, not just the peacocks.28 Fatal Conceit Redux Robert Frank strikes me as an intelligent and thoughtful man who genuinely wants to employ science and reason to improve the design of society for the betterment of all.

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Other Hidden Costs: What Is Seen and What Is Not Seen in Government Actions Even if evolutionary psychologists are wrong in this analysis of sexual selection and costly signaling theory, and it was determined that ostentatious displays of wealth, power, prestige, and creativity should be penalized through a consumption tax because of Frank’s analysis using Coase’s transaction models that reveal the hidden transaction costs of positional ranking and subsequent arms races, there are transaction costs of implementing such a tax. In fact, once you concede the point that at least some government services are necessary and must be paid for by taxes, then to the short list of services such as military, police, courts, and tax collectors, one can bolt on any number of additional services justified under the collective action problem rubric: fire departments, roads and bridges, schools, libraries, national parks and forests, postal service, social security, welfare, Medicare and Medicaid, foreign aid, and countless others embodied in the alphabet soup that this slippery slope line of reasoning has given us.

The Currency Cold War: Cash and Cryptography, Hash Rates and Hegemony
by David G. W. Birch
Published 14 Apr 2020

— Detlev S. Schlichter, Paper Money Collapse (2011) We are used to one particular kind of currency: government currency. The argument for maintaining this monopoly stems from economic efficiency and stability. Society obtains efficiency because a uniform currency with only one issuer minimizes transaction costs in a world of incomplete (or expensive) information. It is not necessary to have information about the creditworthiness of each and every issuer because there is only one. Society obtains stability (we hope) because the currency is issued by a central banker who understands economics (Eichengreen 2019).

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This was because a collection of interlinked community currencies seemed to me less economically efficient in aggregate. I still think this is true, but it may not be the point. I am wondering if we need to explore ways to increase economic activity within communities at the expense of inter-community transaction costs as a response to inequality and the unrest that it may cause. This has several implications, because if communities rather than individuals become central to money creation, then these currencies will be imbued with the values of the communities that create them. New York, New York The idea of cities creating currencies that are optimized to meet their requirements rather than those of the nation state may seem far-fetched.

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If both the sender and the receiver of funds have opted to use shielded addresses, the amount sent will be encrypted as well. Light and dark The idea that counterparties can choose whether a transaction is visible or not is interesting and under-explored. We can use the meta-technology to construct a cash replacement system in which anonymous transactions cost more than non-anonymous transactions. One way to do this is via the Crime Pays System, or CPS, conceived by the artist Austin Houldsworth.20 It was Houldsworth’s idea to have me present CPS at the British Computer Society (BCS) in 2012. In the guise of ‘Mr Don Rogers’, an alter ego created for the performance, I set out the new payment system to an unsuspecting audience, who, I have to say, were excellent sports about the whole thing!

The People's Republic of Walmart: How the World's Biggest Corporations Are Laying the Foundation for Socialism
by Leigh Phillips and Michal Rozworski
Published 5 Mar 2019

Models of markets working together in seamless harmony, as well as arguments about the market system producing the best outcomes, relied on the pretty fantastical assumption that each of us have any and all information permanently at our fingertips. As some economists began to question the notion of hyperrational humans, they found Coase’s notion of transaction costs to be a useful concept that could help save the rest of the discipline. The new field of transaction cost economics turned Coase’s insights about planning within capitalism into a story about flawed humanity. If our world diverged from one populated by perfectly rational beings, then some nonmarket transactions could be grudgingly admitted into the market system—as long as our imperfections were more costly than the benefits we could get from markets.

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Coase argued that companies do all of this apparent in-house imitation of the Soviet Union simply because the cost is too high of leaving up to markets every last coordinating decision. This was quite a clever explanation for the dissonance between copious corporate planning within and throughout a free market system. Economists are fond of the saying that “there is no free lunch.” Coase applied this to markets themselves. Markets introduce a whole web of what he called “transaction costs.” Writing a contract, setting up a market or finding the best price all take up resources and time. So long as the cost of doing all this was cheaper in house than on the market (and it was), it was only rational to keep it in house. So the “free” market isn’t really free either! Coase argued that it only makes sense that some decisions would be left to planning—a decision is made, and it is done.

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The manager’s exercise of central planning over his small province of tyranny is therefore not simply a better means to an end, as Coase thought, but a reflection of how the economy actually works. The adversarial relationship between bosses and workers that capitalism creates is no accident of markets merely introducing transaction costs that are best avoided through planning. Yet for mainstream economists, the confrontation between workers and managers only comes up in the context of “shirking.” The GPS device in the UPS driver’s truck, the call center badge that monitors washroom breaks or the white-collar worker’s app that tracks web browsing history are the sticks requiring one does as one is told; the bonuses are the carrots.

Retire Before Mom and Dad
by Rob Berger
Published 10 Aug 2019

Expense Ratios range from just a few Bips (e.g., 0.05%) to well over 200 (2%). Transaction Costs Mutual funds pay fees to buy and sell stocks and bonds. In this way, they are no different than if you and I bought and sold individual stocks and bonds. We’d have to pay a brokerage fee. So do mutual funds. Here’s the dirty little secret few people know. The transaction costs that mutual funds pay do not come out of the Expense Ratio we just looked at. They are a separate fee. What’s more, we don’t know ahead of time what those fees will be. Why? Because not even the mutual funds know what their transaction costs will be until they actually decide to buy or sell something.

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Because not even the mutual funds know what their transaction costs will be until they actually decide to buy or sell something. We can, if we want, see what a mutual fund company paid in the past for transaction costs. We’d do that by digging into what is called a Statement of Additional Information. These are dense impenetrable documents filed with the Securities and Exchange Commission in Washington, DC. Here’s what you need to know. Index funds tend to have far fewer transaction costs than actively managed funds. Once again, index funds win out over actively managed funds. Load Fees Some, but not all, mutual funds charge what are called Load Fees. These are fees you pay when you either buy shares of the fund or sell shares of the fund.

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Money Mustache 32 Mutual Fund 19-20, 38, 80, 139-140, 143, 145-147, 149, 151-155, 157-159, 161-162, 164, 183-185, 187, 190-191, 195-196, 200, 205, 207, 246 Passive Investing 141 Paul Merriman 161 Progress Principle 48, 211-214, 229 Reit 147 Rick Ferri 164 Roth 401(K) 64, 169-170, 172, 174-177, 179, 183, 238 Roth IRA 170-173, 175, 177, 179-181, 189 Rule Of 72 37-38, 40 Rule Of 752 32-33 Rule Of 857 33, 50, 73, 89 Rule Of 36,036 33 Saving Rate 53-55, 57-61, 63, 66-69, 71-76, 85-86, 98, 115, 154, 176, 195, 211, 213, 215, 222, 224 Schwab 164, 180, 192 Slingshot Effect 58-59, 61, 67, 72, 74, 76, 97, 222 S&P 500 136-137, 140-142, 146, 186, 196-197, 199-200 Spending Rate 55, 57-59, 61, 66, 71-72, 74, 98, 154, 176, 222 Stock 4, 20, 33, 38, 64-65, 101, 129-132, 134-141, 143, 145-147, 150-152, 157-160, 162-163, 184-186, 191-192, 195-203, 207, 233, 246 Target Date Retirement Funds 158-161, 165, 184 Taxes 1, 57, 63-64, 66, 143, 169, 172, 174, 178-179 TDR 158, 160-163, 185, 187, 190-192 Ticker 146, 159, 184, 186, 190, 195 Tips 48, 54, 149 Transaction Costs 152 Value 17, 64, 122, 133-135, 137, 144, 146-148, 158-161, 163, 172, 186, 197, 200-202, 220-221, 226 Vanguard 20, 38, 85, 87, 146, 151, 154, 158-159, 161-164, 191-192, 200, 207, 244 Acknowledgments My wife, Victoria, has managed to survive this life with me by her side for nearly 31 years and counting.

Making Work Visible: Exposing Time Theft to Optimize Workflow
by Dominica Degrandis and Tonianne Demaria
Published 14 May 2017

Optimal Batch Size The optimal batch size for delivery then depends on the combination of the impact of economies of scale and the cost of delaying responses (holding cost and transaction cost). Some people have a bias for large batch sizes because of the concept of economies of scale. Economies of scale is the cost advantage that arises with increased output of a product. The cost advantage is seen in some areas of manufacturing. Boeing produces large quantities of a single product on its assembly line. The transaction cost to create airplane engines needed for just one airplane at a time is too high, so they create a larger batch of engines at one time to reduce the associated overhead cost.

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The shorter window provides a sense of urgency to get something done faster, and it encourages me to break down work into smaller chunks. Ultimately, I am more efficient. Imagine you’re grocery shopping for bananas. If you buy a six-month supply of bananas at one time, your transaction cost is low, but most of the bananas will be rotten within ten days, so you’ve wasted money. If you buy a one-day supply of bananas at one time, they won’t rot, but your transaction costs will be high, because you’ll be grocery shopping every day. Somewhere in between is the right batch size of bananas. The reduction of batch size is a critical principle of Lean manufacturing. Small batches allow manufacturers to slash work in process and accelerate feedback, which, in turn, improves cycle times, quality, and efficiency.

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KEY TAKEAWAYS Delays are common; use metrics, particularly flow metrics, to help you make good decisions on priorities, WIP limits, and capacity utilization. Stop letting yourself and your team reach 100% capacity utilization. Look for the optimal batch size to help you achieve efficiency while keeping transaction costs down. Invest energy in collecting metrics that help you make decisions. —Eric Ries 3.2 THE TIME THIEF O’GRAM Ladies and gents, I give you the Time Thief O’Gram. Think of this tool as a spotlight, shining a light on a criminal lineup of the uncertainty across your organization. The intent here is to look at metrics that reveal high risk.

The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance
by Eswar S. Prasad
Published 27 Sep 2021

Taking Stock of Looming Changes Recent Fintech innovations—including those underpinning cryptocurrencies such as Bitcoin—herald broader access to the financial system, quicker and more easily verifiable settlement of transactions and payments, and lower transaction costs. Domestic and cross-border payment systems are on the threshold of major transformation, with significantly higher speed and lower transaction costs on the horizon. There are, however, likely to be trade-offs. Decentralized payment and settlement systems could certainly generate efficiency gains and, so long as the market is not dominated by a small number of players, create redundancies that render the failure of any single payment provider less consequential.

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First, as these economies become richer, there is enormous latent demand for higher-quality financial services (for example, wealth management, retirement planning) and products (such as mutual funds, stock options, automobile and mortgage loans) from their fast-expanding middle-class populations. The size of some of these economies also allows innovations to be scaled up quickly to reduce per-unit or per-transaction costs. Second, financial regulators in these countries seem to be more willing to take chances on such advances. In China, payment providers such as Alipay met little resistance from financial regulators in their early days. This enabled them to experiment and innovate, quickly moving from just providing payment apps to offering other financial products, with few constraints.

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This is a somewhat less clunky term than nonofficial cryptocurrencies, which would be a more accurate way to describe digital currencies that are not backed by any government authority (nor, in most cases, by any financial or tangible assets either) and whose building blocks include some cryptographic tools. Insofar as cryptocurrencies lack the backing of a government or other institution, they might appear to stand little chance of competing with fiat currencies in the long run. Moreover, it has become clear that Bitcoin is subject to volatile prices and high transaction costs and does not truly guarantee anonymity of transacting parties, which ought to make it less attractive as a payment system. The market response has been the proliferation of cryptocurrencies that attempt to address one or more of these concerns. As of May 2021, there were about seventeen hundred cryptocurrencies with a market capitalization of at least $1 million each (and another five hundred with a market capitalization in excess of $100,000).

The Economics of Enough: How to Run the Economy as if the Future Matters
by Diane Coyle
Published 21 Feb 2011

The work of institutional economists explains the structure of organizations in terms of transactions costs. Relationships are brought within an institution when the costs of a transaction in a market would be too high. Information makes up one important element of transaction costs, and by decreasing them so much the information revolution has thus contributed to a widespread crisis of governance.23 Another important transaction cost is created by distrust. The corrosion of trust in Western societies, described earlier, has increased transaction costs at the same time that reductions in information and communication costs have worked in the other direction.

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They will involve a more productive and thoughtful interplay between markets and governments than we’ve typically had in the past, one taking account of the dramatic technological and structural change in the economy. Markets and governments need each other to function well, and indeed often “fail” in the same contexts. The existence of transactions costs and information asymmetries present a challenge to any institutional framework. The work of the 2009 Nobel laureates Elinor Ostrom and Oliver Williamson focuses precisely on the way these aspects of reality shape different kinds of institutional response. The utterly transformed world of information, due to ICTs, is revolutionizing the governance of every economy, and we’re only partway through the revolution.

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There is nothing in this that runs counter to human nature—on the contrary, it’s in the genes. And the assumption of rational self-interest forms the basis of a powerful way to analyze situations where people do appear to be acting counter to their own interests—it can help identify the information asymmetry or the transaction cost or the psychological trait that would explain the divergence between actual behavior and rational calculation. What’s more, there is much empirical evidence that in many practical situations people with all their cognitive limitations and inconsistencies nevertheless do make choices leading to exactly the outcomes predicted by textbook economic theory.

The Code of Capital: How the Law Creates Wealth and Inequality
by Katharina Pistor
Published 27 May 2019

Conversely, given that the greatest value is created by coding capital, most law school graduates flock to the firms that hire them in large numbers to do just that. The account of transactional lawyers as the code’s masters offered here differs from two other accounts that can be found in the literature, one portraying lawyers as transaction cost engineers, the other as rent seekers. Ronald Gilson has characterized lawyers as “transaction cost engineers”; according to him, they navigate complex regulations, structure transactions so as to avoid unnecessary costs, and from time to time negotiate with regulators to obtain clearance for more adventurous transactions.13 In doing so, they are said to reduce the tension between “transaction form and regulatory purpose.”14 There are obvious parallels to their role as master coders, but there is also an important difference.

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If property rights have been clearly allocated, that is, if the two parties know what their respective rights are and what they are worth in monetary terms, they can calculate the costs each would have to incur, enabling them to resolve their dispute and reach an optimal solution through negotiation. Such an efficient outcome is achievable at least in a world without trans-action costs. However, Coase himself stressed that in the real world, transaction costs are ubiquitous, which is why the initial allocation of property rights by the law actually matters a great deal. Yet, as we have seen, landowners did not just bargain with creditors to protect their interests; they employed lawyers who coded their interests in law and thereby helped tilt the playing field in their favor.

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If, instead, each line of business, each division, or each location can be placed behind a separate legal shield, creditors can focus on the business of their choice. Using a separate legal entity for each operation thus can offer superior protection to creditors. Creditors may not be able to reach other assets of the firm easily, but, if all goes well, they save a lot of transaction costs.20 A good illustration for the power of asset-shielding devices is the partnership system of the Medici, the family that ruled over Florence for almost a century, from 1434 to the 1530s.21 The Medici business included textile manufacturing, banking, and trade, with far-flung operations that crisscrossed Europe and reached as far as Rome, Antwerp, London, Bruges, and Paris.

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio
by Victor A. Canto
Published 2 Jan 2005

Yet, when leverage is ruled out on theoretical grounds, whether one chooses an alpha strategy over an asset-allocation strategy is a matter of indifference because the two are equivalent. Transaction costs, however, tilt the balance in one strategy’s favor over the other. For small investors, the transaction costs of implementing a portable-alpha strategy with some market exposure may not be feasible. Most hedge funds have liquidity constraints, net worth conditions, and leverage requirements, all which combine to exclude many investors from pursuing a full fledged alpha strategy. The transaction-cost barrier alone keeps many investors in a pure asset-allocation strategy. This does not mean, however, alpha strategies cannot play a role in asset-allocation plans.

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In addition, they have liquidity requirements and necessitate investors keep track of their market exposure (that is, long–short positions) to add market (beta) exposure. This is something individuals may not be willing to do or may not be able to do. The various transaction costs may in effect prevent most investors from pursuing alpha strategies. As wealth levels increase, however, investors may be able to amortize these transaction costs over their higher net worths and hire managers who can perform all the needed services. Some portable-alpha strategies may only be available to the wealthiest investors and larger pension plans. This does not rule out the role of pure-alpha strategies in a regular asset-allocation portfolio.

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Largely due to the client base’s geographic location, the firm’s managers have tried to provide less U.S.-centric allocations than ones guided by market-capitalization weights. To this end, the firm’s strategy has been to reallocate some funds away from the U.S. and into other areas of the world, specifically the Pacific region. Transaction costs, taxes, and other considerations have dictated that portfolio allocations be revisited only once a year, with exceptions made for extraordinary events. Finally, the firm’s portfolio revisions are designed to take advantage of a changing economic environment; a top-down approach is used to tilt portfolios toward perceived changes in the macro environment.

The Middleman Economy: How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit
by Marina Krakovsky
Published 14 Sep 2015

Proponents of that idea, which has been called the “threatened intermediaries hypothesis,” began their argument with the premise that middlemen have traditionally been necessary to reduce the high transaction costs of the brick-and-mortar world. So far so good. But the rest of the argument was flawed: they reasoned that if the Internet reduced transaction costs, middlemen would become less necessary. The big flaw is to view all middlemen as providing just one service.18 But reducing transaction costs covers a large mix of services that don’t necessarily come in one bundle.19 If the Internet lowers transaction costs, it could actually create more demand for middlemen. After all, the Internet reduces costs for everyone—and when it reduces a middleman’s costs more than it does someone else’s, buyers and sellers prefer to keep doing business through the middleman.20 That’s why, despite the obsolescence of many travel agency jobs, for example, a certain class of travel agent is still thriving.21 Ellison Poe, owner of Poe Travel in Little Rock, Arkansas, is a perfect example, and after you meet her in a later chapter, you will understand why she says the Internet has had no downside whatsoever for her and why, on the contrary, it has been “a total pro, a great thing, a positive force in the world.”22 As some middlemen disappear, others will become more successful.

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How do they form those connections, and what can they do to strengthen them? In answering such questions, I contend that middlemen provide value by playing some combination of six roles and that the most successful middlemen are those who play those roles best.17 Each role solves a particular problem—reduces a specific friction, a specific transaction cost—that, without the middleman, would inhibit or prevent mutually beneficial deals: •The Bridge promotes trade by reducing physical, social, or temporal distance. •The Certifier separates the wheat from the chaff and gives buyers reassuring information about the seller’s underlying quality. •The Enforcer makes sure buyers and sellers put forth full effort, cooperate, and stay honest.

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A Course on Middlemen * * * The most admirable middlemen never got a formal education in being a middleman because no such classes exist. Yet there’s plenty of material for such an education because lots of social scientists have studied, from one angle or another, the questions of how middlemen provide value and profit from their roles between buyers and sellers. For example, economic theory has much to say about transaction-cost economics, two-sided markets, and intermediaries’ ability to reduce information asymmetries between buyers and sellers. In particular, game theory informs our understanding of repeated interactions, reputations, shirking and cheating, and third-party enforcement. Social psychology and experimental economics show how acting on behalf of others affects people’s behavior and impressions.

What's Mine Is Yours: How Collaborative Consumption Is Changing the Way We Live
by Rachel Botsman and Roo Rogers
Published 2 Jan 2010

Such exchanges have not been particularly efficient through off-line channels, but in the Internet age, redistribution is becoming a way of life. Collapse of “Transaction Costs” When we asked Beal which are the most commonly listed items on Freecycle, he explained that “there isn’t one particular thing” but instead massive categories of “inconvenient things” (old pianos, sofas, and televisions) and “unusual items” (disco balls, fish tanks, and even stuffed animals). These are the items that would have been a pain to lug to the dump (and sometimes you would even have to pay to dispose of them) or tricky to unload on a neighbor. The transaction costs to ensure they were kept in use, not in landfill, would have been high.

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In his paper “The Nature of the Firm,” economist and Nobel laureate Ronald Coase coined the term “transaction costs” to refer to the cost of making any form of exchange or participating in a market.3 If you go to the supermarket, for example, and buy some groceries, your costs are not just the price of the groceries but the energy, time, and effort required to write your list, travel to and from the store, wheel around your cart and choose your products, wait in the checkout line, and unpack and put away the groceries when you get back home. Your total “costs” are greater than the dollar number on your receipt. In the pre-Internet age, the transaction costs of coordinating groups of people with aligned wants and needs or even just similar interests were high, making the sharing of products tricky and inconvenient.

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The residents of Topanga had so many ideas that they had to decide where to start. The challenge the residents experienced was coordination. This barrier has historically prevented most people from attempting to “share nicely,” as the perceived effort and energy needed to make it work negate the value in return. The apparent transaction costs have been too high. They were happy to carpool, but how could they easily be aware of each other’s schedules? They wanted to share chores such as grocery shopping, but how would they know who wanted what and when? Meeting to decide these things would defeat the purpose of making life easier.

Social Life of Information
by John Seely Brown and Paul Duguid
Published 2 Feb 2000

Microsoft continues to grow while other high-tech start-ups compete for the title of "fastest growing ever." 22 Downes and Mui draw on the theory of the firm proposed by the Nobel Prize-winning economist Ronald Coase. Coase developed the notion of transaction costs. These are the costs of using the marketplace, of searching, evaluating, contracting, and enforcing. When it is cheaper to do these as an organization than as an individual, organizations will form. Conversely, as transaction costs fall, this glue dissolves and firms and organizations break apart. Ultimately, the theory suggests, if transaction costs become low enough, there will be no formal organizations, but only individuals in market relations. And, Downes and Mui argue, information technology is relentlessly driving down these costs.

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There are more "Ds" that could be added, such as Kevin Kelly's displacement and devolution. 22. Downes and Mui, 1998. 23. Coase, 1937. Coase's theory should be seen not so much as an attack on neoclassical individualism as an attempt to save it from itself. We return to transaction cost theory briefly in our discussion of the future of the firm in chapter 6. There we take a "knowledge based," rather than transaction cost, view of the firm. 24. Among the targets of early, landmark trust cases were Northern Securities (1911), Standard Oil (1911), and American Tobacco (1911). In November 1998, Philip Morris acquired several brands from the Ligget corporation. 25.

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And, Downes and Mui argue, information technology is relentlessly driving down these costs. Page 24 Though he produced elegant economic theory, Coase had strong empirical leanings. He developed his theory of transaction costs in the 1930s to bridge the gap between theoretical accounts of the marketplace and what he saw in the actual marketplaceparticularly when he traveled in the United States. There, business was dominated by huge and still-growing firms. These defied the purity and simplicity of the theoretical predictions, which envisaged markets comprising primarily individual entrepreneurs. 23 In honor of Coase's empiricism, it's important to look around now.

Fred Schwed's Where Are the Customers' Yachts?: A Modern-Day Interpretation of an Investment Classic
by Leo Gough
Published 22 Aug 2010

HAVING YOUR CAKE AND EATING IT 22. EXCEPTIONS ARE THE RULE 23. FUNDAMENTAL ANALYSIS 24. NEW ISSUES 25. TRUSTEES, EXECUTORS AND LAWYERS 26. RETIREMENT PLANNING 27. INDEX INVESTING 28. DON’T INVEST ON A HIGH 29. COMPANIES DON’T OFTEN TURN AROUND 30. RIDE THE WINNERS 31. THE TROUBLE WITH TRANSACTION COSTS 32. CROOKS 33. AVOIDING THE BIG COLLAPSES 34. COUNTER-CYCLICAL INVESTMENT 35. GLOBALISATION 36. NUMERACY REQUIRED 37. SHORT SELLING 38. THOSE CRAZY REGULATORS 39. COLLECTIVE INVESTMENTS 40. MERGERS AND ACQUISITIONS 41. MASSAGING THE FIGURES 42. LOOKING FOR BARGAINS 43. DISCOUNTED CASH FLOW 44.

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Although it may work for portfolios that are less than expertly picked, if you really believe in your shares – because you have studied them properly, with your business brain in gear – then there shouldn’t be much that happens that should change your mind, and you ought to be willing to hold onto great companies through some lean times. However, as a psychological trick to keep you from buying and selling too often, it’s probably okay as a creed. 31 THE TROUBLE WITH TRANSACTION COSTS ‘The man who chooses to take his money and churn it furiously … cannot in any way predict his fate, save for a single assurance. So long as any money still clings to the side of the churn, he will not be bored.’ DEFINING IDEA… All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies

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~ WARREN BUFFETT People who have never owned shares often imagine that investors spend their time buying and selling every day, if not every hour – and they also imagine that this is fun. That might be okay if you are a large institution with a department full of traders with nothing else to do, because financial institutions pay very low transaction charges. For the private investor, though, it’s an expensive activity, because the transaction costs are higher, so the more you trade, the more the charges eat into your overall return. What’s worse, if you like to speculate in less well-known companies, like the ones quoted on AIM (the Alternative Investment Market) or the OTC (the Over The Counter market), you’ll find that the ‘spread’ can be very much wider than in the main market – that’s the difference between the price at which a dealer will buy from you (the ‘bid’) and the price at which he will sell to you (the ‘offer’).

Machine, Platform, Crowd: Harnessing Our Digital Future
by Andrew McAfee and Erik Brynjolfsson
Published 26 Jun 2017

Often called the theory of the firm, TCE is a branch of economics important enough to have merited three Nobel prizes: the first in 1991 to Coase; the second in 2009 to his student Oliver Williamson, who was recognized along with Elinor Ostrom;†† and most recently a third, to Oliver Hart and Bengt Holm-ström, who were recognized in 2016. As you’ve no doubt inferred from the name, transaction costs turn out to be deeply important: when markets have lower total transaction costs, they win out over hierarchies, and vice versa. We can’t possibly do a fair job of conveying here all the insights of transaction cost economics; there’s too much rich and excellent work. Instead, we want to concentrate on one aspect of TCE that’s especially helpful for understanding the impact of the powerful new digital technologies of the crowd.

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J., 305 Spotify, 146–48 stacks, 295–96, 298 Stallman, Richard, 243 standard partnership creativity and, 119, 120 defined, 37 demand for routine skills and, 321 HiPPO and, 45, 59 inversion of, 56–60 modified by data-driven decision making, 46–60 structure of, 31 Starbucks, 185 statistical pattern recognition, 69, 72–74, 81–82, 84 statistical prediction, 41 status quo bias, 21 steampunk, 273 Sterling, Bruce, 295, 298 S3 (Amazon Web Service), 143 Stites-Clayton, Evan, 263 STR, 221 “stranger-danger” bias, 210 streaming services, 146–48 Street, Sam, 184 Street Bump, 162–63 Stripe, 171–74, 205 structured interviews, 57 students, gifted, 40 Sturdivant, Jeremy, 286 subscription services, 147–48 suitcase words, 113 Suleyman, Mustafa, 78 “superforecasters,” 60–61 supervised learning, 76 supply and demand; See also demand; demand curves; supply curves O2O platforms for matching, 193 platforms and, 153–57 and revenue management, 47 supply curves, 154–56 Supreme Court, US, 40–41 surge pricing, 55 Svirsky, Dan, 209n Sweeney, Latanya, 51–52 Swift, Taylor, 148 switching costs, 216–17, 219 Sydney, Australia, hostage incident (2014), 55 symbolic artificial intelligence, 69–72 introduction of, 69–70 reasons for failure of, 70–72 synthetic biology, 271–72 systems integration, 142 System 1/System 2 reasoning, 35–46 and confirmation bias, 57 defined, 35–36 and second-machine-age companies, 325 undetected biases and, 42–45 weaknesses of, 38–41 Szabo, Nick, 292, 294–95 Tabarrok, Alex, 208–9 Tapscott, Alex, 298 Tapscott, Don, 298 Tarantino, Quentin, 136n TaskRabbit, 261, 265 taxi companies, Uber’s effect on, 201 TCE (transaction cost economics), 312–16 TechCrunch, 296 technology (generally) effect on employment and wages, 332–33 effect on workplace, 334 as tool, 330–31 Teespring, 263–64 Teh, Yee-Whye, 76 telephones, 129–30, 134–35 tenure predictions, 39 Tesla (self-driving automobile), 81–82, 97 Tetlock, Philip, 59 text messages, 140–41 Thank You for Being Late (Friedman), 135 theories, scientific, 116–17 theory of the firm, See TCE (transaction cost economics) Thierer, Adam, 272 “thin” companies, 9 Thingiverse, 274 Thinking, Fast and Slow (Kahneman), 36, 43 Thomas, Rob, 262 Thomke, Stefan, 62–63 3D printing, 105–7, 112–13, 273, 308 Thrun, Sebastian, 324–25 TNCs (transportation network companies), 208 TØ.com, 290 Tomasello, Michael, 322 Topcoder, 254, 260–61 Torvalds, Linus, 240–45 tourists, lodging needs of, 222–23 Tower Records, 131, 134 trade, international, 291 trading, investment, 266–70, 290 Transfix, 188, 197, 205 transparency, 325 transportation network companies (TNCs), 208; See also specific companies, e.g.: Uber Transportation Security Administration (TSA), 89 Tresset, Patrick, 117 trucking industry, 188 T-shirts, 264 tumors, 3D modeling of, 106 Turing, Alan, 66, 67n Tuscon Citizen, 132 TV advertising, 48–51 Tversky, Amos, 35 Twitter, 234 two-sided networks credit cards, 214–16 Postmates, 184–85 pricing in, 213–16, 220 pricing power of, 210–11 switching costs, 216–17 Uber, 200, 201, 218–19 two-sided platforms, 174, 179–80 Two Sigma, 267 Uber driver background checks, 208 future of, 319–20 information asymmetry management, 207–8 lack of assets owned by, 6–7 as means of leveraging assets, 196–97 network effects, 193, 218 as O2O platform, 186 origins, 200–202 and Paris terrorist attack, 55 pricing decisions, 212–15, 218–19 rapid growth of, 9 regulation of, 201–2 reputational systems, 209 routing problems, 194 separate apps for drivers and riders, 214 and Sydney hostage incident, 54–55 value proposition as compared to Airbnb, 222 UberPool, 9, 201, 212 UberPop, 202 UberX, 200–201, 208, 212, 213n Udacity, 324–25 unbundling, 145–48, 313–14 unit drive, 20, 23 Universal Music Group, 134 University of Louisville, 11 University of Nicosia, 289 unlimited service ClassPass Unlimited, 178–79, 184 Postmates Plus Unlimited, 185 Rent the Runway, 187–88 unsupervised learning, 76, 80–81 Upwork, 189, 261 Urmson, Chris, 82 used car market, information asymmetry and, 207 Usenet, 229, 271 user experience/interface as platforms’ best weapon, 211 and successful platforms, 169–74 users, as code developers, 242 “Uses of Knowledge in Society, The” (Hayek), 235–37 utilization rate, O2O platforms, 196–97 Van Alstyne, Marshall, 148 Van As, Richard, 272–74 Vancouver, Canada, Uber prohibition in, 202 venture capital, DAO vs., 302 verifiability, 248 verifiable/reversible contributions, 242–43 Verizon, 96, 232n Veronica Mars (movie), 262 Veronica Mars (TV show), 261–62 Viant, 171 video games, AI research and, 75 videos, crowd-generated, 231–32 Viper, 163 virtualization, 89–93; See also robotics vision, Cambrian Explosion and, 95 “Voice of America” (Wright), 229–30 von Hippel, Eric, 265 wage declines, 332 Wagner, Dan, 48–50 Waldfogel, Joel, 144 Wales, Jimmy, 234, 246–48 Walgreens, 185 Walmart, 7, 47 Wanamaker, John, 8–9 warehousing, 102–3, 188 Warner Brothers, 262 Warner Music Group, 134 Washington Post, 132 Washio, 191n waste reduction, 197 Watson (IBM supercomputer) health claim processing, 83 Jeopardy!

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Satoshi Nakamoto, whoever that is, really did bring something new and powerful into the world. But not powerful enough to make companies go away, or even to significantly reduce their importance in the world’s economies. To see why, we need to go back to Coase’s work, but not stop there. Instead, we need to understand subsequent insights from transaction cost economics (TCE), the discipline he was instrumental in founding. The Latest Thinking on Why Companies Are So Common TCE deals with the very basic question of why economic activity is organized the way it is—why, for example, we see markets and companies in the mix that we do. Often called the theory of the firm, TCE is a branch of economics important enough to have merited three Nobel prizes: the first in 1991 to Coase; the second in 2009 to his student Oliver Williamson, who was recognized along with Elinor Ostrom;†† and most recently a third, to Oliver Hart and Bengt Holm-ström, who were recognized in 2016.

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street
by William Poundstone
Published 18 Sep 2006

Some economists hold that even though some people do have an informational edge, they are unable to profit from it. Transaction costs are often mentioned as a reason. The gains from inside information may be smaller than the commissions. It may also be that the arbitrageur is taking unacknowledged risks. What he believes to be a “sure thing” is not. The usual small profit comes at the expense of accepting a small risk of a catastrophic loss. And one way or another, no one beats the market in the long run. Kelly’s analysis raises doubts about this tidy conclusion. If the only limit to profit is the information rate of the private wire, then it is hard to see why transaction costs must always be larger than profits.

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Shannon wondered about the statistical structure of the market’s random walk and whether information theory could provide useful insights. He mentions such diverse names as Bachelier, (Benjamin) Graham and (David) Dodd, (John) Magee, A. W. Jones, (Oskar) Morgenstern, and (Benoit) Mandelbrot. He considered margin trading and short-selling; stop-loss orders and the effects of market panics; capital gains taxes and transaction costs. Shannon graphs short interest in Litton Industries (shorted shares vs. price: the values jump all over with no evident pattern). He notes such success stories as Bernard Baruch, the Lone Wolf, who ran about $10,000 into a million in about ten years, and Hetty Green, the Witch of Wall Street, who ran a million into a hundred million in thirty years.

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It would be alarming to visit a great stock exchange and find the floor littered with worthless stock certificates. Try visiting a racetrack. Most wager tickets become worthless within minutes. It is folly to bet everything on a favorite (horse or stock). The only way to survive is through diversification. Someone who bets on every horse—or buys an index fund—will at least enjoy average returns, minus transaction costs. “Average” isn’t so hot at the racetrack, given those steep track takes. “Average” is pretty decent for stocks, something like 6 percent above the inflation rate. For a buy-and-hold investor, commissions and taxes are small. Shannon was more interested in above average returns. The only way to beat the market (of stocks or horse wagers) is by knowing something that other people don’t.

The Price of Inequality: How Today's Divided Society Endangers Our Future
by Joseph E. Stiglitz
Published 10 Jun 2012

But even before the crisis, it should have been obvious that privatization was a bad deal for most Americans. We noted before that Social Security is more efficient than private providers of annuities. Private insurance companies have much higher transactions costs. In fact, that was the whole point of privatization: for the elderly, transactions costs are a bad thing; but for the financial sector, they are a good thing. That’s their income. That’s what they live off of. Their hope was to get a slice of the hundreds of billions of dollars65 that people put every year into their Social Security accounts.66 Liberalization/deregulation initiatives have had as mixed a record as those of privatization—with the most notorious being financial sector deregulation and capital market liberalization.

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One role of government is to rebalance the scales of justice—and in the case of the BP disaster, it did, but very gently, and in the end, it became clear that many of the victims were likely to receive compensation that was but a fraction of what they suffered.4 Ronald Coase, a Chicago Nobel Prize–winning economist, explained how different ways of assigning property rights were equally efficient for addressing externalities, or at least would be in a hypothetical world with no transactions costs.5 In a room with smokers and nonsmokers, one could assign the “air rights” to the smokers, and if the nonsmokers valued clean air more than the smokers valued smoking, they could bribe the smokers not to smoke. But one could alternatively assign the air rights to the nonsmokers. In that case, smokers could bribe the nonsmokers to allow them to smoke so long as they valued the right to smoke more than the nonsmokers valued clean air. In a world of transactions costs—the real world, where, for instance, it costs money to collect money from one group to pay another—one assignment can be much more efficient than the other.6 But more to the point, there can be large distributive consequences of alternative assignments.

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Privatization, of course, is based on yet another myth: that government-run programs must be inefficient, and privatization accordingly must be better. In fact, as we noted in chapter 6, the transaction costs of Social Security and Medicare are much, much lower than those of private-sector firms providing comparable services. This should not come as a surprise. The objective of the private sector is to make profits—for private companies, transactions costs are a good thing; the difference between what they take in and what they pay out is what they want to maximize.31 The gap between revenues and expenditures for public programs does create problems over the long run.

How to Fix Copyright
by William Patry
Published 3 Jan 2012

One-to-one negotiations will always be necessary for situations where we want copyright owners to control the individual use of their work, such as licensing the use of a novel or musical composition in a movie for “grand rights” (theater), or for use in advertisements. Statutory licensing is appropriate where we do not want users to bargain over the licensee fee (usually because the transaction costs are high relative to the license fee) but we do want them to pay. Collective administration is appropriate where, due to large transaction costs and the potential inequality of bargaining leverage by individual copyright owners, we want users to have to negotiate fees. The usual theoretical model today remains the exclusive rights. This model is becoming less useful given the large-scale, global nature of the Internet.

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For sound recordings, however, the court held there is no de minimis threshold; the copying of any amount is infringing.51 The result of this terrible decision has been an unwillingness of record companies to put out albums52 unless each and every sample is cleared. Producers of records must certify that all samples have been licensed when delivering the masters. Since previous hip-hop albums used hundreds (and sometimes thousands) of samples, licensing that number of samples is out of the question due to financial and transactional cost reasons. As a result, the creative process of hip-hop has changed.53 Here is an explanation by Public Enemy’s Chuck D and Hank Shocklee in interviews with Stay Free! Magazine: Stay Free!: When you were sampling from many different sources during the making of “It Takes a Nation,” were you at all worried about copyright clearance?

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With collective licensing, copyright owners pool their copyrights together with a private organization, which then licenses use of the entire repertoire to others, takes an administrative cut of license fees received, and pays the amount left over to the copyright owners.8 There are numerous benefits to this, especially reducing transaction costs and enabling copyright owners to receive income for many small uses that would otherwise be economically impossible to negotiate one-to-one. Licensees can have available a vast repertoire without the high costs of clearing individual uses, as well as, usually, protection in the form of a government appeal over license fees.

Peers Inc: How People and Platforms Are Inventing the Collaborative Economy and Reinventing Capitalism
by Robin Chase
Published 14 May 2015

The logic for a very low transaction effort (and cost) was compelling from our business perspective as well: For Zipcar to work, we needed to be indifferent between eight 1-hour rentals and one 8-hour rental. Getting our transaction costs as close to zero as we could was absolutely necessary. When our fleet grew and I needed to hire a VP of operations with big-fleet experience, the candidates from the car rental industry would ask me, “So what’s Zipcar’s transaction cost?” At that time, almost all of our hard-won investment dollars were being poured into technology. Our development costs were huge. But the result was zero marginal cost for each transaction. “What is your transaction cost?” I’d prompt. I learned that in the rental industry the cost was between $8 and $12 per transaction!

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I learned that in the rental industry the cost was between $8 and $12 per transaction! Yikes. No wonder they required a one-day minimum for every rental and extension. What was good for us was also exactly what the customer wanted. To make the transaction cost zero, to make sharing effortless, we needed technology that had several parts: 1. Customer-facing software. Initially customers used the website to join Zipcar, reserve cars, pay their bills, and manage accounts (smartphones didn’t exist yet). 2. Back office: The web pages—that only we could see—allowed us to manage customers, cars, and parking locations. 3. In-vehicle hardware. The Zipcard reader under the windshield allowed customers to walk up and unlock the car they had reserved.

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In 1937, in the influential essay “The Nature of the Firm,” British economist Ronald Coase wrote that the corporation was invented to do things that individuals and small companies couldn’t do. In particular, small companies would choose to become larger companies whenever it was cheaper to hire than to outsource. What would make hiring cheaper than outsourcing? Transaction costs (a term Coase invented). Finding, monitoring the quality of, and managing many discrete individuals was expensive. It was cheaper to hire them. But now the Internet has transformed that equation. Today, we see that the smartest companies and governments are using the Internet’s ability to facilitate collaboration by leveraging expertise, assets, and resources outside their sphere of control.

Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market Into a Casino
by Jim McTague
Published 1 Mar 2011

There was a spirited debate whether or not to impose obligations on HFT firms in return for letting them charge investors slightly wider spreads. Transaction costs would rise, but investors would get a more orderly market. Theodore Weisberg, the president of Seaport Securities and someone who had been trading for more than 41 years, told Bloomberg television that trading in nickel increments instead of penny increments would be enough to attract dealers back to the equities markets. As a result, investor transaction costs would rise, but they’d be getting more stable markets in return, which was what long-term investors preferred.

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Reacting to the news, Kaufman wrote to Schapiro, “There are at least two questions that must be posed—questions we must look to the markets’ regulators to answer. First, had these opaque, complex, increasingly sophisticated trading mechanisms been beneficial for retail investors, helping them to buy at the lowest possible price and sell at the highest praise with the lowest possible transaction costs, or have they left them as second-class investors, pushed aside by powerful trading companies able to take advantage of small but statistically and financially significant advantages? And second, do these high-tech practices and their ballooning daily volumes pose a systemic risk? To take just one example, is anyone examining the leverage these traders use in committing their capital in such huge daily volumes?

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That meant that the spreads they had charged would be squeezed from the old high of 12.5 cents to as low as a penny per share on the most heavily traded stock issues. It pushed many hangers on out of business. But the change was a bonanza for investors, big and small. By 2002, retail traders were reporting a 50% reduction in their transactions costs. Specialists at the NYSE remained a thorn in the side of many traders. The 1975 “Trade-Through Rule” remained in effect. The rule that required an exchange to send a customer’s order to a competing exchange if the competing exchange was posting had a better bid or asked price. The specialists at the NYSE and at the American Stock Exchange (AMEX) often posted better prices, especially for exchange-traded funds (ETFs), which were growing in popularity.

Makers
by Chris Anderson
Published 1 Oct 2012

In short, because we don’t operate the company in a Coaseian model, we’ve got more and smarter people working for us. We minimize transaction costs with technology, not proximity. A social network is our common roof. Skype is the “next cubicle.” Our shared purpose is really shared, not dictated. Joy wins: The open-manufacturing model Joy’s Law and the new breed of companies and communities built on open-access Web principles turned Coase’s Law upside down. Now, working within a traditional monolithic company of the sort Coase had in mind often imposes higher transaction costs than running a project online. Why turn to the person who happens to be in the next office, who may or may not be the best person for the job, when it’s just as easy to turn to an online community member from a global marketplace of talent?

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In the mid-1930s, Ronald Coase, then a recent London School of Economics graduate, was musing over what to many people might have seemed a silly question: Why do companies exist? Why do we pledge our allegiance to an institution and gather in the same building to get things done? His eventual answer, which he published in his landmark 1937 article “The Nature of the Firm,”33 was this: companies exist to minimize “transaction costs”—time, hassle, confusion, mistakes. When people share a purpose and have established roles, responsibilities, and modes of communication, it’s easy to make things happen. You simply turn to the person in the next cubicle and ask that individual to do his or her job. But in a passing comment in a 1990 interview, Bill Joy, one of the cofounders of Sun Microsystems, revealed a flaw in Coase’s model.

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But in a passing comment in a 1990 interview, Bill Joy, one of the cofounders of Sun Microsystems, revealed a flaw in Coase’s model. “No matter who you are, most of the smartest people work for someone else,” he observed, stating what has now come to be known as “Joy’s Law.” His implication: for the sake of minimizing transaction costs, we don’t work with the best people. Instead, we work with whomever our company was able to hire. Even for the best companies, that’s a woefully inefficient process. In a sense, Joy’s quip was simply a modern reflection of the work of a Coase contemporary, Friedrich Hayek. While Coase was explaining why centralized organizations exist, Hayek was arguing that they shouldn’t.

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better
by Andrew Palmer
Published 13 Apr 2015

De la Vega’s subject is the Amsterdam Stock Exchange, and in it he paints not only a landscape of familiar products but also a gallery of familiar behaviors. He observes “herding,” in which investors copy the behavior of others; overconfidence; overtrading, which still ends up costing investors today because of the excessive transaction costs they incur; and the “disposition effect,” in which people hold on to losing investments for far too long. That’s just in normal times. Occasionally, people really lose their heads. In the 2000s, the mania was for property; in the 1990s, it was for dot-com companies; in the mid-nineteenth century, it was for railways.

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Their investment decisions tend to be based not on fundamental analysis of a company’s prospects, but on short-term price trends. They may be fast, critics say, but they are thoughtless.22 Yet the academic consensus also broadly supports the contention that high-frequency traders have helped bring down transaction costs. The British government’s lengthy 2012 investigation of automated trading found that liquidity had improved, bid-ask spreads had narrowed, and markets had become more efficient. Testimony delivered to the Securities and Exchange Commission in 2010 by George Sauter of Vanguard, a big fund manager, concluded that “high-frequency traders provide liquidity and ‘knit’ together our increasingly fragmented marketplace, resulting in tighter spreads that benefit all investors.”23 (Critics riposte that narrower spreads are illusory if the prices quoted are not the ones at which trades are actually executed.)

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Instead, they reckoned, a thought experiment—imagining what the world would look like without a particular innovation—might help.24 A world without HFTs is easy to imagine: the old world of “specialist” market makers and floor trading existed only a few years ago, so people remember it well. There is little obvious enthusiasm for returning to that model. Transaction costs were a lot higher. Big market makers used to charge 25–40 basis points to execute trades in a clunky process that involved an investor calling a broker, who got the stock ticker and went to a jobber on the floor to make the trade. Now the same thing is being done by an algorithm at 1–3 basis points.

People, Power, and Profits: Progressive Capitalism for an Age of Discontent
by Joseph E. Stiglitz
Published 22 Apr 2019

The reason we have a variety of social insurance programs (from retirement annuities, to health care for the aged, to unemployment insurance) is simple: these are big risks that, accordingly, have large impacts on individual well-being, but before the government came along, the market either didn’t provide insurance against these risks, or did so only at very high prices with high transaction costs.6 Dynamic economies are always in transition, and markets don’t manage these transitions well on their own. We are now moving from a manufacturing economy to a globalized, urbanized, service and innovation economy, with marked changes in demography. So too, coordinating a large, complex economy is difficult.

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Mass incarceration may have had many motives,5 but clearly one of its effects has been mass disenfranchisement: some 7.4 percent of African Americans—2.2 million in total—were unable to vote in the 2016 election because of these state laws preventing voting.6 In some Republican-dominated states,7 there is also an attempt to control the vote by making it more difficult for working people to register or to make it to the polling booth. Republicans can’t impose a poll tax, as states of the segregated South once did; but they can increase the transaction costs of registering and voting, and this can be just as effective a deterrent. Rather than making it as easy as possible to register—to exercise one’s basic right as a citizen—say, by registering as one gets one’s driver’s license, they make it as difficult as they can get away with. They can, for instance, demand hard-to-get identification papers.

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Again, large risks like these and ones associated with unemployment, health, and retirement, are risks that markets do not handle well.16 In some cases, like unemployment and health insurance for the aged, markets simply do not provide insurance; in other cases, like retirement, they provide annuities only at high costs, and even then, without important provisions—such as adjustments for inflation. That is why almost all advanced countries provide social insurance to cover at least many of these risks. Governments have become fairly proficient in providing this insurance—transaction costs for the US Social Security system are a fraction of those associated with comparable private insurance. We need to recognize, however, that there are large gaps in our system of social insurance, with many important risks still not being covered either by markets or by government. Unemployment insurance One of the biggest gaps in our system of social protection is that our unemployment insurance program covers a relatively small risk—being unemployed for twenty-six weeks—but leaves the much more serious risk of long-term unemployment unaddressed.

Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State
by Paul Tucker
Published 21 Apr 2018

Economists who opposed the regulatory state offered their own solution: address market failures by taking steps toward more complete markets. Coase versus Pigou: Property Rights and Transaction Costs In 1960 Ronald Coase, a British-born economist working in Chicago, explained how regulatory interventions were not warranted where, instead, property rights could be clarified (or created) and where the transaction costs of enforcing those rights were low (theoretically zero). Such legal rights could be traded and hedged via markets, opening up the option of the work of regulation being performed instead by the law of contract and of torts enforced via the courts: as typically put, private choice rather than public choice.

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Rather, it was that the case for regulation turned on the existence of irremediable and material transaction costs standing in the way of efficiency. In other words, it was not sufficient simply to cite an externality to motivate regulatory intervention. There are three things to be said about this. Creating New Property Rights Can Entail Regulation First, even where governments choose to address externality problems via creating new property rights, they sometimes opt to regulate the new markets for trading those rights (e.g., pollution permits). Simply invoking “transaction costs” does not seem sufficient to explain or warrant the choice between judicial and regulatory oversight.29 Keeping Perspective: The Infeasibility of Committing to Compensate for Financial Instability Second, some transaction costs can be reduced; others cannot.

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Simply invoking “transaction costs” does not seem sufficient to explain or warrant the choice between judicial and regulatory oversight.29 Keeping Perspective: The Infeasibility of Committing to Compensate for Financial Instability Second, some transaction costs can be reduced; others cannot. A classic example of the latter, vital to part IV’s exploration of postcrisis central banking, helps to motivate regulatory intervention to preserve the stability of the financial system. In the event of a massive banking collapse pushing the economy onto a persistently lower path of output and employment, the losers are never going to be able to recover their costs from the “financial polluters” because the banks and other intermediaries are bust.

The Third Industrial Revolution: How Lateral Power Is Transforming Energy, the Economy, and the World
by Jeremy Rifkin
Published 27 Sep 2011

Sharing is clean, crisp, urbane, postmodern: owning is dull, selfish, timid, backward.”27 What I am describing is a fundamental change in the way capitalism functions that is now unfolding across the traditional manufacturing and retail sectors and reshaping how companies conduct business. In conventional, capitalist markets, profit is made at the margins of transaction costs. That is, at every step of the conversion process along the value chain the seller is marking up the cost to the buyer to realize a profit. The final price of the good or service to the end user reflects the markups. But TIR information and communication technologies dramatically shrink transaction costs across the supply chain in every industry and sector, and distributed renewable energies will soon do so as well. The new, green energy industries are improving performance and reducing costs at an ever-accelerating rate.

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And just as the generation and distribution of information is becoming nearly free, renewable energies will also. The sun and wind are available to everyone and are never used up. When the transaction costs for engaging in the new Third Industrial Revolution communications/energy system approach zero, it is no longer possible to maintain a margin, and the very notion of profit has to be re-thought. That’s already happening with the communications component of the Third Industrial Revolution. The shrinking of transaction costs in the music business and publishing field with the emergence of music downloads, ebooks, and news blogs is wreaking havoc on these traditional industries.

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The shrinking of distances and the annihilation of time, resulting from the convergence of coal- and steam-powered technology with print communications, sped up commercial activity at every stage of the supply chain, from the extraction and transport of coal and other ores to the factories, to the hurried transport of finished goods to wholesalers, distributors, and retailers. The dramatic increase in the flow of commerce was matched by the equally impressive decrease in transaction costs. This was achieved, in large measure, by dint of the new vertical economies of scale. Mass-producing products in giant, centralized factories reduced the cost per unit of production, allowing manufacturers to pass the savings along the entire supply chain to the end user. The mass production of cheap goods encouraged more consumption, which allowed more factories to produce greater volumes of goods at ever cheaper prices.

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation
by Richard Bookstaber
Published 5 Apr 2007

We had adjusted our hedge gradually over the course of that Friday as we knew that a number of the largest portfolio insurance providers would be waiting until Monday to do so. This was in part for a technical reason—the models were only run once a day based on the market close—but could also be justified on efficiency grounds. Intraday adjustments can lead to unnecessary whipsawing and increase transaction costs as the market moves up and down. Even though Friday was not a normal day, many firms were locked into the next-day adjustment process and could not have made intraday adjustments, even though the market had declined by more than 70 points by midafternoon. We estimated that the overhang from LOR clients alone would be more than $5 billion, and while LOR was the market leader, the total overhang across all of the portfolio insurance purveyors could be double this amount.

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THE AVALANCHE BURIES THE BUYERS Program traders and arbitrageurs take positions on the S&P contract trading in the futures pit while simultaneously taking opposite positions on the individual stocks that make up the S&P on the NYSE. When the S&P futures contract sells for less than the price of the basket of the individual stocks in the S&P, then the cash-futures arbitrageur buys the S&P and sends in orders to sell the individual stocks. If the price difference is greater than the transaction costs of doing this trade, then they make an almost certain profit. This trade effectively transfers the stock market activities of the futures pit to the individual stocks on the NYSE. That’s where things broke down in 1987, and broke down for a simple reason: Stocks are not as liquid as futures.

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Prices were moving all over the place, swinging more violently minute by minute than they usually did in an entire day, and the spread required to buy or sell the S&P futures—still the most liquid instrument in the equity market—was a dollar or more, 20 times normal. I had to weigh the implications of holding off on a hedge adjustment on the one hand with the incredible transaction costs in executing in the market on the other. The huge volatility of the market broke down all but the most fundamental relationships between the market securities. The usual day-to-day world where investors cared about subtleties like corporate earnings or analyst forecasts dissolved as the energy of the market was turned up.

Trading Risk: Enhanced Profitability Through Risk Control
by Kenneth L. Grant
Published 1 Sep 2004

For example, you may find that your net market value might be negatively correlated to your holding periods, which might reinforce the notion that it is easier to hold for extended periods of time positions with small directional overhang and more difficult to retain position profiles that have large net market exposures. Similarly, correlation patterns between transaction size and capital usage might reveal interesting insights into factors such as liquidity, transaction costs, and other dynamics that will be pertinent to portfolio performance. Be creative. No matter what two factors you try to correlate against each other, I promise you that there have been sillier ones based on less intelligent premises. BABY’S ON FIRE It is very easy to take correlation analysis to extremes.

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In a very meaningful (though imperfect) way, these positions have similar risk characteristics; and it becomes a relatively simple mathematical exercise to view your positions not just in terms of number of shares or contracts (bad), but in terms of dollar value invested (better) or units of expected volatility (better still). As we will discuss later in the book, the primary sets of circumstances under which these relationships break down are those involving large position sizes, where transaction costs begin to increase due to liquidity concerns. These concerns certainly arise with greater frequency in large institutional portfolios but should not deter anyone from understanding the volatility-adjusted exposures tied to the individual positions in their accounts. You can generate similar incremental benefits by introducing the concept of correlation into the mix, which will give you some insight as to how much diversification positions on the same side of the market are generating for your portfolio and how much direct exposure offset you are achieving with positions on opposite sides of the market.

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Of course, day traders wishing to modify the amount of time they are willing to hold positions for the purpose of decreasing their market exposures have much less latitude. Any move to shorten holding periods that already fail to extend beyond one trading session is not likely to reduce the risk of loss in individual securities and may in fact increase it––due to such unavoidable market factors as commissions, bid/offer spreads, and other types of transactions costs. By contrast, those whose holding periods extend beyond one day have a better opportunity to use this variable as a means of targeting the appropriate exposure levels in their portfolios. Once again, a useful rule of thumb is that your exposure will increase and decrease as a function of the square root of the number of days you hold the position.

Willful: How We Choose What We Do
by Richard Robb
Published 12 Nov 2019

Thaler points out the inconsistency of a man refusing to hire somebody to mow his lawn for eight dollars but then turning down the opportunity to mow a neighbor’s similarly sized lawn for twenty dollars. Thaler attributes this paradox to cognitive bias.3 Rational choice economists might point to different reasons for this behavior: if the man hired himself out as a mower, he could suffer diminished status among his neighbors or incur transaction costs in negotiating the terms of the job, as well as additional income tax. If he hired a mower, coordinating and monitoring would impose additional costs. But this is unconvincing: people would mow their own grass but not their neighbor’s for pay, even if they could work in disguise to uphold their status, income taxes were eliminated, and quality was easy to monitor.

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My students are not alone in ignoring the precept that they can maximize return and minimize risk by holding a portfolio of assets that is diversified. Investors often diversify far less than the capital asset pricing model advises and overweight their portfolio toward their home country more than transaction costs alone can justify. This tendency is a notorious embarrassment to portfolio theory. But we need not resort to cognitive biases to account for it. The explanation lies in the importance of choice, whether or not that choice strictly maximizes profit. Suppose people are drawn to four or five investments, based on admiration of certain companies, tips from friends, or trends they believe will benefit certain businesses.

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Since the 1960s, detractors of the efficient market hypothesis have identified potential anomalies in the data that a savvy trader could exploit, and defenders have counterattacked with one of three claims: (1) The detractors looked at hundreds of possible anomalies and only published one—even if markets are perfectly unpredictable, some patterns will appear by chance, (2) There’s a flaw in the detractors’ analysis (for instance, transaction costs would chew up apparent profit or the securities were not really available at the published price), or (3) Any above-market returns can be attributed to risk, since the payoff is positively correlated with other financial assets or human capital. In return, detractors point to alleged cognitive biases, such as loss aversion, as the reason that money-making opportunities persist.

Economists and the Powerful
by Norbert Haring , Norbert H. Ring and Niall Douglas
Published 30 Sep 2012

For example, all consumers have identical tastes and preferences (i.e. are identical clones), each is perfectly selfish and rational (i.e. is a robot), and each has perfect knowledge of all possible future market prices (i.e. is substantially omniscient), while all firms produce identical goods and services and make zero profit, and there are no transportation or transaction costs. Perhaps coincidentally, much of how globalization has been implemented and justified by economists during the past decades seems to assume that just such a worldview is true. Even from purely within the perspective of economics, the SMD assumptions exclude the possibility of increasing returns to scale.

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They have become so normal and ubiquitous that they seem without alternative, yet these practices brought about the latest financial crisis, and most of the other 124 systemic banking crises that economists of the IMF have counted between 1970 and 2007 (Laeven and Valencia 2008). According to one account, money creation by banks emerged as an aberration of deposit banking starting in the 1640s. Some English merchants deposited their gold with goldsmiths or other safe keepers. In order to economize on transaction costs, it was customary to transfer documents of possession rather than the physical gold. The deposit slips started to function as paper money, entirely backed by gold. Soon, the safe keepers had an idea – one that could be called either fraud or a smart invention. They could make money by multiplying the deposit slips they issued.

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The employer and the worker trade units of labor at a price that is determined by the law of demand and supply. A unit of labor of a given quality is well defined, according to this view, just like a potato of given size and quality is well defined. Also the standard requirements for perfect competition need to hold: there can be no transaction costs, information must be complete and contracts can be perfectly enforced without cost. If these conditions are all met, the law of demand and supply will work beautifully (Kaufman 2009). There is no power in the neoclassical labor market. Everybody has plenty of alternatives and everybody is thus indifferent as to whether they are hired by a specific employer or not, and whether they are fired or retained.

The New Science of Asset Allocation: Risk Management in a Multi-Asset World
by Thomas Schneeweis , Garry B. Crowder and Hossein Kazemi
Published 8 Mar 2010

A quick historical example: Early on, equity derivatives were called more risky than the stocks they were based on because the futures contract reported higher historical volatility. The reason, we later discovered, was that individuals just traded in the derivatives markets because derivatives had lower transaction costs. Moreover, because of the lower transaction costs, the futures price would move even if the underlying stock index did not trade because of its higher transaction cost. No real difference in price, no difference in risk; it just looked so to the less educated observer. STOCK AND BOND INVESTMENT MEANS INVESTORS HAVE NO DERIVATIVES EXPOSURE Simply not true in today’s market.

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Other markets and/or assets may require enlarged risk based factor models that capture an enlarged set of underlying risks and therefore expected returns. Small firms with few analysts following them, with less ability to raise capital, with a less diversified client base, limited legal support, and so on may be priced to reflect those risks. Many assets are simply not tradable or have high transaction costs (e.g., housing, commodities, employment contracts, or distressed debt). How they could or should be priced in a single-factor or even a multi-factor model framework was explored, but a solution was rarely found.9 Option Pricing Models and Growth of Futures Markets We have spent a great deal of time focusing on the equity markets.

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Investment size restricts certain investors from taking advantage of more cost efficient asset A Brief History of Asset Allocation 15 classes (e.g., swaps may be the preferred form of accessing a particular asset class but many investors are limited to investing in exchange traded variants, which do not have the same statistical properties). As pointed out, the market is never efficient for everyone; that is, transaction costs differ, borrowing costs differ, taxation differs such that the actual after-tax return for individuals and institutions varies greatly. Finally, the ability to process and understand information and its consequences differs. The very unpredictable nature of risky asset pricing raises the issue of how best to manage that risk.

The Long Twentieth Century: Money, Power, and the Origins of Our Times
by Giovanni Arrighi
Published 15 Mar 2010

Just as the Dutch regime had taken world-scale processes of capital accumulation one step further than the Genoese by internalizing protection costs, and the British regime had taken them a step further than the Dutch by internalizing production costs, so the US regime has done the same in relation to the British by internalizing transaction costs. The notion of an internalization of transaction costs as the distinguishing feature 0F the F0urth (US) systemic cycle 0F accumulation is derived from Richard Coase’s (1937) pioneering theoretical study 0F the competitive advantages of vertically integrated business organizations, from Oliver Williamson’s (1970) expansion 0F C0ase’s analysis, and from Alfred Chandler’s historical study 0F the emergence and swift expansion 0F modern US corporations in the late nineteenth and early twentieth centuries.

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It was a continental military-industrial complex with sufficient power to provide a wide range of subordinate and allied governments with effective protection and to make credible threats of economic strangulation or military annihilation towards unfriendly governments anywhere in the world. Combined with the size, insularity, and natural wealth of its own territory, this power enabled the US capitalist class to “internalize” not just protection and production costs, as the British capitalist class had already done, but transaction costs as well, that is to say, the markets on which the self-expansion of its capital depended. This steady increase in the size, complexity, and power of the leading agencies of capitalist history is somewhat obscured by another feature of the temporal sequence sketched in figure 3.4. This is the double movement — forward and backward at the same time — that has characterized the sequential development of systemic cycles of accumulation.

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Similarly, the internalization of production costs by the British regime in comparison with, and in relation to, the Dutch regime occurred through a revival in new, enlarged and more complex forms of the strategies and structures of Genoese cosmopolitan capitalism and Iberian global territorialism, the combination of which had been superseded by the Dutch regime. As anticipated in chapter 1 and argued further in chapter 4, the same pattern recurred with the rise and full expansion of the US regime, which internalized transaction costs by reviving in new, enlarged, and more complex forms the strategies and structures of Dutch corporate capitalism which had been superseded by the British regime. This recurrent revival of previously superseded strategies and structures of accumulation generates a pendulum-like movement back and forth between “cosmopolitan-imperial” and “corporate-national” organizational structures, the first being typical of “extensive” regimes, as the Genoese and the British were, and the second of “intensive” regimes, as the Dutch THE “ENDLESS” ACCUMULATION OF CAPITAL 225 and the US were.

Optimization Methods in Finance
by Gerard Cornuejols and Reha Tutuncu
Published 2 Jan 2006

This is not a restrictive assumption either–we can always reformulate the problem in this way via a change of numeraire. We assume that proportional transaction costs are paid on asset purchases and sales and denote them with αil and βil for sales and purchases, respectively, for asset i and period l. We assume that αil ’s and βil ’s are all known at the beginning of period 0, although they can vary from period to period and from asset to asset. Transaction costs are paid from the investor’s cash account and therefore, we have the following balance equation for the cash account: xl0 = xl−1 + 0 n X (1 − αi )Pil sli − i=1 n X (1 + βi )Pil bli , l = 1, . . . , L.

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Transaction costs are paid from the investor’s cash account and therefore, we have the following balance equation for the cash account: xl0 = xl−1 + 0 n X (1 − αi )Pil sli − i=1 n X (1 + βi )Pil bli , l = 1, . . . , L. i=1 This balance condition indicates that the cash available at the beginning of period l is the sum of last period’s cash holdings and the proceeds from sales (discounted by transaction costs) minus the cost of new purchases. For technical reasons, we will replace the equation above with an inequality, effectively allowing the investor “burn” some of her cash if she wishes to: xl0 ≤ xl−1 + 0 n X (1 − αi )Pil sli − i=1 n X (1 + βi )Pil bli , l = 1, . . . , L. i=1 The objective of the investor, as we mentioned above, is to maximize her total wealth at the end of period L.

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Furthermore, the optimal solution is sensitive to perturbations in these input parameters—a small change in the estimate of the return or the variance may lead to a large change in the corresponding solution, see, for example, [8, 9]. This attribute is unfavorable since the modeler may want to periodically rebalance the portfolio based on new data and may incur significant transaction costs to do so. Furthermore, using point estimates of the expected return and covariance parameters do not respond to the needs of a conservative investor who does not necessarily trust these estimates and would be more comfortable choosing a portfolio that will perform well under a number of different scenarios.

DeFi and the Future of Finance
by Campbell R. Harvey , Ashwin Ramachandran , Joey Santoro , Vitalik Buterin and Fred Ehrsam
Published 23 Aug 2021

The bank might say: “Are you telling me we should invest in an electronic system that will cannibalize our business and largely eliminate a very important profit center?” However, even 20 years ago, banks realized that their largest customers were very unhappy with the current system. As globalization surged, these customers faced unnecessary forex transactions costs. An even earlier example was the rise of dark pool stock trading. In 1979, the U.S. Securities and Exchange Commission (SEC) instituted Rule 19c3, which allowed stocks listed on one exchange, such as the New York Stock Exchange (NYSE), to be traded off-exchange. Many large institutions moved their trading large blocks to these dark pools, where they traded peer to peer with far lower costs than traditional exchange-based trading.

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Atomicity is a critical feature of transactions because funds can move between many contracts (i.e., exchange hands) with the knowledge and security that if one of the conditions is not met, the contract terms reset as if the money never left the starting point. Remember that transactions have a gas fee, which varies based on the complexity of the transaction. When, for example, ETH is used to compensate a miner for including and executing a transaction, the gas fee is relatively low. Longer or more data-intensive transactions cost more gas. If a transaction reverts for any reason, or runs out of gas, the sender forfeits all gas used until that point. Forfeiture protects the miners who, without this provision, could fall prey to large volumes of failed transactions for which they would not receive payment. The gas price is determined by the market and effectively creates an auction for inclusion in the next Ethereum block.

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Limited access: Obtaining loans is difficult for a large majority of the population. Open ability to take out DAI liquidity against an overcollateralized position in any supported ERC-20 token. Access to a competitive USD-denominated return in the DSR. Inefficiency: Acquiring a loan involves costs of time and money. Instant liquidity at the push of a button with minimal transaction costs. Lack of interoperability: Cannot trustlessly use USD or USD-collateralized token in smart contract agreements. Issuance of DAI, a permissionless USD-tracking stablecoin backed by cryptocurrency. DAI can be used in any smart contract or DeFi application. Opacity: Unclear collateralization of lending institutions.

The Bitcoin Standard: The Decentralized Alternative to Central Banking
by Saifedean Ammous
Published 23 Mar 2018

While investment is also meant to produce income to be exchanged for other goods, it is distinct from money in three respects: first, it offers a return, which money does not offer; second, it always involves a risk of failure, whereas money is supposed to carry the least risk; third, investments are less liquid than money, necessitating significant transaction costs every time they are to be spent. This can help us understand why there will always be demand for money, and why holding investments can never entirely replace money. Human life is lived with uncertainty as a given, and humans cannot know for sure when they will need what amount of money.1 It is common sense, and age‐old wisdom in virtually all human cultures, for individuals to want to store some portion of their wealth in the form of money, because it is the most liquid holding possible, allowing the holder to quickly liquidate if she needs to, and because it involves less risk than any investment.

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This means that the foreign exchange market is around 25 times as large as all the economic production that takes place in the entire planet.21 It's important to remember here that foreign exchange is not a productive process, which is why its volume isn't counted in GDP statistics; there is no economic value being created in transferring one currency to another; it is but a cost paid to overcome the large inconvenience of having different national currencies for different nations. What economist Hans‐Hermann Hoppe has termed “a global system of partial barter”22 across international borders is crippling the ability of global trade to benefit people, exacting a high amount of transaction costs to attempt to ameliorate its consequences. Not only is the world wasting large amounts of capital and labor attempting to overcome these barriers, businesses and individuals worldwide frequently incur significant losses through economic miscalculation caused by the quicksand of exchange rate volatility.

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“An International Look at the Growth of Modern Finance,” Journal of Economic Perspectives, vol. 27, no. 2 (2013): 73–96. 28 The centralization of credit issuance can be viewed as a government intervention in the operation of Coase's Law, described by Coase in his essay: “The Nature of the Firm,” Economica, vol. 4, no. 16 (1937): 386–405. According to Coase, the reason firms exist is that the individual contracting of tasks can be more expensive because it involves transaction costs, such as search and information, bargaining, contracting, and enforcement costs. A firm will thus grow for as long as it can benefit from doing activities in‐house to overcome higher external contracting costs. In a world of depreciating currency and centrally allocated credit, achieving financing becomes one of the main cost advantages of growing in size.

The End of Traffic and the Future of Transport: Second Edition
by David Levinson and Kevin Krizek
Published 17 Aug 2015

These may be private enterprises (new market opportunities will arise) or these resources may be provided in central locations. Libraries will continue to reinvent themselves away from the traditional reading-and-learning mission and transform into the digital age of providing a wider range of club goods that are under-provided to society thanks to transaction costs. Thus, libraries, together with community centers, might be the homes for community 3D printers. Mass customization will likely be a hallmark of these products but customized designs would shortly follow suit; altering designs will not require retooling, merely tweaking the code for the software.

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This is where other services (taxi, transport network companies, transit) come in as backups. This is also where autonomous vehicles can be important. Nevertheless, people prefer not to think about every transaction. If they are charged per use, they use less. But they are less happy and more determined to get a car of their own to avoid transaction costs. Cars of course have costs of their own, but they are less frequent and less obvious. If the charges are invisible though, people may not think about them. Just as we went from terminals and mainframes to personal computers, and internet cafes to internet at home, we went from trains and transit to private transport once we could afford it.

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Discussion The most widely discussed pricing system in the US is a mileage tax concept, sometimes employing GPS systems.324 There are a variety of potential technologies for assessing mileage taxes, most use GPS (or an equivalent such as cellphone triangulation) to identify location, since one of the advantages of these types of systems is the ability to charge different rates for different locations (city vs. country, freeway vs. local street, congested vs. uncongested road).325 Oregon is presently testing a voluntary mileage charge (1.5 cents per mile) for up to 5000 participants dubbed “OReGO."326 While road user charging remains an attractive prospect, its application may still be many years away due to a combination of privacy concerns, implementation and transaction cost issues, and technological development issues.327 Some of these concerns might be obviated under a different governance structure, where it was neither the legislative nor executive branch of government making these decisions. We argue here that congestion exists, governments should price roads to encourage use in the off-peak and discourage use in the peak.

The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order
by Paul Vigna and Michael J. Casey
Published 27 Jan 2015

In this sense, she was lucky—for many women from her background male family members block them from access to their funds and treat the money as their own. Ahmadi’s luck would change in early 2014. The Film Annex’s New York–based founder, Francesco Rulli, aware of the difficulty faced by women like Ahmadi and frustrated by the transaction costs he incurred in sending relatively small amounts of money around the world, implemented a sweeping change to the Film Annex’s payment system. He would pay his bloggers in bitcoin, the digital currency that had seemed to come out of nowhere in 2013, with a small, fiercely dedicated band of tech-minded, libertarian-leaning digital utopians acting as its standard-bearers, and swearing to anybody who’d listen that it was going to change the world.

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The race for an e-commerce fix would be won by the same payments model run by big banks like those with which Chaum was negotiating. In other words, they ended up having no use for him. With the aid of new Web-site security solutions and third-party ratings to give consumers confidence, the infrastructure of the credit-card payment networks, with the intermediaries and transaction costs that went with it, was just bolted onto that of the Internet. Some alternatives, such as PayPal, would create a bridge for those retailers with no means of accepting card payments, but over time most would simply migrate to cards. It would provide an enormous jolt of new business for the two big bank-issued card associations, Visa and MasterCard.

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Also like bitcoin and other cryptocurrencies, Rosen’s project ran off a permanent ledger of transactions and allowed for the digital dollar to be cut into smaller pieces so that commerce could occur in whatever denomination was required. Citi’s e-cash was in this sense a disruptive, disintermediating, peer-to-peer currency. It wouldn’t need the extensive network of communications that underpins credit-card payments, so transaction costs would be kept low, providing gains for both consumers and businesses and making micropayments viable. But this is not to say Rosen wanted to cut banks out from the system as, say, Satoshi Nakamoto did. Far from it. Banks would sit at the heart of his system, reflecting a deep-felt view that he’d developed on the theory of money by reading the likes of Milton Friedman and the nineteenth-century financial journalist Walter Bagehot.

Frugal Innovation: How to Do Better With Less
by Jaideep Prabhu Navi Radjou
Published 15 Feb 2015

In a 1937 essay, Ronald Coase, a Nobel Prize-winning economist, argued that the reason Western economies are organised vertically – like a pyramid with a few large producers at the top and millions of passive consumers at the bottom – is because of transaction costs (the intangible costs associated with search, bargaining, decision-making and enforcement).5 But with the explosion of the internet, mobile technologies and social media – think of the 1.3 billion interconnected Facebook users – these transaction costs have all but disappeared in many sectors. This has allowed a horizontal economy to emerge in the US, western Europe and Japan. The foundations of a new, self-sustaining commercial system are now being laid.

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The NISP has helped Michelin, a tyre manufacturer, reduce its landfill waste by 97% within just 3 years, 18 months ahead of schedule. It estimates that every tonne of carbon dioxide saved costs members merely around $1. This is a far more cost-effective approach than, say, carbon trading, with its high transaction cost. The OECD declared the NISP to be a game-changer in waste management. Its model is being replicated in 20 countries worldwide. Sharing waste is only half the story Companies can also share underused assets and resources. FLOOW2 is a business-to-business marketplace that enables companies to share and exchange under-utilised equipment, services, skills and knowledge.

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Index 3D printers 18, 47–9, 50, 128, 132, 134, 152, 166 3D printing 9, 47–9, 50, 51, 52, 132, 151–2, 206 4D revolution 53–4 A Accor 172–6 Accountable Care Solutions 211 Active Health Management 211 adaptability 90, 154 additive manufacturing 47–9 ADEO Group 127, 128 advertising 24, 61–3, 71–2 aerosols 95, 96 Aetna 32, 208–13, 213, 215 Affinnova 31, 141 affordability 3, 82, 136, 153, 161, 172, 194, 216 in emerging markets 4, 56, 120, 198, 206 health-care innovations 202–3 and quality 1, 3, 9, 12, 75, 120–1, 198, 206 affordances 120–1 Africa 40, 56, 146, 161, 164, 197 financial services 198, 201 IBM in 200–2 innovation potential 200–2 as market 12, 169, 197–8, 199 ageing populations 109, 194 ageing workforce 13, 29, 49, 153 agility 26, 41, 69, 75, 143, 169–70 in innovation 21, 27, 33–4, 42–3, 72, 154, 167, 173, 176, 206 in manufacturing 44–5, 49, 52 Akerman, Dave 136 Air Liquide 205–7 air pollution 74, 78, 187, 200 Airbnb 10, 17, 85, 136, 140, 163, 173, 175 aircraft 68, 149 parts 48–9, 49, 121, 151–2 airlines 60, 121 Alteryx 32 Amazon 46, 60–1, 150 Amelio, Gil 68–9 AmEx (American Express) 161–2, 167, 215 Amgen 45 Anderson, Chris 18 Android operating system 130, 172 AOL 42 Apple 17, 24, 68–9, 71, 99, 150, 155, 172 Apple TV 62 apps 99, 106, 107, 108, 111–12, 124–5, 148 Arduino 135 Ariely, Dan 132 Arla Foods 37 artists 88, 93 ASDA 158–9, 159 Asia 161, 164, 200 aspirations 88–9, 119–20, 198 assets digitising 65–6 flexing see flexing assets reusing 92–3 sharing 159–61, 167 AT&T 21 ATMI 88 Auchan 13, 126, 128, 215 austerity 5, 6–7, 23 Australia 5, 62, 146, 200 Autodesk 48, 92, 132, 196–7 Automatic 131 automation 49–50 Avon 146 AXA 116 Ayed, Anne-Christine 75, 76 B B Corps (Benefit Corporations) 82 B2B (business-to-business) sectors 25–6, 34, 57, 142, 161, 175, 212 B2C (business-to-consumer) companies 25, 34, 212 Badrinath, Vivek 174 BAE Systems 48–9 Ban, Shigeru 93 Bangladesh 66 Bank of America 155 banking services 13, 17, 57, 161–2, 198 see also financial services Banner Health Network 210 Banzi, Massimo 135 Barber, Michael 181 Barclays 100, 115, 117, 215 Barry, Mike 183–4, 187 Bayer 66–7 Bazin, Sébastien 173 BBVA 125 Béhar, Yves 110 Belgium 103 Benefit Corporations (B Corps) 82 Benelux countries 7, 103 Benetton 67 Benoît, Paul 89 Berg 89 Bergh, Chip 122–3 Bertolini, Mark 208–9, 212, 213, 217 BHAGs (“big, hairy audacious” goals) 90–1, 158–9, 179, 191–2 Biasiotta, Bruno 123 big data 32–3, 117, 150 big-box retailers 9, 18, 137 “bigger is better” 2, 8, 14–15, 104 biomimetics (or biomimicry) 84 Birol, Jacques 163–4 BlaBlaCar 10, 85, 163 Blanchard, David 94, 96 Bloomberg, Michael 18, 79, 133 BMI (business model innovation) 192 BMW 47, 62–3, 86 BNP Paribas 168–9 Boeing 92, 144 Bolland, Marc 180–1, 186 Bontha, Ven 59 Booz & Company (now Strategy&) 6, 22, 23, 28, 171 Bosch 156 Boston Consulting Group 55, 64, 116, 145, 217 Botsman, Rachel 10 bottom-of-pyramid (BOP) customers 161, 203, 207 Bouygues Immobilier 90 BP 169 BPS (by-product synergy) 159 Brabeck-Letmathe, Peter 44, 78 brand ambassadors 143, 145 brand loyalty 46, 100, 204, 215 branding 15, 108, 119–20, 156 brands 1, 71, 139, 141, 143, 154, 165–6, 215 “conversations” with 129, 131–2 working together 154, 156–7 Braungart, Michael 82 Brazil 40, 74, 102, 146, 188, 199 emerging market 4, 12, 38, 146, 197, 199 Bretton Woods Conference (1944) 104 Brin, Sergey 63 BringBee 85 Bross, Matt 37–8, 171 Brown, Tim 121 Brusson, Nicolas 163 BT 37–8, 171 BTG (British Technology Group) 171 budgeting, personal 124–5 budgets 6–7, 36, 42 Buffett, Warren 138 buildings 196–7 bureaucracy 36, 63–4, 65, 70, 165, 169, 173, 182 business, primary purpose of 14 business model innovation (BMI) 192 business models 2, 34, 38, 80, 118, 205, 216, 217 changing 190–3, 213 business opportunities 36, 188–9, 190 business process re-engineering 192 business strategy 34 business-to-business see B2B business-to-consumer see B2C by-product synergy (BPS) 159 C C2C (cradle-to-cradle) design 75, 77, 82, 84, 97 Cacciotti, Jerry 22, 23 CAD (computer-aided design) 47, 65, 132, 165 California 79, 99 Calmes, Stéphane 127, 128 Camp, Garrett 163 Canada 5, 102 cannibalisation conundrum 15, 117–18 capital costs 45 car insurance 116 car sharing 10, 17, 85, 86, 108, 123, 163 car-related services 62–3, 116 Caravan Shop 89 carbon emissions 102, 103, 196 reducing 78–9, 106–7, 159, 160, 174 stabilising 184, 186 carbon footprint 94, 100, 102, 156, 184, 186 Carrefour 121–2, 157, 174 cars 89, 92, 116, 119–20, 144, 155, 156 electric 47, 86, 172 emissions 47, 106–7 fuel consumption 47, 106–7 fuel efficiency 8, 12, 24, 47, 78, 131, 197 low-cost 2–4 personalisation 129–30 related services 62–3 standards for 78–9 see also BMW; Ford; Nissan; Renault; Tesla; Toyota Caterpillar 31, 55 CellScope 110 Cemex 59 centralisation 9, 44, 51 CEOs 34, 40, 168, 203–5, 204 certification, sustainability 84 Chaparral Steel 159 chemical industry 33, 58, 66–7 chemical usage, reducing 79 Cheshire, Ian 185–6 Chesky, Brian 163 Chevron 170 China 44, 83, 102, 144, 213, 216 air pollution 187, 200 emerging market 4, 38, 169, 197, 205 innovation in 169, 200 mobile phones 198 R&D 40, 188, 206 selling into 187–8 shifting production from 55, 56 Christchurch (New Zealand) 93 Chrysler 166 circular economy 9, 76–7, 80–4, 159–60, 195–6 “Circular Economy 100” 76–7, 86 circular supply chains 193 Cisco 17, 29, 65, 110 CISL (University of Cambridge Institute for Sustainability Leadership) 158–9 cities 107, 153 Citigroup 161 climate change 8, 100 closed-loop products 86, 91, 185, 192–3 cloud computing 60, 61, 157, 169 CMF-A car platform 4–5, 198–9 CNC (computer numerical control) cutters 128, 134, 152 co-branding 143 co-creation 126–9, 202–3, 206–7 see also collaboration; horizontal economy; prosumers co-distribution 143 co-marketing 143 co-operation 64–5, 69, 70–1 co-opetition 158–9 Coase, Ronald 133 Coca-Cola 57, 62, 142, 154 “cold chains” 57 CoLearnr 114 Collaborating Centre on Sustainable Consumption and Production (CSCP) 193–4 collaboration 76, 114, 138–9, 176, 211, 217–18 cross-functional 36–8, 39, 71–2 see also hyper-collaboration; TechShop collaborative consumption see sharing economy collaborative manufacturing 50–1 collective buying platforms 137 Commonwealth Fund 110 communities of customers 129, 131, 132–3 local 52, 57, 146, 206–7 commuting 131 competition 22, 27, 102, 189 competitive advantage 15–16, 80, 195 competitors 19, 26, 148, 149–50, 172, 215 emerging markets 16, 205–6, 216 engaging 158–9, 167 frugal 16–18, 26, 216 complexity 24, 64 components 3, 67 computer numerical control see CNC computer-aided design (CAD) 47, 65, 132, 165 Comstock, Beth 40–1, 149, 150, 151, 170 concentration 96 Concept Lab 211 concept testing 25, 31, 72, 191 Cone, Carol 7 congestion 108, 201 constraints 4–5, 22, 34, 36, 42, 207, 217 consumer behaviour 3, 6, 97, 98–101 shaping xix, 99–101, 105–9, 125 Consumer Empowerment Index 103 consumer spending 103 consumers 8, 27, 37, 97, 105 developed-world 2, 7, 9, 102 dissatisfaction 130–1 empowerment 22, 105, 106 environmental awareness 101–2, 105 frugal 197–200 of the future 193–4 innovative ideas from 50–1 with particular needs 194–5 power 102–4, 139 social experience 139 and sustainability 95, 97, 101–4 trust of 143 young 16, 85, 86, 122, 124, 131 see also customers; prosumers consumption 85, 101–6, 115, 124, 193 continuous processing 44–5, 47, 50 Cook, Scott 19 core, focusing on 68–9 Cornillon, Paul 37 Corporate Home Exchange 175 corporate leaders 122–4, 180–1, 203–5 corporate social responsibility see CSR Cortese, Amy 138 cost effectiveness 12, 34, 149, 164, 172, 188, 190, 191 consumer energy use 53 customisation 67 health care 202 innovation 21, 173 micro-factories 52 Costco 18 costs 3D printers 48 capital costs 45 development costs 22, 36 distribution costs 54, 55, 96 electricity generation 104 energy costs 161, 190 environmental costs 11 fuel costs 121 of good-enough approach 27 health-care costs 13, 109 innovation costs 168, 171 inventory costs 54 life-cycle costs 12, 24, 196 maintenance costs 48–9, 66 manufacturing costs 47, 48, 52 operating costs 45, 215 production costs 9, 83 raw materials 153, 161, 190 reducing 11, 46, 47, 60, 84, 89, 160, 167, 200 resource costs 78, 203 shipping costs 55, 59 supply chain 58, 84 transaction costs 133 wage costs 48 Coughlin, Bill 167 Coursera 61, 112 Coye, Molly 202 cradle-to-cradle see C2C design creativity 88, 94, 128, 130, 135, 163–4, 199 in organisations 63–4, 70, 71 credit culture 115–16 CRM (customer relationship management) systems 59, 157 cross-functional collaboration 36–8, 39, 71–2 crowdfunding 17, 48, 132, 137–9, 152 crowdsourcing 28–9, 50–1, 126, 140, 143, 152, 202 platforms 142, 150–1, 151, 152 CSCP (Collaborating Centre on Sustainable Consumption and Production) 193–4 CSR (corporate social responsibility) 77, 82, 94, 161 culture, organisational see organisational culture “culture of simplification” 170 curiosity 153–4 customer behaviour see consumer behaviour customer experience, enhancing 75 customer feedback 31–2, 33, 72, 152, 170, 192 customer immersion labs 31–2 customer loyalty 28, 68, 77, 80, 124, 129, 131–2, 215 customer needs 37, 58, 90, 139–40, 170, 192, 206 changing 28, 38, 51, 127, 150, 168, 205 diversity 38, 46, 51 R&D disconnect from 26, 38 customer preferences 58, 67, 75 customer relationship management see CRM customer satisfaction 65, 128, 130–1 customer service 25–6, 127–8, 147 customer visits 18, 20, 128 customers 19, 27, 46, 76, 148, 205 alienating 24–6 behaviour see consumer behaviour bottom-of-pyramid 12–13, 161, 203, 207 communities of 129, 131, 132–3 cost-conscious 3, 6, 7, 22, 26, 156, 189, 215 dreams 140–1 eco-awareness 22, 26, 54, 75, 78, 93, 156, 195–6, 215 in emerging markets 200 engaging with 20–1, 24–6, 27–33, 34, 35, 38–9, 42–3, 115, 128, 170 as experts 146 focus on 19–21, 43, 62, 157–8, 204 goodwill of 84 motivation for change 117 multiple roles 143–6 needs see customer needs outsourcing to 143 participation 128–9 profligate 115–16 R&D and 27–8, 31–2, 38, 43 rewards for 147–8 shared 156–8 used to motivate employees 205–7 young 16, 85, 86, 122, 124, 131 see also consumers; prosumers customisation 9, 46, 47, 48, 51–2, 57–8, 67, 72 CVS Health 7 D D2D Fund 162 Dacia 2–4, 156, 179 Dannon 141 Danone 66, 141, 184, 186 Darchis, François 205–6, 207 DARPA (Defence Advanced Research Projects Agency) 49 Darukhanavala, P.P.

Value of Everything: An Antidote to Chaos The
by Mariana Mazzucato
Published 25 Apr 2018

Just as turnover has risen, so the volatility of funds has increased significantly from 0.84 to 1.11 over the same period. Second, there are transaction costs. Greater turnover - buying and selling more shares - keeps fees higher than they might have been, adding to transaction costs without adding to investors' capital gains given the zero-sum nature of the market. Crucially for the investor, additional fees reduce returns by increasing the cost of managing money. While transaction costs for each trade have fallen over the last thirty years, the frequency of trading has increased exponentially in recent years.

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When Millennium declared bankruptcy the following year, a court indemnified TA and other shareholders (the firm's former managers) against any effort by creditors to claw back the dividend, even after it was revealed that the owners and their loan arrangers had not informed them that its biggest client, the US government, had successfully sued it for $256 million over fraudulent tests.25 HOW FINANCE EXTRACTS VALUE How does finance extract value? There are broadly three related answers: by inserting a wedge, in the form of transaction costs, between providers and receivers of finance; through monopoly power, especially in the case of banks; and with high charges relative to risks run, notably in fund management. In certain areas of the economy, such transaction costs are regarded as reducing efficiency and destroying value, not creating it. Governments are accused of inefficiency whenever they impose an income tax - which puts a wedge between what people receive for work and the value they place on leisure - or when they try to finance social security through a payroll tax, which disconnects wage costs from total labour costs.

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The NHS is also among the cheapest healthcare systems in advanced economies: according to OECD figures from 2015,48 health expenditure relative to GDP in the UK was only 9.9 per cent, almost half of what the US has spent (16.9 per cent) on its far less efficient semi-private system. The NHS owes much of its past successes to its public mission and to its universality principle, translated into an efficient central provision of healthcare services aimed at reducing transaction costs. UK citizens have repeatedly recognized the importance of its public nature: currently, 84 per cent of them think that it should be run in the public sector.49 Even Prime Minister Thatcher stated: ‘The National Health Service is safe with us' during the 1982 Conservative Party conferences, temporarily discarding plans for outright privatization set out by the Central Policy Review Staff within the Cabinet Office.

Green Philosophy: How to Think Seriously About the Planet
by Roger Scruton
Published 30 Apr 2014

In a striking ‘theorem’ Coase also argues that, when a commons is privatized, with property rights assigned to all those who might actively wish to make use of it, any preliminary assignment of private rights will lead, in the absence of transaction costs, to an optimal final distribution, by bargaining among the parties. So far so good, but Coase’s argument does not prove that regulation is unnecessary; only that it is unnecessary in certain special circumstances – where transaction costs are zero, and where the injured parties are identifiable. The situations discussed by Coase are like those researched by Ostrom: situations in which identifiable parties or local communities are being asked to bear the costs of a particular person’s economic activity.

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The contrast with the nuclear disasters in the Soviet Union, in which the state neither assumed liability nor even admitted that the disasters had occurred, is striking. In a famous argument the economist Ronald Coase suggested that damages in tort and contract provide the feedback that, in the absence of transaction costs, overcomes of its own accord the problem posed by externalities.173 Coase was opposing the widely accepted view of Arthur Cecil Pigou, that state action is necessary to ensure that the costs of market transactions are internalized by those who create them.174 Pigou’s suggestion was that pollution and similar externalities should be taxed, so restoring the incentive to assume the costs of market transactions along with the benefits.

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In a famous argument the economist Ronald Coase suggested that damages in tort and contract provide the feedback that, in the absence of transaction costs, overcomes of its own accord the problem posed by externalities.173 Coase was opposing the widely accepted view of Arthur Cecil Pigou, that state action is necessary to ensure that the costs of market transactions are internalized by those who create them.174 Pigou’s suggestion was that pollution and similar externalities should be taxed, so restoring the incentive to assume the costs of market transactions along with the benefits. The burden of Coase’s argument is that this misrepresents the underlying logic of the market, which is one of co-operation rather than antagonism. Thus if John’s use of his land causes $5 of damage to his neighbour Bill, but brings in a profit of $6, then – assuming no transaction costs – it is worth John compensating Bill, since he can do so and still make a profit, and Bill is no worse off than he would have been had John ceased his business. In general, rational choosers, in a regime of frictionless compensation, will ensure that costs are internalized, and distributed in a way acceptable to all.

Tools for Computational Finance
by Rüdiger Seydel
Published 2 Jan 2002

The holder will exercise the call (buy 1.1 Options 3 the stock for the strike price K), when S > K. For then the holder can immediately sell the asset for the spot price S and makes a gain of S − K per share. In this situation the value of the option is V = S − K. (This reasoning ignores transaction costs.) In case S < K the holder will not exercise, since then the asset can be purchased on the market for the cheaper price S. In this case the option is worthless, V = 0. In summary, the value V (S, T ) of a call option at expiration date T is given by
0 in case ST ≤ K (option expires worthless) V (ST , T ) = ST − K in case ST > K (option is exercised) Hence V (ST , T ) = max{ST − K, 0}.

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Intrinsic value of a put with exercise price K (payoff function) 4 Chapter 1 Modeling Tools for Financial Options The curves in the payoff diagrams of Figures 1.1, 1.2 show the option values from the perspective of the holder. The profit is not shown. For an illustration of the profit, the initial costs paid when buying the option at t = t0 must be subtracted. The initial costs basically consist of the premium and the transaction costs. Since both are paid upfront, they are multiplied by er(T −t0 ) to take account of the time value; r is the continuously compounded interest rate. Substracting this amount leads to shifting the curves in Figures 1.1, 1.2 down. The resulting profit diagram shows a negative profit for some range of S-values, which of course means a loss, see Figure 1.3.

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Definition 1.1 (Black-Scholes equation) 1 ∂V ∂2V ∂V + σ 2 S 2 2 + rS − rV = 0 ∂t 2 ∂S ∂S (1.2) The equation (1.2) is a partial differential equation for the value function V (S, t) of options. This equation may serve as symbol of the market model. But what are the assumptions leading to the Black-Scholes equation? Assumptions 1.2 (model of the market) (a) The market is frictionless. This means that there are no transaction costs (fees or taxes), the interest rates for borrowing and lending money are equal, all parties have immediate access to any information, and all securities and credits are available at any time and in any size. Consequently, all variables are perfectly divisible —that is, may take any real number.

Mathematical Finance: Core Theory, Problems and Statistical Algorithms
by Nikolai Dokuchaev
Published 24 Apr 2007

Let a self-financing strategy be such that the number of stock shares at the initial time be γ0=1/2. Find γ1, X1, X2, βi, i=0, 1, 2 for the constantly rebalanced portfolio. Solve Problems 3.11 and 3.12. Problem 3.63 (Make your own model). Introduce a reasonable version of the discrete time market model that takes into account transaction costs (a brokerage fee), and derive the equation for the wealth evolution for self-financing strategy here. (Hint: transaction costs may be per transaction, or may be proportional to the size of transaction or may be of a mixed type.) Discrete time market: arbitrage and completeness Solve Problem 3.29. Problem 3.64 Prove that an equivalent risk-neutral probability measure does not exist for Problem 3.29.

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Definition 3.2 We say that the strategy is self-financing if Xt+1−Xt=γt(St+1−St), t=0, 1,…. (3.2) It follows from (3.2) that (3.3) Here X0>0 is the initial wealth at time t=0. For example, for the trivial risk-free strategy, when γt≡0, the corresponding total wealth is Xt≡X0. © 2007 Nikolai Dokuchaev Discrete Time Market Models 25 Note that these definitions present a simplification of the real market situation, because transaction costs, bid and ask gap, possible taxes and dividends, interest rate for borrowing, etc., are not taken into account. 3.3 A discrete time bond-stock market model A more realistic model of the market with non-zero interest rate for borrowing can be described via the following bond—stock model. We introduce a model of a market, consisting of the risk-free bond or bank account with price Bt and the risky stock with the price St, t=0, 1, 2,….

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Some special effects can be found for N→+∞ (such as strategies that converge to arbitrage). Note also that the most widely used results in practice for optimal portfolio selection are obtained for the case of single-period multi-stock markets, i.e., with T=1 and N>1 (Markowitz mean-variance setting). • Transaction costs (brokerage fees), bid-ask gap, gap between lending and borrowing rate, taxes, and dividends, can be included in the condition of self-investment. • Additional constraint can be imposed on the admissible strategies (for instance, we can consider only strategies without short positions, i.e., with γt≥0). • In fact, we addressed only the so-called ‘small investor’ setting, when the stock prices are not affected by any strategy.

American Secession: The Looming Threat of a National Breakup
by F. H. Buckley
Published 14 Jan 2020

There are further economic arguments for a country to remain large rather than breaking up when we look at the costs of a secession option, even when it isn’t exercised: • The opt-out remedy of secession gives rise to underinvestment costs when the federal government declines to exploit valuable long-term projects whose financing would be threatened by secession. • A right to secession would encourage piggish post-constitutional opportunism, in the form of demands for unwarranted favors from states threatening to leave the Union. • Negotiations over secession would themselves impose transaction costs, by focusing attention on a constitutional crisis and diverting attention from things the government might otherwise usefully do. • The exit option of secession deprives those who remain of the useful contributions to the debate, or the voice, of those who secede. First we’ll examine the economic benefits of bigness, so we can weigh them against the advantages of smallness seen earlier.

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Meanwhile a sterile game of threat and counterthreat had occupied Canada for forty years. With all the wasteful squabbling, it was like a painful marriage, not bad enough for everyone to call it quits but not very happy either. Ask a Canadian whether he likes the idea of secession rights, and he’ll probably say no. Transaction Costs Sometimes secession is like ripping off a Band-Aid: just do it quickly. Czechoslovakia’s breakup was like that, but I don’t think it’s what would happen in the United States. We’d have the precedent of the Civil War to get over, and the negotiations about the division of assets and debts would drag on for some time.

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The issue is off the table for the moment, in large part because Canadians are good and sick of it. But it has diverted attention from other things the government might have been doing, and that’s a cost. The same kind of cost arises in private law bargaining, and the Nobel laureate Ronald Coase gave it a name: transaction costs. These are the costs, in both the direct expenses of bargaining and the distraction from other opportunities, incurred when the parties negotiate to reach an agreement. The costs are greater when more parties must be joined in the agreement, because there will generally be a few malcontents and holdouts when the number of parties exceeds five or six.

The Fissured Workplace
by David Weil
Published 17 Feb 2014

In a world where the costs of transactions between parties may be significant, many activities become located within the walls of a firm.6 A&P’s model of getting food from producers to a consumer’s kitchen lowered costs relative to a long chain of market transactions from producers to wholesale distributors to retail stores. Oliver Williamson built on the Coasian framework to develop a formal theory of transaction cost economics, viewing the primary purpose and impact of organizations as economizing on transaction costs in the course of producing complicated products and services. In the transaction cost framework pioneered by Williamson, business organizations that make up an industry are neither simply production processes combining capital, labor, and material to produce goods for the market (as traditional economics would lead one to believe) nor organizations untethered from economic forces and able to configure themselves as they wish (as often implied by popular business gurus or some management academics).

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A&P’s size in fact led fretful congressional leaders to pass the Robinson-Patman Act of 1936, which prohibited chain stores from receiving better pricing than smaller retailers. 6. See Coase (1937). 7. Williamson notes, “I submit that the modern corporation is mainly to be understood as the product of a series of organizational innovations that have had the purpose and effect of economizing on transaction costs” (1985, 273). 8. One problem with the transaction cost approach is that such costs are not directly observed and are difficult to define, making it challenging to test the theory in practice. The property rights framework provides a more formal way of modeling the consequence of incomplete contracts on how markets and organizations solve coordination problems.

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Over time, competitive forces acting on individual decision makers within organizations pursuing their own objectives lead some functions to end up being done internally, others through various types of relationships (partnerships, franchise agreements, other forms of contracting), and still others through market transactions.7 Property rights (or efficient contracts) theorists in the 1980s pushed Coase’s and Williamson’s questions on the drivers of firm boundaries by asking why parties could not undertake more activities via market relationships by writing contracts that would solve the types of problems that created high transaction costs.8 Market transactions would be sufficient if two parties could write a “complete contract” that captured the private benefits and costs of two parties (whether business/business, buyer/supplier, or employer/employee) covering all exigencies. But that is often not possible for a variety of reasons.

Money: 5,000 Years of Debt and Power
by Michel Aglietta
Published 23 Oct 2018

In the 2000s, Chinese trade with the emerging world doubled from 15 to 30 percent of its total foreign trade. The dollar serves as a third currency for this type of exchange. It is only the chosen vehicle for the invoicing and settlement of exchanges if the transaction costs linked to using the dollar (which implies two conversions between the trade partners) are less than they would be if either of the two partners’ own currency were used. Transaction costs can indeed be lower when a vehicle currency is used: this question essentially depends on the market liquidity of the currency to which the partners have access. However, in 2008 dollar liquidity collapsed worldwide, and interbank credit suddenly dried up.

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Despite the enormous mass of metal in its coffers, the Bank of Amsterdam was able to use its advantages to maintain a symmetrical regulation of the relative value of the units of account. On the one hand, making a deposit for foreign transactions implied having an account with the bank, in return for the guarantee that the funds deposited there were inviolable. On the other hand, as had been known since the invention of the bill of exchange, transaction costs for account payments were much lower than for transfers of metals. Since the Bank was considered totally able to reimburse deposits, the banco florin was at the centre of the European payment system throughout the seventeenth century. This owed also to its political autonomy, which was finally destroyed only in the upheavals of the American War of Independence and then the French Revolution.

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Indeed, electronic wallets can be stored on computer hard disks, so that a transfer of value between two economic agents, A and B, can be realised through electronic transfer e without involving A and B’s bank accounts with their banks a and b.1 Contrary to what is often claimed, these transactions are not equivalent to cash. The transaction costs are, of course, much lower if transaction volumes are high. But these transactions require an electronic apparatus, with the possibility of counterparty recording, in contrast to the absolute anonymity of banknotes. Yet the need for absolute liquidity itself makes up part of the confidence in money in decentralised transaction mechanisms.

Beyond the 4% Rule: The Science of Retirement Portfolios That Last a Lifetime
by Abraham Okusanya
Published 5 Mar 2018

In the CFR, income is paid from the cash reserve and replenished if it dips below two months of income. The 60/40 portfolio is rebalanced annually, and the monthly income taken directly from the portfolio. Based on a 4% withdrawal rate, they found that ‘the fully invested portfolio is slightly superior to the cash reserve approach, assuming that there are no transaction costs and taxes.’ But when you take into account the transaction costs of selling down the portfolio monthly to pay income, the cash reserve approach produces a better outcome – around a 5% improvement in the success rate. So, the cash reserve method doesn’t help reduce the effects of sequence risk if there’s no cost and tax drag for selling down the portfolio.

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An Independent Review of Retirement Income32 commissioned by the Labour Party and published in March 2016 by the Pension Institute’s Professor David Blake and Dr Debbie Harrison has some key recommendations on the use of deterministic projections. Specifically, the report recommends that: the use of deterministic projections of the returns on products should be banned they should be replaced with stochastic projections that take into account important real-world issues, such as sequence-of-returns risk, inflation, and transactions costs in dynamic investment strategies there should be a commonly agreed parameterisation for the stochastic projection model used, ie a standard model should be developed there should be a commonly agreed set of good practice principles for modelling the outcomes from retirement income products I don’t personally support an outright ban on using straight-line projections, but I see strong reasons to rethink how we use them.

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal
by Ludwig B. Chincarini
Published 29 Jul 2012

A professional might use standard simple factors as well as factors for earnings revision, analyst sentiment, profitability, management impact, and proprietary factors.20 Even when quantitative managers use slightly different factors, there’s generally some overlap in the stocks they buy or sell. Quant managers crowd strategies for several reasons. They tend to use similar factors (also called alpha models). Traders quickly pick up on even proprietary factors. Their risk models are often similar, as are their transaction cost models. The optimization process traders use to create portfolios (which accounts for transaction costs) leads to professional quant portfolios that are concentrated in a few hundred similar stocks. Many of those stocks likely appear many times across many portfolios. These concentrated portfolios moved a lot in August. Hedge fund quant factors moved between 10 and 20 standard deviations from historical norms.21 Standard quant factors also moved by unusual amounts in August, two to three standard deviations from historical norms.

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The hedge wasn’t a perfect one, because LTCM’s short position was on the whole index, and the basket was only a subset of Japanese stocks. So LTCM made a total return stock swap with another bank. The bank paid LTCM the return on the basket of the other stocks in the JASDAQ and LTCM paid the bank 30 basis points. The resulting trade had zero risk and essentially no profit or loss, apart from transaction costs and the 30 basis-point financing cost. Then LTCM borrowed the Japanese stocks from themselves and shorted them while also buying the associated cheap warrants. This innovative financing scheme let LTCM borrow nonborrowable stocks and take advantage of an arbitrage opportunity. They called it index art.

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Hedge fund quant factors moved between 10 and 20 standard deviations from historical norms.21 Standard quant factors also moved by unusual amounts in August, two to three standard deviations from historical norms. Crowding among quants happens for several reasons, but the transaction costs model was of primary importance, as it caused us to trade similar securities at each point in time. —Mark Carhart interview, former co-CIO of Quantitative Strategies at GSAM and Founder of Kepos Capital, October 11, 2011 At the end of August, the quant factor aberration disappeared. That is, the factors returned to normal behavior and the funds that had held on to their positions didn’t lose much.

More Than You Know: Finding Financial Wisdom in Unconventional Places (Updated and Expanded)
by Michael J. Mauboussin
Published 1 Jan 2006

The data consistently show that the low-turnover funds (which imply two-year-plus investor holding periods) perform best over three-, five-, ten-, and fifteen-year time frames (see exhibit 8.2). We may be able to attribute this performance difference to lower costs—a reason in and of itself to reduce turnover for many portfolios—but we would note that transaction costs tend to represent only about one-third of total costs for the average mutual fund. Despite consistent evidence supporting the performance benefits of a buy-and-hold strategy, the average actively managed mutual fund has annual turnover nearly 90 percent. What gives? First off, an efficient stock market requires investor diversity—across styles and time horizons.

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Three big drivers of price-earnings ratio nonstationarity are the role of taxes and inflation; changes in the composition of the economy; and shifts in the equity-risk premium. Why the Past May Not Be Prologue A bedrock concept in finance is that investors price assets to generate an appropriate return (adjusted by perceived risk) net of taxes, inflation, and transaction costs. Accordingly, changes in tax law and inflation rates have a material effect on the appropriate value of the market, and hence price-earnings ratios. The role of taxes is conceptually straightforward. Increases in dividend and capital gains taxes require investors to earn a higher pretax return to generate comparable returns.

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See http://www.indexfunds.com/articles/20020221_boglespeech_com_gen_JS.htm. 11 Alice Lowenstein, “The Low Turnover Advantage,” Morningstar Research, September 7, 1997, http://news.morningstar.com/news/ms/FundFocus/lowturnover1.html. 12 Russ Wermers, “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transaction Costs, and Expenses,” Journal of Finance 55 (August 2000): 1655-1703. 13 Yahoo provides the risk classifications (above average, average, and below average) based on the standard deviation of portfolio performance. I quantified the three levels, allocating a value of 1 for funds with below-average risk, 2 for average-risk funds, and 3 for above-average-risk funds, in order to attain an average risk level for each turnover range.

Phishing for Phools: The Economics of Manipulation and Deception
by George A. Akerlof , Robert J. Shiller and Stanley B Resor Professor Of Economics Robert J Shiller
Published 21 Sep 2015

Yet most people do.19 One source of our angst about those bills comes from rip-offs: as consumers we are especially prone to pay too much when we step outside of our comfort zone to make the rare, expensive purchase.20 In some 30 percent of home sales to new buyers, total—buyer plus seller—transaction costs, remarkably, are more than half of the down payment that the buyer puts into the deal.21 Auto salesmen, as we shall see, have developed their own elaborate techniques to sell us more car than we really want; and also to get us to pay too much. Nobody wants to be ripped off. Yet we are, even in the most carefully considered purchases of our lives.

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Once an offer has been accepted, the deadline to arrange the necessary financing is short: the seller is waiting anxiously for verification that the buyer can come up with the money, as promised. This makes the homebuyer, who is inexperienced, and whose focus also has previously been elsewhere, especially vulnerable to rip-off. Usually, when we think of the transaction costs for the transfer of a house, we think of the real estate fees. In one sample of home purchases (involving Federal Housing Administration mortgages), the standard 6 percent was still the modal fee: paid by 29 percent of sellers. Some 47 percent did pay less; but, remarkably, 24 percent somehow managed to pay more.12 Framed as 6 percent, these fees seem fairly small: it’s like the sales tax on a bottle of Tylenol at the local CVS.

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We can’t say for sure, but note that these fees are much lower in other countries; and people there do not seem to be complaining about bad service.15 But those payments to the real estate dealer are not the end of the transaction fees. In a large sample of Federal Housing Administration loans, additional closing costs were on average approximately a further 4.4 percent of the value of the mortgage.16 Put together with the payments to the real estate agent, that means that the transaction costs, for those 10-percent-down first-time homebuyers, are about as large as all the money that they themselves are bringing to the table. Those additional fees for closing come in many different forms. The bulk of them are for two purposes: for exchange of title, and for initiating the mortgage.

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity
by Joseph E. Stiglitz
Published 28 Jan 2020

There are a few standard objections to FTTs that are now widely discredited. These typically invoke the impact on volume and market liquidity that would render prices more volatile. Yet, the marked lowering of transactions costs in recent years or even decades—acting exactly as would a reduction in an FTT—has not resulted in markedly more stable financial markets. Indeed, if anything, lower transactions costs are associated with just the opposite—for example, with the sudden, computer-driven crashes of the computerized age.36 Indeed, Tobin’s original argument (in line with a similar one put forward earlier by Keynes) was that sand in the wheels can actually help stabilize the economy.

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Others, like British Rail, far less so, to the point that governments have discussed reversing their decisions. Some of the “privatizations” were, to say the least, peculiar, like Greece selling its airports to a consortium in which public bodies in Germany composed a major part. Administration and transaction costs for publicly provided annuities (pensions) are a fraction of those in the private sector. In general, Europe’s largely public health insurance system is far more efficient than the largely private system in the United States. 8. The Markets-Will-Provide Doctrine holds that we can rely on markets to not only be efficient, but to also take care of basic individual needs—from housing to pensions, health care to education.

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* There are some who go so far as to contend that if only the government assigns property rights clearly, even problems of externalities can be addressed within the market. This is sometimes referred to as the Coase Conjecture, and is only true under unrealistic assumptions about information and transactions costs. In practice, regulation can be both fairer and more efficient, as the work of Nobel Prize–winner Eleanor Ostrom demonstrated. † Economic theory (in particular, theories of asymmetric information) has explained why the private sector often fails to provide insurance for important risks. PART I Achieving Full Employment, Rapid Growth, and Economic Stability Chapter 1 Employment, Not Austerity A meltdown in the financial sector in 2008, at first barely noticeable and then overwhelming, kicked off what became an economic and then a social crisis in Europe.

Boom and Bust: A Global History of Financial Bubbles
by William Quinn and John D. Turner
Published 5 Aug 2020

This benefited investors directly by making it harder for fraudsters to take advantage of them in financial markets, but it also benefited genuine companies, because it was easier to sell stocks and bonds to more confident investors.63 On secondary markets, transaction costs were remarkably low in the second half of the 1920s: the average one-way total transaction cost in 1929 was around 0.5 per cent, lower than any level on record before the 1980s.64 Traders also benefited from the expansion of communications technology: telephone use expanded by 70 per cent over the decade. By 1929 the New York Stock Exchange had installed 323 telephone lines connecting it to brokerage firms.65 As in previous bubbles, 127 BOOM AND BUST increasing marketability was, to an extent, self-perpetuating: higher marketability increased the volume of trades, which in turn made stocks even more liquid.

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First, as a straightforward consequence of the increase in IPOs, firms which previously would have been privately owned could now be bought and sold on the stock market. Second, transaction costs fell substantially throughout the 1990s, partly as a result of new technology making it less costly to execute trades. The average commission charged by New York Stock Exchange brokers fell from 0.9 per cent in the mid-1970s to 0.1 per cent in 2000, while the bid-ask spread – the difference between the price at which brokers will buy a stock and the price at which they will sell it – fell from 0.6 per cent in 1990 to 0.2 per cent in 2000. Taking both of these trends into account, the average New York Stock Exchange transaction cost between 1990 and 2000 fell from around 0.5 per cent to around 0.2 per cent.41 Third, internet technology made stock trading much easier.

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It had promised freedom from middlemen, but trading it without a third party was cumbersome unless the user was expert in cybersecurity. Its popularity exposed the inability of its system to process large numbers of transactions, resulting in long delays in transferring bitcoins and substantial transaction costs. The impossibility of reversing mistakes made it impractical, and its volatility made it useless as a store of value or unit of account. And its much-vaunted decentralisation meant that no one had the power to fix these considerable drawbacks. It was simply a speculative asset, and when investors began to cash out, bitcoin crashed.

Against Intellectual Monopoly
by Michele Boldrin and David K. Levine
Published 6 Jul 2008

For someone else to own our labor requires them to engage in intrusive and costly supervision of our personal behavior. Selling our labor is not tantamount to selling our house, which is why even renting it – that is, becoming an employee – is quite complicated and subject to a variety of regulations and transaction costs. The transaction costs implied by slavery are socially damaging, as they imply violation of privacy and of essential civil liberties. Hence, they are commonly rejected on economic, not just moral, grounds. Moreover, there is no economic reason to allow slavery. With well-functioning markets, renting labor is a good substitute for owning it.

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If you and I, as owners of bakeries, get together and sign a contract agreeing to limit the number of loaves of bread we will sell, P1: PDX head margin: 1/2 gutter margin: 7/8 CUUS245-10 cuus245 978 0 521 87928 6 May 8, 2008 14:11 254 Against Intellectual Monopoly not only will the courts not enforce that contract, but we will be subject to criminal prosecution as well. The same is true if the same contract is entered into by a bakery and, say, a client restaurant or even a private citizen. Second, economists recognize the important element of transaction costs in determining which contracts should be enforced. “Possession is nine-tenths of the law” is a truth in economics as well as in common parlance. Take the case of slavery. Why should people not be allowed to sign private contracts binding them to slavery? In fact economists have consistently argued against slavery – during the nineteenth century David Ricardo and John Stuart Mill engaged in a heated public debate with literary luminaries such as Charles Dickens, with the economists opposing slavery and the literary giants arguing in favor.28 The fact is that our labor cannot be separated from ourselves.

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With well-functioning markets, renting labor is a good substitute for owning it. And so we allow the rental of labor but not its permanent sale. For intellectual property, the reverse is the socially beneficial arrangement: allow the permanent sale but ban the rental. Again, this is efficient because it minimizes transaction costs. For, with intellectual property, possession belongs to the buyer and not to the seller. If you sell me a copy of an idea, I now have that idea embodied either in me or in an object I own. For you to control the idea requires intrusive and costly supervision of my private sphere – similarly, if you sell me a book, a CD, or a computer file.

Hedge Fund Market Wizards
by Jack D. Schwager
Published 24 Apr 2012

That’s right, as long as there wasn’t a bearish shift in the fundamentals as well. Do you ever run into situations where size is an issue? No, because we make sure that we do not run into the problem of size being an issue. We know our transaction costs very well, and we know how long it takes for us to get in and out of positions. We will limit our position size to assure that we can get out reasonably quickly and to keep our transaction costs small relative to the expected alpha of the trades in that market. Is there a limitation as to how large you can allow the fund to grow? Yes, we have been closed for several years. But even if you are closed, in a year like 2010, your assets can grow dramatically just from profits.

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There are two major differences between us and most other hedge funds. Most hedge funds trade fewer markets, and they trade much more actively. We trade virtually every liquid market in the world, so the amount we have committed to any single market is small relative to our total equity. We also change our positions slowly. As you know, transaction costs are a function of the amount you have to move in a given time frame. Therefore, we have considerably more capacity than managers who trade fewer markets and turn their positions over more quickly. What is your turnover rate per market, per year? It depends what you mean by turnover rate. If you are defining turnover as moving from net long to net short rather than changes in magnitude, then the average time length is about 12 to 18 months.

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Yes, periods of poor performance are difficult. I generally handle it by focusing very hard on improving the trading system. How would you summarize the trading rules you live by? Look where others don’t. Adjust position sizes to overall risk to target a particular volatility. Pay careful attention to transaction costs. Any final words? When I was in my teens, my highly insightful father was somehow able to instill in me the discipline of objectively evaluating your own progress. That lesson, more than anything else, has been critical to my success. Woodriff’s views, confirmed by his long-term success, provide four important insights about trading systems: 1.

Small Change: Why Business Won't Save the World
by Michael Edwards
Published 4 Jan 2010

According to journalist Joshua Weisberg, “Just as Microsoft wanted to avoid becoming IBM, the Gates Foundation — despite protests to the contrary — dreads turning into the Ford Foundation.”26 But this, I think, is changing. Having worked for an “old” foundation for the last nine 30 small change years, I am under no illusion about the fundamental changes that philanthropy requires. Timidity, lack of focus, poor learning, weak accountability, and high transaction costs are all real problems. But I doubt whether business and the market have all the answers to the questions we face, or even whether venture philanthropy is as innovative or effective as is claimed. “There’s nothing unusual about what we’re doing,” says Bill Gates Sr. “We may have more money to spend, but that doesn’t make us different in kind, just in size.”

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“Power always thinks it has a great soul and vast views beyond the comprehension of the weak,” said John Quincy Adams, the sixth president of the United States. But this is almost never true, leading to a long history of failed projects that have ignored the voices of those they were supposed to help. Current trends in fund-raising may contribute to this problem, reducing the transaction costs of donating to good causes but failing to engage givers and receivers in any authentic collaboration outside of writing a check or clicking a mouse on Web sites like Kiva and GlobalGiving. A huge amount of publicity, and a small amount of additional money, has been generated by Kiva and the like, and that is always welcome, but they deemphasize community involvement and skew accountability to those who already have more power, so what are they actually transforming?

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Additional tax breaks for small contributions, and for nonprofits that raise money from their members and from broad the difference that makes the difference 101 swaths of the population (not just from foundations, large donors, and fee-for-service payments), might encourage civil society groups to return to their roots and strengthen their democratic effects, in the same way that President Obama’s election campaign drew strength from large numbers of small donations, 90 percent of which were for $100 or less — but obviously directed at nonpartisan organizations and causes. Evidence suggests that this is also an effective way of linking philanthropy to civic and political activism (including higher rates of voting), rather than just writing checks and clicking on a Web site. Foundations could also reduce the transaction costs of getting support, especially for groups that are less well-resourced, by redesigning application procedures, increasing the length of grants, and finding better ways to distribute funds through multi-funder initiatives. The absence of grass-roots voices, community organizers, and labor representatives on the boards of major foundations is quite striking, populated as they are by business leaders, CEOs of large nonprofits, and the occasional academic or other public figure.

The Four Pillars of Investing: Lessons for Building a Winning Portfolio
by William J. Bernstein
Published 26 Apr 2002

For example, for the years 1992–1994, this Fund ranked in the 13th percentile of the Morningstar small-cap category, and, for the three years ending August 2001, in the 29th percentile. If survivorship bias were taken into account, it would almost certainly have had even higher rankings. Even if it is possible for active managers to successfully pick small stocks, transactional costs in this arena are much higher than with large stocks, so any gains from stock picking will be more than offset by the costs of trading small stocks. • “Active managers do better than index funds in down markets.” This is flat-out wrong—they certainly do not. For example, from January 1973 to September 1974, according to Lipper Inc., the average domestic stock fund lost 47.9%, versus a loss of 42.6% for the S&P 500.

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He tabulated the change in investor expectations as follows: The first thing that leaps out of this table is that the average investor thinks that he will best the market by about 2%. While some investors may accomplish this, it is, of course, mathematically impossible for the average investor to do so. As we’ve already discussed, the average investor must, of necessity, obtain the market return, minus expenses and transaction costs. Even the most casual observer of human nature should not be surprised by this paradox—people tend to be overconfident. Overconfidence likely has some survival advantage in a state of nature, but not in the world of finance. Consider the following: • In one study, 81% of new business owners thought that they had a good chance of succeeding, but that only 39% of their peers did

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Don’t Become a Whale Wealthy investors should realize that they are the cash cows of the investment industry and that most of the exclusive investment vehicles available to them—separate accounts, hedge funds, limited partnerships, and the like—are designed to bleed them with commissions, transactional costs, and other fees. “Whales” are eagerly courted with impressive descriptions of sophisticated research, trading, and tax strategies. Don’t be fooled. Remember that the largest investment pools in the nation—the pension funds—are unable to beat the market, so it is unlikely that the investor with $10 million or even $1 billion will be able to do so.

Six Degrees: The Science of a Connected Age
by Duncan J. Watts
Published 1 Feb 2003

Markets and Hierarchies The original text—and still one of the greatest—on industrial organization is Smith, A. The Wealth of Nations (University of Chicago Press, Chicago, 1976). A precursor to Coase’s theory of transaction costs was Frank Knight’s claim that firms exist to reduce uncertainty: Knight, F. H. Risk, Uncertainty, and Profit (London School of Economics and Political Science, London, 1933). And Ronald Coase’s original argument of transaction costs as the basis for the firm is explicated in Coase, R. The nature of the firm. Economica, n.s., 4 (November 1937). Several decades later, Coase is still trying to get his ideas accepted by mainstream economics.

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To cut a (very) long story short, the most generally agreed-upon economic theory of industrial organization essentially divides the world between hierarchies and markets. Firms, it claims, exist because markets in the real world suffer from a set of imperfections that the Nobel Prize–winning economist Ronald Coase called transaction costs. If everyone could discover, draw up, and enforce market-based contracts with everyone else (if we could all be independent contractors, for example), then the immense flexibility of market forces would effectively eliminate the need for firms entirely. But in the real world, as we have already seen in a number of contexts, information is costly to discover and hard to process.

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Although Coase himself never specified what this authority structure should look like, the consensus of subsequent economic theory is that it should be a hierarchy. Markets, meanwhile, continue to operate between firms, where the boundary between firm and market is a trade-off between the coordination cost of conducting a particular function within the firm and the transaction cost of striking an external contract. If the relationship between two firms ever becomes so specialized that one is effectively in a position to manipulate the other, the problem is assumed to be resolved by a merger or an acquisition. Hence, firms grow by the process of vertical integration: one hierarchy effectively gets absorbed into another, generating a larger, vertically integrated hierarchy.

Chokepoint Capitalism
by Rebecca Giblin and Cory Doctorow
Published 26 Sep 2022

As well as individually negotiating sound recording licenses with all major distributors, you’ll need to jump through all the hoops associated with clearing the mechanical rights for the underlying songs, in every country you wish to operate. Leading music industry lawyer Amanda Harcourt, outlining what’s involved in clearing just the composition rights to set up a streaming service in Europe, describes it as “dreary” and “unduly complex,” with high transaction costs making it especially difficult for small and medium-sized companies.18 In the early 2000s, unlicensed peer-to-peer software providers and streaming platforms abounded. Record sales plummeted and a panicked recording industry adopted a policy of scorched earth litigation, driving them out of the market.

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Spotify CEO Daniel Ek describes these licensing complexities as one of the biggest limits on the platform’s growth.19 That’s undoubtedly true, but these mazes still work to its advantage. Sure, they force Spotify to grow more slowly, but they also stop rivals from ever starting up. That makes them crucial to Spotify’s own anticompetitive flywheel: paying these high transaction costs saves it from having to actually compete. On top of that, as we saw in a previous chapter, the major record labels routinely shake down new players as a condition of granting them the licenses they need to get started, adding further to the cost of entering the market. That explains why Spotify’s only rivals of any significance are deep-pocketed tech giants—they’re the only ones with the resources to do so.

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Anyone who wants to set up a new music or video streaming platform would still need to negotiate access with the major rights holders in just the same way as now—with all the conflicts of interest caused by their market power and equity stakes in the dominant platforms. When you factor in the extra transaction costs a residual remuneration system could create, these markets might become even less attractive to new entrants. That would be truly disastrous to the broader project of dispersing control more fairly across creative ecosystems. A NEW WAY OF THINKING ABOUT STATUTORY LICENSES Rethinking the way we use statutory licenses is one way we might achieve the benefits of residual remuneration rights while putting a genuine floor under the prices paid for creative work and encouraging new entrants.

Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio
by Sal Arnuk and Joseph Saluzzi
Published 21 May 2012

It’s because their firm has a way to make money by disadvantaging your orders all day long. Our markets today are not about executing your trade and investment ideas in a way that is beneficial to you. It is about how dozens of HFT computers touch and manipulate your order so they can make money from your ideas—without you even knowing. Explicitly, your transaction costs may have come down. Your commissions have declined, and spreads have narrowed. You think you’re happy. Implicitly, you pay more for the stocks you buy or you receive less from those you sell. As a result, your assets, whether they are managed by you or by institutions, are slowly, but steadily, being whittled away.

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In a June 2000 press release, Levitt said, “As the securities markets become more global, with many stocks traded in multiple jurisdictions, the U.S. securities markets must adopt the international convention of decimal pricing to remain competitive. The overall benefits of decimal pricing are likely to be significant. Investors may benefit from lower transaction costs due to narrower spreads, and prices will be easier to understand. It is time for the U.S. securities markets to make this change.”6 No doubt Levitt was trying to tilt the playing field toward the individual investor and away from the mutual fund industry. Even though mutual funds represent the retail investor, Levitt apparently thought they had too much power.

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Many dark pools, however, are filled with predatory traders, who are electronically hiding out so that they can watch for institutional algo footprints, to take advantage of these orders. See Chapter 8, “Heart of Darkness,” for more about adverse selection issues with dark pools. Institutional investors may think they are lowering their transaction costs because their brokers are supplying algos at a commission rate of a fraction of a penny per share. The real cost of a trade, however, is what you don’t see. In our Instinet days, we referred to this as the transaction iceberg. Routers that have the goal to maximize economics due to the maker/taker model are a good reason why these implicit costs are so high.

Straight Talk on Trade: Ideas for a Sane World Economy
by Dani Rodrik
Published 8 Oct 2017

This change creates the material basis for a new ethic that will serve the interests of all those who live on this planet in a way that, despite much rhetoric, no previous ethic has done.3 And Amartya Sen: There is something of a tyranny of ideas in seeing the political divisions of states (primarily, national states) as being, in some way, fundamental, and in seeing them not only as practical constraints to be addressed, but as divisions of basic significance in ethics and political philosophy.4 Sen and Singer think of national borders as a hindrance—a practical obstacle that can and should be overcome as the world becomes more interconnected through commerce and advances in communications. Meanwhile, economists deride the nation-state because it is the source of the transaction costs that block fuller global economic integration. This is so not just because governments impose import tariffs, capital controls, visas, and other restrictions at their borders, impeding the global circulation of goods, money, and people. More fundamentally, it is because the multiplicity of sovereigns creates jurisdictional discontinuities and associated transaction costs. Differences in currencies, legal regimes, and regulatory practices are today the chief obstacles to a unified global economy.

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Differences in currencies, legal regimes, and regulatory practices are today the chief obstacles to a unified global economy. As overt trade barriers have come down, the relative importance of such transaction costs has grown. Import tariffs now constitute a tiny fraction of total trade costs. James Anderson and Eric van Wincoop estimated these costs to be a whopping 170 percent (in ad valorem terms) for advanced countries, an order of magnitude higher than import tariffs themselves.5 To an economist, this amount is equivalent to leaving $100 bills on the sidewalk. Remove the jurisdictional discontinuities, the argument goes, and the world economy would reap large gains from trade, similar to the multilateral tariff liberalization experienced over the postwar period.

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Veer too much in the direction of the state, as in the 1930s, and we would forfeit the benefits of international commerce. From the 1980s on, the ideological balance took a decisive shift in favor of markets and against governments. The result internationally was an all-out push for what I have called “hyperglobalization”13—the attempt to eliminate all transaction costs that hinder trade and capital flows. The World Trade Organization was the crowning achievement of this effort in the trade arena. Trade rules were now extended to services, agriculture, subsidies, intellectual property rights, sanitary and phytosanitary standards, and other types of what were previously considered to be domestic policies.

Trend Following: How Great Traders Make Millions in Up or Down Markets
by Michael W. Covel
Published 19 Mar 2007

Trading gamma rays, at around one cycle per 10–20 seconds, requires a lot of expensive instrumentation, whereas you can trade visible light ‘by eye.’ I don’t know of even one short-term trader, however, who claims to show a profit at these frequencies. In general, higher-frequency trading succumbs to declining profit potential against nondeclining transaction costs. You might consider trading a chart with a long enough time scale that transaction costs are a minor factor— something like a daily price chart, going back a year or two.” 375 C He’s barely rated a mention in the nation’s most important newspapers, but pay close attention to what Institutional Investor wrote about him… “Jim Simons [president of Renaissance Technologies and operator of the Medallion Fund] may very well be the best money manager on earth.”

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The real question is: Do they make more money than they would investing in a blind index fund that mimics the performance of the market as a whole? Most academic financial experts believe in some form of the random-walk theory and consider technical analysis almost indistinguishable from a pseudoscience whose predictions are either worthless or, at best, so barely discernibly better than chance as to be unexploitable because of transaction costs.”12 Markets aren’t chaotic, just as the seasons follow a series of predictable trends, so does price action. Stocks are like everything else in the world: They move in trends, and trends tend to persist. Jonathan Hoenig Portfolio Manager, Capitalistpig Hedge Fund LLC This is the view of technical analysis held by most people who know of technical analysis—that it is some form of mysterious chart reading technique, such as astrology.

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Just around the recent high in the Live Cattle market, the fundamental reasons included Chinese Buying, Mad Cow Disease, and The Atkins’ Diet.”5 Trend followers control what they know they can control. They know they can choose a certain level of risk. They know they can measure volatility. They understand the transaction costs associated with trading. However, there is still plenty they know they do not know, so in the face of uncertainty, what do they do? They swing the bat. Their ability to decide is core to their trading philosophy—that is their swinging the bat. Their decision-making skills might seem not worthy of much discussion, but the philosophical framework of their decision making is critical to understanding how they trade successfully.

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest
by Andrew W. Lo and Stephen R. Foerster
Published 16 Aug 2021

The first message is the importance of the market portfolio as the one and only important risky asset. “The three principles in real estate are location, location, and location; in some ways in investments it’s diversify, diversify, diversify.”67 Investing in the market portfolio ensures the ultimate amount of diversification. The second message is to keep transaction costs low. “Regarding costs, quite frankly it’s sort of like the Lake Wobegon68 thesis: The average investor cannot beat the average investor before costs; and if you are trying to find hot stocks or the best new growth fund manager, or listening to Jim Cramer69 … you are going to end up bearing extra risk, on average not getting any reward for it, and spending a lot of money in the bargain.”70 The third message is about the uncertain compensation for assuming more risk.

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And I must say, I must be a wonderful leader because I have yet to find my first follower.”70 The Cost Matters Hypothesis In 2003 in a CFA Magazine article,71 Bogle coined the phrase “cost matters hypothesis” (CMH), a play on words on the more famous efficient market hypothesis (EMH). In his article, he poked gentle fun at Samuelson’s original grand language about the EMH when he wrote “CMH posits a conclusion that is both trivially obvious and remarkably sweeping: The mathematical expectation of the speculator is a loss equal to the amount of transaction costs incurred.” In other words, “Whether markets are efficient or inefficient, investors as a group must fall short of the market return by the amount of the costs they incur.” As Bogle described the two hypotheses, “The one thing everybody knows—academics, brokers, investors—is the efficient markets hypothesis is often right, but it is not always right.

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In addition to turnover costs in mutual funds, he also cautions against turnover in one’s personal portfolio. “Trading is your enemy, because it’s based on emotion.”76 More recently, Bogle quantified the “all-in costs” of actively managed funds compared to Vanguard’s index funds.77 Actively managed funds, according to the calculations, had an average expense ratio of 1.12 percent, transaction costs of 0.50 percent, a “cash drag” (since funds typically hold cash reserves) of 0.15 percent, and sales charges and fees of 0.50 percent, totaling 2.27 percent. Vanguard’s index funds, however, only had an expense ratio of 0.06 percent. Furthermore, actively managed funds had a tax inefficiency differential (resulting from realized capital gains that are taxed, compared with untaxed unrealized gains) of 0.45 percent compared to the index fund, resulting in a 2.66 percent differential.

The Fourth Industrial Revolution
by Klaus Schwab
Published 11 Jan 2016

In the investment business, new “robo-advisory” algorithms and their corresponding apps provide advisory services and portfolio tools at a fraction of the old transaction cost – 0.5% instead of the traditional 2%, thereby threatening a whole segment of the current financial industry. The industry is also aware that blockchain will soon revolutionize the way it operates because its possible applications in finance have the opportunity to reduce settlement and transaction costs by up to $20 billion and transform the way the industry works. The shared database technology can streamline such varied activities as the storage of clients’ accounts, cross-border payments, and the clearing and settling of trades, as well as products and services that do not exist yet, such as smart futures contracts that self-execute without a trader (e.g. a credit derivative that pays out automatically when a country or company defaults).

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Shift 17: The Sharing Economy The tipping point: Globally more trips/journeys via car sharing than in private cars By 2025: 67% of respondents expected this tipping point to have occurred The common understanding of this phenomenon is the usually technology-enabled ability for entities (individuals or organizations) to share the use of a physical good/asset, or share/provide a service, at a level that was not nearly as efficient or perhaps even possible before. This sharing of goods or services is commonly possible through online marketplaces, mobile apps/location services or other technology-enabled platforms. These have reduced the transaction costs and friction in the system to a point where it is an economic gain for all involved, divided in much finer increments. Well-known examples of the sharing economy exist in the transportation sector. Zipcar provides one method for people to share use of a vehicle for shorter periods of time and more reasonably than traditional rental car companies.

Expected Returns: An Investor's Guide to Harvesting Market Rewards
by Antti Ilmanen
Published 4 Apr 2011

Table 3.1 shows that, on paper, momentum strategies fared even better than value, and short-term reversal strategies did even better. It is no coincidence that we find the highest gross returns in small-cap stocks and in high-turnover strategies such as short-term reversal and medium-term momentum. Recall that the numbers here exclude transaction costs, which would be substantial for these strategies. Incorporating trading costs would eat seriously into these paper gains. Ghayur et al. (2010) estimate that—net of costs—value and momentum strategies earned similar long-run returns. Others estimate that the double-digit gross returns of the short-term reversal strategy would have been negative after costs.

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I will not derive it formally here but show one traditional set of assumptions (that can later be relaxed):• one-period world (this implies a constant investment opportunity set and constant risk premia over time); • access to unlimited riskless borrowing/lending and tradable risky assets; • no taxes or transaction costs (i.e., frictionless markets); • investors are rational mean variance optimizers (only caring about means and covariances can be motivated by normally distributed asset returns or by a quadratic utility function); and • investors have homogeneous expectations (all agree about asset means and covariances; all investors see the same picture).

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To compound the arbitrageurs’ problems when they are facing losses, creditors may make margin calls if leverage is employed, stop-loss rules or risk managers can require position reductions, and vanishing liquidity may reinforce the downward spiral. All these considerations push arbitrageurs toward short time horizons and constrain their position sizes. There are also transaction costs and model uncertainty to consider. Trading costs on leveraged strategies can be significant. Barring remarkable hubris, no arbitrageur can be completely confident that his model or view is correct. One important implication for long-horizon institutional investors is that when they delegate asset management, external managers may not inherit the ultimate investor’s long horizon.

The Empathic Civilization: The Race to Global Consciousness in a World in Crisis
by Jeremy Rifkin
Published 31 Dec 2009

In pure networks, providers and users replace sellers and buyers, and access to the use of goods in extended time segments substitutes for the physical exchange of the goods. Transaction costs and margins also come into play in the shift from market-exchange models to network models. In a market exchange economy, sellers make profit on their margins, and margins are dependent on transaction costs. But in most industries, margins are continuing to go down, mainly because of the introduction of new information, communications, and production technologies and new energy-saving technologies, as well as new methods of organization that are reducing their transaction costs. When transaction costs approach zero, margins virtually disappear, and market exchanges are no longer viable ways of conducting business.

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From there it is shipped to a wholesaler and then to a retailer, where the customer pays for the product. At each stage of the process, the seller is marking up the cost to the buyer to reflect his or her transaction costs. Now an increasing number of publishers—especially of textbooks and research books, which require continuous updating—are bypassing all of the intermediate steps in publishing a physical book and the transaction costs involved at each stage of the process. While Encyclopaedia Britannica still charges $1,395 for its thirty-two-volume set of books, the company sells far fewer physical books. Instead, the company puts the book contents on the World Wide Web, where information can be updated and accessed continuously.

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Users now pay a subscription fee to access the information over an extended period of time. Encyclopaedia Britannica eliminates virtually all of the remaining transaction costs of getting the information to its subscribers. The company has made the transition from selling a physical product to a buyer to providing the user access to a service over time. How does a physical book compete with an online book in the future when the latter has reduced the transaction costs so dramatically? The same process is at work across many industries. Buying an automobile, for most people, represents their baptism into an adult world of property relationships.

MONEY Master the Game: 7 Simple Steps to Financial Freedom
by Tony Robbins
Published 18 Nov 2014

Many of the larger funds have realized that a 1% ballpark expense ratio is where they want to come in so that investors don’t flinch and brokers have a good story to sell—I mean, tell. 2. Transaction Costs. Transaction costs are a broad, sweeping category and can be broken down further into categories such as brokerage commissions, market impact costs (the cost of moving the market as mutual funds trade massive market-moving positions), and spread costs (the difference between the bid-and-ask or the buy-and-sell price of a stock). A 2006 study by business school professors Roger Edelen, Richard Evans, and Gregory Kadlec found that US stock mutual funds average 1.44% in transaction costs per year. This means that these transaction costs are perhaps the most expensive component of owning a mutual fund, but the industry has deemed it too tough to quantify, and thus it goes unreported in the brochures. 3.

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By becoming an insider, you can put a stop to this thievery today. Fees this high are the equivalent of climbing Everest in flip-flops and a tank top. You were dead before you got started. ADD ’EM UP Nontaxable Account Taxable Account Expense ratio, 0.90% Expense ratio, 0.90% Transaction costs, 1.44% Transaction costs, 1.44% Cash drag, 0.83% Cash drag, 0.83% — Tax cost, 1.00% Total costs, 3.17% Total costs, 4.17% “The Real Cost of Owning a Mutual Fund,” Forbes, April 4, 2011 ESCAPE To escape the fee factories, you must lower your total annual fees and associated investment costs to 1.25% or less, on average.

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That doesn’t sound like such a bad deal until you realize that you just bought the most expensive form of life insurance available. Earlier, in chapter 2.2, we outlined the laundry list of fees you will pay to own an actively managed mutual fund and how these fees can dramatically drag down your performance. To recap, the total of all the fees (expense ratio, transaction costs, soft-dollar costs, cash drag, sales charges) will average approximately 3.1% per year, according to Forbes (if held in a tax-deferred account such as a 401[k], IRA, or variable annuity). That’s $3,100 per year for every $100,000. But we ain’t done yet. When you buy a variable annuity, not only are you paying the fees listed above but also you have additional fees paid to the insurance company.

The Great Divide: Unequal Societies and What We Can Do About Them
by Joseph E. Stiglitz
Published 15 Mar 2015

Home-equity loans, too, encouraged Americans to borrow against the equity in their homes, increasing the (total) loan-to-value ratios and thereby making the mortgages riskier. The mortgage originators didn’t focus on risk, but rather on transactions costs. But they weren’t trying to minimize transactions costs; they were trying to maximize them—devising ways that they could increase them, and thereby their revenues. Short-term loans that had to be refinanced—and left open the risk of not being able to be refinanced—were particularly useful in this respect. The transactions costs generated by writing mortgages provided a strong incentive to prey on innocent and inexperienced borrowers—for instance, by encouraging more short-term lending and borrowing, entailing repeated loan restructurings, which helped generate high transactions costs.

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Let’s remember why these programs were started: The private sector left most elderly bereft of support, the market for annuities essentially didn’t exist, and the elderly couldn’t get health insurance. Even today, the private sector doesn’t provide the kind of security that Social Security provides—including protection against market volatility and inflation. And transaction costs of the Social Security Administration are markedly lower than those in the private sector—not a surprise, since their objective is to maximize these costs. Transaction costs are their profits. Second, many of those receiving benefits are our young—providing them education and healthcare (even if they or their parents don’t pay taxes) are investments in our future. America is the country with the least equality of opportunity of any of the advanced countries for which there is data.

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The transactions costs generated by writing mortgages provided a strong incentive to prey on innocent and inexperienced borrowers—for instance, by encouraging more short-term lending and borrowing, entailing repeated loan restructurings, which helped generate high transactions costs. The regulators, too, were accomplices in crime. They should have recognized the inherent risks in the new products; they should have done their own risk assessments, rather than relying on self-regulation or on the credit-rating agencies. They should have realized the risks associated with high leverage, with over-the-counter derivatives, and especially the risks that were compounding as these were not netted out. The regulators deceived themselves into thinking that if only they ensured that each bank managed its own risk (which they had every incentive, presumably, to do), then the system would work.

Trading at the Speed of Light: How Ultrafast Algorithms Are Transforming Financial Markets
by Donald MacKenzie
Published 24 May 2021

In the case of US share trading, for example, competition among trading venues increased, fees fell considerably, and the reduction of the standard minimum increment of price from an eighth of dollar to a single cent made it possible for the new automated market-making firms to greatly reduce the previous generously wide spreads between the highest prices at which market-makers would buy shares and the lowest prices at which they would sell them. The changes—which took place in the late 1990s and early 2000s—almost certainly cut transaction costs; see, for example, the time series of estimated costs in Angel, Harris, and Spatt (2013: 23). What is much less clear, though, is the extent to which transaction costs have continued to fall. For example, in Angel, Harris, and Spatt’s data there is no consistent decline in costs after 2006. Perhaps, as Budish and his colleagues suggest, the increasing costs of HFT’s speed races have begun at least partially to cancel out cost savings resulting from continuing broader improvements in information technology (Budish et al. 2015: 1555 and 1593–4).

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A useful 2016 review by Albert Menkveld of the evolving literature (to which readers can turn if they wish to explore this literature in more detail) finds that “HFT market-making reduces transaction cost[s],” but also suggests that “HFTs are able to predict” and profit from the flow of what are often called the child orders that are generated by the execution algorithms that break up large orders from institutional investors into small parts. To the extent that this is so, this profit making will increase these investors’ transaction costs (Menkveld 2016: 19 and 11–12). Three particular contributions to the financial-economics literature on HFT especially influenced my research.

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A major early goal of this literature was to identify the effects on markets of the increased prevalence, especially in the US, of HFT and other forms of algorithmic trading. See, for example, the 2012 review (primarily based on this early literature) by the UK’s Foresight Programme, which painted a broadly positive picture of what it referred to as computer-based trading as having reduced transaction costs and improved efficiency and liquidity—albeit with what the review cautioned was perhaps “greater potential for periodic illiquidity”—and with “no direct evidence” that HFT increased market volatility (UK Government Office for Science 2012: 11–12). Some of the underlying studies (such as the widely cited Brogaard 2010) indeed suggested that the presence of HFT can actually reduce volatility.2 More recent research on algorithmic trading in financial economics both differentiates HFT more clearly from other forms of algorithmic trading and focuses more strongly on the central divide within HFT between market-making and liquidity-taking strategies.

Portfolios of the poor: how the world's poor live on $2 a day
by Daryl Collins , Jonathan Morduch and Stuart Rutherford
Published 15 Jan 2009

Economic theory places price at the absolute center of financial decision-making. The cost of financial services is important for the poor, too, but it is more difficult to understand how these services are priced. Modern rich-country providers have made huge strides in reducing “transaction costs”—the costs of using an instrument other than the financial cost of the funds used. But transaction costs for poor people usually remain high. They may include the time taken to stand in a long queue, the emotional cost of having to deal with unhelpful, stone-faced tellers, the cost of the bus ride to reach the bank, or the sheer number of lenders who must be persuaded to part with their money before a usefully large sum can be amassed.

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India, for example, had 35 micro health insurance schemes running in 2006, under this partner-agent model, with nearly 900,000 policyholders.23 The diaries show us why microfinance institutions are good at the retail end of this partnership. Their regular contact with clients in their own slums and villages allows them to break up the loan repayments into more manageable pieces. The installments then become small and frequent enough to suit the cash flows of poor households (while not driving transaction costs too high). The same principles apply to collecting insurance premiums. Given all of the other elements of designing a workable insurance product, it is easy to overlook the important role of a convenient payment plan. This chapter has demonstrated the importance of payment systems for the poor households we came to know.

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While this structure can perhaps be viewed as a kind of distributive justice (profits are made from those with, rather than those without, the money available), it is one of the reasons why moneylenders remain restricted in scale and limited to poor and 152 THE PRICE OF MONEY high-risk markets: since they do not reward “good” clients who have capital, they are likely to attract “bad” and cash-strapped clients disproportionately. Third, most informal interest-bearing loans are troublesome to arrange, in spite of their price. So there is an additional transaction cost that is not reliably priced for every borrower or perhaps even for the same borrower over time. Poor households care about price, but they also care about convenience and flexibility and are willing to pay for those features. They are also happy to pay for reliability of the sort that Jyothi provides, and they are agreeably surprised when they find reliability combined with a relatively low price, as they do, increasingly, at microfinance institutions.

Bourgeois Dignity: Why Economics Can't Explain the Modern World
by Deirdre N. McCloskey
Published 15 Nov 2011

In future days they will be more and more numerous. The result can be checked against other measures. Douglass North and John Wallis reckoned that 50 percent of American national income was Coasean transaction costs, the costs of persuasion being part of these. Expenditures to negotiate and enforce contracts—the Wallis-North definition of transaction costs—rose from a quarter of national income in 1870 to over half in 1970.10 Their measure is not precisely the one wanted here. Their transactions costs also include, for example, “protective services,” such as police and prisons, some of whose income (I am claiming three-quarters of it remaining after sweet talk) is “talk” only in an inappropriately extended and sometimes physically violent sense.

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It was not the induced thriftiness in the individual businessperson that mattered (contrary again to Marx and Weber), but the admiration, or at any rate toleration, by the rest of the society for a bourgeois life of creating economic value. One “creates” economic value by buying low and selling high, that is, by moving coal and ideas from a place in which they are not highly valued to a place in which they are, if transport and transaction costs do not offset the gross profit. Weber’s error was to suppose that “accumulate, accumulate” enriched the modern world when what did so was a new and favorable rhetoric regarding business, which led to betterments, which led to profitable investment out of savings easily assembled. Weber’s secundum mobile of “worldly asceticism” leading to high rates of capital accumulation was not what made the Great Enrichment.

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One way of backing the estimates from the detailed occupational categories would be to do in-depth interviews, probing in each job for sweet talk—as against mere information or coercion or physical activity—by riding along in squad cars and listening and watching. The managers likewise could be shadowed. It is what Ronald Coase, in economics, did during the 1930s to discover transaction costs and what Robyn Penrose, in fiction, did during the 1980s to discover managerial teaching. Coercion, as against persuasion, is in most rich places less prevalent now, in some ways, than it was in the same places in the eighteenth century. True, coercion in taxation is much higher—try persuading the IRS to make a special exception for you.

Principles of Corporate Finance
by Richard A. Brealey , Stewart C. Myers and Franklin Allen
Published 15 Feb 2014

If the cash were invested in securities, it would earn interest. On the other hand, you can’t use those securities to pay the firm’s bills. If you had to sell them every time you needed to pay a bill, you could incur heavy transactions costs. The financial manager must trade off the cost of keeping an inventory of cash (the lost interest) against the benefits (the saving on transactions costs). For small firms this trade-off can be important. But for very large firms the transactions costs of buying and selling securities become trivial compared with the opportunity cost of holding idle cash balances. Suppose that the interest rate is 5% a year, or roughly 5/365 = .0137% per day.

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Unfortunately, the cost of capital is not easily measured and is a natural focus for argument in regulatory hearings. But when a utility buys electric power, the cost of capital is rolled into the contract price and treated as an operating cost. In this case the pass-through to the customer may be less controversial. 61Total transaction costs for infrastructure projects average 3% to 5% of the amount invested. See M. Klein, J. So, and B. Shin, “Transaction Costs in Private Infrastructure Projects—Are They Too High?” The World Bank Group, October 1996. 62Because the project is an independent company, it cannot drag down the parent company if something does go badly wrong with the project. Part 7 Debt Financing Leasing Most of us occasionally rent a car, bicycle, or boat.

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If A and G were shareholders in the same enterprise, A would be happy for the firm to invest, while G would be clamoring for higher current dividends. No one believes unreservedly that capital markets function perfectly. Later in this book we discuss several cases in which differences in taxation, transaction costs, and other imperfections must be taken into account in financial decision making. However, we also discuss research indicating that, in general, capital markets function fairly well. In this case maximizing shareholder value is a sensible corporate objective. But for now, having glimpsed the problems of imperfect markets, we shall, like an economist in a shipwreck, simply assume our life jacket and swim safely to shore.

The Limits of the Market: The Pendulum Between Government and Market
by Paul de Grauwe and Anna Asbury
Published 12 Mar 2017

Why do we see so many cooperative relationships within companies? One answer is offered by British economist Ronald Coase, who won the Nobel Prize in Economics in . His answer was as follows. Market transactions lead to transaction costs. The buyers and sellers have to find and trust one another. Contracts must be drawn up and the quality of goods and services evaluated. If contractual terms are not met, action must be taken. All this creates transaction costs. A partnership within one and the same company can reduce or even eliminate a number of these costs.11 Thus companies are formed which arrange a number of transactions internally.

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.  South Korea liberalization and material prosperity  real GDP per capita , f Soviet Union see Russia Spain eurozone and weakening of government – eurozone government bond spreads, ten-year f global financial crisis ()  government debt f,  gross domestic product (GDP) per capita f interest rate on ten-year government bonds f labour costs, gross hourly f liquidity crisis  Spartacus movement – specialization – stagnation ,  structural problems in currency union  supply and demand , f Sweden employer contribution and labour costs   INDEX labour costs, gross hourly f productivity, labour costs and public sector  total income, share of received by top % f, f system I intuitive, emotional behaviour –, b, , –b,  system II individuals’ rational, calculating capacities –, b, , b,  taxation  and environment , – external limits of governments  increase  progressive wealth tax  see also income tax technological optimism ,  technological pessimism  technological progress , –, – tipping points , ,  Tocqueville, A. de  too big to fail banks  top-down control mechanisms  top managers/CEOs and winner-takesall – transaction costs  trickle-down theory  Tuymans, L.  ultimatum game  unemployment , , , , – United Kingdom ,  Bank of England , , ,  capital, share of belonging to top % and top % t debt issuance in own currency  government control over currency  government debt f,  gross domestic product (GDP) in constant prices , f gross domestic product (GDP) per capita f income taxes f, , f,  interest rate on ten-year government bonds f labour costs, gross hourly f social security spending as percentage of government spending f total income received by top % f, f United States , ,  capital, share of belonging to top % and top % t consumption per capita  Federal Reserve (Fed) , , , n gross domestic product (GDP) in constant prices , f income, share of total received by top % f, f income taxes f, , f,  New Deal  productivity, annual growth in f,  social security spending as percentage of government spending f taxation policies capping top incomes  value added tax (VAT) –,  virtuous circle  wages –, ,  wealth inequalities ,  well-being ,  collective , , , ,  consumer ,  economic  individual , , ,  Western Europe ,  gross domestic product (GDP) per capita, average annual economic growth of , f, f,  growth  growth production per capita since industrial revolution , f labour costs, high and prosperity  social security  willingness to pay , , b, b winner-takes-all phenomenon – World Bank  World Economic Forum – world inequality, development of –b  

Investing Demystified: How to Invest Without Speculation and Sleepless Nights
by Lars Kroijer
Published 5 Sep 2013

The first thing to note is that over the past century we would have done far better investing in US government bonds than in residential property. It is of course easy to criticise analysis like this for not correctly incorporating rental income (or the ownership benefit of not paying rent), maintenance and improvement costs, transaction costs, insurance costs, and transaction and on-going tax. Or not being international. I would agree that it is hard to claim that these things are an overly exact science, but this index questions the premise that property investments are necessarily a huge profit centre. Figure 9.1 Inflation adjusted Case-Shiller House Price index versus short-term US government debt However, we can also see why property was such a hot investment in the years before the sub-prime crisis (see Figure 9.2).

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While there are certain indices that suggest that art has been a great investment,8 they suffer from a few shortcomings. For one, the studies often focus on segments of the art world that have been successful, suggesting selection bias, and are typically not easily replicable, so gaining exposure to them is not feasible. Also, many indices and the past performance of collectibles ignore the large transactional costs, insurance and storage costs. When you include all of these costs the return from collectibles is far less obvious, and you should not include them in the financial part of your portfolio. There are, of course, non-economic reasons for buying collectibles. On top of the hope for a financial return, investors in a painting could derive great value from looking at it or reading a first edition book.

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For most people it is worth paying the cheap product providers’ small costs so that everything is taken care of for you. Trading is expensive and pulling the trigger can be nerve wracking Trading is expensive and one of the main reasons many investors underperform, but by changing allocations when you are trading securities you will be able to save money on transaction costs. Some product providers offer combined products with fixed weightings between bonds and equities. While they have the same issues outlined here they also have the huge advantage of large natural flows from customers and have lower costs as a result. If you find a product that suits your profile this added advantage is worth noting.

Working in Public: The Making and Maintenance of Open Source Software
by Nadia Eghbal
Published 3 Aug 2020

(New York: Anchor Books, 1990), 106. 360 Tim Ferriss, “Why I’m Stopping the Fan-Supported Podcast Experiment,” Tim Ferriss’s 4-Hour Workweek and Lifestyle Design Blog, July 11, 2019, https://tim.blog/2019/07/11/why-im-stopping-the-fan-supported-podcast-experiment/. 361 Taylor Wofford, “Fuck You and Die: An Oral History of Something Awful,” Vice, April 5, 2017, https://www.vice.com/amp/en_us/article/nzg4yw/fuck-you-and-die-an-oral-history-of-something-awful. 362 Nick Szabo, “Micropayments and Mental Transaction Costs,” Nakamoto Institute, n.d., https://nakamotoinstitute.org/static/docs/micropayments-and-mental-transaction-costs.pdf. 363 Tim Carmody, “Statement of Purpose,” Amazon Chronicles, January 27, 2019, https://amazonchronicles.substack.com/p/statement-of-purpose. 364 Tim Carmody, “Unlocking the Commons: Or, the Psychoeconomics of Patronage,” Kottke.org, December 15, 2017, https://kottke.org/17/12/unlocking-the-commons-or-the-psychoeconomics-of-patronage 365 Matthew Butterick, “To Pay or Not to Pay: How I Profited from Gentle Shame,” Butterick’s Practical Typography, August 5, 2016, https://practicaltypography.com/to-pay-or-not-to-pay.html. 366 Damon Kiesow, “Journalism’s Dunbar Number: Audience Scales, Community Does Not,” Local News Lab, March 4, 2019, https://localnewslab.org/2019/03/04/journalisms-dunbar-number-audience-scales-community-does-not/. 367 Alex Kantrowitz, “Paid Email Newsletters Are Proving Themselves as a Meaningful Revenue Generator for Writers,” BuzzFeed, April 29, 2019, https://www.buzzfeed.com/alexkantrowitz/writers-have-been-trying-to-support-online-themselves-for 368 Kevin Draper, “Why The Athletic Wants to Pillage Newspapers,” The New York Times, October 23, 2017, https://www.nytimes.com/2017/10/23/sports/the-athletic-newspapers.html. 369 David Bauder and David A.

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Once companies started using open source for commercial purposes, and people realized that these “hobby projects” were able to compete with the software made by paid employees, scholars had to come up with a new framework to explain this behavior. Previously, our understanding of how and why people make things was modeled after Ronald Coase’s theory of the firm, which proposes that firms (i.e., companies, organizations, and other institutions with centralized resources) naturally emerge as a way to reduce transaction costs in the market.109 Coase would’ve told us that only companies make software because, from a coordination standpoint, managing the resources required to pull off such a feat would be most efficiently handled within the same organization. By contrast, the open source projects attracting attention in the late 1990s and early 2000s—the Linux kernel, which powers operating systems; Apache, an HTTP server; FreeBSD, an operating system; GNOME, a desktop environment—were produced by distributed groups of developers that transcended employer affiliations.

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By contrast, the open source projects attracting attention in the late 1990s and early 2000s—the Linux kernel, which powers operating systems; Apache, an HTTP server; FreeBSD, an operating system; GNOME, a desktop environment—were produced by distributed groups of developers that transcended employer affiliations. Coase’s theory of the firm fails to explain why these developers would find one another and make software together, despite a lack of both formal contracts and financial compensation. In terms of transaction costs, collaborating on open source software with unaffiliated individuals should be too “expensive,” compared to writing software with one’s coworkers. But a few people noticed that these open source projects operated like communities, so they instead explained the projects’ behavior by describing them as a commons, meaning a resource that is owned, used, and managed by a community.

Asset and Risk Management: Risk Oriented Finance
by Louis Esch , Robert Kieffer and Thierry Lopez
Published 28 Nov 2005

Even if this condition is satisfied, the proportions Xj will be dependent on t through the prices. If therefore one wishes to consider a portfolio that has identical proportions at two given different moments, the nj must be altered in consequence. This is very difficult to imagine in practice, because of transaction costs and other factors, and we will not take account of it in future. Instead, our reasoning shall be followed as though the proportions remained unchanged. As for an isolated security, when one considers a return estimated on the basis of several returns relating to the same duration but from different periods, one uses the arithmetical mean instead of the geometric mean, which gives: = 1  RP ,t 12 t=1 = 1  Xj Rj t 12 t=1 j =1 12 RP ,1 month N 12 = N   Xj j =1 1  Rj t 12 t=1 12  Therefore, according to what was stated above:4 RP ,1 month = N  Xj Rj,1 month .

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The economic conditions that define an efficient market are: • The economic agents involved on the market behave rationally; they use the available information coherently and aim to maximise the expected utility of their wealth. • The information is available simultaneously to all investors and the reaction of the investors to the information is instantaneous. • The information is available free of charge. • There are no transaction costs or taxes on the market. • The market in question is completely liquid. It is obvious that these conditions can never be all strictly satisfied in a real market. This therefore raises the question of knowing whether the differences are significant and whether they will have the effect of invalidating the efficiency hypothesis.

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Their origin may be: • Speculative bubbles, in which the rate of a security differs significantly and for a long time from its intrinsic value before eventually coming back to its intrinsic value, without movements of the market economic variables as an explanation for the difference. • Irrational behaviour by certain investors. These various elements, although removed from the efficiency hypothesis, do not, however, bring it into question. In addition, the profit to investors wishing to benefit from them will frequently be lost in transaction costs. 3.1.2.6 Conclusion We quote P. Gillet in conclusion of this analysis. Financial market efficiency appears to be all of the following: an intellectual abstraction, a myth and an objective. The intellectual abstraction. Revealed by researchers, the theory of financial market efficiency calls into question a number of practices currently used by the financial market professionals, such as technical analysis. (. . .)

Irrational Exuberance: With a New Preface by the Author
by Robert J. Shiller
Published 15 Feb 2000

It is not clear whether the transaction tax would indeed encourage long-term investors over short-term speculators. We should recognize that some speculative trading is done infrequently, while some trading based on information about fundamentals is done frequently. Real estate markets, which are subject to much higher transaction costs than stock markets, nevertheless seem to be vulnerable to speculative bubbles and crashes. Moreover, it has been found that countries that impose higher transaction costs do not have lower stock market volatility.26 On balance, although I feel that there might be some merit in Tobin-style transaction taxes for 228 A C ALL TO AC TION reducing speculative volatility, I have not found the case strong enough to recommend any such action.

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Another piece of evidence that has been offered in support of the efficient markets theory is that professional investors, institutional money managers, or securities analysts do not seem to have any reliable ability to outperform the market as a whole, and indeed they often seem to underperform the market once account is taken of transactions costs and management fees. This result may seem puzzling, since one would think that professional investors are more educated about investing, more systematic than individual E F F ICIE N T MARKE TS , RANDOM WALKS, AND BUBB LES 175 investors. But perhaps the result is not as puzzling as it at first seems.

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See Womack, “Brokerage Analysts’ Recommendations”; and Brad Barber, Reuven Lehavy, Maureen McNichols, and Brett Trueman, “Can 258 NOTES TO PAGES 175–181 Investors Profit from the Prophets? Consensus Analyst Recommendations and Stock Returns,” unpublished paper, University of California at Davis, 1998. The latter argue that, despite transaction costs, “consensus recommendations remain valuable to investors who are otherwise considering buying or selling” (p. 25). 5. Judith Chevalier and Glenn Ellison, “Are Some Mutual Fund Managers Better Than Others? Cross-Sectional Patterns in Behavior and Performance,” Journal of Finance, 54(3) (1999): 875–99. 6.

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile
by Alexander Davidson
Published 1 Apr 2008

On exchange fees, Furse noted that the average cost of buying a UK equity is around £6.50 per £1,000 traded, of which the exchange fee is 4 pence, or little more than half of 1 per cent of the total transaction cost. Clearing and settlement come to 2 pence, commissions an average of 85 pence, market impact approximately 60 pence and, unique to the UK, stamp duty is £5. Even if investors avoided stamp duty by trading contracts for difference (rather than the cash equities), the fee charged by the LSE was likely to be less than 3 per cent of total transaction cost, Furse told the convention. ‘So even if were to offer our services for free this would only reduce the cost of trading to the investor by 4 pence per thousand pounds traded.’

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The beta measures the sensitivity of a share price to movements in the general stock market. The CAPM stipulates that the market does not reward investors for taking unsystematic (company-specific) risk because it can be eliminated through diversification. The model is theoretical and is based on various assumptions, including no taxes or transaction costs. Share buyers require a higher return than debt providers to compensate for the risk, and for the fact that the company must give priority to debt repayment over paying dividends. The cost of debt, the other part of WACC, is more transparent. It is commonly estimated as the redemption yield on the company’s bonds, and interest rates on loans and overdrafts.

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These are factors used in the Black–Scholes model, which was developed in 1973 and is widely used in financial markets for valuing options. Other factors used in the model are volatility, the underlying stock price, and the risk-free rate of return. But Black–Scholes makes key assumptions that are not always tenable, including a constant risk-free interest rate, continuous trading and no transaction costs. Equity options tend to come in the standard contract size of 1,000 shares. To find the cost of an option contract, multiply the option price by 1,000. If a call option is priced at 70p, it will cost £700 per contract. The contract size may _______________________________ DERIVATIVES FOR RETAIL INVESTORS 71  vary if the underlying company is involved in a capital restructuring such as a rights issue.

A Pelican Introduction Economics: A User's Guide
by Ha-Joon Chang
Published 26 May 2014

However, by emphasizing the adjective new, this group clearly dissociated itself from the original Institutionalist school – now called the Old Institutional Economics (OIE). The main point of departure from the OIE was that the NIE analysed how institutions emerge out of deliberate choices by individuals.24 The key concept in the NIE is that of transaction cost. In Neoclassical economics, the only cost is the cost of production (costs of material, wages, etc.). However, the NIE emphasizes that there are also costs of organizing our economic activities. Some define transaction cost rather narrowly as the cost involved in market exchange itself – finding out about alternative products (‘shopping around’), spending time and money actually doing the shopping and sometimes bargaining for better prices.

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Others define it more broadly as the ‘cost of running the economic system’, which includes the cost of conducting market exchange but also the cost involved in enforcing the contract after the exchange is over. So, in this broader definition, transaction cost includes the cost of policing against thefts, running the court system and even monitoring workers in factories so that they put in the maximum possible amount of labour service specified in their contract. Institutions are not just constraints: contributions and limitations of the New Institutional Economics Deploying the concept of transaction cost, the NIE has developed a wide range of interesting theories and case studies. One prominent example is the question as to why, in a supposedly ‘market’ economy, so many economic activities are conducted within firms.

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Social institutions and the structure they create were everything; individuals were seen as being totally determined by the society they live in – ‘there is no such thing as an individual’, infamously declared Clarence Ayres, who dominated the (declining) Institutionalist school in the US in the early post-Second World War period. Transaction costs and institutions: the rise of the New Institutional Economics From the 1980s, a group of economists with Neoclassical and Austrian leanings – led by Douglass North, Ronald Coase and Oliver Williamson – started a new school of institutional economics, known as the New Institutional Economics (NIE).23 By calling themselves institutional economists, the New Institutionalist economists made it clear that they were not typical Neoclassical economists, who looked at only individuals but not the institutions that affect their behaviour.

Exponential Organizations: Why New Organizations Are Ten Times Better, Faster, and Cheaper Than Yours (And What to Do About It)
by Salim Ismail and Yuri van Geest
Published 17 Oct 2014

We also believe they will operate with a balanced mix of open and protected data, encouraging constant and disruptive innovation at their edges. In the same way that Internet communications have seen costs drop to near zero, we expect to see internal organizational and transactions costs also fall to near zero as we increasingly information-enable and distribute our organizational structures. Ultimately, in the face of such low transaction costs, we anticipate what we’re calling a Cambrian Explosion in organizational design—everything from community-based structures to virtual organizations (see Ethereum) that will be small, nimble and extensible. It is also becoming increasingly clear that, like the Internet, the ExO paradigm is not just for business.

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This shift will, of course, be quite challenging for large organizations, which rely on drawn-out projections and tracking for planning and control purposes. 6. Smaller Beats Bigger (aka Size Does Matter, Just not the Way You Think) Ronald Coase won the 1991 Nobel Prize in Economics for his theory that larger companies do better because they aggregate assets under one roof and, as a result, enjoy lower transaction costs. Two decades later, the reach delivered by the information revolution has negated the need to aggregate assets in the first place. For decades, scale and size have been desirable traits in an enterprise. A bigger company could do more, the argument went, because it could leverage economies of scale and negotiate from strength.

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That’s one reason why, for generations, business schools and consulting firms have focused on the management and organization of extremely large companies. And Wall Street has gotten rich trading the stock of giant companies, which often merge to create even more gigantic organizations. All that is changing. In The Start-up of You, Reid Hoffman shows that transaction costs are no longer an advantage and that each individual can (and should) manage himself or herself as a business. Why? One reason is the unparalleled and unprecedented ability of a small team today to do big things—an ability that grows ever greater if the exponential technologies described in Chapter One are put to use.

The Greed Merchants: How the Investment Banks Exploited the System
by Philip Augar
Published 20 Apr 2005

The Securities Industry Association summarized the findings of a series of academic studies encompassing 500,000 recommendations made by analysts during the period 1985–2000: Although investors would have outperformed the market indexes following the consensus recommendations of analysts, to implement this trading strategy would require buying and selling stocks frequently – since so many analysts were included in the study and they changed their recommendations frequently – with turnover rates at times in excess of 400 per cent annually would produce significant transaction costs.* In other words analysts do a good job picking stocks but an investor following all their recommendations would incur commissions and other costs such as taxes that could reduce the investor’s performance to that of the market indices.9 In Britain an academic study of leading brokers’ recommendations in the mid nineties came up with a similar conclusion: ‘High trading levels are required to capture the excess returns generated by the strategies analysed, entailing substantial transaction costs and leading to abnormal returns for these strategies that are not reliably greater than zero.’10 The evidence from Britain and America is consistent in finding that the total returns from following analysts’ recommendations in these years were not sufficient to cover trading and other costs.

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Federal funds rate for interest rates; US consumer price index for inflation. * The only time in recent history that US markets closed for any length of time was in the few days after the terrorist attacks on 11 September 2001. * Fund managers are known as the buy side, brokers as the sell side. * Transaction costs are commissions, taxes, financing and deal processing expenses. † Analysts mark the companies they follow on a five-point scale, from ‘strong buy’ at the top to ‘strong sell’ at the bottom, over two time periods, usually three months and two years. Companies often react badly to criticism from analysts and during the IPO boom of the 1990s an investment bank whose analyst had a negative rating on a stock could expect to be excluded from any capital markets business that was in the offing.

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Rothschild 31–2 narcissism, organizational 198 NASDAQ index 12, 13 National Association of Securities Dealers (NASD) 185, 188, 201 National City Bank 6–7 Neuer Markt 73–4 New York Stock Exchange 187–8, 201, 205 Office of Federal Home Loan Oversight 80 Office of Risk Assessment 205 O’Kelly, Gene 200–201 oligopoly 102 O’Neal, Stanley 23, 61, 135–6 Ong, Belita 11–12 options, definition of 77 output of investment banks, evaluation of 63–5, 85, 100 over-the-counter derivatives 77–8, 81, 89 Paine Webber 45 Parmalat 84, 161 Partnoy, Frank 41, 181–2, 209 Paulson, Henry 197, 206 Pecora, Judge Ferdinand 85 Perella, Joseph 43 perfect competition 102 Pitt, Harvey 187 Plender, John 208 PNC Financial 81–2 political connections 181–4, 209 prices 86–7, 97–8, 100–101, 172 advisory work 90–91, 94–5, 96–7 basis point pricing 91–3 collusion 93–8, 100–103 derivatives 88–9 and fund managers 192 negotiation, lack of 176–8, 179 under oligopoly 102 pre-announcement movements, shares 122 share trading 87–8, 89 strategic pricing 94–5, 98 underwriting 89–90, 92, 94–6 prime brokerage 133 private equity 132 privatization, UK 181 product development 131–4 product range 33 profits 51–2, 61–2 and compensation 60, 99–100 diverting attention from 95 falling, implications of 209–10 identification of 192–3 outlook for 209–10 return on equity (ROE) 54–7, 58 source of 166–7 programme trades 87, 88 proprietary trading 114–19, 192, 206, 211–12 prospect theory 180 Prudential-Bache Securities 11 Prudential plc 82 Public Company Accounting Oversight Board 200 Purcell, Philip 14, 22, 23–4, 39, 138, 205–6 Quattrone, Frank 19–20, 137–8, 151 Qwest 82 Racketeer-Influenced Corrupt Organizations law (RICO) 10, 26 recession, post-2001 13–14 Reed, John 189 regulation 7–8, 20, 81, 183, 185–90, 199 and bundling 193 integrated structure, failure to reform 22, 23, 24 and lobbying 209 recent 19, 200–203, 205, 209–10 regulatory arbitrage 185 relationship banking, demise of 35–6, 152–3, 170 research 66–7, 68, 69, 140–41, 145, 146 independent 69, 201–2, 204 internal position of 196 see also analysts Restoring Trust: Investment in the Twenty-First Century 194 returns 49–51, 61–2, 99–100, 165–6 and analysts’ recommendations 67 compensation 58–60, 99–100, 165–6 and cost of equity capital 57–8 excess, source of 166–7 falling, implications of 209–10 margins 52–3, 88–9, 119 outlook for 209–10 profits 51–2 return on equity (ROE) 54–7, 58, 61 risk management 111–13, 125–31 risk premium 55, 56 Ritter, Professor Jay 71, 89–90, 94–5, 179 Rogers, John 68 Roosevelt, President Franklin D. 7 Roye, Paul 191 Rubin, Robert 42, 182–3 salaries see compensation Salomon Brothers 11, 34, 37, 41–2, 137, 148–9 cynicism, culture of 152, 153 losses, 1994 128 and WorldCom 121 Salomon Smith Barney 17, 41, 150–51, 195 Sanford Bernstein 32 Sants, Hector 170–71, 189 Sarbanes-Oxley Act (2002) 19, 200–201, 209 Sassoon, James 184 Saunders, Ernest 11 scandals see corruption/malpractice Schapiro, Mary 188 Schroders 42 Securities and Exchange Commission (SEC) 7, 19, 21, 23, 185–7, 205 Securities Industry Association 183 securitization 78 securitized bonds 46 settlements paid by investment banks 19, 20, 23, 24, 38, 39, 42, 43, 201, 207 share prices, pre-announcement movements 122 shareholder activism 203–4 shareholder value 8–9, 63, 169 shareholders, and corporate control 163–4, 203–4 Sherman Anti-Trust Act (1890) 5–6, 8 Smith, Adam 86, 171–2 Smith, David 171 Smith, Professor Roy 195 Smith Barney 40, 41 Southern Peru Copper Corp 91 special purpose entities/vehicles (SPEs/SPVs) 78, 82, 83 ‘specialists’ 115–16 ‘spinning’ 17–18, 43, 137, 160 Spitzer, Eliot 15, 65–6 inquiry headed by 15, 16–17, 21, 22, 24, 38, 200 whispering campaign against 23 status of investment banking 4–5, 12, 18 Stevenson, Lord 175 Stiglitz, Joseph 12, 64, 176, 182–3 stock exchanges, structural reform 212 stock markets bull market mentality 3–5, 12–13, 64, 65, 71–3 performance of 63–4 public interest in 12 stock options 176 new accounting rules 201, 209 Stonehill, Charles 147–8 structural reform 211–15 Sudarsanam, Professor Sudi 76 Summers, Lawrence 63 swaps 77, 132 Sykes, Sir Richard 210 taxation, 401K amendment 9 team ethos 124–5 Thain, John 188, 209 Time Warner 13, 14, 76–7 Tomlinson, Lindsay 194 transaction banking 152–3, 170 transaction costs 67 Travelers 41 treasurers (company), and derivatives 80 Treasury bond scandal 41–2 ‘Triple Play’ 121 Truman, President Harry S. 7 trustees, mutual/pension funds 191–2 UBS 31, 32, 37 underwriting fees 89–90, 92, 94–6 value-at-risk (VAR) 117, 129–31 volatility of markets, and performance of investment banks 24–5, 51–2, 57–8 Wall Street 9 Wall Street Crash 6–7 Walter, Professor Ingo 195 Wasserman, Ed 18 Wasserstein, Bruce 31, 43, 77 Weill, Sanford 195 Welch, Jack 45 Wertheim 147 Wheat, Allen 59, 137 WorldCom 17, 121, 150–51, 161 Zumwinkel, Klaus 178–9

Arguing With Zombies: Economics, Politics, and the Fight for a Better Future
by Paul Krugman
Published 28 Jan 2020

Truth and Virtue in the Age of Trump Conservatism’s Monstrous Endgame Manhood, Moola, McConnell, and Trumpism 17. ON THE MEDIA Essay: Beyond Fake News Bait-and-Switch Triumph of the Trivial Is There Any Point to Economic Analysis? The Year of Living Stupidly Hillary Clinton Gets Gored 18. ECONOMIC THOUGHTS Essay: The Dismal Science How I Work The Instability of Moderation Transaction Costs and Tethers: Why I’m a Crypto Skeptic Credits Index ARGUING with ZOMBIES INTRODUCTION The Good Fight Punditry was never part of the plan. When I finished graduate school in 1977, I envisioned a life devoted to teaching and research. If I ended up playing any role in public debate, I assumed it would be as a technocrat—someone dispassionately providing policymakers with information about what worked and what didn’t.

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And by the time that big shock arrived, the descent into an intellectual Dark Age combined with the rejection of policy activism on political grounds had left us unable to agree on a wider response. In the end, then, the era of the Samuelsonian synthesis was, I fear, doomed to come to a nasty end. And the result is the wreckage we see all around us. TRANSACTION COSTS AND TETHERS: WHY I’M A CRYPTO SKEPTIC July 31, 2018 I’m still on vacation, hiking and biking in various parts of Europe. I’m keeping up with the news, more or less, but am only occasionally and unpredictably in a place and condition where I can actually write something and post it. But this is one of those times, and I thought I’d post some thoughts in advance of stuff I’ll be doing after I get back.

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Specifically, in a couple of weeks I’m going to play Emmanuel Goldstein—the designated enemy—at a conference on blockchain and all that. Hey, if you only speak to friendly audiences, you’re not challenging yourself enough. So I thought it might be worth explaining why I’m a cryptocurrency skeptic. It comes down to two things: transaction costs and the absence of tethering. Let me explain. If you look at the broad sweep of monetary history, there has been a clear direction of change over time: namely, one of reducing the frictions of doing business and the amount of real resources required to deal with those frictions. First there were gold and silver coins, which were heavy, required lots of security, and consumed a lot of resources to produce.

The Tyranny of Metrics
by Jerry Z. Muller
Published 23 Jan 2018

Merton called “the imperious immediacy of interests … where the actor’s paramount concern with the foreseen immediate consequences excludes consideration of further or other consequences.”3 In short, advancing short-term goals at the expense of long-range considerations. Costs in employee time. To the debit side of the ledger must also be added the transactional costs of metrics: the expenditure of employee time by those tasked with compiling and processing the metrics—not to speak of the time required to actually read them. That is exacerbated by the “reporting imperative”—the perceived need to constantly generate information, even when nothing significant is going on.

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See metric fixation Forbes, 76 Ford Motor Company, 34 foreign aid and philanthropy, 153–56 Freedom of Information Act, 162 From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession, 12 gaming the metrics, 3, 24–25, 149–50 Geisinger Health System, 108–9, 110–11, 123 General Motors, 33 Geographical Information Systems (GIS), 126 Gibbons, Robert, 55–56 goals: displacement of, through diversion of effort, 169–70; value of short-term over long-term, 20 Goodhart’s Law, 19–20, 24 Google Ngram, 40, 159 Google Scholar, 79 Government Accountability Office, 156 Guardian, The, 163 Halbertal, Moshe, 160, 164 Hayek, Friedrich, 12, 59, 60–61 Healthgrades, 115 Henderson, Rebecca, 150 higher education, 9–14, 175–76; designed to make money, 86–87; encouraging everyone to pursue, 67–68; grading institutions in, 81–86; higher metrics through lower standards in, 69–73; measuring academic productivity, 78–80; pressure to measure performance in, 73–75; raising the number of winners lowering the value of winning with, 68–69; rankings, 75–78; value and limits of rankings in, 81 high-stakes testing, 93 Holmstrom, Bengt, 52, 169 Howard, Philip K., 41 human capital, 72, 98 impact factor measurement, 79 Improving America’s Schools Act, 90 information, distortion of, 23–24 innovation, 20; discouragement of, 140, 150–51, 171–72; employees moving to organizations that encourage, 173; unmeasurable risk for potential benefits of, 61–62 Institute of Medicine, 118–19 intimacy, 160 intrinsic rewards, 53–57, 119–20 Iraq War, 131–34 Johns Hopkins University, 109–10 Johnson, Lyndon, 98 Joint Commission, 115 Joint Stock Companies Act, 30 judgment, 6–7; distrust of, 39–42; measurement demanding, 176–77 “juking the stats,” 2 Kedourie, Elie, 62–63, 73 Kelvin, Lord, 17 Kennedy, Edward, 90 Keystone project, 109–10, 111–12, 176 Khurana, Rakesh, 12 Kilcullen, David, 131–34 Kiplinger, 76 Klarman, Seth, 47 Knight, Frank, 61–62, 151 knowledge: forms of, 59–60; practical, local, 62; pretense of, 60 Kohn, Alfie, 62 Kolberg, William, 90 Kozlowski, Dennis, 144 Lancelot, William, 33 leadership and organizational complexity, 44–47 Lehman Brothers, 146–47 Levy, Steven, 47 Limited Liability Act, 30 litigation, fear of, 42 London Business School, 138–39 Lowe, Robert, 29–30 Lumina Foundation, 67–68, 71 Luttwak, Edward, 35–37 luxury goods, 104 managerialism, 34–37 Manning, Bradley (later Chelsea),162–63 Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change, 172 Masters of Management, 13 materialist bias, 36 Mayer-Schönberger, Viktor, 35 McNamara, Robert, 34–37, 131 measurement and improvement, 16–17, 101, 107, 111, 119, 123, 132, 176, 183 measuring inputs rather than outcomes, 23–24 “Measuring Progress in Afghanistan,” 132 measuring the most easily measurable, 23 measuring the simple when the desired outcome is complex, 23 Medicaid, 104 Medicare, 104, 114–16, 120–23 medicine: broader picture on metrics, pay-for-performance, rankings, and report cards in, 112–20; case selection bias in, 117–18; Cleveland Clinic, 107–8, 110–11; conclusions from success in, 110–12; cost disease and, 44; discouraging cooperation and common purpose in, 172; financial push to control costs in, 103–4, 119–20; Geisinger Health System, 108–9, 110–11, 123; Keystone project, 109–10, 111–12, 176; measured performance metrics in, 2–5, 107, 123, 176; ranking the American system of, 105–7; reducing readmissions test case, 120–23; rise of metric fixation with increased critique of, 42–43; tales of success in, 107–10 Mercurio, Jed, 2–3 Merton, Robert K., 12, 170 metric fixation, 4–9, 13; in business and finance, 137–51; cost disease and, 44; critique of the professions and apotheosis of choice in, 42–44; defined, 18; distortion of information with, 23–24; distrust of judgment leading to, 39–42; in higher education, 9–14, 67–87, 175–76; innovation and creativity stifled by, 20; key components of, 18; leadership and organizational complexity and, 44–47; lure of electronic spreadsheets in, 47; managerialism and, 34–37; in medicine, 2–5, 42–44, 103–23, 172, 176; by the military, 35–37, 131–35, 176; negative transformations of nature of work with, 19; pay for performance and, 19; in philanthropy and foreign aid, 153–56; in policing, 125–29, 175; predicting and avoiding negative consequences of, 169–73; recurrent flaws in, 23–25; relationship between measurement and improvement in, 17–19; in schools, 11, 24, 89, 175–76; Taylorism and, 31–34; theory of motivation and, 19–20; and transparency as enemy of performance, 159–65 metrics: checklist for when and how to use, 175–83; corruption or goal diversion in gathering and using, 182; costs of acquiring, 180; development of measures for, 181; diagnostic, 92–93, 103, 110, 123, 126, 176; diminishing utility of, 170; gaming the, 3, 23–24, 149–50; kind of information measured by, 177; media depictions of, 1–4; philosophical critiques of, 59–64; purposes of specific measurements and, 178–79; reasons leaders ask for, 180–81; recognition that not all problems are solvable by, 182–83; transactional costs of, 170; used to replace judgment, 6–7; usefulness of information from, 177–78 Michigan Keystone ICU Project, 109–10, 111–12, 176 Middle States Commission on Higher Education, 10–11 Milgrom, Paul, 52, 169 military, American, 35–37, 131–35, 176 Minsky, Hyman, 148 Mintzberg, Henry, 52 Mitchell, Ted, 82 Moneyball, 7 Morieux, Yves, 45, 170 mortgage backed securities, 146–47 motivation: extrinsic and intrinsic rewards and, 53–57, 119–20, 137–38, 144; theory of, 19–20 Muller, Jerry Z., 79 Mylan, 140–42, 143 National Alliance of Business, 90 National Assessment of Educational Progress (NAEP), 91, 97, 99 National Center for Educational Statistics, 97 National Center on Performance Incentives, 95–96 National Health Service, 104, 114, 116–17 National Security Agency, 163 Natsios, Andrew, 155–56 New Public Management, 51–53 Newsweek, 76 No Child Left Behind Act of 2001, 11, 24, 89, 100; problem addressed by, 89–91, 96; Race to the Top after, 94–95; unintended consequences of, 92–94.

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See also No Child Left Behind Act of 2001 Scientific Institute for Quality of Healthcare (IQ Healthcare),113–14 scientific management, 32–33 scientism, 60–62 Scott, James C., 59, 62 Shaw, George Bernard, 40–41 Shih, Willy, 150–51 short-termism, 147–50, 170 Simon, David, 1 Smith, Adam, 12 Snowden, Edward, 163 social trust, lack of, 41 Soviet system, 61 Spellings, Margaret, 11 spreadsheets, 47 standards and standardization: costs of not relying on, 178; degrading information quality through, 23; higher metrics through lower, 69–73; improving numbers by lowering of, 23; Taylorism in, 33 Status and Trends in the Educational Achievement of Racial and Ethnic Groups, 97 Steele, Glenn D., 111 Sunstein, Cass R., 161–62 Taylor, Frederick Winslow, 32 Taylorism, 31–34, 138 Thatcher, Margaret, 56–57, 62–63, 73 time loss, 10, 11, 62, 74, 180, 182; in bureaucratic organizations, 156; caused by executives under the spell of metric fixation, 45; in charitable organizations, 154; in colleges and universities, 83; in education, 173; by employees, 170; increased performance measures leading to more, 18; in medicine, 119 Times Higher Education Supplement, 76 Tirole, Jean, 54 Tollman, Peter, 45, 170 “Toxicity of Pay for Performance, The,” 119–20 transactional costs of metrics, 170. See also time loss transparency, 3–4, 17–18, 113; diplomacy and intelligence, 162–65; as enemy of performance, 159–65; in government, 160–62 “Twice-Revised Code, The,” 30 Tyco, 144 Uniform Crime Report, 127–28 unintended consequences of metric fixation: costs in employee time, 170; costs to productivity, 173; degradation of work, 172–73; diminishing utility, 170; discouraging cooperation and common purpose, 172; discouraging innovation, 140, 150–51, 171–72; discouraging risk-taking, 62, 117–18, 171; goals displacement, 169–70; by No Child Left Behind, 92–94; rewarding of luck, 171; rule cascades, 171; short-termism, 170 U.S.

The fortune at the bottom of the pyramid
by C. K. Prahalad
Published 15 Jan 2005

The farmers know the difference between the old system and the system introduced by the ITC eChoupal. It is more than just a win in terms of savings. It provides a social basis for becoming an insider. 3. The ICICI-supported SHGs take it one step further. They start with understanding the rationale for the contacting system: how and why it reduces transaction costs and therefore reduces the cost of capital as well as increases access to capital. Further, governance cannot be just between ICICI and the individual. By creating a collective commitment to accountability to contracting conditions, SHGs continually reinforce in the local community the benefits of being within the system.

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Investors will seek the best opportunities. TGC is the capacity of a society to guarantee transparency in the process of economic transactions and the ability to enforce commercial contracts. This is about reducing uncertainty as to ownership and transfer of ownership. Transparency in the process reduces transaction costs. Clearly developed laws, transparent microregulations, social norms, and timely and uniform enforcement are all part of TGC. My argument is that TGC is more important than laws that are not enforced. BOP consumers live in a wide variety of countries with varying degrees of TGC. Consider the spectrum: 1.

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The dependence on the informal sector was as high as 58% for households with assets lower than Rs. 5,000.”13 In other words, a majority of the extremely poor are reliant on extortionist money lenders for living capital. Yet formal financial intermediaries, such as commercial banks, typically do not serve poor households. The reasons include the high cost of small transactions, the lack of traditional collateral, geographic isolation, and simple social prejudice. “According to Mahajan,14 the transaction costs of savings in formal institutions were as high as 10% for the rural poor. This was because of the small average size of transactions and distance of the branches from the villages.” Even those institutions that provide financial services to the poor are limited in scale. With more than 400 million poor people and participation rates in formal institutions around 30%, demand far outstrips supply.

Market Wizards: Interviews With Top Traders
by Jack D. Schwager
Published 7 Feb 2012

The undisciplined use of leverage is the single most important reason why most traders lose money in the futures markets. In general, futures prices are no more volatile than the underlying cash prices or, for that matter, many stocks. The high-risk reputation of futures is largely a consequence of the leverage factor. 5. Low transaction costs—Futures markets provide very low transaction costs. For example, it is far less expensive for a stock portfolio manager to reduce market exposure by selling the equivalent dollar amount of stock index futures contracts than by selling individual stocks. 6. Ease of offset—A futures position can be offset at any time during market hours, providing prices are not locked at limit-up or limit-down.

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When you trade currencies, do you use the interbank market or the futures market? I only use the interbank market, unless I am doing an arbitrage trade against the IMM. [The International Monetary Market (IMM) is a subsidiary of the Chicago Mercantile Exchange and the world’s foremost currency futures exchange.] The liquidity is enormously better, the transaction costs are much lower, and it is a twenty-four-hour market, which is important to us because we literally trade twenty-four hours a day. What portion of your trading is in currencies? On average, about 50 to 60 percent of our profits come from currency trading. I assume you are also trading currencies beyond the five that are currently actively traded on the IMM.

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If you can just learn discipline by using a trend-following system, even temporarily, it will increase your odds of being successful as a trader. Do you have an opinion about systems sold to the public? I looked at some of these systems a few years ago and found that they generally made too many trades. If a system trades too frequently, the transaction costs will be too high, a factor that will significantly reduce the probability of the system working. I think to be viable, a trend-following system has to be medium to longer term. The more sensitive systems just generate too much commission. Besides providing a training vehicle for learning good trading habits, do you feel that trend-following systems can provide an effective trading approach?

Adaptive Markets: Financial Evolution at the Speed of Thought
by Andrew W. Lo
Published 3 Apr 2017

Our simulation assumes that the cash earns the yield on one-month U.S. Treasury bills, and that all changes in portfolio weights incur transactions costs of 0.05 percent, or 5 basis points (bps), of the trade size. This is on the high side for modern markets. For the S&P 500 index, implementing the dynamic index using the Chicago Mercantile Exchange’s E-Mini S&P 500 Futures contract would yield considerably lower transactions costs than 5 bps.14 We deduct the transaction costs in our calculations of the daily returns. Table 8.2 shows that an investor who stays in this cruise-controlled fund is rewarded.

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“As we continued to discover new anomalies,” said Shaw, “we also benefited from a sort of a second-order effect: if the profit that could be gained from a given single effect was exceeded by the transaction cost that would be incurred to exploit it, it would be a mistake for anybody to bet on that effect in isolation. Once we’d identified a number of small inefficiencies, though, the aggregate profit opportunity was often sufficient to break through the transaction cost threshold. This allowed us to extract profits from market inefficiencies that were too small for most traders to exploit, creating a barrier to entry for potential competitors.”

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For example, what might happen if cell phone coverage were extended further into the Indian Ocean, or if the fishing boats of Kerala were able to afford refrigeration for their catches? The history of hedge funds makes it clear that technology is a key component of the financial environment. Not only secrecy but also technology limited the concept of the hedge fund in Alfred Winslow Jones’s day. Transactions costs were too high, and transaction speed was too slow, for many later strategies to be successful. Even something as simple as rebalancing a portfolio could be an enormous and costly labor before technological advances in hardware, software, and telecommunications transformed the industry. It’s no coincidence that David Shaw was originally “the guy who did the technology” at Morgan Stanley.

Machinery of Freedom: A Guide to Radical Capitalism
by David Friedman
Published 2 Jan 1978

This insight leads us to the Coase Theorem, named after Ronald Coase, the economist whose ideas are largely responsible for this part of the chapter. The Coase Theorem states that any initial definition of property rights will lead to an efficient outcome, provided that transaction costs are zero. The condition — zero transaction costs — is as important as the theorem. Suppose we start with a definition of property rights that forbids trespassing photons; anyone may forbid me from making a light that he can see. The right to decide whether or not I turn on the lights in my house is worth more to me than to my neighbors, so in principle I should be able to buy their permission.

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Buying up most of the land affected by national defense might be less difficult than negotiating a unanimous contract among 200 million people, but hardly easy. The land must be purchased before sellers realize what is going on and increase their price. Raising enough money to buy the United States would be a hard project to keep secret. In addition, the transaction costs would be substantial — about $100 billion in realtor commissions for all the fixed property in the United States. There is one favorable factor to help offset these difficulties. The cost of a minimal national defense is only about $20 billion to $40 billion a year. The value to those protected is several hundred billion dollars a year.

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The right to control the air a foot over a piece of land is worth more to the owner than to anyone else, so ownership of land usually includes ownership of the space immediately above it. The second is that, since the proper composition of bundles of rights will often be uncertain and may change over time, they should be defined in a way that makes it as easy as possible to trade rights. Property rights should be defined in a way that minimizes the transaction costs of likely transactions. One of the questions to be decided is how to bundle the rights; another and closely related question is what the rights are that we are bundling. Does my right to forbid intense lights and sounds from my property mean that I can forbid my neighbor from testing lasers and nuclear weapons — and holding loud parties — or only that I can collect damages afterwards?

The Precariat: The New Dangerous Class
by Guy Standing
Published 27 Feb 2011

The owners could be out tomorrow, along with their management teams and the nods-andhandshakes that make up informal bargains about how labour is done, how payments should be honoured and how people are treated in moments of need. In 1937, Ronald Coase set out a theory that was to earn him a Nobel Prize in Economics. He argued that firms, with their hierarchies, were superior to atomised markets made up solely of individuals; they reduced the transaction costs of doing business, one reason being that they fostered long-term relationships based on trust. This reasoning has collapsed. Now that opportunistic buyers can amass vast funds and take over even well-run companies, there is less incentive to form trust relationships inside firms. Everything becomes contingent and open to re-negotiation. 30 THE PRECARIAT For years academic journals were full of articles on national ‘varieties of capitalism’.

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It can be a full-time job being unemployed, and it involves flexibility, since people must be on call almost all the time. What politicians call idleness may be no more than being on the end of the phone, chewing nails nervously hoping for a call. The precarity trap A labour market based on precarious labour produces high transaction costs for those on the margins. These costs include the time it takes to apply for benefits if they become unemployed, the lack of income in that period, the time and costs associated with searching for jobs, the time and cost in learning new labour routines, and the time and cost involved in adjusting activities outside jobs to accommodate the demands of new temporary jobs.

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But then suppose she is offered another temporary low-paying job. She hesitates. Some benefits might continue for a while, under rules to help ‘make work pay’ and reduce the WHY THE PRECARIAT IS GROWING 49 standard ‘poverty trap’. But she knows that when the job ends she will once again face daunting transaction costs. The reality is that she cannot afford to take the job because, in addition to the cost in lost benefits while the job lasts, there is the cost of getting back on benefits. That is the precarity trap. The precarity trap is intensified by the erosion of community support. While being in and out of temporary low-wage jobs does not build up entitlement to state or enterprise benefits, the person exhausts the ability to call on benefits provided by family and friends in times of need.

Portfolio Design: A Modern Approach to Asset Allocation
by R. Marston
Published 29 Mar 2011

So it is the month of January which is the key to the small-cap premium. This January effect has also seemed to diminish more recently. Since 1981, the small cap premium in January has diminished from 5.27 percent per month to 1.74 percent per month. That’s still a hefty premium for a one month return, though transaction costs in the small-cap space may be large enough to prevent abnormal returns for investors seeking to exploit this premium. This chapter will not focus on the January effect per se since this is not a book about short-term trading strategies. Instead, we will ask whether the small-cap premium continues to exist and, if so, how this should influence P1: a/b c03 P2: c/d QC: e/f JWBT412-Marston T1: g December 8, 2010 17:27 Printer: Courier Westford Small-Cap Stocks 43 portfolio allocations.

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In the long run, there is little profit or loss from selling currencies in the forward market (which an investor would do in order to hedge the currency risk). A policy of selling French francs to hedge the currency exposure on French stock investments, for example, made an average profit of minus 0.7 percent per year between 1979 and June 2009 ignoring transactions costs. The same policy applied to Deutschemarks made an average profit of only +0.5 percent per year.10 It should not be surprising that returns are so small, since consistently high profits would be soon eliminated by additional speculators joining in the game. A more surprising result is shown in Table 5.4.

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Investors do not have to worry about foreign currency transactions and custody remains in the United States. To what extent is the American investor getting true foreign diversification by investing in ADRs? First, it’s important to recognize that arbitrage will ensure that the returns on ADRs and on the underlying foreign stocks are identical except for transactions costs. Second, there are now almost 3000 ADRs available in the U.S. market for firms from virtually every country that has an active stock market, so it’s possible to invest in a wide variety of foreign stocks through ADRs. To examine pricing of ADRs, consider first the case of liquid stocks that are widely traded by investors.

To Save Everything, Click Here: The Folly of Technological Solutionism
by Evgeny Morozov
Published 15 Nov 2013

Shirky’s veneration of Ronald Coase’s theory of the firm—and its accompanying discourse on transaction costs—may seem harder to dismiss, not least because Coase is a Nobel Prize–winning economist. References to Coase pop up regularly in the work of our Internet theorists; in addition to Clay Shirky, Yochai Benkler also draws heavily on Coase to discuss the open-source movement. There is nothing wrong with Coase’s theories per se; in the business context, they offer remarkably useful explanations and have even helped spawn a new branch of economics. But here is the problem: thinking of a Californian start-up in terms of transaction costs is much easier than pulling the same trick for, say, the Iranian society.

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While it seems noncontroversial to conclude that cheaper digital technologies might indeed lower most so-called transaction costs in Iran, that insight doesn’t really say much, for unless we know something about Iran’s culture, history, and politics, we know nothing about the contexts in which all these costs have supposedly fallen. Who are the relevant actors? What are the relevant transactions? In the absence of such knowledge about Iran, the natural reflex is to opt for the simplest possible model: imagine a two-way split between the government and the dissidents and then think through how their own transaction costs may have fallen thanks to “the Internet.” This seems like a rather perfunctory way of talking about a rather complex subject.

…

For much of his theoretical apparatus, Shirky draws on two sources: Susanne Lohmann’s explanation of the 1989 protests in East Germany by means of rational-choice theory (from which Shirky borrows the notion of information cascades) and Ronald Coase’s theory of the firm (from which Shirky borrows the notion of transaction costs). Alas, neither of them is an unambiguously good or neutral guide to understanding digital technologies once we liberate ourselves from Internet-centrism. Like most scholars in the rational-choice tradition, Lohmann—whom Shirky misidentifies as a historian (she’s a political scientist)—doesn’t explain collective action of East Germany by attending to historical and cultural factors or tracing the emergence of new attitudes or ideologies.

The Market for Force: The Consequences of Privatizing Security
by Deborah D. Avant
Published 17 Oct 2010

Though contemporary mercenaries attempt to distinguish themselves from the lawless “guns for hire” that ran riot over Africa during the Cold War, their consortium with arms manufacturers, mineral exploiters, and Africa’s authoritarian governments and warlords sustains the militarization of Africa.13 This poses “a mortal danger to 7 8 9 10 11 12 13 Oliver Williamson, “Public and Private Bureaucracies: a Transaction Cost Economic Perspective,” Journal of Law, Economics, and Organization Vol. 15, No. 1 (1999), p. 320. Abdel-Fatau Musah and J. Kayode Fayemi, “Introduction,” in Mercenaries: an African Security Dilemma (London: Pluto, 2000) p. 4. Communication from James Fennell, head of the Africa division of DSL, 29 November 2000.

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Building on the Hobbesian supposition that life is “nasty, brutish, and short” in anarchy, economic institutionalists focus on the importance of the state for the control of violence. North, Levi, Olson and others suggest that state monopoly over violence is necessary to move out of anarchy and into a situation where productive activity can take place.18 Transaction cost economics further develops this logic, suggesting that a state can best control violence if it organizes internally to create public bureaucracies.19 Williamson argues that just as hierarchies are sometimes preferable to markets there are conditions under which public bureaucracies are preferable to private firms.

…

Only by contracting with a “specialist in violence” can people can move beyond the trade-off between peace and prosperity. If the specialists in violence become governments, coercion can be used in productive ways. Robert Bates, Avner Greif, and Smita Singh, “Organizing Violence,” Journal of Conflict Resolution Vol. 46, No. 5 (October 2002): 599–629. Oliver Williamson, “Public and Private Bureaucracies: A Transaction Cost Economics Perspective,” Journal of Law, Economics and Organization, Vol. 15, No. 1 (1999). See Oliver Williamson, Markets and Hierarchies: Analysis and Anti-Trust Implications (New York: Free Press, 1975). See also, R. H. Coase, “The Nature of the Firm,” Economica Vol. 4, No. 16 (November 1937); H.

Mastering Private Equity
by Zeisberger, Claudia,Prahl, Michael,White, Bowen , Michael Prahl and Bowen White
Published 15 Jun 2017

In some jurisdictions new regulations have made the use of leverage beyond a certain point less economical. 4 Please refer to Chapter 7 Target Valuation for additional information on optimizing the funding structure in a buyout. 5 Debt has been found to make managers risk averse in the face of bankruptcy risk. 6 Please refer to Chapter 9 Deal Structuring and Chapter 10 Transaction Documentation for further details on bank financing and covenants. 7 Please refer to Chapter 12 Securing Management Teams for a detailed example of management incentive structures. 8 Please refer to Chapter 9 Deal Structuring for additional detail on LBO debt instruments. 9 Please refer to Chapter 13 Operational Value Creation for more on attributing operational value-add. 10 The simplified calculation does not include transaction cost on entry or exit. 11 This breakdown does not attribute any of the improvement in multiple and debt paydown to the underlying EBITDA growth. 12 In addition to the three main types of buyouts discussed in this section, various combinations of the three strategies can be employed. For example, in a ‘buy-in management buyout,’ the existing management team is bolstered by new team members and partners with the PE sponsor on an acquisition. 13 Family businesses often use buyouts as a viable succession option. 5 ALTERNATIVE STRATEGIES Funds that invest in venture capital, growth equity and buyout deals constitute the backbone of the private equity (PE) industry.

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The SPA sometimes includes provisions that impose financial penalties on the party terminating the agreement, referred to as break-up or break fees in the case of termination by the seller or reverse break-up fees in the case of termination by the buyer. These fees are intended to cover the transaction costs of the party not terminating the transaction. DEBT COMMITMENT LETTERS: Debt commitment letters are typically addressed to a buyout fund’s acquisition vehicle by the lead arranger3 of a leveraged buyout (LBO)’s debt financing. Securing a debt commitment letter is often required before a seller will sign an SPA to provide funding certainty for the seller.

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Only 3% of LPs surveyed decided to discontinue after having co-invested in the past (Exhibit 21.2). Exhibit 21.2 Breakdown of LPs by Current Co-investment Activiy Source: Preqin A range of attractions are cited by LPs engaging in co-investing. HIGHER NET RETURNS DUE TO LOWER FEES: Historically, LPs have paid no fees on co-investments (but naturally shared transaction costs pro rata with other equity investors). Yet with the number of co-investments rapidly increasing in recent years, some sort of compensation is often used to entice GPs into sharing deal flow or to stand out from other LPs. This can take the form of one-time equity arrangement fees (analogous to a lead bank arranging debt financing), management fees and even carried interest.

Money Free and Unfree
by George A. Selgin
Published 14 Jun 2017

Bad money can also drive out good money in the absence of legal penalties. This occurs when prices happen (for reasons unrelated to legal sanctions) to be expressed in terms of bad money, and high transactions costs of nonpar exchange make it prohibitively costly to transact with good money. This variant of Gresham’s law may be called Rolnick and Weber’s law. More generally, Rolnick and Weber’s law asserts that, if there are high market-based transactions costs of nonpar exchange, par monies will drive nonpar monies out of circulation (Rolnick and Weber 1986). Was the survival of state bank notes after the passage of the national banking acts a manifestation of either Gresham’s law or Rolnick and Weber’s law?

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If domestic money is being frequently debased, traders quoting prices in weight units would naturally favor more stable foreign coins—less frequently requiring weighing and assaying—as their medium of exchange. By contrast, traders who consider switching from a domestic to an alternative fiat currency as a medium of exchange find that there is no simple common metric. A network effect associated with using the common unit of account protects the incumbent currency by imposing high transactions costs on those who would switch first (Selgin 2003). Acceptance of an alternative currency in transactions presupposes familiarity with its exchange value, but until its acceptance is widespread, or at least until the domestic unit has become thoroughly unreliable as a unit of account (as in a high inflation), there is scant individual incentive to track the exchange rate between the incumbent and alternative currencies.

…

Therefore, freedom of note issue is necessary if market price signals are to be relied upon to stamp out a contagion. A secondary bank-note market is typically portrayed as involving professional non-bank-note “brokers” as well as bank-note “reporters”—weekly publications with information on note discounts. If brokers do not request any risk-related discount (beyond transaction costs) to redeem a bank’s notes, holders of those notes can rest assured that the bank is solvent and will not have any incentive to test its solvency by staging a run on it. On the other hand, holders of notes trading at a discount do not need to run, either, but can “walk” to a broker who charges them for assuming the risk that the notes’ issuers may fail.

Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least
by Antti Ilmanen
Published 24 Feb 2022

Unlisted private sector is likely as important outside the US, famously including the “Mittelstand” firms in Germany and huge family-owned private ventures in the Far East. 4 The results are broadly similar if I use their longest common sample for housing and equities (1891–2015), though inflation was lower, and equity returns came about 1% more from income than capital gains. 5 See Demers-Eisfeldt (2021) on US housing, Chambers-Spanjers-Steiner (2021) on UK real estate, and Pagliari (2017) on US commercial real estate. These running costs should be distinguished from the (very high but one-off) transaction costs when buying or selling a house. 6 In the same vein, Eichholtz et al. (2021) study long-run histories of housing returns in Paris and Amsterdam using direct historical sources, and they find 1.4–2.3% lower estimates than Jorda et al. for the overlapping periods. Evidence on rental income growth echoes these findings.

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Loss averse investors may miss out on long-term rewarded exposures if they disinvest after a bad experience, or never gain exposure for fear of such experiences. By forgoing rewarded risks, loss averse investors actually increase the risk of not earning enough to achieve long-term goals. But realized losses tend to be felt more keenly than opportunity losses. The costs of excessive turnover include transaction costs, operational costs, and redemption fees. For strategies with performance fees, there is an additional cost to investors: forfeiting a high-water-mark option by disinvesting after a drawdown. (Investors typically do not have to pay performance fees until the fund has reached the high-water mark, whereas other funds will be charging performance fees from initial investments.)

…

Put returns are expressed as a percentage of the underlying index NAV, gross of trading costs and fees. For comparability, the series is scaled to 10% volatility based on the 6% volatility of the unlevered return over the full sample, implying a leverage of 1.67. The hypothetical Trend return is a backtest, gross of fees, net of estimated transaction costs. The strategy applies trend following at 1-, 3- and 12-month windows in four asset classes and targets overall portfolio volatility of 10%. Both Put and Trend returns are in excess of cash. Besides the empirical debate, we also argued about the economic rationale. Against my point that investors should pay a premium for the valuable service of financial catastrophe insurance, Taleb suggested that put buying strategies may offer positive long-run returns because investors tend to underweight rare events (opposite to the prospect theory claim that investors overweight rare events).

A Mathematician Plays the Stock Market
by John Allen Paulos
Published 1 Jan 2003

Technical Strategies and Blackjack Most academic financial experts believe in some form of the random-walk theory and consider technical analysis almost indistinguishable from a pseudoscience whose predictions are either worthless or, at best, so barely discernibly better than chance as to be unexploitable because of transaction costs. I’ve always leaned toward this view, but I’ll reserve my more nuanced judgment for later in the book. In the meantime, I’d like to point out a parallel between market strategies such as technical analysis in one of its many forms and blackjack strategies. (There are, of course, great differences too.)

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Opportunities to make an excess profit by utilizing technical rules or fundamental analyses, so the story continues, disappear before they can be fully exploited, and investors who pursue them will see their excess profits shrink to zero, especially after taking into account brokers’ fees and other transaction costs. Once again, it’s not that subscribers to technical or fundamental analysis won’t make money; they generally will. They just won’t make more than, say, the S&P 500. (That exploitable opportunities tend to gradually disappear is a general phenomenon that occurs throughout economics and in a variety of fields.

…

An expectation of a regression to the mean is not the whole story, of course, but there are dozens of studies suggesting that value investing, generally over a three-to-five year period, does result in better rates of return than, say, growth investing. It’s important to remember, however, that the size of the effect varies with the study (not surprisingly, some studies find zero or a negative effect), transaction costs can eat up some or all of it, and competing investors tend to shrink it over time. In chapter 6 I’ll consider the notion of risk in general, but there is a particular sort of risk that may be relevant to value stocks. Invoking the truism that higher risks bring greater returns even in an efficient market, some have argued that value companies are risky because they’re so colorless and easily ignored that their stock prices must be lower to compensate!

The AI-First Company
by Ash Fontana
Published 4 May 2021

AI-FIRST AGGREGATION* The large amount of data flowing freely around the world creates an opportunity: aggregate that data, curate it with intelligent systems, distribute it widely to generate more data, and so on. The opportunity to aggregate arises as we generate lots of data. The low transaction costs on the Internet mean it’s easier to start using products—just enter a credit card number online—so people adopt more products and generate more data. The low distribution costs afforded by the Internet—just download the app—make it easier to sell products, allowing broad appeal and the collation of more usage data.

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For example, an AI-First application that gets tickets from the software program JIRA (developed by the Australian software company Atlassian Corporation) and learns how to route those tickets to the right engineers can both aggregate data and sell through the Atlassian marketplace. Incumbents, however, cannot piggyback so they have to spend money on sales and marketing to get their products to customers. Zero transaction costs. AI-First aggregators operate their systems on another vendor’s infrastructure. Incumbents are effectively the database from which the AI-First product pulls data. A good example is a software application that plugs into Salesforce, the cloud-based CRM. Applications can plug into and run within the Salesforce application, pulling data and processing functions on the computing infrastructure running Salesforce, effectively reducing the marginal cost of transacting data in the AI-First product to zero.

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A/B test, 271 accessibility of data, 72, 107 accuracy, 175, 203–4 in proof of concept phase, 59–60 active learning-based systems, 94–95 acyclic, 150, 271 advertising, 227, 240 agent-based models (ABMs), 103–5, 271 simulations versus, 105 aggregated data, 81, 83 aggregating advantages, 222–65 branding and, 255–56 data aggregation and, 241–45 on demand side, 225 disruption and, 239–41 first-mover advantage and, 253–55 and integrating incumbents, 244–45 and leveraging the loop against incumbents, 256–61 positioning and, 245–56 ecosystem, 251–53 staging, 249–51 standardization, 247–51 storage, 246–47 pricing and, 236–39 customer data contribution, 237 features, 238–39 transactional, 237, 281 updating, 238 usage-based, 237–38, 281 on supply side, 224–25 talent loop and, 260–61 traditional forms of competitive advantage versus, 224–25 with vertical integration, see vertical integration aggregation theory, 243–44, 271 agreement rate, 216 AI (artificial intelligence), 1–3 coining of term, 5 definitions and analogies regarding, 15–16 investment in, 7 lean, see Lean AI AI-First Century, 3 first half of (1950–2000), 3–9 cost and power of computers and, 8 progression to practice, 5–7 theoretical foundations, 4–5 second half of (2000–2050), 9 AI-First companies, 1, 9, 10, 44 eight-part framework for, 10–13 learning journey of, 44–45 AI-First teams, 127–42 centralized, 138–39 decentralized, 139 management of, 135–38 organization structure of, 138–39 outsourcing, 131 support for, 134–35 when to hire, 130–32 where to find people for, 133 who to hire, 128–30 airlines, 42 Alexa, 8, , 228, 230 algorithms, 23, 58, 200–201 evolutionary, 150–51, 153 alliances of corporate and noncorporate organizations, 251 Amazon, 34, 37, 84, 112, 226 Alexa, 8, 228, 230 Mechanical Turk, 98, 99, 215 analytics, 50–52 anonymized data, 81, 83 Apple, 8, 226 iPhone, 252 application programming interfaces (APIs), 86, 118–22, 159, 172, 236, 271 applications, 171 area underneath the curve (AUC), 206, 272 artificial intelligence, see AI artificial neural network, 5 Atlassian Corporation, 243 augmentation, 172 automation versus, 163 availability of data, 72–73 Babbage, Charles, 2 Bank of England, 104–5 Bayesian networks, 150, 201 Bengio, Yoshua, 7 bias, 177 big-data era, 28 BillGuard, 112 binary classification, 204–6 blockchain, 109–10, 117, 272 Bloomberg, 73, 121 brain, 5, 15, 31–32 shared, 31–33 branding, 256–57 breadth of data, 76 business goal, in proof of concept phase, 60 business software companies, 113 buying data, 119–22 data brokers, 119–22 financial, 120–21 marketing, 120 car insurance, 85 Carnegie, Andrew, 226 cars, 6, 254 causes, 145 census, 118 centrifugal process, 49–50 centripetal process, 50 chess, 6 chief data officer (CDO), 138 chief information officer (CIO), 138 chief technology officer (CTO), 139 Christensen, Clay, 239 cloud computing, 8, 22, 78–79, 87, 242, 248, 257 Cloudflare, 35–36 clustering, 53, 64, 95, 272 Coase, Ronald, 226 compatibility, 251–52 competitions, 117–18 competitive advantages, 16, 20, 22 in DLEs, 24, 33 traditional forms of, 224–25 see also aggregating advantages complementarity, 253 complementary data, 89, 124, 272 compliance concerns, 80 computer chips, 7, 22, 250 computers, 2, 3, 6 cost of, 8–9 power of, 7, 8, 19, 22 computer vision, 90 concave payoffs, 195–98, 272 concept drift, 175–76, 272 confusion matrix, 173–74 consistency, 256–57 consultants, 117–18, 131 consumer apps, 111–13, 272 consumer data, 109–14 apps, 111–13 customer-contributed data versus, 109 sensor networks, 113–14 token-based incentives for, 109–10 consumer reviews, 29, 43 contractual rights, 78–82 clean start advantage and, 78–79 negotiating, 79 structuring, 79–82 contribution margin, 214, 272 convex payoffs, 195–97, 202, 272 convolutional neural networks (CNNs), 151, 153 Conway, John, 104 cost of data labeling, 108 in ML management, 158 in proof of concept phase, 60 cost leadership, 272 DLEs and, 39–41 cost of goods sold (COGS), 217 crawling, 115–16, 281 Credit Karma, 112 credit scores, 36–37 CRM (customer relationship management), 159, 230–31, 255, 260, 272 Salesforce, 159, 212, 243, 248, 258 cryptography, 272 crypto tokens, 109–10, 272 CUDA, 250 customer-generated data, 77–91 consumer data versus, 109 contractual rights and, 78–82 clean start advantage and, 78–79 negotiating, 79 structuring, 79–82 customer data coalitions, 82–84 data integrators and, 86–89 partnerships and, 89–91 pricing and, 237 workflow applications for, 84–86 customers costs to serve, 242 direct relationship with, 242 needs of, 49–50 customer support agents, 232, 272 customer support tickets, 260, 272 cybernetics, 4, 273 Dark Sky, 112, 113 DARPA (Defense Advanced Research Projects Agency), 5 dashboards, 171 data, 1, 8, 69, 273 aggregation of, 241–45 big-data era, 28 complementary, 89 harvesting from multiple sources, 57 incomplete, 178 information versus, 22–23 missing sources of, 177 in proof of concept phase, 60 quality of, 177–78 scale effects with, 22 sensitive, 57 starting small with, 56–58 vertical integration and, 231–32 data acquisition, 69–126, 134 buying data, 119–22 consumer data, 109–14 apps, 111–13 customer-contributed data versus, 109 sensor networks, 113–14 token-based incentives for, 109–10 customer-generated data, see customer-generated data human-generated data, see human-generated data machine-generated data, 102–8 agent-based models, 103–5 simulation, 103–4 synthetic, 105–8 partnerships for, 89–91 public data, 115–22 buying, see buying data consulting and competitions, 117–18 crawling, 115–16, 281 governments, 118–19 media, 118 valuation of, 71–77 accessibility, 72, 107 availability, 72–73 breadth, 76 cost, 73 determination, 74–76 dimensionality, 75 discrimination, 72–74 fungibility, 74 perishability and relevance, 74–75, 201 self-reinforcement, 76 time, 73–74 veracity, 75 volume of, 76–77 data analysts, 128–30, 132, 133, 137, 273 data as a service (DaaS), 116, 120 databases, 258 data brokers, 119–22 financial, 120–21 marketing, 120 data cleaning, 162–63 data distribution drift, 178 data drift, 176, 273 data-driven media, 118 data engineering, 52 data engineers, 128–30, 132, 133, 137, 161, 273 data exhaust, 80, 257–58, 273 data infrastructure engineers, 129–32, 137, 273 data integration and integrators, 86–90, 276 data labeling, 57, 58, 92–100, 273 best practices for, 98 human-in-the-loop (HIL) systems, 100–101, 276 management of, 98–99 measurement in, 99–100 missing labels, 178 outsourcing of, 101–2 profitability metrics and, 215–16 tools for, 93–97 data lake, 57, 163 data learning effects (DLEs), 15–47, 48, 69, 222, 273 competitive advantages of, 24, 33 data network effects, 19, 26–33, 44, 273 edges of, 24 entry-level, 26–29, 31–33, 36–37, 274 network effects versus, 24–25 next-level, 26–27, 29–33, 36–37, 278 what type to build, 33 economies of scale in, 34 formula for, 17–20 information accumulation and, 21 learning effects and, 20–21 limitations of, 21, 42–43 loops around, see loops network effects and, 24–26 powers of, 34–42 compounding, 36–38 cost leadership, 39–41 flywheels, 37–38 price optimization, 41–42 product utility, 35–36 winner-take-all dynamics, 34–35 product value and, 39 scale effects and, 21–23 variety and, 34–35 data learning loops, see loops data lock-in, 247–48 data networks, 109–10, 143–44, 273 normal networks versus, 26 underneath products, 25–26 data pipelines, 181, 216 breaks in, 87, 181 data platform, 57 data processing capabilities (computing power), 7, 8, 19, 22 data product managers, 129–32, 274 data rights, 78–82, 246 data science, 52–56 decoupling software engineering from, 133 data scientists, 54–56, 117, 128–30, 132–39, 161, 274 data stewards, 58, 274 data storage, 57, 81, 246–47, 257 data validators, 161 data valuation, 71–77 accessibility in, 72, 107 availability in, 72–73 breadth in, 76 cost in, 73 determination in, 74–76 dimensionality in, 75 discrimination in, 72–74 fungibility in, 74 perishability and relevance in, 74–75, 201 self-reinforcement in, 76 time in, 73–74 veracity in, 75 decision networks, 150, 153 decision trees, 149–50, 153 deduction and induction, 49–50 deep learning, 7, 147–48, 274 defensibility, 200, 274 defensible assets, 25 Dell, Michael, 226 Dell Technologies, 226 demand, 225 denial-of-service (DoS) attacks, 36 designers, 129 differential privacy, 117, 274 dimensionality reduction, 53, 274 disruption, 239–41 disruption theory, 239, 274 distributed systems, 8, 9 distribution costs, 243 DLEs, see data learning effects DoS (denial-of-service) attacks, 36 drift, 175–77, 203, 274 concept, 175–76 data, 176 minimizing, 201 e-commerce, 29, 31, 34, 37, 41, 84 economies of scale, 19, 34 ecosystem, 251–52 edges, 24, 274 enterprise resource planning (ERP), 161, 250, 274 entry-level data network effects, 26–29, 31–33, 36–37, 274 epochs, 173, 275 equity capital, 230 ETL (extract, transform, and load), 58, 275 evolutionary algorithms, 150–51, 153 expected error reduction, 96 expected model change, 96 Expensify, 85–86 Facebook, 25, 43, 112, 119, 122 features, 63–64, 145, 275 finding, 64–65 pricing and, 238–39 federated learning, 117, 275 feedback data, 36, 199–200 feed-forward networks, 151, 153 financial data brokers for, 120–21 stock market, 72, 74, 120–21 first-movers, 253–55, 275 flywheels, 37–38, 243–44 Ford, Henry, 49 fungibility of data, 74 Game of Life, 104 Gaussian mixture model, 275 generative adversarial networks (GANs), 152, 153 give-to-get model, 36 global multiuser models, 275 glossary, 271–82 Google, 111–12, 115, 195, 241, 251, 253–54 governments, 118–19 gradient boosted tree, 53, 275 gradient descent, 208 graph, 275 Gulf War, 6 hedge funds, 227 heuristics, 139, 231, 275 Hinton, Geoffrey, 7 histogram, 53, 275 holdout data, 199 horizontal products, 210–12, 276 HTML (hypertext markup language), 116, 276 human-generated data, 91–102 data labeling in, 57, 58, 92–100, 273 best practices for, 98 human-in-the-loop (HIL) systems, 100–101, 276 management of, 98–99 measurement in, 99–100 missing labels, 178 outsourcing of, 101–2 profitability metrics and, 215–16 tools for, 93–97 human learning, 16–17 hyperparameters, 173, 276 hypertext markup language (HTML), 116, 276 IBM (International Business Machines), 5–8, 255 image recognition, 76–77, 146 optical character, 72, 278 incumbents, 276 integrating, 245–46 leveraging the loop against, 256–61 independent software vendors (ISVs), 161, 248, 276 induction and deduction, 49–50 inductive logic programming (ILP), 149, 153 Informatica, 86 information, 1, 2, 276 data versus, 22–23 informational leverage, 3 Innovator’s Dilemma, The (Christensen), 239 input cost analysis, 215–16 input data, 199 insourcing, 102, 276 integration, 86–90, 276 predictions and, 171 testing, 174 integrations-first versus workflow-first companies, 88–89 intellectual leverage, 3 intellectual property (IP), 25, 251 intelligence, 1, 2, 5, 15, 16 artificial, see AI intelligent applications, 257–60, 276 intelligent systems, 19 interaction frequency, 197 interactive machine learning (IML), 96–97, 276 International Telecommunications Union (ITU), 250–51 Internet, 8, 19, 32, 69, 241–42, 244 inventory management software, 260 investment firms, 232 iPhone, 252 JIRA, 243 Kaggle, 9, 56, 117 Keras, 251 k-means, 276 knowledge economy, 21 Kubernetes, 251 language processing, 77, 94 latency, 158 layers of neurons, 7, 277 Lean AI, 48–68, 277 customer needs and, 49–50 decision tree for, 50–52 determining customer need for AI, 50–60 data and, 56–58 data science and, 54–56 sales and, 58–60 statistics and, 53–54 lean start-up versus, 61–62 levels in, 65–66 milestones for, 61 minimum viable product and, 62–63 model features lean start-ups, 61–62 learning human formula for, 16–17 machine formula for, 17–20 learning effects, 20–22, 277 moving beyond, 20–21 legacy applications, 257, 277 leverage, 3 linear optimization, 42 LinkedIn, 122 loans, 35, 37, 227 lock-in, 247–48 loops, 187–221, 273 drift and, 201 entropy and, 191–92 good versus bad, 191–92 metrics for measuring, see metrics moats versus, 187–88, 192–94 physics of, 190–92 prediction and, 202–3 product payoffs and, 195–98, 202 concave, 195–98 convex, 195–97, 202 picking the product to build, 198 repeatability in, 188–89 scale and, 198–201, 203 and data that doesn’t contribute to output, 199–200 loss, 207–8, 277 loss function, 275, 277 machine-generated data, 102–8 agent-based models, 103–5 simulation, 103–4 synthetic, 105–8 machine learning (ML), 9, 145–47, 277 types of, 147–48 machine learning engineers, 39, 56, 117–18, 129, 130, 132, 138, 139, 161, 277 machine learning management loop, 277 machine learning models (ML models), 9, 26, 27, 31, 52–56, 59, 61, 134 customer predictions and, 80–81 features of, 61, 63 machine learning models, building, 64–65, 143–54 compounding, 148–52 diverse disciplines in, 149–51 convolutional neural networks in, 151, 153 decision networks in, 150, 153 decision trees in, 149–50, 153 defining features, 146–47 evolutionary algorithms in, 150–51, 153 feed-forward networks in, 151, 153 generative adversarial networks in, 152, 153 inductive logic programming in, 149, 153 machine learning in, 151–52 primer for, 145–47 recurrent neural networks in, 151, 153 reinforcement learning in, 152, 153 statistical analysis in, 149, 153 machine learning models, managing, 155–86 acceptance, 157, 162–66 accountability and, 164 and augmentation versus automation, 163 budget and, 164 data cleaning and, 162–63 distribution and, 165 executive education and, 165–66 experiments and, 165 explainability and, 166 feature development and, 163 incentives and, 164 politics and, 163–66 product enhancements and, 165 retraining and, 163 and revenues versus costs, 164 schedule and, 163 technical, 162–63 and time to value, 164 usage tracking and, 166 decentralization versus centralization in, 156 experimentation versus implementation in, 155 implementation, 158–66 data, 158–59 security, 159–60 sensors, 160 services, 161 software, 159 staffing, 161–162 loop in, 156, 166–81 deployment, 171–72 monitoring, see monitoring model performance training, 168–69 redeploying, 181 reproducibility and, 170 rethinking, 181 reworking, 179–80 testing, 172–74 versioning, 169–70, 281 ROI in, 164, 176, 181 testing and observing in, 156 machine learning researchers, 129–34, 135–36, 138, 277 management of AI-First teams, 135–38 of data labeling, 98–99 of machine learning models, see machine learning models, managing manual acceptance, 208–9 manufacturing, 6 marketing, customer data coalitions and, 83 marketing segmentation, 277 McCulloch, Warren, 4–5 McDonald’s, 256 Mechanical Turk, 98, 99, 215 media, 118 medical applications, 90–91, 145, 208 metrics, 203 measurement, 203–9 accuracy, 203–4 area underneath the curve, 206, 272 binary classification, 204–6 loss, 207–8 manual acceptance, 208–9 precision and recall, 206–7 receiver operating characteristic, 205–6, 279 usage, 209 profitability, 209–18 data labeling and, 215–16 data pipes and, 216 input cost analysis, 215–16 research cost analysis, 217–18 unit analysis, 213–14 and vertical versus horizontal products, 210–12 Microsoft, 8, 247 Access, 257 Outlook, 252 military, 6, 7 minimum viable product (MVP), 62–63, 277 MIT (Massachusetts Institute of Technology), 4, 5 ML models, see machine learning models moats, 277 loops versus, 187–88, 192–94 mobile phones, 113 iPhone, 252 monitoring, 277 monitoring model performance, 174–78 accuracy, 175 bias, 177 data quality, 177–78 reworking and, 179–80 stability, 175–77 MuleSoft, 86, 87 negotiating data rights, 79, 80 Netflix, 242, 243 network effects, 15–16, 20, 22, 23, 44, 278 compounding of, 36 data network effects versus, 24–25 edges of, 24 limits to, 42–43 moving beyond, 24–26 products with versus without, 26 scale effects versus, 24 traditional, 27 value of, 27 networks, 7, 15, 17 data networks versus, 26 neural networks, 5, 7, 8, 19, 23, 53, 54, 277–78 neurons, 5, 7, 15 layers of, 7, 276 next-level data network effects, 26–27, 29–33, 36–37, 278 nodes, 21, 23–25, 27, 44, 278 NVIDIA, 250 Obama administration, 118 Onavo, 112 optical character recognition software, 72, 278 Oracle, 247, 248 outsourcing, 216 data labeling, 101–2 team members, 131 overfitting, 82 Pareto optimal solution, 56, 278 partial plots, 53, 278 payoffs, 195–98 concave, 195–98 convex, 195–97, 202 perceptron algorithm, 5 perishability of data, 74–75, 201 personalization, 255–56 personally identifiable information (PII), 81, 278 personnel lock-in, 248 perturbation, 178, 278 physical leverage, 3 Pitts, Walter, 4–5 POC (proof of concept), 59–60, 63, 278 positioning, 245–56 power generators, 209, 278 power teachers, 209 precision, 278 precision and recall, 206–7 prediction usability threshold (PUT), 62–64, 90, 91, 173, 200–202, 279 predictions, 34–35, 48, 63, 65, 148, 202–3 predictive pricing, 41, 42 prices charged by data vendors, 73 pricing of AI-First products, 236–39 customer data contribution and, 237 features and, 238–39 transactional, 237, 280 updating and, 238 usage-based, 237–38, 281 of data integration products, 87 optimization of, 41–42 personalized, 41 predictive, 41, 42 ROI-based, 235–36, 279 Principia Mathematica, 4 prisoner’s dilemma, 104 probability, in data labeling, 107 process automation, 6 process lock-in, 248 products, 59 features of, 61, 63 lock-in and, 248 utility of, 35–36 value of, 39 profit, 213 profitability metrics, 209–18 data labeling and, 215–16 data pipes and, 216 input cost analysis, 215–16 research cost analysis, 217–18 unit analysis, 213–14 and vertical versus horizontal products, 210–12 proof of concept (POC), 59–60, 63, 278 proprietary information, 44, 279 feedback data, 199–200 protocols, 248 public data, 115–22 buying, see buying data consulting and competitions, 117–18 crawling, 115–16, 281 governments, 118–19 media, 118 PUT (prediction usability threshold), 62–64, 90, 91, 173, 200–202, 278 quality, 175, 177–78 query by committee, 96 query languages, 279 random forest, 53, 64, 279 recall, 279 receiver operating characteristic (ROC) curve, 205–6, 279 recurrent neural networks (RNNs), 151, 153 recursion, 150, 279 regression, 64 reinforcement learning (RL), 103, 147–48, 152, 153, 279 relevance of data, 74–75 reliability, 175 reports, 171 research and development (R & D), 42 cost analysis, 217–18 revolutionary products, 252 robots, 6 ROI (return on investment), 55, 63–65, 93, 164, 176, 181, 198, 279 pricing based on, 235–36, 279 Russell, Bertrand, 4 sales, 58–60 Salesforce, 159, 212, 243, 248, 258 SAP (Systems Applications and Products in Data Processing), 6, 159, 161, 247, 248 SAS, 253 scalability, in data labeling, 106 scale, 20–22, 227, 279 economies of, 19, 34 loops and, 198–200, 203 in ML management, 158 moving beyond, 21–23 network effects versus, 24 scatter plot, 53, 280 scheme, 279 search engines, 31 secure multiparty computation, 117, 279 security, 159 Segment, 87–88 self-reinforcing data, 76 selling data, 122 sensors, 113–14, 160, 280 shopping online, 29, 31, 34, 37, 41, 84 simulation, 103–4, 280 ABMs versus, 105 social networks, 16, 20, 44 Facebook, 25, 43, 112, 119, 122 LinkedIn, 122 software, 159 traditional business models for, 233–34 software-as-a-service (SaaS), 87, 280 software development kits (SDKs), 112, 280 software engineering, decoupling data science from, 133 software engineers, 139, 134–37 Sony, 7 speed of data labeling, 108 spreadsheets, 171 Square Capital, 35 stability, 175–77 staging, 249–51 standardization, 247–48, 249–50 statistical analysis, 149, 153 statistical process control (SPC), 156, 173, 280 statistics, 53–54 stocks, 72, 74, 120–21 supervised machine learning, 147–48, 280 supply, 225 supply-chain tracking, 260 support vector machines, 280 synthetic data, 105–8, 216 system of engagement, 280 system of record, 243, 281 systems integrators (SIs), 161, 248, 281 Tableau, 253 talent loop, 260–61, 281 Taylor, Frederick W., 6 teams in proof of concept phase, 60 see also AI-First teams telecommunications industry, 250–51 telephones mobile, 113 iPhone, 253 networks, 23–25 templates, 171 temporal leverage, 3 threshold logic unit (TLU), 5 ticker data, 120–21 token-based incentives, 109–10 tools, 2–3, 93–97 training data, 199 transactional pricing, 237, 280 transaction costs, 243 transfer learning, 147–48 true and false, 204–6 Turing, Alan, 5 23andMe, 112 Twilio, 87 uncertainty sampling, 96 unit analysis, 213–14 United Nations, 250 unsupervised machine learning, 53, 147–48, 281 Upwork, 99 usability, 255–56 usage-based pricing, 237–38, 281 usage metrics, 209 user interface (UI), 89, 159, 281 utility of network effects, 42 of products, 35–36 validation data, 199 value chain, 18–19, 281 value proposition, 59 values, missing, 178 variable importance plots, 53, 281 variance reduction, 96 Veeva Systems, 212 vendors, 73, 161 data, prices charged by, 73 independent software, 161, 248, 276 lock-in and, 247–48 venture capital, 230 veracity of data, 75 versioning, 169–70, 281 vertical integration, 226–37, 239, 244, 252, 281 vertical products, 210–12, 282 VMWare, 248 waterfall charts, 282 Web crawlers, 115–16, 282 weights, 150, 281 workflow applications, 84–86, 253, 259, 282 workflow-first versus integrations-first companies, 88–89 yield management systems, 42 Zapier, 87 Zendesk, 233 zettabyte, 8, 282 Zetta Venture Partners, 8–9 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z ABOUT THE AUTHOR Ash Fontana became one of the most recognized startup investors in the world after launching online investing at AngelList.

The Wisdom of Crowds
by James Surowiecki
Published 1 Jan 2004

It takes work to find the right people, and to haggle with them over how much you’ll pay them. It takes work to ensure that everyone’s doing what they promised they would do. And it takes work to make sure, after everything’s done, that everyone gets what’s coming to them. These are all what Coase called “transaction costs,” which include “search and information costs, bargaining and decision costs, policing and enforcement costs.” A well-run company reduces these costs. If your e-mail goes on the fritz, it’s easier and faster to call the office tech guy instead of some outside company. And it’s often smarter for a company to hire full-time employees who are always available to work than it is to go hunting for talented people every time a new project arises.

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But the company thinks its chances of publishing interesting books are better if it leaves the door open to lots of different writers, and so it’s willing to endure the hassle of having to sign each book on a case-by-case basis. (It’s also a hassle for writers, of course, who have to write and sell books on a case-by-case basis. One way publishers and authors try to reduce the hassle, which is to say, reduce transaction costs, is by signing multibook deals.) Although companies typically don’t think of it in this way, what they’re really wrestling with when they think about outsourcing is the costs and benefits of collective action. Doing things in-house means, in some sense, cutting themselves off from a host of diverse alternatives, any of which could help them do business better.

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This model allows people to be handpicked for their diverse abilities (planning, safecracking, explosives, etc.), so that the group can have exactly what it needs for the job. And the one-off nature of the project ensures that everyone on the team has an incentive to perform well. The problems with this model, though, are precisely those that Ronald Coase had in mind when he talked about transaction costs. It takes a lot of work to put the group together. It’s difficult to ensure that people are working in the group’s interest and not their own. And when there’s a lack of trust between the members of the group (which isn’t surprising given that they don’t really know each other), considerable energy is wasted trying to determine each other’s bona fides.

An Empire of Wealth: Rise of American Economy Power 1607-2000
by John Steele Gordon
Published 12 Oct 2009

It had taken three weeks and cost $120 to send a ton of flour from Buffalo to New York City before the canal, triple the cost of the flour itself. Soon it cost only $6 and took eight days. Transportation is what economists call a “transaction cost,” one that adds to the cost of an item without adding to its intrinsic value. Advertising, sales, and packaging are all examples of transaction costs. The lower these transaction costs, obviously, the lower the final price, and thus the higher the demand. When a transaction cost is lowered as dramatically as the Erie Canal lowered the cost of the produce of the Middle West, delivered to New York City, the consequences will always be far-reaching.

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The railroad business, in decline for most of the century, began to revive, and pointless inefficiencies—most trucks had to return to their place of origin empty, for instance—were quickly drained out of the transportation business. In 1980 transportation amounted to about 15 percent of GDP. By the 1990s it had dropped to 10 percent. Since transportation is what economists call a transaction cost—necessary expenses that do not add to the intrinsic value of the product, such as advertising and packaging—this was a pure gain for the economy as a whole. The most important deregulation of the 1970s was on Wall Street. The New York Stock Exchange had begun as an agreement among brokers to set minimum prices for stock trading, and commissions had been fixed ever since.

The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism
by Jeremy Rifkin
Published 31 Mar 2014

For example, as an author, I sell my intellectual work product to a publisher in return for an advance and future royalties on my book. The book then goes through several hands on the way to the end buyer, including an outside copyeditor, compositor, printer, as well as wholesalers, distributors, and retailers. Each party in this process is marking up the transaction costs to include a profit margin large enough to justify their participation. But what if the marginal cost of producing and distributing a book plummeted to near zero? In fact, it’s already happening. A growing number of authors are writing books and making them available at a very small price, or even for free, on the Internet—bypassing publishers, editors, printers, wholesalers, distributors, and retailers.

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The fixed costs of bringing online a distributed IoT infrastructure, while considerable, are far less than those required to build out and maintain the more centralized technology platforms of the First and Second Industrial Revolutions. While fixed costs are less, the Internet of Things also brings down the marginal cost of communication, energy, and logistics in the production and distribution of goods and services. By eliminating virtually all of the remaining middlemen who mark up the transaction costs at every stage of the value chain, small- and medium-sized enterprises—especially cooperatives and other nonprofit businesses—and billions of prosumers can share their goods and services directly with one another on the Collaborative Commons—at near zero marginal cost. The reduction in both fixed and marginal costs dramatically reduces the entry costs of creating new businesses in distributed peer-to-peer networks.

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The convergence of print and renewable energies had the effect of democratizing both literacy and power, posing a formidable challenge to the hierarchical organization of feudal life. The synergies created by the print revolution and wind and water power, along with steady improvements in road and river transport, sped up exchange and decreased transaction costs, making possible trade in larger regional markets. The new communication/energy matrix not only shortened distances and quickened time, bringing diverse people together in joint economic pursuits after centuries of isolation, but in so doing, also encouraged a new openness to others and the beginning of a more cosmopolitan frame of mind.

Behemoth: A History of the Factory and the Making of the Modern World
by Joshua B. Freeman
Published 27 Feb 2018

Anthony Calladine, “Lombe’s Mill: An Exercise in Reconstruction,” Industrial Archeology Review XVI, 1 (Autumn 1993), 82, 86. 3.Calladine, “Lombe’s Mill,” 82, 89; William Henry Chaloner, People and Industries (London, Frank Cass and Co., Ltd., 1963), 14–15. An 1891 fire destroyed most of the building, which was reconstructed on a smaller scale. It now houses the Derby Silk Mill museum. 4.S. R. H. Jones, “Technology, Transaction Costs, and the Transition to Factory Production in the British Silk Industry, 1700–1870,” Journal of Economic History XLVII (1987), 75; Chaloner, People and Industries, 9–18; Calladine, “Lombe’s Mill,” 82, 87–88; R. B. Prosser and Susan Christian, “Lombe, Sir Thomas (1685–1739),” rev. Maxwell Craven, Susan Christian, Oxford Dictionary of National Biography (Oxford: Oxford University Press, 2004); online ed., Jan. 2008, http://www.oxforddnb.com/view/article/16956. 5.John Guardivaglio, one of the Italian workers who had come back with John Lombe, helped set up the mill near Manchester.

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Maxwell Craven, Susan Christian, Oxford Dictionary of National Biography (Oxford: Oxford University Press, 2004); online ed., Jan. 2008, http://www.oxforddnb.com/view/article/16956. 5.John Guardivaglio, one of the Italian workers who had come back with John Lombe, helped set up the mill near Manchester. Tram could be made from raw silk imported from Persia, easier to get than the higher-quality Italian or Chinese silk needed for organzine. Calladine, “Lombe’s Mill,” 87, 96–97; Berg, Age of Manufactures, 202–03; Jones, “Technology, Transaction Costs, and the Transition to Factory Production,” 77. 6.Daniel Defoe, A Tour Thro’ the Whole Island of Great Britain, 3rd. ed., vol. III (London: J. Osborn, 1742), 67; Charles Dickens, Hard Times for These Times ([1854] London: Oxford University Press, 1955), 7, 1. 7.James Boswell, The Life of Samuel Johnson, vol.

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Chapman, “Financial Restraints on the Growth of Firms in the Cotton Industry, 1790–1850,” Textile History 5 (1974), 50–69; Berg, Age of Manufactures, 182. 18.Hills, “Hargreaves, Arkwright and Crompton,” 118–23; Berg, Age of Manufactures, 236; Fitton and Wadsworth, The Strutts and the Arkwrights, 61–68, 76–78, 94–97; Adam Menuge, “The Cotton Mills of the Derbyshire Derwent and Its Tributaries,” Industrial Archeology Review XVI (1) (Autumn 1993), 38. 19.Berg, Age of Manufactures, 236, 239, 244, 248, 258; George Unwin, Samuel Oldknow and the Arkwrights (Manchester: Manchester University Press, 1924), 30–32, 71, 124–25; Landes, Unbound Prometheus, 85; E. P. Thompson, The Making of the English Working Class ([1963] London: Pelican Books, 1968), 327, 335; Jones, “Technology, Transaction Costs, and the Transition to Factory Production,” 89–90. 20.Chaloner, People and Industries, 14–15; Fitton and Wadsworth, The Strutts and the Arkwrights, 98–99, 192–95, 224–25. 21.Small four-spindle, hand-powered spinning frames, built from Arkwright’s plans for a demonstration model, can be seen at the museums in Cromford and Belper.

Anarchy State and Utopia
by Robert Nozick
Published 15 Mar 1974

However, the process of actually carrying out the payments and ascertaining the precise risk imposed upon others and the appropriate compensation would seem to involve enormous transaction costs. Some efficiencies easily can be imagined (for example, keep central records for all, with net payments made every n months), but in the absence of some neat institutional device it remains enormously cumbersome. Because great transaction costs may make the fairest alternative impracticable, one may search for other alternatives, such as Fried’s risk pool. These alternatives will involve constant minor unfairness and classes of major ones.

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But such reasons sometimes will hold, as well, where prior identification and communication, though possible, are more costly even than the great benefits of the act. Prohibiting such unconsented to acts would entail forgoing their benefits, as in the cases where negotiation is impossible. The most efficient policy forgoes the fewest net beneficial acts; it allows anyone to perform an unfeared action without prior agreement, provided the transaction costs of reaching a prior agreement are greater, even by a bit, than the costs of the posterior compensation process. (The party acted upon is compensated for his involvement in the process of compensation, as well as for the act itself.) But efficiency considerations are insufficient to justify unpenalized boundary crossings for marginal benefits, even if the compensation is more than full so that the benefits of exchange do not redound solely to the boundary crosser.

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Recall the additional considerations against permitting boundary crossings with compensation mentioned earlier (p. 71). To say that such acts should be allowed if and only if their benefits are “great enough” is of little help in the absence of some social mechanism to decide this. The three considerations of fear, division of the benefits of exchange, and transaction costs delimit our area; but because we have not yet found a precise principle involving the last and the considerations mentioned earlier (p. 71), they do not yet triangulate a solution in all its detail. RISK We noted earlier that a risky action might present too low a probability of harm to any given person to cause him worry or fear.

The Fair Trade Scandal: Marketing Poverty to Benefit the Rich
by Ndongo Sylla
Published 21 Jan 2014

However, the first assumption is not acceptable for a movement concerned with sustainable working conditions, whereas the second is simply a parameter beyond the scope of the movement. The second answer consists in reducing transaction costs. Here again there are macroeconomic and institutional considerations that curb the determination and the margin for manoeuvre of producer organisations. Indeed, the level of transaction costs is influenced by the economic development level reached by countries. Generally speaking, they are higher among poor countries than among rich ones (World Bank, 2010b and its Logistics Performance Index).

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The notion of ‘efficiency’ enjoys such a status in the paradigm of ‘sustainable social economy’ in its FT version. Indeed, in the book written by the two co-founders of Fairtrade, numerous sections advocate in favour of the increased efficiency of producers in the South. For instance, one can read: Fair Trade should suggest a market structure that reduces transaction costs as much as possible. Inefficiency leads to higher costs, and therefore, loss of markets. (Roozen and van der Hoff, 2002: 245) Fair Trade does not encourage inefficient production by suggesting a protected market. (Roozen and van der Hoff, 2002: 247) Or again: Fair Trade is full-fledged trade and must therefore adapt to the key components of the market as a whole: efficiency and quality, financial 88 Sylla T02779 01 text 88 28/11/2013 13:04 the free market as a solution to poverty flexibility and the use of appropriate techniques are the guarantees of an environmentally sound production model and of long-term economic policy.

Where Does Money Come From?: A Guide to the UK Monetary & Banking System
by Josh Ryan-Collins , Tony Greenham , Richard Werner and Andrew Jackson
Published 14 Apr 2012

As cash became less and less important as a medium of payment in relation to demand deposits that could easily be moved around with the use of debit cards or electronic transfers, so the macro-economic importance of the banking system as the main creator of new money in the economy increased.112 As the European Central Bank stated in 2000: At the beginning of the 20th century almost the totality of retail payments were made in central bank money. Over time, this monopoly came to be shared with commercial banks, when deposits and their transfer via checks and giros became widely accepted. Banknotes and commercial bank money became fully interchangeable payment media that customers could use according to their needs. While transaction costs in commercial bank money were shrinking, cashless payment instruments became increasingly used, at the expense of banknotes.113 Today virtually all (most estimates are between 97 to 98 per cent) money in circulation is commercial bank money.114 As shown in Figure 7, its growth has been exponential.

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As new kinds of financial institutions – secondary banks (see section 3.6.3) – began lending aggressively, the Bank decided that rather than try to regulate the quantity of credit provided by the banking system as a whole, it would attempt to influence the price of credit. The price or cost of credit is the interest rate charged on it when it is lent out. This makes sense in a world of perfect information, complete and competitive markets, flexible prices, zero transaction costs, and utility-maximising agents, which are the conditions required for markets to clear, or reach equilibrium. In such a world, higher interest rates should lead to a reduction in the demand for credit and vice versa, as the credit market, like all markets, would be in equilibrium. Every commercial bank may need to borrow reserves and cash from the central bank, so by changing the rate of interest charged on central bank reserves, the Bank of England can, in theory, influence the demand for loans from banks, as banks will pass on this change in interest rate to customers.

…

In 2008, the volume of WIR-denominated trade was 1.5 billion Swiss francs.43 Evaluation of the system suggests it has a stabilising, counter-cyclical effect on the Swiss economy, as businesses use it more during recessions.44 In such ‘mutual credit’ systems, credit is linked directly to the productive or spare capacity of the individuals or businesses involved as credits within the system are backed by delivery of goods and services by members. Developments in technology have significantly reduced the transaction costs involved in such complementary currencies. Some thinkers have suggested encouraging their development could increase the resilience of a financial system that has become overly dependent on the type of state-monopoly, debt-based money that has been described and analysed consistently throughout Where Does Money Come From?

Reinventing Capitalism in the Age of Big Data
by Viktor Mayer-Schönberger and Thomas Ramge
Published 27 Feb 2018

As more customers bank online and on mobile devices, banks no longer need a comprehensive branch network or as many bank clerks and tellers. Actions to reduce the cost per transaction, whether for investment management, lending, or payment follow. As discount brokerage Charles Schwab demonstrated in the 1970s and 1980s, if transaction costs are sufficiently low, money can still be made even with reduced fees. But in the twenty-first century, banks aren’t competing against Charles Schwab–type firms. Instead they face a new generation of start-ups that are relentlessly utilizing digital technology to extract insight from data and provide services at rock-bottom prices.

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—Henning Kagermann, former CEO of SAP and president of Acatech at the National Academy of Science and Engineering “This refreshingly optimistic book, full of fascinating examples, shows how the digital age can lead to a future of data-rich markets that empower individuals and improve our lives in a diverse and inclusive society.” —Urs Gasser, professor and executive director, Berkman Klein Center for Internet & Society, Harvard University “For a generation, information technology has progressively driven down transaction-costs and displaced a universal tradeoff between richness and reach. This landmark book takes that logic to an entirely new plane, where the richness of data merges with the open and unbounded reach of markets. The possibility of data-rich markets is a vision that should challenge and inspire every corporate strategist and public policy maker.”

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Critics of fair-value accounting: For a discussion and critical analysis about the pros and cons of the argument, see Christian Laux and Christian Leuz, “Did Fair-Value Accounting Contribute to the Financial Crisis?” Journal of Economic Perspectives 24 (2010), 93–118. shift in focus from collection to use: See, e.g., Fred H. Cate and Viktor Mayer-Schönberger, “Notice and Consent in a World of Big Data,” International Data Privacy Law 3 (2013), 67–73; Kirsten E. Martin, “Transaction Costs, Privacy, and Trust: The Laudable Goals and Ultimate Failure of Notice and Choice to Respect Privacy Online,” First Monday 18, no. 12-2 (2013), http://firstmonday.org/ojs/index.php/fm/article/view/4838/3802; Alessandro Mantelero, “The Future of Consumer Data Protection in the E.U. Rethinking the ‘Notice and Consent’ Paradigm in the New Era of Predictive Analytics,” Computer Law and Security Review 30 (2014), 643; Joel R.

Platform Revolution: How Networked Markets Are Transforming the Economy--And How to Make Them Work for You
by Sangeet Paul Choudary , Marshall W. van Alstyne and Geoffrey G. Parker
Published 27 Mar 2016

This is because it would be difficult to trust that your home would be left in good shape (Airbnb), your car would be returned undamaged (RelayRides), or your lawnmower would come back (NeighborGoods). The effort necessary to individually verify credit- and trustworthiness is an example of the high transaction costs that used to prevent exchange. By providing default insurance contracts and reputation systems to encourage good behavior, platforms dramatically lower transaction costs and create new markets as new producers start producing for the first time. Platforms beat pipelines by using data-based tools to create community feedback loops. We’ve seen how the Kindle platform relies on reactions from the community of readers to determine which books will be widely read and which will not.

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Are entrenched companies that operate familiar pipeline businesses doomed to capitulate as platforms reshape and ultimately take over their industries? Not necessarily. But if incumbents hope to fight the forces of platform disruption, they’ll need to reevaluate their existing business models. For example, they’ll need to scrutinize all their transaction costs—that is, the money they spend on processes such as marketing, sales, product delivery, and customer service—and imagine how those costs might be reduced or eliminated in a more seamlessly connected world. They’ll also need to examine the entire universe of individuals and organizations they currently interact with and envision new ways of networking them so as to create new forms of value.14 They’ll need to ask questions such as: • Which processes that we currently manage in-house can be delegated to outside partners, whether suppliers or customers?

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Airbnb provides an infrastructure that allows guests and hosts to interact with each other using system resources, including the search capabilities and data services that allow guests to find attractive properties as well as the payment mechanisms necessary to conclude a transaction. In addition, Airbnb manages behind-the-scenes functions that reduce transaction costs for guests and hosts. For example, the platform provides default insurance contracts for both parties, protecting guests in the event of accident or crime and protecting hosts from negligent guest behavior (though, as we’ll discuss in chapter 11, this insurance coverage is not without its shortcomings).

How Will Capitalism End?
by Wolfgang Streeck
Published 8 Nov 2016

Moreover, rather than just consuming political decisions, citizens in a functioning democracy are invited and indeed obliged to participate in their production. In the process, they must subject their specific, collectively unexamined ‘raw’ wants to critical scrutiny in some sort of public dialogue. Getting their way may demand collective rather than individual action, requiring in turn considerable investment, making for high transaction costs without guarantee that the result will be to one’s personal liking. In fact the role of citizen requires a disciplined readiness to accept decisions that one had originally opposed, or that are contrary to one’s interests. Results are thus only rarely optimal from an individual’s perspective, so that lack of fit with what one would have preferred must be compensated by civic satisfaction about their having been achieved through a legitimate democratic procedure.

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Money replaces direct exchange by indirect exchange, through the interpolation of a universally available, easily transportable, infinitely divisible and durable intermediate commodity (a process described by Marx as ‘simple circulation’, C–M–C). According to Smith, monetary systems develop from below, from the desire of market participants to extend and simplify their trade relations, which increase their efficiency by continually reducing their transaction costs. For Smith, money is a neutral symbol for the value of objects to be exchanged; it should be made as fit as possible for purpose, even if it has an objective value of its own, arising in theory from its production costs. The state makes an appearance only to the extent that it can be invited by market participants to increase the efficiency of money by ‘putting its stamp’ on it, thus making it seem more trustworthy.

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In this version economic sociology would compete with standard economics on its turf and terms, by offering to add a ‘social factor’ to the economists’ account of economic affairs while accepting their definition of what is and is not ‘economic’. What this must amount to is, in essence, an extended efficiency theory with strong prescriptive implications: to make markets really work, you need to factor in networks and trust and the like as indispensable devices for reducing transaction costs, and generally to recognize the hidden efficiencies of particularistic as distinguished from universalistic social relations even in presumably impersonal and in this sense ‘rational’ markets and organizations. In a more ethnographic mode, this sort of economic sociology undertakes to produce thick descriptions of how the economy is ‘being done on the ground’: with intuition and tacit knowledge, following half-conscious rules of thumb, and of course deviating widely from the rationalistic homo economicus model of standard economic theory.

Hacking Capitalism
by Söderberg, Johan; Söderberg, Johan;

It runs counter to the assumption in economic theory that markets are prevalent because they are the most efficient method to organise economic interactions. Coase’s response was that firms emerge when the transaction cost from coordinating buyers and seller are higher than the cost of a hierarchic organisation.6 Benkler adds to Coase’s reasoning by saying that falling costs of communication technology have given rise to networks of volunteer developers. Transaction costs can at times be lower in the network than in both the market and in the firm. Furthermore, the strengths of the network model are accentuated in the creative economy.

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The shortage of satellite images hindered researchers from taking long series of images over an extended period of time and discouraged them from double-checking data.9 The ineffectiveness of enclosing information can also be argued by pointing at the fact that capital itself, from within, is developing enclaves free from property claims. Patent pools and collective rights organisations are set up to reduce the transaction costs of intellectual property. Members aggregate their patents or copyrights in a common pool and enjoy the freedom to draw from it without asking for permission.10 At first sight it might appear as if the partial suspension of property rights is against the grain of the intellectual property regime.

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The idea that networks is a novel mode of organising businesses and that it is distinct from markets has been in vogue since the 1990s. According to the argument, networks are supposed to be superior for sharing tacit know-how, in adapting to a volatile environment, and for perpetual learning processes.8 Unfortunately, Yochai Benkler’s decision to follow Ronald Coase and confine himself to an analysis of transaction costs puts a limitation on his thinking. The observations on networks ought instead to be framed in the debate about markets versus central planning that was waged between neoclassical and socialist economists in the first half of the twentieth century. In the 1930s, the great depression gave socialists wind in their sails when advocating the rationality of central planning against the anarchy of markets.

The Social Life of Money
by Nigel Dodd
Published 14 May 2014

The problem, he argues, comes down to Menger’s adherence to an untenable methodological individualism, with each agent trying to reduce transaction costs in isolation, both from each other and, more importantly, an overarching institutional authority: “To state the sociologically obvious: the advantages of money for the individual presuppose the existence of money as an institution in which its ‘moneyness’ is established” (Ingham 2004b: 23, original italics). Orléan sees the issue slightly differently, arguing that whereas the emphasis on reducing transactions costs is an advantage of Menger’s model, “what the instrumentalist approach has never been able successfully to demonstrate is that money is an essential requirement for the existence of a market economy” (Orléan 2013: 51).

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This method is meant to treat money as if it were a commodity: a creature of the market, not of sovereignty, law, or society. According to Goodhart, the euro’s design was informed by the theory of “optimal currency areas,” in which it is assumed—consistent with Menger’s theory—that money’s spatial domain can evolve on the basis of the progressive minimization of transaction costs (Goodhart 1998: 419). If Menger’s theory has been discredited by historical evidence that contradicts it, what explains its enduring appeal to economists? For one thing, the theory seems elegant and simple. As Goodhart notes, although the idea that money is a social or political artifact might be better supported by the empirical data, such a viewpoint “is somewhat woolly and socio-logical” (Goodhart 2008: 301), and does not lend itself easily to mathematical modeling.

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As Harvey notes, the credit monies Marx refers to originated as private bills of exchange that had two key advantages: their supply adjusted quickly to changes in commodity production (unlike ordinary money, credit notes disappear from circulation once they are paid off), and they helped to reduce transaction costs (Harvey 2006: 245–46). 13 Gold, in turn, was the main constituent of international means of payment, or world money. When gold functions in this way, Marx said, money reverts to its “primitive” form (Marx 2009: 202). 14 Peter Schlemihl is the main character in Adelbert von Chamisso’s novel, Peter Schlemihls wundersame Geschichte (1814) (von Chamisso 2008), who sells his shadow to the devil in exchange for an endless supply of gold.

Heads I Win, Tails I Win
by Spencer Jakab
Published 21 Jun 2016

Over the thirty years he had possession of the beginning and ending dates of the economic expansions and contractions, between the end of 1955 and 1985, he dutifully switched his portfolio to cash only during recessions and remained fully invested in the S&P 500 at other times. We’ll be generous to Biff and ignore capital gains taxes and transaction costs. By the end of 1985, he would have accumulated a portfolio worth nearly $122,000. That’s not too shabby—an 8.7 percent compound annualized return, which is far better than what most investors earn. But, shockingly, it’s less than the over $149,000, or 9.4 percent, that he would have netted by just staying invested in the S&P 500 throughout the entire thirty years, in good and bad economic times alike.

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William Sharpe, a Nobel Prize–winning economist and the man behind the famous Sharpe ratio used to measure portfolio risk, recently tried to calculate the all-in costs of active funds. Some aren’t at all obvious. In 2013 the average expense ratio was 1.12 percent, but service charges also averaged 0.5 percent. Then there are the transaction costs within a fund—paying commissions to brokers to buy and sell stocks. That comes to another 0.5 percent. Finally, there is the fact that, unlike with an index fund, active managers usually have a little bit of cash on hand to meet redemptions or to be able to pounce on opportunities. Since the market usually is going up or at least paying dividends, having cash lying around that earns next to nothing adds another 0.15 percent.4 Add it all up and active funds’ 2.27 percentage points of total visible and invisible expenses is 2.21 points higher than the largest stock index fund.

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But another finding by the same researchers genuinely surprised me. They looked at ten thousand investors at a large discount broker and the subsequent performance of stocks investors bought versus the ones they sold. The average difference between them was negative 3.3 percent annually, and that was before counting transaction costs. Many how-to books on trading or biographies of successful speculators advise you to “sell your losers and keep your winners.” Of course that only reflects those investments’ performance before the day you hit that button. Based on these figures, this old chestnut is precisely backwards. Any way you slice it, frequent trading is a loser’s game.

Bank 3.0: Why Banking Is No Longer Somewhere You Go but Something You Do
by Brett King
Published 26 Dec 2012

Without formal financial services, households rely on informal services that are associated with high transaction costs. Thus increasing access to formal financial services for the majority of households in developing countries remains an important policy goal for institutions such as the United Nations, the World Bank and IMF. It has also been recognised that even for those with bank accounts, physical distances to branches or points of financial service add significantly to transactions costs. Mainstream financial institutions generally shy away from developing economies because of the premise that low-income populations do not save and are bad borrowers.

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Of course, HTML5 won’t be a silver bullet that eliminates all the downsides to native apps in a single stroke. Although HTML5 will reduce developers’ dependence on app stores, which typically take a commission of between 10 and 30 per cent, they will still incur some marketing, distribution and transaction costs. The benefits of cross-platform speed to market, along with lower distribution costs, mean that the likes of Facebook will be championing HTML5 as an alternative app experience. The restrictions will be around native mobile function and feature access. That will likely be solved by mobile browsers that have the native plug-ins.

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But there are other competitors also, including the likes of iCarte, Erply, iMag, and others looking to enable NFC in the same way. Dwolla Unlike Square and PayPal, Dwolla works completely independently of the existing payment networks beyond cash-in and cash-out functionality. Dwolla’s main strategy is to attack the current transaction costs of moving money around. If a transaction is under $10, the transfer (or payment) is free, if over $10, there is a capped $0.25 fee. Dwolla has around 70,000 customers today (including 5000 merchants or retailers17) and it already processes around $1m a day through its network. Dwolla argues that its network is safer for consumers and merchants alike because it doesn’t send sensitive credit card details across the network—just a secure ID and the transaction details.

Why Stock Markets Crash: Critical Events in Complex Financial Systems
by Didier Sornette
Published 18 Nov 2002

The point is that you don’t want to trade too much, otherwise you will have to pay for significant transaction costs. The average return over one correlation time that you will make using this strategy is of the order of the typical amplitude of the return over these five minutes, say 003% (to account for imperfections in the prediction skills, we take a somewhat more conservative measure than the scale of 004% over one minute used before). Over a day, this gives an average gain of 059%, which accrues to 435% per year when return is reinvested, or 150% without reinvestment! Such small correlations would lead to substantial profits if transaction costs and other friction phenomena like slippage did not exist (slippage refers to the fact that market orders are not always executed at the order price due to limited liquidity and finite human execution time).

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Such small correlations would lead to substantial profits if transaction costs and other friction phenomena like slippage did not exist (slippage refers to the fact that market orders are not always executed at the order price due to limited liquidity and finite human execution time). It is clear that a transaction cost as small as 003%, or $3 per $10000 invested is enough to destroy the expected gain of this strategy. The conundrum is that you cannot trade at a slower rate in order to reduce the transaction costs because, if you do so, you lose your prediction skill based on correlations only present within a five minute time 38 chapter 2 horizon. We can conclude that the residual correlations are those little enough not to be profitable by strategies such as those described above due to “imperfect” market conditions.

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In order to understand the specific manners with which this is attained would require a level of modeling not yet available at present and whose achievement is at the heart of a very active domain of research that we only glimpsed in chapter 4. As we pointed out in chapter 2, the existence of transaction costs and other imperfections of the market should not be used as an excuse for disregarding the no-arbitrage condition but rather should be constructively invoked to study its impacts on the models. In other words, these market imperfections are considered as second-order effects. Existence of Rational Agents Mainstream finance and economic modeling add a second overarching organizing principle, namely that investors and economic agents are rational.

How Markets Fail: The Logic of Economic Calamities
by John Cassidy
Published 10 Nov 2009

In his 1960 article, he acknowledged that when an activity inflicted harm on many different people, getting all the interested parties to agree on an efficient solution might be difficult and costly. Economists refer to the costs of negotiation as transaction costs: in his Nobel lecture, Coase acknowledged that the theorem named after him applied only when these were negligible. “I tend to regard the Coase Theorem as a stepping stone on the way to an analysis of an economy with positive transactions costs,” he said. And he went on: “[I]t does not imply, when transaction costs are positive, that government action . . . could not produce a better result than relying on negotiations between individuals in the market.

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Such a simplistic mindset makes it impossible for people to discuss in a responsible way the relative merits of different tax systems. Instead, we Pigovians acknowledge: (1) There will be some government spending; (2) This spending will be funded with taxes; (3) Government should use the least bad taxes it has available. In fact, Pigovian taxes are not only least bad—they are good. They correct market failures when transaction costs are too high to expect the forces of the Coase theorem to fix the problem. An alternative method of dealing with global warming is for the government to impose a cap on total carbon emissions. A variant of this idea, which the Obama administration is pursuing, is to distribute a limited number of “emission rights,” which can be traded in a secondary market.

The Euro: How a Common Currency Threatens the Future of Europe
by Joseph E. Stiglitz and Alex Hyde-White
Published 24 Oct 2016

There is, of course, a cost to this financial transaction (which can be viewed as a kind of insurance against exchange-rate fluctuations). In well-functioning markets, however, the cost of such insurance is relatively low. But these mechanisms do not work very well for long-term investments, partly because the necessary markets do not exist or have high transactions costs. There is an alternative way of managing such risks: diversifying production across the markets in which one transacts, in which one buys and sells. The American firm might set up part of its production process in Canada, and as it does so, America’s and Canada’s real economy becomes more integrated.

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Exchanging currencies was a bother—and often expensive. The fact that it was expensive should have said something about the functioning of financial markets: the costs of exchanging currencies should be extremely small, if markets actually functioned efficiently, as hypothesized in the standard models. But while transactions costs are an annoyance for travelers today, they are not economically significant. Most transactions (both in numbers and value) are mediated electronically—through bank transfers and debit and credit cards. The costs for computers to move from one currency to another is negligible. (The prices charged by banks may be significantly larger, again testimony to market failures that are pervasive in the financial system.

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(The prices charged by banks may be significantly larger, again testimony to market failures that are pervasive in the financial system. But the appropriate response is not to reconfigure entire currency arrangements but to regulate and reform the financial sector.) There is another kind of transaction cost that sharing a currency may reduce: the exchange-rate risk going forward of longer-term investments that we discussed earlier in the chapter. But these costs have had at best a second-order effect in major production and supply chain decisions. China, for instance, has become integrally incorporated into the global supply chain, in spite of exchange-rate risk as well as political and supply-side risks.

Adam Smith: Father of Economics
by Jesse Norman
Published 30 Jun 2018

In very rough chronological order, they include Marxism, focused on production, class conflict, capital accumulation, business cycles and technological change; Austrian economics, stressing limitations on human rationality, the importance of norms, spontaneous order, prices as signals, innovation and entrepreneurship; post-Keynesianism, emphasizing uncertainty and ‘animal spirits’, stagnation, unemployment and the scope for active government fiscal interventions; developmental economics, analysing the industrial linkages which hinder or assist improvements in productive capabilities, protection and the role of policy in nurturing infant industries; institutional economics, exploring how institutions shape individual and collective behaviour, and more recently the specific role of transaction costs; and monetarism, emphasizing the importance of the money supply and the influence of monetary factors on inflation, economic performance and national output. The boundaries are porous: many would argue, for example, that institutional economics or behavioural economics should now be considered part of the mainstream.

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Much of the analysis has probed what the implications are, not of insisting on perfect information, perfect rationality and perfect liquidity, but of relaxing these very strong assumptions in different ways, through models focusing on imperfect or asymmetric information, bounded rationality and the impact of transaction costs. The best of this work has been rewarded with a hatful of Nobel Prizes. The career of Kenneth Arrow is again a case in point. For one thing, Arrow himself did a great deal of work to explore and explain the negative effects of asymmetric information in the US healthcare insurance market, and how that market might be made to function better.

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As we have seen, markets often differ from each other in crucial ways, few more so than those for land, labour and capital. Moreover, economies are not just about markets, and laissez-faire is not the same thing as market competition. Many of the best economists around the world have spent the last few decades trying to think through the limitations of markets—imperfect information and rationality, transaction costs, preferences, linkages and the rest—and to understand how different markets, from housing to healthcare, actually work. As an ideology, neoliberalism is dead. But the debate we need to have, the debate about what markets are and should be for, about the limitations of the idea of ‘market failure’ and the need to ensure effective competition, and about norms and culture and the role of the state, has been left by the wayside.

Learn Algorithmic Trading
by Sebastien Donadio
Published 7 Nov 2019

This may be the case with an average that could potentially be calculated within all the data; data that you shouldn't have since you calculate the average using just the prices you get before placing an order. Market change regime: Modeling stock distribution parameters are not constant in time because the market changes regime. Transaction costs: It is important to consider the transaction costs of your trading. This is very easy to forget and not to make money on the real market. Data quality/source: Since there are many financial data sources, data composition differs a lot. For instance, when you use OHLC data from Google Finance, it is an aggregation of many exchange feeds.

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Complexity and the need for calculating power are very low. Therefore, execution does not take too long and it is quick to obtain results regarding the performance of the trading strategies. Disadvantages The main weakness of the for-loop backtester is accuracy in relation to the market. It neglects transactions costs, transaction time, the bid and offer price, and volume. The likelihood of making a mistake by reading a value ahead of time is pretty high (look-ahead bias). While the code of a for-loop backtester is easy to write, we should still use this type of backtester to eliminate low-performance strategies.

Concentrated Investing
by Allen C. Benello
Published 7 Dec 2016

Short‐term developments are too unpredictable. On the other hand, shares of quality companies run for the shareholders stand an excellent chance of providing above-average returns to investors over the long term. Furthermore, moving in and out of stocks frequently has two major disadvantages that will substantially diminish results: transaction costs and taxes. Capital will grow more rapidly if earnings compound with as few interruptions for commissions and tax bites as possible. 5. Do not diversify excessively. An investor is not likely to obtain superior results by buying a broad cross‐section of the market—the more diversification, the more performance is likely to be average, at best.

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It was this “form of self‐deception” as Buffett described it, that nearly destroyed GEICO in the early 1970s.158 Simpson believes that, when considering active management, the base case for an investor must be a passive index fund, for example an S&P 500 index fund, a total market index fund, or a worldwide market index fund. That base case index fund allows an investor to obtain a market return very cheaply, so unless an active manager can add value over and above that index, the investor is better off in the index fund. For active managers as a whole, investing is a zero sum game, less fees and transaction costs, so most active managers won’t do as well as the market because they are the market. Academic studies tend to flatter the active managers due to survivorship bias, which means that because the worst drop out, they aren’t counted. How, then, does a manager add value over the market? In Simpson’s opinion, a “closet indexer”—an investor who closely follows index components to achieve returns in line with the index without disclosing that they are doing so—and who varies from the index “a little bit here and there and everywhere” won’t outperform.159 A broadly diversified portfolio will likely underperform the market after taking out fees.

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In a notebook Shannon recorded a varied list of thinkers, including French mathematician Louis Bachelier, Benjamin 74 Concentrated Investing Graham, and Benoit Mandelbrot. He took notes about margin trading; short selling; stop‐loss orders; the effects of market panics; capital gains taxes and transaction costs. The only surviving document from Shannon’s research is a mimeographed handout from one of the lectures he delivered at MIT in the spring term of 1956, in a class called Seminar of Information Theory. According to the handout, the lecture, called The Portfolio Problem, covered The $64,000 Question, a wire service giving horse tips, and the Kelly Criterion.

The Little Book of Hedge Funds
by Anthony Scaramucci
Published 30 Apr 2012

In other words, an investor was akin to a monkey in a coin-flipping contest, who—despite the odds—kept getting heads over and over again. This investor’s successful stock selection is a fluke as we are fooled by randomness. Malkiel went on to say that since most money managers cannot outperform their respective benchmarks or indexes, they are adding no value; in fact, they may actually be detractors of value as they require transaction costs. In any case, there I was. Sitting in Baker Library. Waiting for my coveted Goldman Sachs interview. Reading about the efficient market theory. Thinking about its disconnects. And, as it turned out, so were many a more knowledgeable and experienced financial minds. Times, They Are a Changing In the late 1980s, Michael Jackson was the King of Pop, Reaganomics was infiltrating the U.S. economy, I was wearing a skinny yellow tie to my Goldman Sachs interview (I had to get that in there), communism was moments away from heading to the ash heap of history (unless, of course, you are Cuban or North Korean), and we were experiencing the great go-go stock market era, with the market doubling from 1982 to 1987.

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A trader notices a difference between the price of HSBC on the New York Stock Exchange (NYSE) and Hong Kong Stock Exchange, where it is selling for $49.05 and $49.25, respectively. A skillful arbitrageur would quickly purchase HSBC on the NYSE and then sell it on the Hong Kong Exchange. After transaction costs of a penny each way, there is a risk-free profit of 18 cents. People become billionaires from this sort of stuff; however, as more people enter the market this strategy’s spreads start to narrow. (The decimalization of NASDAQ trading went a long way toward narrowing spreads.) Investors beware: In turbulent times, arbitrage strategies can be dangerous.

Unsustainable Inequalities: Social Justice and the Environment
by Lucas Chancel
Published 15 Jan 2020

FINANCIAL GLOBALIZATION The other aspect of globalization, having to do with financial flows, makes it possible to explain in a rather convincing manner the rise in inequality at the very top end of the income distribution scale. The opening up of capital markets can have several effects. On the one hand, liberalization increases both their size and their yields, thanks to the economies of scale it permits (many transaction costs disappear as the volume of business increases, so the returns on invested capital are greater), and the gains are redistributed to a minority of top managers in the financial sector, in the form of higher salaries and related benefits (stock options and so forth), sometimes amounting to staggering rates of compensation.20 On the other hand, financial liberalization increases the returns on inherited wealth.

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Standard economic theory provides us with the answer in this case: where a natural monopoly exists, introducing competition has the effect of increasing costs rather than reducing them (it would make no sense, for example, to build two parallel water-supply networks); furthermore, theories of property rights and transaction costs tell us that private management of a natural monopoly of this kind requires a high level of supervision on the part of public authorities, particularly in order to prevent the private operator from extracting monopoly rents, and that this supervision can prove to be very costly. As an empirical matter, it turns out that a good number of municipalities in the United States that opted for privatization in recent decades have since reverted to public management, because the quality of service under private management declined without the costs to consumers being lowered.5 The first victims were the least well-off, who could not afford preferable alternatives (buying mineral water, for example).

Corporate Finance: Theory and Practice
by Pierre Vernimmen , Pascal Quiry , Maurizio Dallocchio , Yann le Fur and Antonio Salvi
Published 16 Oct 2017

Actual markets approach the theory of an efficient market when: participants have low-cost access to all information; transaction costs are low; the market is liquid; and investors are rational. Take the example of a stock whose price is expected to rise 10% tomorrow. In an efficient market, its price will rise today to a level consistent with the expected gain. “Tomorrow’s” price will be discounted to today. Today’s price becomes an estimate of the value of tomorrow’s price. In general, if we try to explain why financial markets have different degrees of efficiency, we could say that: The lower transaction costs are, the more efficient a market is. An efficient market must quickly allow equilibrium between supply and demand to be established.

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An efficient market must quickly allow equilibrium between supply and demand to be established. Transaction costs are a key factor in enabling supply and demand for securities and capital to adjust. Brokerage fees have an impact on how quickly a market reaches equilibrium. In an efficient market, transactions have no costs associated with them, neither underwriting costs (when securities are issued) nor trading costs (when securities are bought and sold). When other transaction-related factors are introduced, such as the time required for approving and publishing information, they can slow down the achievement of market equilibrium.

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Stocks seem to perform less well on Mondays than on other days of the week and provide higher returns in the month of January compared to other months of the year (in particular for small- and medium-sized enterprises). Nevertheless, these calendar anomalies are not material enough to allow for systematic and profitable arbitrage given transaction costs. For each of these observations, some justifications consistent with the rationality of investor behaviour can be put forward. Meteorological anomalies. There is consistent observation that stock prices perform better when the sun shines than when it rains. There again, although statistically significant, these anomalies are not material enough to generate arbitrage opportunities.

Free culture: how big media uses technology and the law to lock down culture and control creativity
by Lawrence Lessig
Published 15 Nov 2004

If the friend recommending the album gains nothing from a bad recommendation, then one could expect that the recommendations will actually be quite good. The net effect of this sharing could increase the quantity of music purchased. C. There are many who use sharing networks to get access to copyrighted content that is no longer sold or that they would not have purchased because the transaction costs off the Net are too high. This use of sharing networks is among the most rewarding for many. Songs that were part of your childhood but have long vanished from the marketplace magically appear again on the network. (One friend told me that when she discovered Napster, she spent a solid weekend "recalling" old songs.

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And leaders in our profession have lost an appreciation of the high costs that our profession imposes upon others. The inefficiency of the law is an embarrassment to our tradition. And while I believe our profession should therefore do everything it can to make the law more efficient, it should at least do everything it can to limit the reach of the law where the law is not doing any good. The transaction costs buried within a permission culture are enough to bury a wide range of creativity. Someone needs to do a lot of justifying to justify that result. The uncertainty of the law is one burden on innovation. There is a second burden that operates more directly. This is the effort by many in the content industry to use the law to directly regulate the technology of the Internet so that it better protects their content.

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Yet just thirty years ago, the dominant scholar and practitioner in the field of copyright, Melville Nimmer, thought it obvious.[221] However, my criticism of the role that lawyers have played in this debate is not just about a professional bias. It is more importantly about our failure to actually reckon the costs of the law. Economists are supposed to be good at reckoning costs and benefits. But more often than not, economists, with no clue about how the legal system actually functions, simply assume that the transaction costs of the legal system are slight.[222] They see a system that has been around for hundreds of years, and they assume it works the way their elementary school civics class taught them it works. But the legal system doesn't work. Or more accurately, it doesn't work for anyone except those with the most resources.

The Curse of Cash
by Kenneth S Rogoff
Published 29 Aug 2016

Yes, especially as large notes are phased out, those engaged in corruption and other criminal activities will find other ways to do business, and there will be an even greater incentive for innovation. But other ways of making payments (gold, uncut diamonds, bitcoins) each have their problems, ranging from illiquidity and high transactions costs (uncut diamonds) to risks of ultimate tracing (bitcoins). As this book stresses repeatedly (because the point is so essential), of course criminals can use transaction technologies that circulate completely outside the legal economy. However, as long as the government blocks the doors into the legal economy, it can seriously undermine the liquidity of black market transaction media and dramatically increase the cost of using them compared to cash.

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In the United States, more than 8% of households were un-banked in 2013, according to an FDIC survey.3 Another 20% were underbanked, meaning they also used alternative financial services outside the banking system, including prepaid cards, payday loans, pawn shops, and check-cashing services. More than 25% of adult Americans do not have a credit card. Unfortunately, the cost of not having bank access is high. Check-cashing services charge exorbitant fees; for immigrants and others who need to wire funds abroad and transfer money to relatives, the transaction costs can amount to 10–15% or more. Storing cash at home and carrying cash greatly increases the chance of theft.4 The risks of being subject to fraud are much higher outside the regulated financial sector. The poor may benefit from being able to use paper currency, but overall, financial exclusion implies large costs for basic services.

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For example, a black market could develop for large-denomination euro notes on the darknet, effectively allowing a 100-, 200- or 500-euro note to be used multiple times before being smuggled out of the United States. I have addressed this basic point before in chapters 5 and 7, but repeat it here, because it is fundamental. Any bills that can be used only in the underground economy would sell at steep discounts, because they would be costly and difficult to use. For tax evaders and even criminals, high transactions costs and illiquidity would be significant impediments akin to the problems with uncut diamonds; they want to spend their money in retail stores and online, like everyone else. Last but not least, if the bills did retain high value, counterfeits would eventually intrude once innovation in the notes’ security features had stopped.

My Life as a Quant: Reflections on Physics and Finance
by Emanuel Derman
Published 1 Jan 2004

In late July of 1995, shortly before his death, in response to a question I sent him about these matters, he emailed me: "I view all our work on fixedincome models as resulting from the application of the capital asset pricing model to fixed-income markets" I had a touching glimpse of his love for this approach a few years before he died when, together with a few of my colleagues, I tried to assess the effect of transactions costs and hedging frequency on our trading desk's options prices. We built a Monte Carlo simulation program that dynamically replicated each option as the stock price changed, adding the assumed transactions costs as each rebalancing of the hedging portfolio took place. In the long run we intended to use the program to see how much this caused options prices to deviate from the Platonic Black-Scholes value; in this way we could estimate the actual cost of our hedging strategy rather than accept the value of the idealized value embodied in the Black-Scholes model.

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In the long run we intended to use the program to see how much this caused options prices to deviate from the Platonic Black-Scholes value; in this way we could estimate the actual cost of our hedging strategy rather than accept the value of the idealized value embodied in the Black-Scholes model. Whenever you write a program to do something new, you should first make sure that it does the old things correctly. In testing the program written by one of my colleagues, we first ran it assuming that there were no transactions costs and that you could hedge continuously, in order to ensure that we obtained the exact Black-Scholes replication price. Of course, you cannot really hedge continuously in a computer simulation, so we rehedged very often, several times a day. To our amazement, we discovered that even for 10,000 rehedgings on a one-year option-that is, for more than thirty rebalancings in a day-we still couldn't obtain the exact Black-Scholes value.

The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do About It
by Ian Goldin and Mike Mariathasan
Published 15 Mar 2014

The current period of integration is revolutionary in that a larger set of changes have occurred with a pervasively wider influence than over any comparably short time in previous phases of globalization.3 We consider, in turn, two additional examples of global connectivity that we feel are unique and have significantly lowered the transaction costs of economic integration. The first is innovation and technological progress, particularly with respect to computing power and information technologies. In the late 1960s Douglas Engelbart, a computer scientist at the Stanford Research Institute, gave a demonstration of the new technological opportunities emerging with the advent of personal computing.

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Haldane, at the Bank of England, has been doing groundbreaking work on complexity; the New York Fed has been undertaking novel network analysis; and within Europe there is a growing focus on interbank networks from the European Central Bank and a number of the national central banks. Although a growing chorus of economists cautioned against unchecked deregulation, the mainstream of the profession saw the lowering of transaction costs as economically sensible. These economists provided cover for those in government and business who were un willing to curtail the flow of cheap credit that was driving consumers’ confidence and sense of good fortune. It is never easy to turn off the music or take away the punch bowl while a party is in full swing.

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In the interaction of politics and economics, new transport technologies played an important part. The most significant innovation, however, came not from new planes or cargo devices but from the Internet. As the standardization of container size and freight technology made international transport easier by substantially reducing transaction costs, the virtual world experienced a parallel standardization with the invention of the Internet Protocol Suite, which significantly simplified communication between disparate networks and across borders. World container traffic was almost seven times as high in 2008 as in 1988; in the intervening period, the Internet fundamentally transformed our commercial habits.

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth
by Michael Jacobs and Mariana Mazzucato
Published 31 Jul 2016

Magnusson, ed., Evolutionary Economics: The Neo-Schumpeterian Challenge, Boston, MA, Kluwer, 1994, pp. 245–63; ‘Innovative enterprise and historical transformation’, Enterprise & Society, vol. 3, no. 1, 2002, pp. 35–54. 4 J. A. Schumpeter, Capitalism, Socialism, and Democracy, 3rd edn, New York, Harper, p. 106. 5 It is beyond the scope of this chapter to explore the relation between the theory of innovative enterprise and other theories of the firm such as those contained in transaction-cost theory, resource-based theory, agency theory, dynamic-capability theory and evolutionary theory. For consideration of these alternative theories, see W. Lazonick, Business Organisation and the Myth of the Market Economy, Cambridge, Cambridge University Press, 1991; ‘Integration of theory and history’; ‘Innovative enterprise and historical transformation’; ‘The Chandlerian corporation and the theory of innovative enterprise’, Industrial and Corporate Change, vol. 19, no. 2, 2010, pp. 317–49; ‘The theory of innovative enterprise: methodology, ideology, and institutions’, in J.

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Mankiw, ‘Defending the one percent’, Journal of Economic Perspectives, vol. 27, no. 3, Summer 2013, pp. 21–34. 22 I recognised this early in my own work on information asymmetries, in a major controversy with Steven N. S. Cheung over whether the institution of sharecropping (which I argued could be explained by information asymmetries) mattered (see J. E. Stiglitz, ‘Incentives and risk sharing in sharecropping’, The Review of Economic Studies, vol. 41, no. 2, 1974, pp. 219–55 and S. Cheung, ‘Transaction costs, risk aversion and the choice of contractual arrangements’, Journal of Law and Economics, vol. 19, no. 1, 1969). North has perhaps done more to bring institutional analysis into the mainstream than anyone else: see D. C. North, Institutions, Institutional Change and Economic Performance, Cambridge, Cambridge University Press, 1990. 23 J.

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In this way regulators hope to generate the mass of transactions that a true market needs, creating artificial differences between identical products in order to do so. Such a market brings gains to both (some) consumers and producers only if large numbers of consumers remain inelastic, paying the higher prices of supplies that are not part of introductory offers. Meanwhile, transaction costs rise: for consumers, who have to keep looking out for new introductory offers and making arrangements to change their suppliers; and for suppliers, who have to keep developing and marketing new introductory offers. This is the main way in which a neoliberal strategy can deal with the tendency for an oligopolistic sector to produce high prices.

The King of Oil: The Secret Lives of Marc Rich
by Daniel Ammann
Published 12 Oct 2009

Rich and his partners put the very same theory into practice that economists have expounded for years. Skillful traders do well when the risk is high and the supply is threatened by crisis. Only then can they use their competitive advantage to the best effect. “Trading companies reduce search, negotiation, and transaction costs and seem likely to be employed at least initially when the risks of international trade are high,” says Geoffrey Jones, a professor of business history at Harvard Business School, who is a specialist in trading companies.6 Traders can help their customers by compensating for a lack of information and trust.

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It is my belief that this long-term way of thinking is the most important secret of Rich’s success and can explain many of the strategies and courses of action he has followed over the years. Rich was always interested in obtaining long-term contracts with his clients. In economic terms, the development of new markets, making business contacts, and negotiating contracts cost a lot of money. Once a business relationship has been established, many of the so-called transaction costs no longer apply. The longer the relationship, the lower the marginal costs and the higher the potential profits. “We didn’t get into a new country to make a million dollars and then go home. We went to stay there,” said a trader who had opened African markets while working for Rich in the 1970s.

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Moritz), 7–8 Sweet Pain of Love, 218 Swissair Flight 111, 113–14 Swiss Federal Act on International Mutual Assistance in Criminal Matters (IMAC), 126–27, 284n Swiss Office for Police Matters, 128–29 Swiss Penal Code, 115, 152–53 Swiss tax treaty, 120–21, 125–27 Switzerland, 76–78, 125–34 extradition of Marc Rich, 128–34, 149–50 flight of Marc Rich to, 109–11, 113–16, 125–26, 201–2 “Sympathy for the Devil” (song), 7 Syria, 54, 72, 202 Taba Summit, 259 Tachkemoni School, 28 Tanker trade, 84–85, 189–90 Tapies, Antony, 10 Tax evasion and fraud, 8–9, 116–17, 125–28, 136–37, 145–47, 167–71 Texaco, 55–57 Thomajan, Bob, 110 Time (magazine), 137 Tin, 41, 44, 227 Torre de Madrid, 49 Trade liberalization, 267 Trader principle, 180–81 Trafford, John, 75–76, 80, 83, 115 Transaction costs, 85, 176 Trans-Asiatic Oil Ltd., 65–66 “Transfer pricing,” 145 Trau, René, 34, 217 Trillin, Calvin, 33–34 Troland, John, 107, 119 Trust, 40, 78, 86–88 Trust (Fukuyama), 86–87 Tucholsky, Kurt, 25 Tunisia, 14, 53, 63 Turkey, 82 20th Century Fox, 108, 111, 122, 123 20/20 (TV program), 254 UNITA (National Union for the Total Independence of Angola), 183–85 United Nations Human Rights Commission, 199 United Nations Oil-for-Food Programme, 231–32 United Nations Security Council, 191 United States of America v.

Lectures on Urban Economics
by Jan K. Brueckner
Published 14 May 2011

Related studies investigate whether educational outcomes (high school graduation, for example) are more favorable for children raised in owner-occupied dwellings. See Dietz and Haurin 2003 for a survey. Housing Demand and Tenure Choice 129 6.4.3 Some other factors affecting tenure choice A number of other factors not considered in the model may also affect tenure choice. Expected mobility Consumers incur substantial transaction costs in buying and selling houses, including closing costs and commissions for real-estate salespeople. Although these costs are worth bearing occasionally when changing residences, their burden becomes more significant with frequent moves. Therefore, homeownership may be the wrong choice for a consumer who expects to relocate relatively soon.

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(d) Considering the social surplus from (a), (b), and (c), comment on the wisdom of using a common pollution standard. How does the standard compare with separate pollution standards, and with the case in which the government doesn’t intervene at all? Exercise 9.2 Suppose the marginal damage and marginal benefit curves in a polluted neighborhood are MD = P/3 and MB = 4 – P. Also, suppose that transactions costs are low, so that the neighborhood residents and the firm can bargain. We saw that in this case, the socially optimal level of pollution is achieved. Start by computing the socially optimal P. Then, for each of the following cases, compute the amount of money transferred through the bargaining process, and indicate who pays whom (i.e., whether consumers pay the firm, or vice versa).

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Does peer ability affect student achievement? Journal of Applied Econometrics 18: 527–544. Harris, John R., and Michael P. Todaro. 1970. Migration, Unemployment and Development: A Two-Sector Analysis. American Economic Review 60: 126–142. Haurin, Donald R., and H. Leroy Gill. 2002. The Impact of Transaction Costs and the Expected Length of Stay on Homeownership. Journal of Urban Economics 51: 563–584. Henderson, J. Vernon. 1986. Efficiency of Resource Usage and City Size. Journal of Urban Economics 18: 47–70. Henderson, J. Vernon. 2003. Marshall’s Scale Economies. Journal of Urban Economics 53: 1–28. Hirsch, Werner Z. 1970.

Free Money for All: A Basic Income Guarantee Solution for the Twenty-First Century
by Mark Walker
Published 29 Nov 2015

Indeed, as intimated, the envisioned future overcomes one of the inherent inefficiencies in a market economy: transaction costs. It takes time and effort to buy and sell goods. Suppose today I offer my neighbors free ice and ice chests. I try to sell the idea that they could get rid of their freezers and the associated costs of running them. An energy efficient fridge/freezer might cost $5 to $10 a month to run, so this would be a savings for my neighbors. However, there are certain transaction costs involved. They would have to come over and pick up the ice. Even if I offer free delivery, they would have to be 206 FREE MONEY FOR ALL home to receive the ice.

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Even if I offer free delivery, they would have to be 206 FREE MONEY FOR ALL home to receive the ice. For most, this would not be worth the hassle to save a few dollars a month. As the price of electricity drops, even getting free ice from me would be a losing proposition: my neighbors could make ice virtually for free and have no transaction costs involved. It might be objected that there will still be a free market for “high forms” of intellectual labor. Consider, for example, the intellectual labor of writing a novel, writing a song, or making a movie. If robots and computers cannot emulate these forms of human labor, then there is still something that humans can offer the economy.

Hustle and Gig: Struggling and Surviving in the Sharing Economy
by Alexandrea J. Ravenelle
Published 12 Mar 2019

As noted in the journal Contexts, “The sharing economy is a floating signifier for a diverse range of activities. Some are genuinely collaborative and communal, while others are hotly competitive and profit-driven.”8 Juliet Schor groups sharing economy activities into four broad categories: • Recirculation of goods. These services reduce transaction costs (such as consignment shop fees and the risk of financial loss) and provide reputational information on sellers to reduce the risks of financial transactions with strangers. • Increased utilization of durable assets. These services, such as Airbnb and its earlier, free predecessor, Couchsurfing.com, allow some people to earn additional money to supplement traditional incomes, while providing others with low-cost access to goods and space

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See also entrepreneurial ethos errand jobs, 41 escrow services, 44, 57, 229n6 ethnicity, 49, 169, 171 Etsy, 39 E-Verify program, 11 EV Grieve (blog), 41 evictions, 41, 46 exchange of services, 27, 29 expenses: bathroom access and, 106–7; Black Car Fund fees, 76; booking fees, 74–75; cleaning fees, 109; consignment shop fees, 27; cost of miles driven, 184–85; fee-based services, 9; out-of-pocket expenses, 140–42, 229n6; platform service fees, 5, 55–56, 79–80, 224n2; rental car fees, 3, 5, 167; transactions costs, 27 expenses of consumption, 9 Facebook, 29, 30, 50, 55, 72, 107, 114, 170–71, 206 Factory Investigating Commission, 93 factory work: Dover, New Hampshire, 67; Lowell, Massachusetts, 66–67; Paterson, New Jersey, 65–66, 224n12; strikes in, 67; workers’ compensation and, 92–94 Fair Labor Standards Act (FLSA) of 1938, 70, 89, 189, 196, 225n23 Fair Labor Standards Amendments of 1966, 70, 89 Family and Medical Leave Act, 196 family issues: double income families, 37; family decay, 32; family leave protections, 94; split-attention parenting, 16 Farley, Lin, 119 fax machine analogy, 17 Federal Reserve Board reports, 9, 41, 175, 176, 220n16 Federal Trade Commission, 233n54 fellow servant rule, 92 Fenton, Anny, 33 54-hour bill, 93 Figure Eight, 38.

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See also Airbnb repeat business: Kitchensurfing Tonight, 58; TaskRabbit, 56, 80 research methodology: case studies, 7; critical perspective and, 7–8; Hawthorne effect, 232n24; interview matrix, 216–17; participant recruitment and methodology, 21–22, 223n85, 225n34, 228n30, 229n5; service platforms, 7 response rates, 1, 78–79, 81–82, 160 retirement funds: access to, 190; as contributory plans, 37; decreases in, 9; productivity and, 190; sharing economy and, 94, 156; temporary workers lack of, 180; use of, 61 reviews, negative, 4 review systems: customer review sites, 26; employee monitoring and, 204–5; negative reviews, 4, 13, 91, 143; transfer between sites, 20 Rideshare Guy website, 76 ride-sharing, 223n75, 233n72 risks: overview, 22; mitigation of, 170; as transaction costs, 27 risk shifts: overview, 31, 36–38; advanced planning and, 97–100; assumption of risk, 92; dangers of driving for hire, 101–4; entrepreneurship and, 36–37; financial risks, 37; financial sustainability, 31; marketing of self, 181; risk reduction, 27 Robinson, Spottswood, 119 Rockefeller family, 68–69 Rodriguez, Ydanis, 51 Rogers, Jackie Krasas, 122 Roosevelt, Franklin D., 70 Russell, Mike, 189 safety issues: overview, 113; background screening mechanisms, 113–15; pedestrian dangers, 228n32; yellow taxicab standards, 227n16 Santander Bank, 3, 73 Sapone, Marcela, 187–89 Sasso, Anthony, 58 scams: overview, 23; overpayment scams, 148–49; platforms misuse and, 141–42 Scharf, Michael, 109, 189–90, 192 schedules: client response rates and, 84; computerized scheduling systems, 180; flexibility in, 207; just-in-time scheduling, 179, 180–81; long, 5 scheduling availability, 1, 62, 87 Schierenbeck, Warren, 58–59 Schoar, Antoinette, 38 Schor, Juliet, 16, 26, 27, 56, 100, 183, 194, 224n1 Schultz, Ken, 191 Schumpeter, Joseph A., 207 scientific management, 178 Scott, Marvin, 124 secondary labor market, defined, 37 secondhand economy companies, 27, 28fig. 2.

Rebooting India: Realizing a Billion Aspirations
by Nandan Nilekani
Published 4 Feb 2016

The ability of technology to deliver low-cost solutions is especially important in a developing country like ours, and this approach has already proven its worth many times over. For example, withdrawing money from a bank used to take anywhere from ten minutes to an hour, and cost the bank an estimated Rs 50 in processing fees; with the advent of ATMs, the same transaction can be completed under five minutes at a cost of only Rs 15. The money saved in transaction costs is enough to pay for the set-up and maintenance of ATM machines. The National Stock Exchange (NSE) and the National Securities Depository Limited (NSDL) have helped us make the switch to a fully electronic online stock-trading system, bringing down the costs of trading and storing securities to a fraction of what they were a decade ago.

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As of August 2015, over 170 million bank accounts have been opened under this scheme.12 Breaking our addiction to cash: Why nations are going cashless India is the fourth largest user of cash in the world. What makes cash-based transactions such an attractive prospect for most Indians? For one, there are no extra transaction costs involved when you pay with cash, costs that often make it financially unviable for smaller merchants to switch to electronic payments. While the local supermarket may have enough transaction volume to simply accept these fees as the cost of doing business, the owner of a corner stall selling bananas, shampoo sachets and cigarettes by the stick certainly doesn’t have any incentive to allow customers to pay by card.

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In a payment transaction, the party that benefits the most from that electronic payment typically bears the cost. In this case, the clear beneficiary was the government, which would profit from the high levels of transparency and accountability provided by the Aadhaar-linked microATM network. The savings generated by switching to this model were sufficient to cover the government’s transaction costs; while the official recommendation was 3.14 per cent, the government currently pays a transaction fee of 2 per cent. The operational model for microATMs is much like the public call office (PCO) model, where thousands of small entrepreneurs benefited from operating a pay-per-use phone. The only capital investment needed is Rs 15,000 to purchase a compact operating device, much like a payment card terminal.

Mastering Blockchain, Second Edition
by Imran Bashir
Published 28 Mar 2018

The general objectives are to satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitrations and enforcement costs, and other transaction costs." The original article written by Szabo is available at http://firstmonday.org/ojs/index.php/fm/article/view/548. This idea of smart contracts was implemented in a limited fashion in Bitcoin in 2009, where Bitcoin transactions using a limited scripting language can be used to transfer value between users, over a peer-to-peer network where users do not necessarily trust each other, and there is no need for a trusted intermediary.

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Conversely, if the transaction that has an appropriate fee paid is included in the block by miners but has too many complex operations to perform, it can result in an out-of-gas exception if the gas cost is not enough. In this case, the transaction will fail but will still be made part of the block, and the transaction originator will not get any refund. Transaction cost can be estimated using the following formula: Total cost = gasUsed * gasPrice Here, gasUsed is the total gas that is supposed to be used by the transaction during the execution and gasPrice is specified by the transaction originator as an incentive to the miners to include the transaction in the next block.

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After clicking on Create, two functions from the contract will be exposed, as shown in the following screenshot: Relevant costs and exposes two methods Functions isAlreadyHased (to check if the idea is already hashed) and SaveIdeaHash (to save the new idea string) can now be invoked as shown in the following example: Invoking the SaveIdeaHash function Now if we look at the logs produced in Remix IDE shown at the bottom of the IDE, we can see helpful details as shown in the following screenshot: Logs The log shown valuable information such as: status: This is 1 in the example, meaning that transaction has been mined and executed successfully. from: This is the address of the account from, which the contract was initiated. to: This is the address of the contract on the blockchain. gas: This shows how much gas is sent. transaction cost: This shows how much gas is consumed. hash: This is the hash of the contract. input: This is input in shown in hex. decoded input: This shows the decoded input. logs: This shows transaction logs. value: This shows the value in Wei in the contract. Similarly, isAlreadyHashed can be called.

Capitalism 3.0: A Guide to Reclaiming the Commons
by Peter Barnes
Published 29 Sep 2006

In fact, he argued, nature can be protected through property rights, provided they’re clearly defined and the cost of enforcing them is low. In Coase’s model, pollution is a two-sided problem involving a polluter and a pollutee. If one side has clear property rights (for instance, if the polluter has a right to emit, or the pollutee has a right not to be emitted upon), and transaction costs are low, the two sides will come to a deal that reduces pollution. How will this happen? Let’s say the pollutee has a right to clean air. He could, under common law, sue the polluter for damages. To avoid such potential losses, the polluter is willing to pay the pollutee a sum of money up front.

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It lets us adjust old assumptions and see what might happen. And it lets us imagine things that don’t exist but could, and sometimes, because we imagined them, later do. Coase supposed that a single polluter or his neighboring pollutee possessed a right to pollute or not be polluted upon. He further supposed that the transaction costs involved in negotiations between the two neighbors were negligible. He made these suppositions half a century ago, at a time when aggregate pollution wasn’t planet-threatening, as it now is. Given today’s altered reality, it might be worth updating Coase’s suppositions to make them relevant to this aggregate problem.

Trend Commandments: Trading for Exceptional Returns
by Michael W. Covel
Published 14 Jun 2011

If you want to go for the really high-frequency stuff, you might try trading visible light, in the range of one cycle per 10-15 seconds. Trading gamma rays, at around one cycle per 10-20 seconds, requires a lot of expensive instrumentation, whereas you can trade visible light by eye. Higher-frequency trading succumbs to declining profit potential against nondeclining transaction costs. You might consider trading a chart with a long enough time scale that transaction costs are a minor factor—something like a daily price chart, going back a year or two.”2 All trends are historical. None are in the present. There is no way to determine a current trend, or even define what current trend might mean. You can only determine historical trends.

Getting to Yes: Negotiating Agreement Without Giving In
by Roger Fisher and Bruce Patton
Published 15 Mar 1991

To sum up, in contrast to positional bargaining, the principled negotiation method of focusing on basic interests, mutually satisfying options, and fair standards typically results in a wise agreement. The method permits you to reach a gradual consensus on a joint decision efficiently without all the transactional costs of digging in to positions only to have to dig yourself out of them. And separating the people from the problem allows you to deal directly and empathetically with the other negotiator as a human being, thus making possible an amicable agreement. Each of the next four chapters expands on one of these four basic points.

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This does not mean you should be less persistent in pursuing your interests, but it does suggest avoiding tactics such as threats or ultimatums that involve a high risk of damage to the relationship. Negotiation on the merits helps avoid a choice between giving in or angering the other side. In single-issue negotiations among strangers where the transaction costs of exploring interests would be high and where each side is protected by competitive opportunities, simple haggling over positions may work fine. But if the discussion starts to bog down, be prepared to change gears. Start clarifying the underlying interests. You should also consider the effect of this negotiation on your relationship with others.

The Second Curve: Thoughts on Reinventing Society
by Charles Handy
Published 12 Mar 2015

Keeping everything in-house, he suggested, lowered the transaction costs when compared with negotiating with separate outside businesses. Put simply, if you employed them you could tell them what to do. The result of applying the Coase argument was the integrated organisation, where everything connected with the output of the organisation was both owned and managed by it. Fifty years later he was awarded a Nobel Prize for his insight, just when new communication technologies were beginning to cast doubt on his thesis and more and more firms were starting to separate out many of their non-core activities. They found that any transaction costs were outweighed by the savings in overheads and fringe benefits that often go with membership of a large organisation.

The Automatic Millionaire, Expanded and Updated: A Powerful One-Step Plan to Live and Finish Rich
by David Bach
Published 27 Dec 2016

CHARLES SCHWAB 1-866-855-9102 www.​schwab.​com Charles Schwab is one of the largest full-service financial service firms in the country. They offer both “do-it-yourself” and sophisticated investors a robust platform that makes opening an IRA easy. (Their web site says it takes only about 10 minutes.) The minimum amount to open an IRA at Schwab is $1,000. They offer 3,000 no-load mutual funds and 200 ETFs with no transaction costs. If you prefer to work with an advisor face-to-face, Schwab has 325 branches around the country. At the same time, the firm has quickly taken a lead in the automated investment process, now referred to as “robo advisory.” Their robo advisory program is called Intelligent Portfolios and is available with an account minimum of $5,000.

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When you visit the site, go to the investment area and check out the Fidelity Freedom Funds. These funds make investing simple by doing the asset allocation automatically for you based on your retirement date. Additionally, Fidelity offers over 3,400 mutual funds and 70 ETFs with no commissions or transaction costs. If you want to work directly face-to-face with an advisor, they have over 180 branches across the country. The section of the web site on retirement accounts is well laid out and easy to navigate, with a robust planning section. As I write this, Fidelity is beta testing their robo advisory offering called Fidelity Go, which will offer a completely automated investment service that helps you select and build a diversified retirement account and then automatically rebalances it for you.

Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market
by Scott Patterson
Published 11 Jun 2012

The human market makers and specialists it had had to deal with in the past could throw a wrench into its fine-tuned models, which required fast and flawless execution. It was the same problem that would help scuttle Haim Bodek’s efforts to build an AI trading system at Hull in Chicago. On Island, human middlemen weren’t a problem. What’s more, the high speeds and low transaction costs—as well as the reams of data Island spit out—blended perfectly with Nova’s strategies, which were driven by cutting-edge AI systems that went back to Mercer and Brown’s days developing AI-driven language-translation systems at IBM in the 1980s and early 1990s. Renaissance’s relationship with Island wasn’t perfect.

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Eventually, despite Simons’s initial concerns, Renaissance became one of the most prolific users of Island. It was perfect timing. “We remain optimistic,” Simons wrote in a 1999 letter to Renaissance investors. “An inexorable trend towards electronic trading in … equities is having the effect of increasing liquidity and decreasing transaction costs.” The Bots were growing, flexing their muscles, and becoming increasingly powerful. Timber Hill and Renaissance, along with electronic traders such as ATD, were at the vanguard of the Algo Wars, designing programs that could trade automatically, with little or no human intervention. It was just the beginning.

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But something had gone wrong. “I must confess to you that I was an ardent proponent of bringing technology to trading and brokerage. Unfortunately, I only saw the good sides. I saw how electronic trading and record-keeping could be used to force people to be more honest, to make the process more efficient, to lower transaction costs and to bring liquidity to the markets. I did not see the forces of fragmentation and the opportunity for people to use technology to keep to the letter but avoid the spirit of the rules—creating the current crisis.” He gazed out at his audience. Peterffy wasn’t shocked to see the stern faces, the shaking heads and averted eyes.

The Future of Money
by Bernard Lietaer
Published 28 Apr 2013

This theory works from the assumption that all parties have all the information relevant to optimise a given purchase, that there are zero transaction costs and no barriers to entry for few suppliers. In 'real' world transactions, these conditions are rarely met. Interestingly, the cyber economy could become the first actual large-scale involves information, both of us have it. In buying this book, for instance, Government classifications, trade 'near-perfect market'. Information can definitely be more abundant and accessible to more people in cyberspace. The Net makes transaction costs lower than ever. And many of the usual barriers to entry, such as location, capital requirements, etc., are less applicable.

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Some technical lessons from the 1930’s usable today One of the more interesting features successfully tested in hundreds of cases in the 1930s (including Worgl, described in Chapter 5) which has not been copied in the more recent systems is the idea of demurrage. This feature has nevertheless some very important and desirable effects. First of all, it would advantageously replace the transaction costs (which have the built-in incentive to discourage trading) necessary to fund overhead expenses. It could also be used to fund some collective project that the community agrees should be supported. One pragmatic disadvantage experienced in today's complementary currency systems is that they typically have to depend on continuous sales efforts by the originators of the system.

Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever
by Robin Wigglesworth
Published 11 Oct 2021

In the conclusion to his letter to the Post’s owner, Buffett therefore laid out his recommendations: Either stay the course with a bunch of big, mainstream professional fund managers and accept that the newspaper’s pension fund would likely do slightly worse than the market; find smaller, specialized investment managers who were more likely to be able to beat the market; or simply build a broad, diversified portfolio of stocks that mirrored the entire market. Buffett obliquely noted that “several funds have been established fairly recently to duplicate the averages, quite explicitly embodying the principle that no management is cheaper, and slightly better than average paid management after transaction costs.” At the time there was no real term for such a seemingly lazy investment strategy—at the time championed only by some oddballs working at third-tier, parochial banks in San Francisco, Chicago, and Boston—but today they are called index funds, and the approach is dubbed “passive investing.”

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By December 1975, Vanguard had filed a registration in Delaware for the “First Index Investment Trust.” By April of the following year, Bogle, Twardowski, and Riepe had prepared a draft prospectus for FIIT, which projected that the cost of managing an index fund would be 0.3 percent annually in operating expenses, and 0.2 percent in transaction costs—roughly a tenth of the all-in cost of an actively managed fund.14 After they answered follow-up questions from the Vanguard board, the prospectus was formally filed with the SEC in May 1976. Vanguard signed a deal with Standard & Poor’s to be able to license their index for a nominal sum, reflecting how the company didn’t yet recognize its indices as a potential revenue stream.* The next step was to assemble a team of brokerage firms to manage the sale of shares to their clients, given that the fund needed some money to get started and Vanguard had no distribution itself.

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Klotz and Booth quickly realized that DFA needed someone to beef up their trading systems, especially vital since smaller stocks were vastly more arduous to trade than the likes of Coca-Cola or General Motors. If they did a bad job, the fund would at best struggle to accurately mimic its underlying market, and at worst slowly bleed out through the constant churn of transaction costs. Rex Sinquefield told his colleagues he was “staying the hell out of it,” but encouraged the idea, knowing how useful she could be to DFA. Initially she spent long nights overhauling their trading system free of charge, but after a long period of incessant nagging, Jeanne Sinquefield joined DFA as its head of trading.

Unfinished Business
by Tamim Bayoumi

It specified that by the start of 1999 wholesale financial transactions would be carried out in a common currency and hence would not involve transaction costs (Euro notes and coins were introduced in 2002). Since the membership of the monetary union was not to be determined until 1998, there remained uncertainty as to which countries would be admitted and hence the group across which transaction costs would be eliminated. However, it was clear from the start that the currency union would incorporate a wide swathe of Europe, almost certainly including the northern core of Germany, France, the Netherlands, and Belgium. European bankers could confidently make plans on the assumption that transaction costs would be eliminated across a much of the continent by the end of the 1990s.

The Permanent Portfolio
by Craig Rowland and J. M. Lawson
Published 27 Aug 2012

The commissions can be free for a limited number of trades a year, less than $10 at a discount broker, or be hundreds of dollars at a full-service brokerage for each trade. Costs vary. The problem is, if you are making many small trades then the ETF can get expensive. If you are, for instance, depositing $100 a month into your portfolio you may spend $10 just to purchase the ETF. In other words, 10 percent of your savings that month went into transaction costs! Not good. However, if you sent that same $100 into a mutual fund company they simply buy the fund without charging you a commission. Your $100 is used to buy the full $100 worth of mutual fund shares. You are able to buy more shares of the fund because you avoided the sales commission. That's much better.

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ShareBuilder allows periodic automatic investing (e.g., every month) that will buy your specified ETF shares for $4 per transaction. The money is taken directly from your bank account. Just like Folio Investing, you can space out the buy-ins so that they only occur when you have accumulated a significant contribution in order to keep transaction costs under control. Portfolio Service Plus Physical Gold You can use the ETFs and other funds recommended in this chapter for the stocks, bonds, and cash and set an equal amount to each for the portfolio service. That way each month you will buy equally into all of them. Then use the remaining amount of your monthly savings to purchase physical gold.

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This approach will minimize portfolio transactions, which will help to reduce the taxable capital gains generated by the portfolio. 2. During the rebalancing process, if more than one asset is above 25 percent, but not yet at the 35 percent upper band, you can simply leave it alone to save on taxes and transaction costs. In this case, use the proceeds from the asset that has hit 35 percent to buy the other lagging assets that are below 25 percent, but leave any assets above 25 percent alone. 3. When you have to do a sale, pick transaction lots you've owned the longest to get favorable long-term capital gains treatment. 4.

Superminds: The Surprising Power of People and Computers Thinking Together
by Thomas W. Malone
Published 14 May 2018

Even though markets are often cheaper to operate than hierarchies when many people and decisions are involved, they can be more expensive, too, especially in ever-changing situations that involve only a small number of potential trading partners. A number of Nobel Prize–winning economists, including Ronald Coase, Oliver Williamson, Oliver Hart, and Bengt Holmström, have analyzed the situations in which this is true.8 A key issue is that the transaction costs of making decisions in markets can sometimes be greater than those of hierarchies. For instance, say Ron promises to give Elizabeth a slice of deer meat in exchange for a bunch of grapes, but then he takes the grapes and never gives her the meat. That is a problem. A manager in a hierarchy can deal with problems like this by quickly punishing Ron, but markets require some mechanism outside the market itself.

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A manager in a hierarchy can deal with problems like this by quickly punishing Ron, but markets require some mechanism outside the market itself. In the primitive world, this might be a community; in the modern world, it might be contracts and the legal system. In the modern world, another important kind of transaction cost arises when one party has the potential to “hold up” the other party in the future. For example, imagine that I make a significant investment in retooling my tire factory to make a special tire in a size that only fits the cars you make. For the first year, you buy all my tires, and everything is fine.

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Comparing Markets to Communities Like hierarchies, markets can have either higher or lower decision-making costs than communities. The same price mechanism that often makes markets cheaper than hierarchies also makes them cheaper than communities when coordinating large numbers of people and decisions. On the other hand, communities, like hierarchies, are often better than markets at dealing with transaction costs arising from things like contract negotiations and hold-up problems. In a community, for example, people already have lots of reasons to go along with decisions that are dictated by community norms; if they violate these norms, they know that the community has many ways to punish them. But in a market, resolving issues that trading parties disagree about requires some extra effort that goes beyond the market itself.

A Small Farm Future: Making the Case for a Society Built Around Local Economies, Self-Provisioning, Agricultural Diversity and a Shared Earth
by Chris Smaje
Published 14 Aug 2020

Some people dismiss it as a fallacy of the ‘captured garden’ whereby impoverished farmers unreasonably exploit their own labour in order to make ends meet. That does sometimes seem to be the case, but it can’t account for all instances of the inverse productivity relationship. In fact, no single explanation suffices, but the main factor seems to be the lower transaction costs of small farms employing their own labour and growing produce for their own consumption. Big farms, on the other hand, have lower transaction costs in obtaining finance or purchased farm equipment and selling their produce, which is why there isn’t usually an inverse productivity relationship in wealthy countries.41 Human attention and ingenuity always addresses itself most keenly to the key limiting factor it faces, and when you’re working to produce food for your household from a small area, rather than paying someone to produce it for a market, that limiting factor is usually the productivity of your land.

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… which is usually geared to the use of extensive and irregularly yielding resources in situations where livelihoods depend on exploiting, but not over-exploiting, a local ecological base … These include things like seasonal pastures, wild game or firewood gleanings from surrounding forests, or aquatic resources such as fish or irrigation water. They rarely include intensive cropland (gardens, arable fields) which can be intensified through individual or household labour. This is a key point, implying there are transaction costs to maintaining commons, which are probably worth paying only when doing so is easier than the alternatives. It also implies that commons work best where people are reliant for their daily living on fundamentally local resources that are susceptible to over-exploitation. The main way this has worked historically in the northerly latitudes with which I’m most familiar is common pastures for livestock, enabling small-scale farmers lacking land for a commercial herd to keep animals for milk, manure and other default services that make the most of livestock’s ability to tap the local nutrient base.

Kanban in Action
by Marcus Hammarberg and Joakim Sunden
Published 17 Mar 2014

Transaction and coordination costs Transaction cost is a term from economics that represents the cost incurred in making an economic exchange, such as search and information costs, cost of drawing up and enforcing contracts, and so on. Applied to the world of software development, transaction costs mean setup and cleanup activities associated with the delivery of value, such as planning, estimation, budgeting, integration, and deployment. All these costs are really waste (see section 7.1) because the customer would prefer to get the value you deliver without having to pay any of these transaction costs. This doesn’t mean you should stop doing them; it’s just the cost of doing business.

You've Been Played: How Corporations, Governments, and Schools Use Games to Control Us All
by Adrian Hon
Published 14 Sep 2022

His answer was that while using contractors would, in theory, be cheaper due to market competition driving the price of labour down, companies would suffer significant transaction costs if they took that route—everything from constantly arguing about costs and worrying about losing trade secrets to spending too much time looking for (and keeping) good workers. Companies that opted instead to employ workers might pay more for their labour but would avoid a lot of those transaction costs, so they’d come out on top in the long run. In the 1980s, management consultants argued Coase’s theory no longer applied, since computers—like those that now tell Amazon warehouse workers what to pick and where to walk—could magically reduce or even eliminate those transaction costs.

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In the 1980s, management consultants argued Coase’s theory no longer applied, since computers—like those that now tell Amazon warehouse workers what to pick and where to walk—could magically reduce or even eliminate those transaction costs. Whether or not this was true, it was a great story, and in any case, dismembering big firms was a tried-and-tested way of boosting stock prices. And so in the first two decades of the 2000s, venture capitalists and investors eagerly poured billions into startups that were designed from the ground up to be powered by loose groups of independent, self-employed contractors. Those startups included Uber, Amazon, Airbnb, and innumerable other “sharing economy” and “gig economy” businesses which have no workers and own no property but instead use APIs to outsource all front-line functions that require a human.

Interlibrary Loan Practices Handbook
by Cherie L. Weible and Karen L. Janke
Published 15 Apr 2011

This decision must be made carefully on a case-bycase basis and according to local policy (see “Section 107—Fair Use” later in this chapter). Borrower Responsibilities and Options The decision by a library about whether to subscribe to a journal is out of the scope of this chapter. However, acquisitions staff and ILL practitioners should work closely with one another to ensure that royalty fees, as well as the more hidden ILL transaction costs, do not exceed the price of a subscription and to ensure that collections are managed so that patrons’ needs are met. Once a subscription to a journal title is started, the library can begin to borrow recent articles freely from it. The Copyright Clearance Center (CCC; www.copyright.com) opened for business in 1978.

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In addition to cost data, the studies provide us with the best practices of high-performing libraries that can be adopted by others. The first, a cost study, was done in 1992 as a joint project of ARL and the Research Libraries Group (RLG) and had seventy-six participants from the United States and Canada.3 Researchers learned that staff costs accounted for 77 percent of total transaction cost (combined borrowing and lending). The second study was conducted in 1996 with 119 participants—ninety-seven research libraries and twenty-two college libraries from the Oberlin Group.4 The results are broken out for the two library types for costs, fill rate, turnaround time, and user satisfaction.

Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School
by Andrew Hallam
Published 1 Nov 2011

They won’t want you stepping anywhere near the Whopper. And they certainly won’t want you paying attention to the leader of Harvard University’s Endowment Fund, Jack Meyer. When interviewed by William C. Symonds in 2004 for Bloomberg Businessweek, he said: “The investment business is a giant scam. It deletes billions of dollars every year in transaction costs and fees. . . Most people think they can find fund managers who can outperform, but most people are wrong. You should simply hold index funds. No doubt about it”13 Clearly, investing in index funds is a way to statistically ensure the highest odds of investment success. Doing so, however, means that you will need to stand your ground and perhaps take the road less traveled, while most people succumb to the impressive sales rhetoric that leads them toward—at the very least—investment mediocrity with actively managed mutual funds.

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When you have found a business that you want to buy, analyze its price as if you were buying the entire business. The return you make can be highly dependent on the price you pay. But even with the best stock-picking tools, the odds are high that eventually most stock pickers will lose to market-tracking indexes, especially after factoring in transaction costs and taxes. It’s fun to fight the tide. But you should invest the bulk of your money intelligently with a diversified account of indexes. Notes 1. “Women Better Investors Than Men,” BBC News online, accessed April 16, 2011, http://news.bbc.co.uk/2/hi/business/4606631.stm. 2. Jason Zweig, “How Women Invest Differently Than Men,” The Wall Street Journal, May 12, 2009, accessed April 16, 2011, http://finance.yahoo.com/focus-retirement/article/107064/How-Women-Invest-Differently-Than-Men?

Scale: The Universal Laws of Growth, Innovation, Sustainability, and the Pace of Life in Organisms, Cities, Economies, and Companies
by Geoffrey West
Published 15 May 2017

To varying degrees, all of these provide insights into the nature, dynamics, and structure of companies, but none brings a broad scientific perspective to the problem in the sense I have been using in this book.2 The mechanisms that have traditionally been suggested for understanding companies can be divided into three broad categories: transaction costs, organizational structure, and competition in the marketplace. Although these are interrelated they have very often been treated separately. In the language of the framework developed in previous chapters these can be expressed as follows: (1) Minimizing transaction costs reflects economies of scale driven by an optimization principle, such as maximizing profits. (2) Organizational structure is the network system within a company that conveys information, resources, and capital to support, sustain, and grow the enterprise. (3) Competition results in the evolutionary pressures and selection processes inherent in the ecology of the marketplace.

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Much of the work is qualitative, often gathered through case studies of specific companies or business sectors, from which the general dynamical and organizational features of companies are intuited. Historically, companies have been viewed as the necessary agents that organize people to work collaboratively to take advantage of economies of scale, thereby reducing the transaction costs of production or services between the manufacturer or provider and the consumer. The drive to minimize costs so as to maximize profits and gain greater market share has been extraordinarily successful in creating the modern market economy by providing goods and services at affordable prices to vast numbers of people.

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See also finite-time singularity; technological singularity Singularity Is Near, The (Kurzweil), 422 Sisyphus, 418, 423, 424 “six degrees of separation,” 296–97, 301, 304–5 sleep, 6, 12 “slum clearance,” 260, 261, 263 “small world problem,” 296–97, 302–4, 305 smart cities, 270, 294, 338, 346 Smith, Adam, 380 social brain hypothesis, 308–9, 315–16 social capital, 278, 286, 372, 392 Social Darwinism, 287 social incubators, cities as, 295–304 social media, 332, 340 social metabolic rate, 13 social metabolism, 13, 373–74, 415 social networks, 344–45 cities and, 281–88, 295–304, 326–27 Dunbar and numbers, 304–9 impedance matching, 123 integrating physical infrastructure with, 315–24 social physics, 56–57 socioeconomic diversity and business activity, 363–71, 367 “socioeconomic space,” 285 socioeconomic time, 326–32 solar energy, 236, 240–42 solar system, 37, 108–9 Sornette, Didier, 415, 418, 425 Soros, George, 364 South African coast, 140, 144 space filling, 27, 112–13, 129, 201, 284 Spinoza, Baruch, 172 sports rankings, 352–53 square-cube law, 39–42, 43, 58, 59, 158–59 standardized measures, 76 Standard Model of particle physics, 338–39 standard of living, 184, 185–86, 229, 234–35 Standard & Poor’s, 385, 404 Stanford University, 265, 301, 303, 329–30, 361, 435–36 steam engines, 69 Stevenage, 263–65, 267 Stewart, Potter, 20 stock markets, 142, 144, 389–90 Stokes, George, 71 stone arch bridges, 61 strength of materials, 42–45 string theory, 85, 130, 225, 429 Strogatz, Steven, 297–98, 300–301 structuralism, 87 Strumsky, Debbie, 356, 364 Strutt, Edward, 78 Strutt & Parker, 78 sublinear scaling, 19, 28, 173, 374, 412–13 cities, 272, 273, 274–75, 288, 295, 321, 372, 374–75, 388 companies, 391–92, 408 patents, 2, 2n, 4, 29, 276, 357, 386 Sumatra earthquake of 2010, 46 supercentenarians, 188–89, 191 Superconducting Super Collider (SSC), 82–83 superexponential growth, 413–14, 414, 417 superlinear scaling, 18, 19, 29, 374 cities, 275–76, 280, 304, 318, 319, 321, 326–27, 342, 355–56, 370, 374, 391–92 companies, 408, 413–14, 414 Superman, 43–45, 44, 161 survival analysis, 402–3, 405–6 “survival of the fittest,” 87, 89, 403 survivorship curves companies, 397, 398–400, 400–402 human, 189–94, 191, 192 Swift, Jonathan, 128 Swiss Federal Institute of Technology, 271 Sydney Opera House, 259 Szell, Michael, 352 Takamatsu Corporation, 406 Taleb, Nassim, 383 Tange, Kenzo, 248, 258 Taylor Walker (London), 224–26 technological singularity, 28–32, 420, 422, 424 telescopes, 37 temperature, 20–21, 109 exponential scaling of, 173–78 extending life span and, 203–4 temperature dependence of life span, 175, 176, 177, 203–4 temperature rise, 237 terminal units, 113–14, 151, 201–2, 284 terrorist attacks, 134 Tesla, Inc., 124, 403–4 Tesla, Nikola, 123–24 Texas, flow of transport, 292–94, 293 Thames Tunnel, 64 Theory of Everything (ToE), 429–30, 444 theory of relativity, 107–8, 115, 339, 422, 428, 429 thermodynamics, 14, 69, 71, 233, 236, 237 Thiel, Peter, 184 Thomas, Warren, 52–53 Thomas Edison Company, 123–24 Thompson, D’Arcy Wentworth, 86–88, 97, 111, 181 ¾ power scaling law, 25–27, 93, 155, 458n time dilation, 332 tipping points, 16, 24, 157–58, 382, 463n total market capitalization, 379, 389–90, 390 Tottenham Hotspur, 187 “Toward a Metabolic Theory of Ecology” (Brown, Savage, Allen, Gillooly), 174 “toy model,” 109 traffic flows, 292–94 traffic gridlock, 332–33 transaction costs, 380, 381 transportation time, 332–35 travel time, 329–30, 332–35, 346–47 treadmills, 328, 412, 418 Treatise on Man (Quetelet), 56 trees, 116–17, 121, 121–22, 172, 459–60n scaling exponents, 147, 150, 150–51 trial and error, 69–71, 74–75 Triumph of the City, The (Glaeser), 213 tumors, 6, 15, 27, 172 growth curves, 170, 171 turbulence, 72 Tusko (elephant), 53 Twitter, 296, 332, 340, 447 Two New Sciences (Galileo), 38–42 Tycho Brahe, 439 Tyrannosaurus rex, 159 UCLA School of Medicine, 205 Ultimate Resource, The (Simon), 232–33 United Nations Millennium Development Goals, 230–31 unit of length, 135–37 universality concept of, 76–77 magic number four and, 93–99 “universal laws of life,” 81, 87 universal time, 423–24 University of Modena, 249 University of New Mexico (UNM), 105, 106 urbanization, 6–7, 8–10, 214–15, 223–26 global sustainability and, 28–32, 213–15 life span and, 184–85, 191, 192–93 Urbanocene, 212, 214–15, 236, 262 urban overload, 303–4 urban planning and design, 253–58, 261–67, 290, 294–95 urban psychology, 302–4 urban renewal, 260, 261, 263 urban sociology, 266 Utzon, Jørn, 259 van der Leeuw, Sander, 249–50 van Gogh, Vincent, 189 variational principle, 115–16 Vasa (ship), 70, 459n Vinge, Vernor, 422 von Neumann, John, 424 wages in cities, 30, 275, 276, 278, 281, 285–86 Walford, Roy, 205–6, 207 walking pace, 334, 335–36, 336 Wallace, Alfred Russel, 89, 228 Walmart, 32, 388–89, 394 wars, mathematical analysis of, 132–35 washing machine, 152–53 Washington, D.C., 266–67 Washington Square (New York City), 260, 261 water supply, 360–63 Watson, James, 84, 437 watts (W), 457n Watts, Duncan, 297–98, 300–301 wave theory of light, 126 wealth creation and ranking of cities, 355–59 “wear and tear,” 15, 88, 199–200 decline of body functions with age, 195, 197, 201, 202 weight lifting, 48–51, 50, 352–53 Welwyn Garden City, 255 West, Jacqueline, 187, 317 West, Louis, 52–53 whales, 3, 5, 16, 27, 80, 90–91, 92, 155, 159–60.

Culture & Empire: Digital Revolution
by Pieter Hintjens
Published 11 Mar 2013

Similar natural monopolies are rail transport, electricity, phones, and the Internet Protocol. You want your toaster to plug into any power socket. You want your phone to reach anyone and be reachable by anyone. When a successful natural monopoly emerges thanks to luck, regulation, or market forces, it eliminates a lot of waste -- also called "friction costs," "transaction costs," or perhaps "excess profits." Natural monopolies can create huge value. Vendors (those selling stuff) have a corresponding incentive to try to capture that value, restoring profits that would be lost by too much of Adam Smith's invisible hand. The natural monopoly can benefit users by releasing value.

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The PATRIOT Act makes it illegal to transmit funds from account to account without such a license. The loss of this license would effectively kill PayPal. Micropayment Systems As the Web boomed from 1995 to 1999, various groups developed micropayment systems that solved credit cards' high transaction costs. The theory at that time was that people would, for example, pay a few cents to read an on-line newspaper. These systems were developed, cast into official standards (the HTTP web protocol has an error code called "Payment Required"), and then quietly abandoned due to lack of interest. It turned out that advertising worked much better as a micropayment system, which brought us Google.

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Typically, these are existing publishers whose subscribers already expect to pay. The focus however is on subscriptions, not micropayments. In 2002, the M-Pesa system formalized mobile phone micropayments in Kenya. Before that, users sent each other phone credit. Phone credit makes an extraordinarily good digital currency, as it is safe, portable, and has minimal transaction costs. Systems like M-Pesa succeeded in Africa mainly because there was no existing financial industry to lobby against it. Good luck trying to get a Visa card if you live in Lagos, Nigeria. Digital Currencies: From E-Gold to BitCoin The first digital currency was e-gold, founded in 1996. At its peak, e-gold had five million users and transactions of $2 billion a year.

Toward Rational Exuberance: The Evolution of the Modern Stock Market
by B. Mark Smith
Published 1 Jan 2001

Under relentless pressure from the government and its biggest customers, the Exchange was finally forced to agree to the elimination of fixed commission rates effective May 1, 1975 (to become known as May Day). Dire predictions emanated from affected brokers, who feared that the traditional means by which business was done would be destroyed. They were right. The brokerage industry would undergo severe dislocations in the years ahead. But at the same time, the reduction in transaction costs (first for institutions but eventually also for individuals) caused an explosion in trading volume. The active trading that can be seen today, both by institutions and by individuals (often transacting on the Internet for less than $10 per trade), would not have been possible without the May Day reforms.

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Turnover on the New York Stock Exchange (defined as the annual Exchange trading volume divided by the total number of Exchange-listed shares outstanding), which had fallen to an all-time low of 12% in 1940, rebounded to exceed 80% by the mid-1980s. Professional portfolio managers tended to trade more frequently than individuals, particularly since the elimination of fixed commission rates on New York Stock Exchange stocks in 1975 greatly reduced transaction costs. In addition, new products (like stock index futures) enabled institutions to buy and sell large baskets of stock quickly and cheaply, further increasing the pace of trading activity. The total value of the U.S. stock market grew from roughly $1.4 trillion in 1980 to nearly $3 trillion by early 1987.

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income taxation index arbitrage index funds Individual Retirement Accounts (IRAs) industrial revolution industrials inflation; Federal Reserve policies to control; growth investing and; OPEC oil price increases and Inland Steel insider trading; outlawed Institutional Investor institutional investors; and crash of 1962; Nifty Fifty and; portfolio insurance and; reduction in transaction costs for; see also mutual funds; pension funds insurance companies: investments by; stocks of Internal Revenue Service (IRS) International Business Machines (IBM) International Mercantile Marine Internet investment trusts Investors Overseas Services (IOS) ITT Izvestia Johnson, Edward Crosby, II Johnson, Lyndon B.

Transaction Man: The Rise of the Deal and the Decline of the American Dream
by Nicholas Lemann
Published 9 Sep 2019

Coase then answered his own question, proposing a new way to think about what functions a corporation should assume and manage through its own organization by calculating which alternative—performing a function internally or purchasing it from another firm—carried lower “transaction costs.” At Alfred Sloan’s General Motors, for example, it made economic sense to own and operate factories and an auto-lending division, but not dealerships or iron mines—going outside GM for the former had high transaction costs, but not going outside for the latter. The real importance of his article was in reviving the classic economic idea that in a market system, society, rather than resting on an unshakable foundation of major institutions, “becomes not an organization but an organism.”

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It implied, unsurprisingly, that the Economic Graph the company had been promoting was the key to growth: whether or not it was a direct case of cause and effect, cities with denser networks of LinkedIn connections produced more new jobs than cities with sparser networks. The perpetually exuberant intellectual culture of Silicon Valley had rediscovered Ronald Coase’s old essay “The Nature of the Firm”; the current read of it was that the Internet had reduced transaction costs so radically that conventional business organizations were becoming unnecessary (which of course meant that conventional benefits and pensions would be unnecessary too). Even the most complex projects could be executed by loose, temporary assemblages of talent. Important innovations would come from small new companies, not big old ones.

Financial Statement Analysis: A Practitioner's Guide
by Martin S. Fridson and Fernando Alvarez
Published 31 May 2011

Cash and cash equivalents—Extinguishment of Dollar Thrifty's nonvehicle debt, payment of a special cash dividend to Dollar Thrifty shareholders prior to closing, reflection of the cash portion of the merger consideration, retention payments by Dollar Thrifty prior to closing, estimate of future merger-related transaction costs, additional borrowings under Hertz's senior asset-based lending facility, and reclassification of Dollar Thrifty's cash and cash equivalents, as Dollar Thrifty's required minimum balance would cease to be necessary upon extinguishment of the described debt. (The last item also results in an adjustment to cash and cash equivalents—required minimum balance.)

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To adjust cash and cash equivalents, as follows: (In thousands) Extinguishment of DTG's non-vehicle debt prior to closing $ (153,125) Special Cash Dividend paid to DTG shareholders prior to closing (see Note 4(a)) (200,000) Cash portion of merger consideration (see Note 3) (1,071,933) Retention payments paid by DTG prior to closing(i) (see Note 4(a)) (3,880) Estimate of future merger-related transaction costs (49,165) Additional borrowings under Hertz's Senior ABL facility 515,000 Reclassification of DTG's cash and cash equivalents---required minimum balance(ii) 100,000 Total $ (863,103) (i)DTG has established a retention program with a pool of approximately $7,760,000 for DTG employees who are not executive officers, as to which DTG and Hertz have agreed that 50% of the approximately $7,760,000 charge is payable upon completion of the merger and 50% is payable upon completion of a six-month requisite service period following the merger.

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To record the stock portion of the merger consideration, at fair value less par, and to eliminate DTG's additional paid-in-capital, as follows: (In thousands) Eliminate DTG's additional paid-in capital $ (937,093) Issuance of Hertz common stock and options 287,630 Total $ (649,463) p. To eliminate DTG's accumulated deficit, and to record estimated non-recurring costs of Hertz and DTG for advisory, legal, regulatory and valuation costs, as follows: (In thousands) Eliminate DTG's accumulated deficit $ 223,630 Estimated remaining merger related transaction costs assumed to be non-recurring (49,165) Total $ 174,465 q. To eliminate DTG's accumulated other comprehensive loss. r. To eliminate DTG's treasury stock. The unaudited pro forma condensed combined financial statements do not reflect Hertz's expected realization of annual cost savings of $180 million by 2013.

Valuation: Measuring and Managing the Value of Companies
by Tim Koller , McKinsey , Company Inc. , Marc Goedhart , David Wessels , Barbara Schwimmer and Franziska Manoury
Published 16 Aug 2015

If the company intends to use the asset for its remaining life (by renewing the lease as it expires), then it has created no value, even though the company appears to be less capital-intensive and to have lower debt. In fact, it has destroyed value because the cost of the lease is higher than the cost of borrowing. The company also incurs its own transaction costs and may have to pay taxes on any gain from the sale of the asset. What’s more, other creditors and rating agencies will often treat the lease as a debt equivalent anyway. The transaction may create value if the company wants the ability to stop using the asset before its remaining life expires and wants to eliminate the risk that the value of the asset will be lower when it decides to stop using the asset.

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Informed investors develop a point of view about the intrinsic value of the company’s shares based on its underlying fundamentals, such as return on capital and growth. They base their buy and sell decisions on this informed point of view. They may not all agree on the intrinsic value. Some may believe the company’s shares are worth $40, others $50, and others $60. Because of transaction costs and uncertainty about the intrinsic value, they will trade only if the stock price deviates by more than 10 percent from their value estimates. The other type of investors in this market are the noise traders. These traders may be news oriented, trading on any event that they believe will move the share price in the near term, without having a point of view on the company’s intrinsic value.

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Investors can diversify their investment portfolios at lower cost than companies can diversify their business portfolios, because they only have to buy and sell stocks, something they can do easily and relatively cheaply many times a year. In contrast, substantially changing the shape of a portfolio of real businesses involves a diversified company in considerable transaction costs and disruption, and it typically takes many years. Moreover, the business units of diversified companies often perform less well than those of more focused peers, partly because of added complexity and bureaucracy. Today, many executives and boards in developed markets realize how difficult it is to add value to businesses that aren’t connected to each other in some way.

Ours to Hack and to Own: The Rise of Platform Cooperativism, a New Vision for the Future of Work and a Fairer Internet
by Trebor Scholz and Nathan Schneider
Published 14 Aug 2017

Peer cooperativism shares these core governance and organizational patterns with commons-based peer production, but its defining feature, enabling workers to make a living from their cooperative work, presents distinct challenges that peer production has not had to face. Finally, networks have destabilized the model of the firm. Transaction costs associated with both market exchanges and social sharing have declined; interactions once preserved for firms that combined capital with contractual commitments for labor, materials, and distribution can now be done in a more distributed form. This technological fact has underwritten the rise of the on-demand economy, workforce management software that increases contingency, and outsourcing and offshoring no less than it underwrote FOSS, Wikipedia, or SETI@home.

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Uber, for instance, does not own cars and doesn’t employ drivers; it regards its workers as independent contractors. In this way, the company externalizes most costs to workers, eliminating collective bargaining and implementing intrusive data-driven mechanisms of reputation and rankings to reduce transaction costs (for the company). The growth of the sharing economy has so far come with an increasing precarization of labor, and erosion of job security, social protection, and safety nets for workers, such as benefits related to healthcare, pensions, parenting, and so on. If you are European like myself, and you’re used to a functioning, social-democratic safety net, what is now promised by companies like Uber and Airbnb is not very appealing.

The Wisdom of Finance: Discovering Humanity in the World of Risk and Return
by Mihir Desai
Published 22 May 2017

Indeed, the Journal of Law and Economics dedicated a special issue to alternative accounts and interpretations of this merger—a remarkable fact given economists’ skepticism about anecdotes. While there are innumerable variants, there are two primary interpretations of this romance that progresses from spot market transaction to long-term contractual arrangements and then all the way to merger. Each of these interpretations—the transaction cost approach and the property rights approach—is associated with a Nobel Prize (Ronald Coase in 1991 and Oliver Hart and Bengt Holmström in 2016), so, by academic standards, this is a prize fight. The considerably less romantic interpretation is that GM merged with Fisher in 1926 because the ongoing costs of contracting with each other just became too high.

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P., 175–77 Socrates, 168 Stevens, Wallace, xi, 7, 32–34, 170 disorder and chaos, 33–34 insurance executive, 32–33 T talent, etymology of, 58–59, 74 “Tale of Beryn” (Chaucer), 74 Talmud, 52 Thales of Miletus, 7, 42–43, 162, 177 Tiger Moms, 95 Tolstoy, Leo, 9, 162–64 tontines, 28–30 Tontine Coffee House, 28 Tootsie Roll Industries, 78–80, 83–85 transaction cost approach to mergers, 115 Trilogy of Desire (Dreiser), 165 Trollope, Anthony, 7, 38, 175 Trump, Donald, 127, 152 Turner, Ted, 108 “Two Cultures” (Snow), 175 “Two Tramps in Mud Time” (Frost), xiii Tynan, Kenneth, 96 U Ulysses (Joyce), 91–92 V Vaillant, George, 138–39 value creation and valuation, 7, 59 accounting vs. finance, 64 alpha generation or getting paid for beta, 71–73 destruction of value, 63 discounted cash flows, 65 measuring value creation, 64–67 stewardship and, 61–63, 74 terminal values, 66–67 weighted average cost of capital, 65 value of education, 65–66 value of housing, 66 van Doetechum, Lucas, 58 (illus.), 59 van Eyck, Jan, 97 (illus.), 103 Vega, Joseph de la, 5–6, 43–44 venture capital, 73, 82 Vishny, Robert, 77 W Wall Street (film), 165, 166 Warhol, Andy, 129 Washington, George, 142–43, 145 Watson, Thomas, 138 Wealth of Nations, The (Smith), 121 Weaver, Sigourney, 97–98 Wells Fargo, 80 Wesley, John, 63 West, Kanye, 99 Wheel of Fortune (TV show), 17–18 White, Vanna, 18 Whitney Museum of Modern Art, 140 Wilder, Gene, 94 Wilson, E.

The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk
by William J. Bernstein
Published 12 Oct 2000

He tabulated the change in investors’ return expectations as follows: Expected returns Next 12 months, own portfolio Next 12 months, market overall June 1998 15.20% 13.40% Sept. 1998 12.90% 10.50% 140 The Intelligent Asset Allocator The first thing that leaps out of this table is that the average investor thinks that he or she will best the market by about two percent. While it is possible that many investors may in fact beat the market by a few percent, it is of course mathematically impossible for the average investor to do so. In fact, as we’ve already discussed, the average investor must of necessity obtain the market return, minus expenses and transaction costs. Even the most casual observer of human nature should not be surprised by this paradox—folks tend to be overconfident Overconfidence likely has some survival advantage in a state of nature, but not in the world of finance. Consider the following: ■ In one study, 82% of U.S. drivers considered themselves in the top 30% of their group in terms of safety.

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Vanguard European and Pacific Stock Index Funds. These funds have a low turnover and are suitable for taxable accounts. The Pacific Stock Index Fund is essentially a Japanese fund, with Japan comprising almost 80% of fund assets. 9. Vanguard Emerging Markets Stock Index Fund. Because of the very high spreads and transactional costs, there is a .5% purchase fee and a .5% redemption fee. It is uncertain how much in distrib- 148 The Intelligent Asset Allocator utions the fund will yield in the long term, and thus how suitable it will be for taxable accounts. However, Vanguard has a history of keeping fund transactions at a minimum, and it is sensitive to the high trading costs in this area. 10.

This Is Not Normal: The Collapse of Liberal Britain
by William Davies
Published 28 Sep 2020

From the perspective of a multinational corporation, far from overthrowing the ‘burden of red tape’ (as Brexiteers believe), Britain is now in the process of building a new wall of inefficiency around itself. In economic jargon, the ‘transaction costs’ of locating in and doing business with Britain will rise permanently as a result of Brexit. Regulatory inefficiencies benefit one class of business only: the intermediaries and consultants who sell services in managing these transaction costs (a ‘Brexit management industry’ is surely going to arise, just like a minister for Brexit).7 International capital will be greatly inconvenienced by Brexit, but that simply means that less of it will travel to or via Britain in the future.

Bitcoin Internals: A Technical Guide to Bitcoin
by Chris Clark
Published 16 Jun 2013

Bitcoin Internals Chris Clark July 31, 2013 Contents 1 Introduction 2 Using Bitcoin 2.1 Wallets 2.2 Funding Your Wallet 2.3 Sending Payments 3 Cryptography 3.1 Cryptographic Hash Functions 3.2 Merkle Trees 3.3 Public Key Cryptography 3.4 Digital Signatures 4 Digital Currencies 4.1 Properties 4.2 Double-Spending 4.3 Types of Digital Payment Systems 5 Precursors 5.1 Triple Entry Accounting 5.2 Publicly Announced Transactions 5.3 Proof of Work 5.4 Proof of Work Chains 6 Technical Overview 6.1 Architecture 6.2 Ownership 6.3 Addresses 7 Transactions 7.1 Structure 7.2 Verification 7.3 Scripting 8 The Block Chain 8.1 The Byzantine Generals’ Problem 8.2 The Solution 8.3 Criticisms 9 Mining 9.1 Procedure 9.2 Proof of Work 9.3 Difficulty Targeting 9.4 Reward 9.5 Mining Pools 9.6 Mining Hardware Acknowledgements I would like to thank Lucy Fang, Vadim Graboys, Dan Gruttadaro, VikingCoder, and Sheldon Thomas for their assistance in the preparation of this book. Chapter 1 Introduction Bitcoin is the world’s first decentralized digital currency. Unlike most existing payment systems, it does not rely on trusted authorities such as governments and banks to mediate transactions or issue currency. With Bitcoin, Transaction costs can be reduced to pennies (in contrast to typical credit card fees of 2%). Electronic payments can be confirmed in about an hour without expensive wire transfer fees, even internationally. There is a low risk of monetary inflation1 since the production rate of bitcoins is algorithmically limited and there can never be more than 21 million bitcoins produced.

Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy
by Francis Fukuyama
Published 29 Sep 2014

If I live in a neighborhood with high rates of crime, I may have to walk around armed, or not go out at night, or put expensive locks and alarms on my door to supplement the private security guards I have to hire. In many poor countries, as we will see in Part II, families have to leave a member at home all day to prevent their neighbors from stealing from their garden or dispossessing them of their house altogether. All of these constitute what economists call transaction costs, which can be saved if one lives in a high-trust society. Moreover, many low-trust societies never realize the benefits of cooperation at all: businesses don’t form, neighbors don’t help one another, and the like. The same thing applies in citizens’ relationship to their government. People are much more likely to comply with a law if they see that other people around them are doing so as well.

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Not only did direct costs of litigation soar; costs were incurred due to the increasing slowness of the process and uncertainties as to outcomes.5 Thus conflicts that in Sweden and Japan would be solved by quiet consultations between interested parties through the bureaucracy are fought out through formal litigation in the American court system. This has a number of unfortunate consequences for public administration, leading to a process characterized, in the words of Sean Farhang, by “Uncertainty, procedural complexity, redundancy, lack of finality, high transaction costs.” By keeping enforcement out of the bureaucracy, it also makes the system far less accountable.6 In a European parliamentary system, a new rule or regulation promulgated by a bureaucracy is subject to scrutiny and debate, and can be changed through political action at the next election. In the United States, policy is made piecemeal in a highly specialized and therefore nontransparent process by judges who are often unelected and serve with lifetime tenure.

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The inflection point of the curve is shifted to the right, however, due to a general recognition that the dangers of excessive micromanagement are often greater than those posed by excessive autonomy. FIGURE 25. Bureaucratic Autonomy and the Quality of Government Capacity and autonomy interact with one another. One can control the behavior of an agent through either explicit formal rules and incentives or informal norms and habits. Of the two, the latter involves substantially lower transaction costs. Many highly skilled professionals are basically self-regulating, due to the fact that it is hard for people outside their profession to judge the quality of their work. The higher the capacity of a bureaucracy, then, the more autonomy one would want to grant it. In judging the quality of government, therefore, we want to know about both the capacity and the autonomy of the bureaucrats.

Escape From Rome: The Failure of Empire and the Road to Prosperity
by Walter Scheidel
Published 14 Oct 2019

In the latter region, prebendal assets were never similarly well privatized or protected, and the advent of Turkic and Mamluk conquest regimes increased the odds of arbitrary confiscation.47 The impact of political fragmentation on trade varied. Even though one might reasonably suspect more intense polycentrism to have raised transaction costs, the opposite could also be the case. The presence of multiple autonomous polities along the same trade route did in fact harm exchange by prompting serial predation. At the same time, interroute fragmentation that enabled traders to choose among “multiple politically independent routes” lowered tariffs.

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This shift also focused policy more expressly on growth of the manufacturing sector.94 As a further result of this trend, Parliament showed itself increasingly responsive to demands for acts that reorganized property rights. By modifying less-flexible archaic rights regimes and loosening constraints on investment by eroding customary rights in favor of those that responded to changing economic opportunities, legislation removed obstacles to economic development. Acts frequently aimed to lower transaction costs within society and displayed particular interest in transportation issues. Enclosure acts benefited capitalist farming. And as we will see in chapter 12, Parliament’s willingness to side with innovators against incumbents accelerated industrial development.95 All of this, to be sure, was very much a work in progress.

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Two candidates stand out: Latin as a shared elite language that transcended political divisions, and—once again—Christianity, as the one commonly shared belief system, backed by a single transnational organization. Latin, followed later by exchange in the influential Romance languages of Italian and then French, facilitated communication among the educated. Christian norms are thought to have helped pacify the medieval lords and to have lowered transactions costs, most notably in interregional trade.26 The “idealist” school of thought regarding the underpinnings of modernity puts the greatest emphasis on the importance of cultural cohesion. If we follow those who ascribe a central role to the emergence of a European culture of knowledge and science and view it as being rooted in transnational exchange and competition, anything that assisted in this process would have been beneficial to transformative development.

The Ascent of Money: A Financial History of the World
by Niall Ferguson
Published 13 Nov 2007

In 1924 John Maynard Keynes famously dismissed the gold standard as a ‘barbarous relic’. But the liberation of bank-created money from a precious metal anchor happened slowly. The gold standard had its advantages, no doubt. Exchange rate stability made for predictable pricing in trade and reduced transaction costs, while the long-run stability of prices acted as an anchor for inflation expectations. Being on gold may also have reduced the costs of borrowing by committing governments to pursue prudent fiscal and monetary policies. The difficulty of pegging currencies to a single commodity based standard, or indeed to one another, is that policymakers are then forced to choose between free capital movements and an independent national monetary policy.

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In turn, Indian textiles could be traded for pepper and spices from the Pacific islands, which could be used to purchase precious metals from the Middle East.31 Later, the Company provided financial services to other Europeans in Asia, not least Robert Clive, who transferred a large part of the fortune he had made from conquering Bengal back to London via Batavia and Amsterdam.32 As the world’s first big corporation, the VOC was able to combine economies of scale with reduced transaction costs and what economists call network externalities, the benefit of pooling information between multiple employees and agents.33 As was true of the English East India Company, the VOC’s biggest challenge was the principal-agent problem: the tendency of its men on the spot to trade on their own account, bungle transactions or simply defraud the company.

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Stocks do not wear out and require new roofs; houses do. The second is liquidity. As assets, houses are a great deal more expensive to convert into cash than stocks. The third is volatility. Housing markets since the Second World War have been far less volatile than stock markets (not least because of the transactions costs associated with the real estate market). Yet that is not to say that house prices have never deviated from a steady upward path. In Britain between 1989 and 1995, for example, the average house price fell by 18 per cent or in real, inflation-adjusted terms by more than a third (37 per cent).

Buy Now, Pay Later: The Extraordinary Story of Afterpay
by Jonathan Shapiro and James Eyers
Published 2 Aug 2021

With household budgets squeezed, lenders have a responsibility to ensure that they’re not putting customers into financial jeopardy,’ Leigh said.20 He also raised concerns about merchant fees. Technology should be driving transaction costs down, and Leigh, an economist, said it was not optimal for society if 5 per cent of the costs of goods was being spent to facilitate the transactions. ‘The wedge between retailers and consumers should be as low as it can be, and new technology should be reducing transaction costs. I get worried when I see technology is increasing them,’ he said.21 In the United Kingdom, consumer advocates were also getting on Afterpay’s back. As the coronavirus and prolonged lockdowns amid Brexit confusion crippled the British economy, the Financial Conduct Authority said in September 2020 that its interim chief executive, Christopher Woolard—who had taken over from Andrew Bailey when he became governor of the Bank of England, replacing Mark Carney—would review the regulation of consumer credit.

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Any move to stop Afterpay preventing merchants from surcharging could be catastrophic, striking its central claim that customers only pay more than the price tag on the goods if they are late making repayments. Consumers had signed up in droves, trusting the simplicity of Afterpay’s offer and that there were no hidden fees. Adding transaction costs now could fatally destroy that trust. To the payments wonks sitting in the RBA’s headquarters at the top of Martin Place, no-surcharge rules always rang alarm bells: the ability for merchants to pass on payments costs is the core mechanism by which downward pressure can be exerted on those costs.

Unknown Market Wizards: The Best Traders You've Never Heard Of
by Jack D. Schwager
Published 2 Nov 2020

The undisciplined use of leverage is the single most important reason why most traders lose money in the futures markets. In general, futures prices are no more volatile than the underlying cash prices or, for that matter, most stocks. The high-risk reputation of futures is largely a consequence of the leverage factor. Low transaction costs—Futures markets provide very low transaction costs. For example, it is far less expensive for a stock portfolio manager to reduce market exposure by selling the equivalent dollar amount of stock index futures contracts than by selling individual stocks. Ease of offset—A futures position can be offset at any time during market hours, providing prices are not locked at limit-up or limit-down.

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Based on multiple empirical tests I have conducted in the past, my own key conclusions about optimization, which I believe are also consistent with Parker’s views, can be summarized as follows:20 Any system—repeat, any system—can be made to be very profitable through optimization (that is in regards to past performance). If you ever find a system that can’t be optimized to show good profits in the past, congratulations, you have just discovered a money machine (by doing the opposite, unless transaction costs are excessive). Therefore, incredible past performance for a system that has been optimized may be nice to look at, but it doesn’t mean very much. Optimization will always, repeat always, overstate the potential future performance of a system—usually by a wide margin (say, three trailer trucks’ worth).

Imagining India
by Nandan Nilekani
Published 25 Nov 2008

The scheme would allow employees a choice of investments for their pension savings under an independent regulator and included strong IT support to drastically reduce transaction costs. OASIS, however, quickly found itself tugged in different directions—the ministry of labor eyed the EPFO as the potential designer of the scheme, which was obviously the last thing that the committee, which favored both defined contribution and low transaction costs, wanted. And politics being what it is, each proposal had its chances of succeeding; so Ajay, who was part of the expert committee, tells me that much of the next few months were spent in a blur of talking and persuading people.

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And the MCX is playing a complementary role to the NCDEX in expanding the reach of our markets. “We have twenty thousand terminals across the country,” he tells me, “and we are now doing business worth ten thousand crore rupees in a day.” Across India’s IT innovations in banking, retail, education, telecom or commodities, we are seeing the spread of such “high-volume, low-transaction-cost” models. In India’s expanding mobile networks, 90 percent of all accounts are prepaid, and the cards are so ubiquitous that you can recharge the phone at a paanwalla’s. Rural India’s IT kiosks are a way for entire communities to access the Internet. Aravind Eye Hospital in Tamil Nadu and Narayana Hrudayalaya in Karnataka are building remote, low-cost health care networks that cover more than one million people in rural areas.

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Over the last few decades, social security theory has evolved from the quick fixes of the depression era, and India has become a dream testing ground for talented economists and policy makers to address age-old problems with new ideas. Information technology, for instance, has become transformational here, and Ajay says that the IT systems implemented in the NSE-50 index he designed has had substantially lower “market impact costs” compared with any other in the world. Using IT intelligently can dramatically lower transaction costs in any social security system we implement. Additionally, now that India has some key institutions in place—in the shape of the NSDL and a strong regulatory system—we can build a pensions model that is unprecedented in efficiency and seamlessness. On pension approaches, the World Bank had outlined three “pillars” in 1994 that set out choices for a government.

The End of Money: Counterfeiters, Preachers, Techies, Dreamers--And the Coming Cashless Society
by David Wolman
Published 14 Feb 2012

Precise numbers are hard to come by, perhaps not surprisingly considering the franchises at stake, but one estimate from 1994 is that the United States spent $60 billion on cash management. By 2005 that figure was estimated at $110 billion.26 Processing paper checks adds another $50 billion on to that bill.27 In 2007, Europe’s €360 billion in cash transactions cost around €50 billion ($70 billion). That expense is primarily borne by merchants, although it doesn’t take an economist to know that merchants pass those costs on to you and me in the form of higher prices. By some estimates, countries could save 1 percent of their annual GDP if they were to shift from a paper to a fully digital monetary system.28 For the United States, that would put the annual costs of cash in the ballpark of $150 billion, or about three times the annual budget of the U.S.

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An American expat in Reykjavik told me he once saw a couple of local children selling homemade cookies on the street, much like American kids set up lemonade stands, except that the young Icelanders had debit-card readers on hand. This widespread adoption of a card-based system makes economic sense: analysts have found that using cash in Iceland has a per-transaction cost that is five times higher than using a card. If that sounds abstract, think about it this way: it’s expensive for businesses and governments to ensure that ATMs, cash registers, and banks in every remote fishing village have correct change, whereas all you need for electronic payment is electricity and a phone hookup.8 As Thorkelsdottir shows me some of her first pencil sketches for the banknotes redesign, I think of my conversation the previous day with an Icelandic economist, who reminded me that it was George Washington who said: “It is not a custom with me to keep money to look at.”

Money Mischief: Episodes in Monetary History
by Milton Friedman
Published 1 Jan 1992

One dollar in New York is one dollar in San Francisco, one pound in Scotland is one pound in Wales, plus or minus perhaps the cost of shipping currency or arranging book transfers—just as under the late-nineteenth-century gold standard the rate of exchange between the dollar and the pound varied from $4.8865 only by the cost of shipping gold (yielding the so-called gold points). Similarly, 7.8 Hong Kong dollars is essentially just another name for 1 U.S. dollar, plus or minus a minor amount for transactions costs. It requires no financial operations by the Hong Kong currency board to keep it there, other than to live up to its obligation to give 7.8 Hong Kong dollars for 1 U.S. dollar, and conversely. And it can always do so because it holds a volume of U.S. dollar assets equal to the dollar value of the Hong Kong currency outstanding.

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As an aside, a classic story illustrating British provincialism in the Victorian era has an American taking an English gentleman to task for the complexity of the British currency: "12 pence to the shilling, 20 shillings to the pound, 21 shillings to the guinea." Responds the English gentleman: "What are you Americans complaining about? Look at your awful dollar—4.8665 to the pound." [back] *** * In a private communication dated April 24, 1989, Angela Redish suggests that the widest plausible limits, allowing for mint costs and 1 percent transactions costs, were 15.3 and 15.89. The limits of the market ratio cited are imperfect estimates, and so are not seriously in conflict with her estimated range. [back] *** * Walker (1896b, chapters 4, 5, and 6) has an excellent discussion of this episode, as well as of prior French experience. [back] *** * Schumpeter makes it clear that the "monetary monomaniacs" he refers to are among "the silver men," not the "sponsors of gold."

Does Capitalism Have a Future?
by Immanuel Wallerstein , Randall Collins , Michael Mann , Georgi Derluguian , Craig Calhoun , Stephen Hoye and Audible Studios
Published 15 Nov 2013

The lowering of prices may be beneficial to the purchasers but it is of course negative for the sellers. What had been a profitable leading product has become a more competitive, much less profitable product on the world scene. What can the producers do? One alternative is to trade the advantage of low transaction costs for lower production costs. This usually involves the shifting of primary production locations from one or more “core” locations to other parts of the world-system where “historic” labor costs are lower. Persons in these new locations for production may perceive and hail this entry into the world production nexus as national “development.”

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But that epoch also ushered in multiple crises flowing from the effects of the business cycle, the institutionalization of revolutionary and reform movements, and the competitive geopolitics of industrial imperialism that in 1914 nearly killed capitalism. The American hegemony of the twentieth century helped to tame these crises by adding another layer of complexity: the internalization of transaction costs. The acute need to stabilize the capitalist system against multiple dangers is what after 1945 determined the elaborate and imposing architecture of modern governments, economic corporations, and international organizations. Logically then, the epochal accomplishment remaining for the twenty-first century is the internalization of the costs of social and environmental reproduction to be achieved at a truly planetary level.

The Global Auction: The Broken Promises of Education, Jobs, and Incomes
by Phillip Brown , Hugh Lauder and David Ashton
Published 3 Nov 2010

The emphasis was on building the company’s competitive capacity that required it to go beyond contract in its commitment to workers, suppliers, customers, and overseas operations. He observed how the company tried to engineer relationships likely to foster long-term commitment by developing trust relations throughout their global operations. In other words, he was acutely aware that cost reduction may come at the price of increasing what economists call transaction costs—that is, the cost of getting things done. Having said that, the imperative to reduce costs and prices remained, given a need to ensure that costs are compatible to the price level they were getting from the market. And although cutting costs and jobs in Germany was a politically sensitive issue even before the global recession, he observed that German consumers don’t pay his company a price premium because, like everywhere else, people want the best goods at the lowest price.

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See also BRIC (Brazil, Russia, India, and China) nations rust belt, 99 property rights, 68 prosperity, 2–4, 16, 26–27, 64, 132–33, 146, 152, 154–58, 164, 185n4 protectionism, 13, 149–52 public sector workforce, 17–18, 115, 127 salaries, 55, 59, 71, 78, 85, 114, 117, 118, 118–19, 120, 123, 176n9 Salzman, Harold, 37 Samsung, 95 Samuelson, Paul, 152 Index Saez, Emmanuel, 116, 125 safety net, 12, 24 Saudi Arabia, 30 Savery, Thomas, 66 Saxenian, Anna Lee, 38 STEM (science, technology, engineering, or math) subjects, 36–40, 39, 45, 153, 155 Stembridge, Bob, 45 Schneider, Craig, 79 Schultz, Theodore, 16–17, 166n8 Schumpeter, Joseph, 113 scientific management, 8, 65–66, 69, 71–72, 76, 80–81, 160 Stimpson, Herbert, 69–71 stock options, 159, 162 Summers, Lawrence, 115, 126 supply chains, 40, 77, 104–5 supply side economics, 17 Scientific Office Management, 72 Scott, Robert, 108–9, 112 self-interest, 4, 24, 26, 40, 156 self-regulation, 13 surveillance, 74, 174n33 Sweden, 124–25 symbolic-analytic services, 15 self-reliance, 19 Sennett, Richard, 142 talented workers, 25–26 Tate, Jay, 65–66 Serco, 115 service industries, 50, 73–80, 109, 152, 170–71n2 tax policies, 125, 162 Taylor, Fredrick Winslow, 8, 65–66, 68–69, 71–72 Shanghai Nanotechnology Promotion Center, 44 technology, 166n3 technology transfer, 41 shareholders, 67, 98, 104, 106, 124–25, 159, 162 Shierholz, Heidi, 122, 180n25 shipping containers, 57–58 telecommunications industry, 53–54, 61–62, 107 Temesek Holdings, 42 Shukla, Rajesh, 130 Silicon Valley, 39, 163 Thatcher, Margaret, 4, 24, 125 time and motion studies, 69, 71 Simmel, Georg, 137 Singapore, 38, 42, 158 Singh, Manmohan, 33–34 Time magazine, 145 Times newspaper group, 95 trade barriers, 99 skilled workforce, 25, 47–50, 84–87, 90–92, 127, 166n3, 170n44. See also high-skill, trade unions, 110, 125, 160 transaction costs, 107 low-wage workforce Smith, Adam, 16, 67, 76, 81–82, 166n3 social amnesia, 163 transnational companies, 3, 36, 40–41, 49–50, 52, 87, 98–100, 107, 112 trickle down economics, 24 social capital, 134–35 social conflict, 146 trust relations, 107 Tulgan, Bruce, 177n25 social congestion, 135–36, 139, 146 social inequalities, 148, 162 social justice, 3, 17, 27, 64, 146, 148, 150, unemployment, 24, 31, 41, 47, 92, 114, 118, 119, 136–37, 163 152, 154, 160–64, 185n4 social mobility, 12, 17, 34 socialism, 187n31 soft currencies, 140 software, 72, 74, 77, 79–80, 100, 114–15, 175n38.

Plenitude: The New Economics of True Wealth
by Juliet B. Schor
Published 12 May 2010

No society in history has been rich—or reckless—enough to create so much overproduction. The silver lining of the materiality paradox is that we’ve racked up an enormous inventory of products that no longer have much value for their original owners. In response, economies of reuse and resale have expanded rapidly. The Web has drastically reduced the transaction costs of exchange and expanded the geographic scope of the market. In addition to well-known sites such as eBay and craigslist, there are specialized Web resellers for many items, from Harley-Davidson motorcycles to cloth diapers. Anecdotal evidence also suggests a rise in other secondary exchange practices, such as barter, regifting, and clothing, seed, plant, and craft supply swaps.

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Its benefits are greatest when individuals don’t need the goods all the time, up-front costs are high, usage does not degrade or personalize the item, and costs of operation or depreciation can be allocated to individuals (as with cars). On the other side of the ledger, shared ownership increases what economists call transactions costs—the time and effort of creating rules, setting up scheduling, and policing problems (although the Internet has dramatically reduced these costs). When money is cheap, nature isn’t counted, and time is expensive, as in the BAU economy, where incentives favor private ownership. A shift toward plenitude, which economizes on materials and is rich in time, enhances the value of sharing.

When More Is Not Better: Overcoming America's Obsession With Economic Efficiency
by Roger L. Martin
Published 28 Sep 2020

We are currently connecting more and more things, in more and more tightly coupled ways.7 The internet of things (IoT) is the latest generation of enhanced connectedness. Untold billions of devices will be connected to provide real-time information, computer-to-computer. Systems everywhere are becoming tightly coupled. Lots about it is good, indeed very good. A connected world is more efficient. A connected world drives out transaction costs and unnecessary rework. Humans are already tightly connected at fractional costs; now machines will be too, and machines to humans, and vice versa. But tightly coupled systems can fail catastrophically. In 2003, the entire US Northeast (plus Central Canada) experienced a power blackout because a single power line in Ohio came in contact with a tree branch.

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See educators teaching See also educators certainty, 170–173, 181, 185 integrative approach to, 174 reductionism, 173–178 technology, 65, 66, 88–89 tenure-based voting rights, 157–159 theorizing, 178–179 Third Congressional District of Maryland, 202, 203 third-party candidates, 201–202 3G Capital, 123–124, 126, 187 tightly coupled systems, 106–107 Tilly, Charles, 192, 194 time-and-motion studies, 42 time horizons, 155–159 Tobin, James, 92 Tobin tax, 92, 103 Tocqueville, Alexis de, 198–199 Ton, Zeynep, 124–126 total quality management, 43 Toyota Production System, 43 Toys “R” Us, 97–98, 99, 101 trade free, 41–42, 56, 63, 66, 150–152 productive friction in, 150–152 trade barriers, 150 trade policy, 56, 150, 151 Trader Joe’s, 125 trade wars, 41 trading technology, 88–91 training, 125 transaction costs, 106 trickle-down economics, 161 Troubled Asset Relief Program (TARP), 138, 144 two-sided markets, 152–153 Uber, 192 unemployment, 24 United States, metaphor for, 26 University of Chicago, 24 US Census Bureau, 4 US Constitution, 40 US economy achieving balance in, 97–114 efficiency in, 63 as efficient machine, 21–44, 94, 100, 210 gaming the system and, 84–94 growth of, 33–38 imbalances in, 1–17 models of, 22–25 as natural system, 77–94 of 1970s, 5–12, 24 proxies in, 45–57 sectors, 22 user-experience (UX) design, 180 value creation, 130 Verizon, 53–54 voter registration, 205–206, 207 voters, 201–206 Voters Not Politicians, 204 wage growth, 9, 10, 68 wages, 67–70, 125, 150 Wagner School, 180 Wallace, George, 201 Wallenstein Feed & Supply (WFS), 133–134 Washington Mutual, 137 Waste Management Inc.

API Marketplace Engineering: Design, Build, and Run a Platform for External Developers
by Rennay Dorasamy
Published 2 Dec 2021

Merchants can also grow their product offering and extend reach to markets that were previously difficult to access. An example could be the ability to make a payment from a transactional account which would allow access to customers without a credit card. Alternate payment methods could also result in lower card transaction costs. Open Banking has the potential to eliminate various fee elements of card transactions that are part of merchant service charges from the issuing banks, processors and schemes, which is also a benefit for customers. The payment system benefits from increased competition as the levelled playing field will potentially bring innovative payment solutions.

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The dynamic nature of an API Marketplace is indeed one of its biggest advantages as its flexibility allows it to respond far faster than existing enterprise systems. In the next chapter, we consider monetization for API Marketplaces. The Consumption model has a significant impact on how the platform is monetized as the two are intrinsically linked. If the monetization model is high volume with low transaction costs, more developers are needed in the pipeline. If the strategy is lower volume, subscription-based revenue, then a smaller subset of established, loyal organizations willing and able to pay a subscription is the objective. © The Author(s), under exclusive license to APress Media, LLC, part of Springer Nature 2022 R.

Good Profit: How Creating Value for Others Built One of the World's Most Successful Companies
by Charles de Ganahl Koch
Published 14 Sep 2015

Imagine how productive business would be if everyone acted with complete integrity, with their word as their bond, never doing anything they wouldn’t want exposed to the whole world. There would be much less need for all the time and money spent on controls, contracts, litigation, and security, and the enormous drag of transaction costs would be greatly reduced. At Koch, integrity means firm adherence to a moral code, outlined in our Guiding Principles and Code of Conduct. It requires courage, because acting in harmony with our principles can cause discomfort and fear—especially when it involves challenging conventional wisdom.

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As such it is most beneficial to companies with concentrated risk profiles, limited capital, significant debt obligations, or other needs for reduced earnings volatility. However, insurance is seldom a profitable long-term investment. In part, this is because insurance companies price insurance to cover their expected losses plus overhead, transaction costs, and profit margin. On average, we estimate that insurance premiums exceed the cost of losses by about 40 percent (a percentage that includes the fact that premiums are typically invested several years prior to a claim). So how did we at Koch apply MBM to make our approach to insurance consistent with our risk philosophy—turning something that could be viewed as a necessary evil into an excellent generator of good profit?

Open for Business Harnessing the Power of Platform Ecosystems
by Lauren Turner Claire , Laure Claire Reillier and Benoit Reillier
Published 14 Oct 2017

Niche/vertical focus: Niche players may try to cherry-pick the most profitable segments that are big enough to support a critical mass on their own (e.g. fashion marketplaces such as Farfetch, Videdressing, Vestiaire Collective and Vinted compete against eBay’s fashion vertical). 132 • • • Platform maturity: profitable growth Subsidized cost competitors: Platforms may copy your basic functionality but seek alternative monetization methods in order to offer low transaction costs to address the price-sensitive segments of the market. Classified sites such as Gumtree, leboncoin or OfferUp have been challenging incumbent marketplaces. ‘Me too’ imitators: Some firms may try to replicate your business model in other geographies before you can establish a footprint. You may then have to acquire them, decide not to enter in these international markets, or invest more to catch up at a later stage.

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We agree with this maxim and believe that the single most dangerous pitfall for many established firms in the next decade would be a failure Competing against platforms 199 to grasp the underlying economic models that are disrupting so many markets. The key to competing against platforms – or becoming one – is to understand the way they operate and what it means for the industry and for the business – both in terms of opportunities and threats. At a macro level, industries characterized by relatively high transaction costs, asymmetry of information and regulatory protection are now ripe for disruption by innovative digital entrants. In many cases, these entrants have proven that customers can be more efficiently served and transactions better coordinated through a platform business model. Even if parts of an industry are not directly impacted (for example, car production), the firms operating in this industry may see that platforms are disrupting their market (for example, by undermining car ownership and therefore depressing demand).

Open Standards and the Digital Age: History, Ideology, and Networks (Cambridge Studies in the Emergence of Global Enterprise)
by Andrew L. Russell
Published 27 Apr 2014

Boundary activities, as we have seen, are crucial sites where managers and engineers decide through managerial hierarchies what they can make or decide inside their firm, and what they need to do with respect to markets and organizations that exist outside the firm. In some cases, these decisions can be understood in terms of economic efficiency, using the economist Ronald Coase’s concept of transaction costs.7 The problem with the concept is that it tends to reduce – or ignore altogether – strategic, political, and cultural factors that are in many cases decisive. We deceive ourselves if we pretend that decisions to build from within or purchase from without are made solely on the grounds of economic efficiency.

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Scott, Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed (New Haven, CT: Yale University Press, 1999); Timothy Schoechle, Standardization and Digital Enclosure: The Privatization of Standards, Knowledge, and Policy in the Age of Global Information Technology (Hershey, PA: IGI Global, 2009). 10 Ronald H. Coase, “The Nature of the Firm,” Economica New Series, 4 (1937): 386–405; Oliver E. Williamson, “Transaction Cost Economics: The Natural Progression,” in Karl Grandin, Les Prix Nobel (Stockholm: Nobel Foundation, 2010); Naomi R. Lamoreaux, Daniel M. G. Raff, and Peter Temin, “Beyond Markets and Hierarchies: Toward a New Synthesis of American Business History,” American Historical Review 108 (2003): 404–433; Naomi R.

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See also specific topic Standards Committee (AIEE) 47–52 Standards Development Organization Advancement Act of 2004 277 Standards Engineering Society 276 Standards Planning and Requirements Committee (SPARC) 204–215 mission of 205 Study Group on Database Systems 205–206 Study Group on Distributed Systems (DISY) 206–208, 209–211, 212 three-schema design 205 Standards Policy for Information Infrastructure (Kahin and Branscomb) 261 Standards war 241–247 Stanford University 166 Stanford University Digital Systems Laboratory 170–171 Stanford University Research Institute 168 State Department 172 Stefferud, Einar 246–247 Steinmetz, Charles Proteus 44, 47, 48–49, 52, 57, 93 Stevenson, A.A. 78–80, 84 Stone, Harlan Fiske 83 Strassburg, Bernard 132, 138–139, 141–142, 158, 159–160, 181 Stratton, Samuel 84 Strowger, Almon 110–111 Strut, John William 38 Subcommittee 6 (ISO) 202–203 Subcommittee 16 (ISO) 203–204 see also Open Systems Interconnection (OSI) Sun Microsystems 15, 222 Sunshine, Carl 183 Sutherland, Ivan 166 Swartz, Aaron 3 System Network Architecture (IBM) 13, 23, 176, 219, 222 System Theory 10–11 Tanenbaum, Andrew 201 Taylor, Frederick Winslow 103 Taylor, Robert W. 166, 236 TCP/IP Interoperability Conference 240–241 TCP/IP networking protocols Arpanet and 237–238 background 232, 234 generally 225 momentum of 225 OSI versus 257, 258 UNIX operating system and 224, 257 voluntary consensus standards 19 Technical Committee 97 (TC 97) 147–148, 149, 150, 151 Technological determinism 3–4 Telegraph Act of 1866 30–31, 32 Telegraph industry argument for government control over 32–35 competition in 29 consolidation in 30–31 cooperation in 29–30 electrical measurement and 40 labor in 36–38 monopoly in 28–29, 31–32 Treaty of Six Nations 30 Western Union see (Western Union) and world politics 40 Telegraphy standards electrical measurement 38–41 labor and 36–38 Morse Code 35–36 overview 21–22, 25–27, 35, 56–57 Telenet 176, 179 Telephone Group 119–120 TELNET 238 Temin, Peter 265 The Terminator (film) 157 Thayer, Harry 106–107, 108, 123 Thompson, George K. 124–125, 126 Thomson, Elihu 39–40 Thomson, J.J. 38 Thomson, William (Lord Kelvin) 38, 39–40 Thurston, Robert 45, 57 Tomlinson, Ray 187 Tootill, Geoffrey 149 TP-4 protocol 238 Trade associations 82–84, 86, 267 Transaction costs 97 Transmission Control Program (TCP) 182–183, 188, 233, 236–237 see also TCP/IP networking protocols Transpac 176, 192, 193 Traub, Joe 151 Treasury Department 72–73 Treaty of Six Nations 30 Turner, Fred 157 The Two Sources of Morality and Religion (Bergson) 9 Tymnet 176 Underwriters’ Laboratories 74 UNESCO 148 United Kingdom, computer industry in 201–202 United Nations Standards Coordinating Committee 147 United States, decentralization of computer industry in 161–162, 201 United States of America Standards Institute (USASI) 63 University of California, Berkeley 166 University of California, Irvine 244–245 University of California, Los Angeles 168, 170–171 University of California, Santa Barbara 168 University of Michigan 66 University of Tokyo 187 University of Utah 168, 178 UNIX operating system 224, 226, 257, 260, 274 U.S.

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market
by Steven Drobny
Published 31 Mar 2006

Our job in our equity category is to find investments around the world that will make money on an absolute basis as well as outperform any global equity index. We use classic hedge fund risk management and cut the position if things start going against us. We’ll recognize that if we’re wrong, we’re wrong, and get out. Bid/offer spreads are not that big, so transactions costs are minimal. The next big asset category where we can be systematic, earn risk premia, and control our downside is fixed income. In Triumph of the Optimist (by Elroy Dimson, Paul Marsh, and Mike Staunton), a book about risk premia around the world, there is a whole section on bonds. Because bonds, on average, have paid a positive risk premium over time, you are supposed to be long fixed income.

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It did in FX in the early 1990s, but as the regulatory regime got tighter and tighter, we got less and less information, to the point where we really got nothing. Also, it wasn’t like we were sitting there trying to catch the next 50 pips or big figure. Structurally, we were looking for 5 or 10 percent moves, so flows weren’t that useful for our style of trading. Do you worry about transaction costs or, because you are looking for such large moves, do you deem them inconsequential? I didn’t worry about it at GS because I took the high road. I was a partner at the firm and to increase camaraderie, we did all our trades internally. I didn’t worry about paying a pip or an extra tenth of a vol then because it was really just an accounting transfer.

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Lee R., III, 34, 349 3-6-3 Rule, 138 370 Tiger Management, 8, 12, 21–22, 27–28, 31, 33, 93, 184, 206, 245, 247–256, 260, 262, 269 Timber, 280 Time decay, 79 Time horizon, 69, 113, 135, 165, 186, 211–212, 284, 294, 317, 334 Timing, significance of, 58, 193, 331–332 Top-down approach, xiii, 51, 346 Trading book/diary, 84–85, 115 Transaction costs, 61, 100. See also Management fees; Performance fees Transparency, 32, 304 Treasurer. See Porter, John, Dr. Treasury inflation-protected securities (TIPS), 196, 317–318 Trend reversals, 17 Triangle, 291 Triumph of the Optimist (Dimson/Marsh/Staunton), 61–62 Tudor Investment Corporation, 13, 253–254 Turkey/Turkish lira, 36, 45, 204, 223, 287, 305–306 Uganda, 237 UK Broad Country Equity Index, 5–6 Underperforming stocks, 69 Undervaluation, 151, 301 United Kingdom, 14, 17, 61, 73, 110, 126, 141, 163, 168–169, 174, 211, 275, 288, 320, 335 United Kingdom Gilts, 126–127, 136, 157, 285 United States, generally: deficit, 52, 350 dollar (USD), xii, 7, 18–20, 29, 105, 109, 122–124, 167, 179, 182, 193, 220–221, 223–225, 285, 296, 301–302, 317 Dollar Index, 118 government bonds, 17–18, 23, 225 Treasuries, 25, 118, 126–127, 146, 193–194, 225, 296, 302, 309, 320–321 unemployment rate, 27 yield curve, 319 Unsystematic money, 64, 67 INDEX Unsystematic trades, 68 Uptrends, 126 Uruguay, 289, 306 Valuation, 60, 174, 184, 190, 300 Value at risk (VAR), 28, 39, 74, 139, 148–149, 250, 316–317, 323 Vannerson, Frank, 9 Vega, 332–333 Venezuela, 296 Venezuelan bolivar, 39 Venture capital, 182, 194, 197, 280, 282 Vietnam, 261, 266 Volatility, impact of, 32, 46, 50, 55, 62–63, 86, 94–95, 99, 114, 135, 140–142, 148, 166–168, 186, 258–259, 280, 282, 292, 309, 311, 313, 319, 323, 329, 344 Wadhwani, Sushil, Dr., 32, 162–179 Wadhwani Asset Management, 162 Wall Street Journal, 231 Weak currencies, 18 Wealth creation, 178, 298 Weymar, Helmut, 9 When Genius Failed (Lowenstein), 159 Wilson, Robert, 269, 279 Windfalls, 12, 15 Winner’s curse, 330–331 Wisdom of Crowds,The (Suroweicki), 43 World Bank, 5, 135, 145, 153, 155 World economy, impact of, xii World Trade Center, terrorist attack on, 45–46, 87–89, 149–150, 207, 213, 297, 319 World War II, economic impact of, 6 Yahoo!

Commodity Trading Advisors: Risk, Performance Analysis, and Selection
by Greg N. Gregoriou , Vassilios Karavas , François-Serge Lhabitant and Fabrice Douglas Rouah
Published 23 Sep 2004

Rather, they simply are seeking short-term gains from the expected fluctuation in futures prices. Most futures trading activity is, in fact, conducted by speculators, who use futures markets (as opposed to transacting directly in the commodity) because it allows them to take a significant position with reasonably low transaction costs and a high amount of leverage. Managed futures investors attempt to profit from sharp price movements. However, the main distinction is that a speculator trades directly while the managed futures investor employs a CTA to trade on his or her behalf. Managed futures investors can take the form of private commodity pools, public commodity funds, and, most recently, hedge funds.

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Managers focusing on short-term trades try to capture rapid moves and are out of the market more than their intermediate and long-term counterparts. Because these managers base their activity on swift fluctuation in prices, their returns tend to be noncorrelated to long-term or general advisors or to each other. In addition, they are more sensitive to transaction costs and heavily rely on liquidity and high volatility for returns. Strong trending periods, which often exceed the short-term time frame, tend to hamper the returns of these advisors and favor those with a longer time horizon. When analyzing potential alternative investment opportunities, it is important not only to review past performance returns and variability of returns, but also to carefully analyze the degree of correlation of a particular strategy with other types of traditional and alternative investments.

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In addition, a retail IMA will, in common with registered managed investment schemes, generally be prohibited from investing in managed futures funds and wholesale IMAs that have not been registered under Part 5C (ASIC 2003b, p. 32). The overriding rationale for these reforms seems to be the desire on the part of the regulator to lower the transaction costs associated with establishing retail IMAs (ASIC 2003b, p. 37). This commercial imperative aside, it is difficult to provide a coherent justification for the reforms. The reforms draw an artificial distinction between managed investment schemes (where the fund manager has the discretion to select investments for the scheme) and retail IMAs, which are deemed not to be managed investment schemes (even though it is the operator that has the discretion to select investments for the accounts).

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street
by Justin Fox
Published 29 May 2009

Marveled Jensen: One must realize that these analysts are extremely well endowed. Moreover, they operate in the securities markets every day and have wide-ranging contacts and associations in both the business and the financial communities. Thus, the fact that they are apparently unable to forecast returns accurately enough to recover their research and transactions costs is a striking piece of evidence in favor of the strong form of the [efficient market] hypothesis.28 Following the precedent set by Fama a few years before, Jensen’s thesis was published in full in the pages of Chicago’s Journal of Business in 1969. Richard Roll did Jensen one better; his “Application of the Efficient Market Model to U.S.

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These sharks were the arbitrageurs who could be relied upon to attack risk-free money-making opportunities and make them disappear. The predators who kept markets efficient did require a rarefied theoretical environment to thrive. Merton later dubbed it the “super-perfect market paradigm.” In it there were no transaction costs, no worries about moving prices with one’s buying or selling, and no market discontinuities—that is, markets were always open and prices only changed in small increments.23 Louis Bachelier had envisioned such a market, too, but he had been unwilling to look more than an “instant” into its future.

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“They believe that ketchup transactions prices are the only hard data worth studying.” The research program of these ketchup economists consists largely of looking for—and not finding—ways to make excess profits in the ketchup market. Two-quart bottles of ketchup always sell for twice as much as one quart bottles “except for deviations traceable to transactions costs,” and you can’t get a bargain on ketchup by buying and combining the ingredients yourself. “Indeed,” he continued, “most ketchup economists regard the efficiency of the ketchup market as the best established fact in empirical economics.” Then Summers got serious for a moment: The parallels should be clear.

Virtual Competition
by Ariel Ezrachi and Maurice E. Stucke
Published 30 Nov 2016

These costs, which include segmenting consumers, identifying elasticities, and preventing resale, are significant in all industries. This, of course, is the reason not all firms enact this pricing strategy. The omission of Notes to Page 118 3. 4. 5. 6. 295 these transactions costs from existing theories of price discrimination is impor tant because, as Varian has pointed out: ‘A full welfare analysis of attempts to engage in [perfect] price discrimination cannot neglect the transactions costs involved in the negotiation itself.’ ” P. Papandropoulos, “How Should Price Discrimination Be Dealt with by Competition Authorities?” Revue des droits de la concurrence 3 (2007): 34–38, http://ec.europa.eu/dgs/competition/economist/concurrences _03 _ 2007.pdf.

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As Professor Lynn Stout discussed, societal norms of fairness and prosocial behav ior are both common in and necessary for a market economy.47 Violations of social norms of fairness decrease trust and increase retaliation.48 How trusting can you be in a world where people will seek whenever possible to profit at your expense? The transaction costs in a world where greed runs amok would be astronomical. Many people in behavioral economic experiments are trusting. However, their willingness to trust and cooperate is conditional, depending on the actual or expected cooperation of others.49 For online markets to deliver their benefits, people must trust firms and their use of their data.

Competition Overdose: How Free Market Mythology Transformed Us From Citizen Kings to Market Servants
by Maurice E. Stucke and Ariel Ezrachi
Published 14 May 2020

OkCupid even asks, “Would you ever sleep with a serial killer?”—a question that might not have occurred to you but might indeed help winnow down the field of potential dates. THIRD, online dating makes it easier to find people who share our interests, hobbies, and values. Online dating thus reduces our transaction costs. Rather than spend money on multiple dates to see if the person is right, we can quickly scan all the essential details. FOURTH, online dating platforms eliminate traditional barriers. As the Economist noted, “For most of human history, the choice of life partner was limited by class, location and parental diktat.”51 Now, the magazine notes, “There are services for Jews, Christians, Muslims, Trump supporters, people who self-select as intelligent and vegans.

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The State’s Role in Promoting Healthy Competition As we’ve seen, many policy makers and government officials operate under the delusion of self-correcting markets, in which the collective self-interest of all the competitors is supposed to eliminate the need for regulation. However, few markets, if any, match this simplistic vision of perfect competition, where fully informed, self-interested buyers and sellers interact, with few, if any, transaction costs. As a result, nearly every market is regulated—either by the market participants themselves, a few powerful firms, or the government. For example, the closest thing we have to perfect competition—the stock market—is also one of the most heavily regulated, precisely because regulations are needed to provide guardrails to prevent competition from turning toxic.

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H., 252–53 Thaler, Richard, 237 Thatcher, Margaret, 187 Theory of Moral Sentiments, The (Smith), 236–37 Theory of the Leisure Class (Veblen), 248 time-limited offers, 82 Tinder.com, 108 Tiny Lab Productions, Lithuania, 194–95, 199, 202–3, 223 Toma, Catalina, 112–13 toxic competition overview, 40, 122, 227–28, 254, 255 and antitrust laws, 103 collegiate sports programs, 139–40 deregulation of the financial industry, 129–30 economic waste caused by, 23–25 escalation of problems, 9–10 factors that lead us to, 281–84 four conditions leading to, 49–65 Gamemakers, 192–93, 203, 206–7, 220–22, 223 incremental steps disguise the movement toward darkness, 282–83 lack of awareness and/or control, 6 misallocation of resources, 24 NHL pre-helmet law scenario, 4–5 of online dating services, 116 paying less and getting much less, ix–x, xii–xiii quality and integrity as cost of, 178–79 regaining your power to change it, 284–87 in school ranking systems, 7–9 sellers’ inability to limit customer choices, 102, 103 See also choice overload; competition machine; exploiting human weakness; race to the bottom tracking software of Gamemakers, 204–7, 217, 222 traditional barriers, 110 transaction costs, 110 transparency in online dating, 109–10 Travelers Group Inc., 128 Travel Troubleshooter blog, 79 Trimega Laboratories, United Kingdom, 181 Trinity School, New York, 32–33 Trump, Donald, 174, 263 Trump administration deregulating as much as possible, 159 First Step Act, 169 and FTC, 157 increasing private prisons, 175 and online gambling, 153 rolling back consumer financial protections, 268–69, 285–86 Trump International Hotel Las Vegas, 147, 149 Trump International Sonesta Beach Resort, 149–50, 176 Truth in Hotel Advertising Act (2016), 153–54 Tulane University, 12–14, 21, 22–23, 38 Tyrie, Andrew, 291 UAB (University of Alabama at Birmingham), 138–39, 140–41 UK Forensic Science Service (FSS), 177–80 UK National Health Service (NHS), 183–87 Ultimatum Game, 237–39, 240 unethical behavior as cost of zero-sum competition, 246–47 unions as anticompetitive, 232 United Kingdom competition machine explosion, 41–45, 44 fuel shortage incidents on airlines, 57 horsemeat scandal, xii, 41–42, 45–47 investigating drip pricing on hotel booking sites, 148 National Health Service and cream-skimming, 183 privatizing the UK Forensic Science Service, 177–83 privatizing water, 52–53, 58–59, 68, 162, 187 school ranking system effects, 7–8 self-regulation in food industry, 273–74 United Nations, 229–30, 271 United States bankruptcies and their causes, 270 deterioration of the American Dream, 231–32 job satisfaction levels, 227 kudzu-ing drip pricing, 148–53 oregano fraud, 52 school ranking system effects, 8–9 wealth inequality, 229–30 Universal Declaration of Human Rights, 271 universities race to woo and reject applicants, xii.

Security Analysis
by Benjamin Graham and David Dodd
Published 1 Jan 1962

But by insisting that higher expected return comes only with greater risk, MPT effectively repudiates the entire value-investing philosophy and its long-term record of risk-adjusted investment outperformance. Value investors have no time for these theories and generally ignore them. The assumptions made by these theories—including continuous markets, perfect information, and low or no transaction costs—are unrealistic. Academics, broadly speaking, are so entrenched in their theories that they cannot accept that value investing works. Instead of launching a series of studies to understand the remarkable 50-year investment record of Warren Buffett, academics instead explain him away as an aberration.

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Both during and immediately after World War I, no self-respecting NYSE member firm facilitated a client’s switch from Liberty bonds into potentially more lucrative, if less patriotic, alternatives. There was no law against such a business development overture. Rather, according to Graham, it just wasn’t done. A great many things weren’t done in the Wall Street of the 1930s. Newly empowered regulators were resistant to financial innovation, transaction costs were high, technology was (at least by today’s digital standards) primitive, and investors were demoralized. After the vicious bear market of 1937 to 1938, not a few decided they’d had enough. What was the point of it all? “In June 1939,” writes Graham in a note to a discussion about corporate finance in the second edition, “the S.E.C. set a salutary precedent by refusing to authorize the issuance of ‘Capital Income Debentures’ in the reorganization of the Griess-Pfleger Tanning Company, on the ground that the devising of new types of hybrid issues had gone far enough.”

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With so much information available, there is a tendency to act too quickly to buy and sell in haste, and to substitute the views of others for the hard work necessary to come to one’s own conclusions. Perhaps this is why so many market participants can be described only as “traders” and “speculators,” unafraid of using debt to turbocharge returns. Their method requires frequent profitable trades, after transaction costs, and incurs far higher taxes than the long-term investor pays. They also pay a heavy price in terms of emotional wear and tear. It is easy to vacation or enjoy family if one owns great businesses—and it’s impossible if one is tracking a flock of trading positions about which one has little conviction.

EuroTragedy: A Drama in Nine Acts
by Ashoka Mody
Published 7 May 2018

Thus, as the Fed official and monetary historian Robert Solomon has written, competitive devaluation ceased to be “a live issue.”195 Advanced economies outside Europe gradually “learned to float” without disrupting the global trading system.196 Much later, a new—​and longer-​lasting—​economic argument emerged in the European discourse to justify a monetary union. Since within a monetary union it would no longer be necessary to convert from one currency to another, costs of international transactions would be lowered, and the uncertainty arising from exchange-​rate fluctuations would be eliminated. The proposition was that lower transaction costs and reduced uncertainty about future exchange rates would promote trade among members of the monetary union, which, in turn, would increase economic prosperity. Because this reasoning for monetary union appeared only later, it is discussed in the next chapter. The final economic argument, which also appeared only much later, was based on the briefly popular “two poles” view.197 By then, floating exchange rates had become the global norm.

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Leigh-​Pemberton later told European scholar kohl’s euro 69 Alasdair Blair, “most of us, when we signed the [Delors Committee] Report in May 1989 thought that we would not hear much about it.”23 But the Delors Committee’s report had more life than Pöhl or LeighPemberton had imagined. Although mainly a rewarmed version of the Werner Committee’s report, the Delors Report staked out a new economic claim. A single currency, it asserted, would bolster commerce within Europe, because it would “remove intra-​Community exchange rate uncertainties and reduce transactions costs.”24 Speaking to European parliamentarians in Strasbourg a few days before the release of the report, Delors said that the “inter-​dependence” of European economies and the development of a single market made a single currency “indispensable.”25 A French official commented that although not quite “indispensable,” a single currency would improve the “efficiency” of the single market.26 Some voices did protest.

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In 1993, Barry Eichengreen—​economics professor at the University of California, Berkeley, and perhaps the most important chronicler of the EMU—​brusquely said, “I dispute the belief that a single currency is a technically necessary concomitant of a single market in capital, labor, and goods.” Eichengreen explained that the decline in transactions costs achieved through a single currency would be trivial and the dividends from reduced exchange rate uncertainty would be “quite small” (Eichengreen 1993, 1322). Just as Emminger had pointed out a decade earlier, Eichengreen said that “the existence of forward markets in foreign exchange permits traders to hedge currency risk at low cost” (1327).

The Dollar Meltdown: Surviving the Coming Currency Crisis With Gold, Oil, and Other Unconventional Investments
by Charles Goyette
Published 29 Oct 2009

Some may be reluctant to hold U.S. dollars even for a short time and may wish to add gold and silver investments to their portfolio beyond their core physical holdings. From time to time people may wish to park their money in precious metals assets, to add to and withdraw money as need arises or for expected expenditures. Some will want to speculate. Can this be done with minimal transaction costs? It can. Exchange-Traded Funds Exchange-traded funds or ETFs are one of the most popular developments of the investment markets in recent times. ETFs are like mutual funds, but they trade throughout the day on a stock exchange. Among the reasons for the growing popularity of ETFs are their low expense ratios and certain tax efficiencies.

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Demand for non-standard bars can be quite weak in a rising silver market, causing delays and difficulties when selling. The 1- and 10-ounce silver bars (again of the major hallmarks only) and 1-ounce silver coins such as the U.S. Silver Eagles and the Canadian Silver Maple Leaf coins have higher transaction costs but are suitable for smaller investments. Other Ways to Own Silver What the exchange-traded funds GLD and IAU do with gold, iShares Silver Trust (New York Stock Exchange symbol: SLV) does with silver. Created in 2006, SLV is off to a fast start with 268 million ounces of silver in trust, valued at $3.8 billion, in May 2009.

Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions
by Joshua Rosenbaum , Joshua Pearl and Joseph R. Perella
Published 18 May 2009

Mergers and Acquisitions Basics: The Key Steps of Acquisitions, Divestitures, and Investments. Hoboken, NJ: John Wiley & Sons, 2005. Gaughan, Patrick A. Mergers, Acquisitions, and Corporate Restructurings. 4th ed. Hoboken, NJ: John Wiley & Sons, 2007. Gaughan, Patrick A. Mergers: What Can Go Wrong and How to Prevent It. Hoboken, NJ: John Wiley & Sons, 2005. Gilson, Stuart. “Transactions Costs and Capital Structure Choice: Evidence from Financially Distressed Firms.” Journal of Finance 52 (1997): 161-196. Goetzmann, William N., and Roger G. Ibbotson. The Equity Risk Premium: Essays and Explorations. New York: Oxford University Press, 2006. Graham, John R. “How Big Are the Tax Benefits of Debt?”

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Covenant-lite term loans in LBO financing structures were more typical when structured alongside an ABL facility because commercial banks would not agree to covenant-lite cash flow revolvers unless the revolver benefited from a super-priority security interest in the collateral. 169 Toggles may also be created to activate the 100% cash flow sweep, cash balance sweep, average interest expense option, or other deal-specific toggles. 170 The length of the projection period provided in a CIM (or through another medium) may vary depending on the situation. 171 The timing for the sharing of the Sponsor Model depends on the specifics of the particular deal and the investment bank’s relationship with the sponsor. 172 If the banker is analyzing a public company as a potential LBO candidate outside of (or prior to) an organized sale process, the latest balance sheet data from the company’s most recent 10-K or 10-Q is typically used. 173 The “free cash flow” term used in an LBO analysis differs from that used in a DCF analysis as it includes the effects of leverage. 174 As ValueCo is private, we entered a “2” in the toggle cell for public/private target (see Exhibit 5.12). 175 In this case, a “1” would be entered in the toggle cell for public/private target (see Exhibit 5.13). 176 In the event the target has debt being refinanced with associated breakage costs (e.g., call or tender premiums), those expenses are included in the uses of funds. 177 In accordance with FAS 141(R), M&A transaction costs are expensed as incurred. Debt financing fees, however, continue to be treated as deferred costs and amortized over the life of the associated debt instruments. 178 The allocation of the entire purchase price premium to goodwill is a simplifying assumption for the purposes of this analysis.

Mythology of Work: How Capitalism Persists Despite Itself
by Peter Fleming
Published 14 Jun 2015

With only technocrats in the room, the cultural atmosphere becomes rather moribund and confusing, as managerial stances cancel each other out. The prototypical neoliberal manager requires social goods to attack – something to bite – even if this results in major organizational dysfunction. I believe there are four driving factors for this attraction to confrontation and conflict. Firstly, as the classic economic theory of ‘transaction cost analysis’ crept into almost every sphere of economic activity, including work, its underlying cynicism crafted a specific ideological view of the employee. In particular, the idea of ‘shirking’ became popular for understanding the presumed divergence between what a principal (the firm) hires the agent (worker) to do on its behalf and what the agent actually does.

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capitalism ref1, ref2, ref3, ref4 General Motors plant (Michigan) ref1 Goffee, R. ref1 Goldman Sachs ref1 The Good Soldier Svejk (Hasek) ref1 Gordon, D. ref1 Gorz, A. ref1, ref2 Graeber, D. ref1 Groundhog Day (Ramis) ref1 Guattari, F. ref1, ref2, ref3 on criticism/criticality ref1 and de-subjectification ref1 language ref1, ref2 Gujarat NRE ref1 Gulf of Mexico oil spill (2010) ref1 Hamper, B. ref1 Hanlon, G. ref1 Hardt, M. ref1 Hart, A. ref1 Harvard Business Review (HBR) ref1 Harvey, D. ref1, ref2 Hayek, F. ref1, ref2, ref3 health and safety ref1, ref2 ‘Help to Buy’ support scheme ref1 Hirschhorn, N. ref1 Hodgkinson, T. ref1 holiday policy ref1 Houellebecq, Michel ref1, ref2, ref3 human capital ref1, ref2, ref3, ref4, ref5, ref6, ref7 human relations movement ref1 Human Resource Management (HRM) ref1, ref2, ref3, ref4, ref5, ref6 humour ref1 ‘I, Job’ function ref1, ref2, ref3, ref4, ref5, ref6 and biopower ref1, ref2 and death drive ref1, ref2 as escape into work ref1 and illness ref1, ref2, ref3 resisting ref1, ref2, ref3, ref4, ref5, ref6 see also escape; totality refusal see also work, as all-encompassing; working hours illegal immigrants, deportations ref1 illness ref1, ref2 collective ref1, ref2 see also Social Patients’ Collective as desirable experience ref1, ref2, ref3, ref4 of managers ref1, ref2 and productive power ref1, ref2 as weapon against capitalism ref1 ‘immersion room’ exercise ref1, ref2, ref3, ref4 imperceptibility ref1 see also invisibility incentivization ref1 indexation process ref1, ref2, ref3, ref4, ref5 informality and authoritarianism ref1, ref2 see also deformalization insecurity ref1 Institute of Leadership and Management (ILM) ref1, ref2, ref3 invisibility ref1, ref2 ‘Invisible Committee’ ref1, ref2 Italian autonomist thought ref1, ref2 Jameson, F. ref1 Jones, G. ref1 Junjie, Li ref1 Kamp, A. ref1 Kein Mensch ist illegal ref1 Kellaway, L. ref1 Key Performance Indicators (KPIs) ref1 Keynes, J.M. ref1, ref2 Khrushchev, Nikita ref1, ref2 Kim, Jonathan ref1 King, Stephen ref1 ‘Kitchen Debate’ ref1 Kramer, M. ref1, ref2 labour unions ref1 dissolution of ref1, ref2 language, evolution of ref1 Larkin, P. ref1 Latour, B. ref1, ref2 Laval, C. ref1, ref2 Lazzarato, M. ref1, ref2 leaders backgrounds ref1 remuneration and bonuses ref1, ref2, ref3, ref4, ref5 see also managers Lefebvre, H. ref1 Leidner, R. ref1 Lewin, D. ref1 liberation management ref1, ref2, ref3, ref4, ref5 life itself, enlisting ref1, ref2, ref3, ref4, ref5 lines of flight ref1, ref2 Lordon, F. ref1, ref2, ref3 Lucas, R. ref1, ref2 Lukács, G. ref1 Lynch, R. ref1 McChesney, R. ref1 McGregor, D. ref1 management ref1, ref2 and class function ref1, ref2 as co-ordination ref1 and inducement of willing obedience ref1, ref2 information deficit ref1 and power ref1, ref2 self-justification rituals ref1 as transferable skill ref1, ref2 managerialism ref1, ref2, ref3, ref4, ref5, ref6, ref7 and abandonment ideology ref1, ref2, ref3, ref4, ref5 and boundary management ref1 and conflict-seeking behaviour ref1 division between managers and managed ref1, ref2 general principles of ref1 and leadership ref1 profligate management function ref1 refusing ref1 and securitization ref1 as self-referential abstraction ref1 managers as abandonment enablers ref1, ref2 and deformalization ref1 and engagement of workers ref1, ref2 lack of practical experience ref1 overwork ref1, ref2 see also leaders Marcuse, H. ref1 Market Basket supermarket chain ref1 Marx, K. ref1, ref2, ref3, ref4, ref5, ref6 Maslow, A. ref1 Matten, D. ref1 meat consumption ref1 Meek, J. ref1 Meyerson, D. ref1 Michelli, J. ref1 Miller, W.I. ref1 Mitchell, David ref1 mobile technology ref1, ref2, ref3, ref4, ref5, ref6, ref7 Modafinil ref1, ref2 Monaghan, A. ref1 money ref1, ref2 see also accumulation Mooney, G. ref1 Moore, A.E. ref1 Moore, Michael ref1, ref2 music industry ref1 Naidoo, Kumi ref1 NASA ref1 Natali, Vincenzo ref1 Negri, A. ref1, ref2 neoliberal capitalism ref1, ref2, ref3, ref4, ref5, ref6, ref7 and bureaucracy ref1 and ideal worker ref1, ref2 and non-work time ref1, ref2 and paranoia ref1, ref2 resisting ref1, ref2 see also post-labour strategy and threat of abandonment ref1, ref2 and truth telling ref1, ref2, ref3 neoliberalism ref1, ref2, ref3, ref4, ref5, ref6 and class relations ref1, ref2, ref3 and disciplinary power ref1 and human-capital theory ref1 and impossibility ref1, ref2, ref3, ref4, ref5, ref6 and micro-fascism ref1 and reign of technocrats ref1 role of state ref1 and truth telling ref1, ref2 and worker engagement ref1, ref2, ref3 Nestlé ref1 New Public Management ref1, ref2 New Zealand, and capitalist deregulation ref1 New Zealand Oil and Gas (NZOG) ref1 Newman, Maurice ref1 Nietzsche, Friedrich ref1, ref2 Nixon, Richard ref1, ref2 Nyhan, B. ref1 obsession ref1, ref2, ref3, ref4, ref5, ref6, ref7, ref8 Onionhead program ref1 overcoding ref1, ref2, ref3, ref4, ref5, ref6, ref7 The Pain Journal (Flanagan) ref1, ref2, ref3 paranoia ref1, ref2, ref3, ref4 overwork/paranoia complex ref1, ref2 Paris Commune ref1, ref2 Parkinson’s Law ref1 Parnet, C. ref1 Parsons, T. ref1 Peep Show (TV comedy) ref1 pensions ref1, ref2 personnel management ref1 see also Human Resource Management Peters, T. ref1 Philip Morris ref1 Pike River Coal mine (New Zealand) ref1 Pollack, Sydney ref1 Pook, L. ref1 Porter, M. ref1, ref2 post-labour strategy, recommendations ref1 postmodernism ref1, ref2, ref3 power ref1, ref2, ref3, ref4, ref5 and truth telling ref1 Prasad, M. ref1 Price, S. ref1 private companies, transferring to public hands ref1 privatization ref1, ref2, ref3, ref4, ref5, ref6, ref7 profit maximization ref1, ref2, ref3, ref4, ref5 quantitative easing ref1 Rand, Ayn ref1 rationalization ref1, ref2, ref3 Reifler, J. ref1 reserve army of the unemployed ref1 Ressler, C. ref1 results-only work environment (ROWE) ref1, ref2, ref3 Rimbaud, A. ref1 Rio+20 Earth Summit (2012) ref1 ‘riot grrrl’ bands ref1 rituals of truth and reconciliation ref1 Roberts, J. ref1 Roger Award ref1 Roger and Me (Moore) ref1 Rosenblatt, R. ref1 Ross, A. ref1, ref2 Ross, K. ref1 Rudd, Kevin ref1 ruling class fear of work-free world ref1, ref2 and paranoia ref1, ref2 Sade, Marquis de ref1 Sallaz, J. ref1 Saurashtra Fuels ref1 Scarry, E. ref1 Securicor (G4S) ref1 Segarra, Carmen ref1 self-abnegation ref1 self-employment ref1 self-management ref1, ref2, ref3, ref4, ref5 self-preservation ref1, ref2, ref3, ref4 self-sufficiency ref1, ref2, ref3 shareholder capitalism ref1, ref2, ref3, ref4 shift work ref1, ref2 see also working hours Shragai, N. ref1 sleep and circadian rhythms ref1 as form of resistance ref1 working in ref1, ref2, ref3 smart drugs ref1, ref2 Smith, Roger ref1 smoking and addiction ref1 dangers of ref1, ref2 scientific research ref1 sociability ref1, ref2 ‘the social’ ref1, ref2 social factory ref1, ref2, ref3, ref4, ref5, ref6, ref7 and structure of work ref1 social media ref1 Social Mobility and Child Poverty Commission ref1 Social Patients’ Collective (SPK) ref1, ref2, ref3 social surplus (commons) ref1, ref2, ref3 socialism ref1, ref2, ref3, ref4 Sontag, S. ref1 Spicer, A. ref1 stakeholder management ref1, ref2 Starbucks ref1 state, theory of ref1 subcontracting ref1, ref2, ref3 subsidization ref1, ref2, ref3, ref4, ref5, ref6, ref7 suicide as act of refusal ref1 Freud’s definition ref1 work-related ref1, ref2, ref3, ref4, ref5 surplus labour ref1, ref2 surplus living wage ref1 ‘tagged’ employees ref1 ‘tagged’ prisoner ref1 Tally, Richard ref1 taxation ref1, ref2, ref3 Taylor, F.W. ref1 Taylor, S. ref1 Taylorism ref1 technological progress, and emancipation from labour ref1 Thatcher, Margaret ref1 Thatcherism ref1 They Shoot Horses Don’t They? (Pollack) ref1 Thikol ref1 Thompson, E.P. ref1 Thompson, J. ref1 time ref1, ref2, ref3, ref4 tobacco industry CSR as legitimation strategy ref1 and false truth telling ref1, ref2 lawsuits against ref1, ref2 totality refusal ref1, ref2, ref3 see also escape transaction cost analysis ref1 Under the Dome (King) ref1 unemployment ref1, ref2, ref3, ref4, ref5, ref6, ref7 United Health Programs of America ref1, ref2 universities management ref1, ref2 and paranoia ref1 US Equal Employment Opportunities Commission ref1 utopian thought ref1, ref2, ref3 Virno, P. ref1, ref2 Volkswagen ref1 wage theft ref1 waste (non-utility) ref1, ref2 water management ref1 Waterman, R.H. ref1 Webb, Robert ref1 Weber, M. ref1, ref2, ref3, ref4, ref5, ref6 Weil, D. ref1 Weiss, B. ref1 Williams, R. ref1 Williams-Grut, O. ref1 Willmott, H. ref1 Witthall, Peter ref1 work ref1, ref2 as all-encompassing ref1, ref2, ref3, ref4, ref5, ref6 see also ‘I, Job’ function and economic necessity ref1, ref2, ref3, ref4, ref5 fetishistic character of ref1, ref2 for it’s own sake ref1, ref2, ref3, ref4 as ‘open prison’ ref1, ref2 and refusal ref1, ref2, ref3, ref4, ref5 see also escape; totality refusal and ritual ref1, ref2, ref3, ref4, ref5 as social construction ref1, ref2, ref3, ref4 universalization of ref1, ref2, ref3, ref4, ref5, ref6, ref7, ref8 work and non-work boundaries blurred ref1, ref2, ref3, ref4, ref5, ref6, ref7, ref8 see also ‘I, Job’ function; working hours workers engagement and disengagement ref1, ref2, ref3 see also deformalization working hours prolonged ref1, ref2, ref3, ref4 three-day work week ref1 work-creep ref1 see also results-only work environment; shift work World Health Organization ref1 ‘XYZ Tobacco’ (pseudonym) ref1, ref2 zero-hour contracts ref1, ref2 Zheng, Li ref1 Žižek, S. ref1

The End of Big: How the Internet Makes David the New Goliath
by Nicco Mele
Published 14 Apr 2013

As it turned out, it didn’t really change any of our lives (so far at least).” Self-financing and hitting up friends is probably what bands have always done when they want to record something but don’t have a record deal; what has changed is that Kickstarter (like other Web resources) reduces the search and transaction costs for hitting up friends (and in some cases others who find out about it), including the cost of distributing the rewards that incentivize the donors or investors. And it’s hardly a unique story. Among the over 26,000 projects successfully funded on Kickstarter since its inception in 2008, a third have been music albums, another third film or video, and about a tenth writing and publishing projects.20 Not one of these projects needed a big studio, big record label, or big publisher to back them.21 Approximately one-tenth of the films premiering at Sundance Film Festival in 2012 were at least partially funded on Kickstarter, leading David Carr to remark in the New York Times that “at Sundance Kickstarter resembled a movie studio, but without the egos.”22 And Kickstarter is just one of several crowd-sourced funding sites.

…

Similarly, in consent of the networked, a technology platform’s power is derived from its users—arguably much more so than a government’s. When you move to a country, you explicitly agree to its laws and the shape and form of its government. Once you’re there, leaving it can entail a high transaction cost—even higher if the government doesn’t want you to leave. When you join an online community, you’re presented with the terms of service, an obtuse legal document frequently stretching on for pages. Facebook’s terms of service are close to ten pages long. Many digital companies (like Yahoo!) change their terms of service without notification.

The Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power
by Michael A. Cusumano , Annabelle Gawer and David B. Yoffie
Published 6 May 2019

In an earlier era, many software developers who worked on the Windows platform discovered that Microsoft would often copy and integrate third-party applications, effectively putting those players out of business.8 PHARMAPACKS ON AMAZON: LEVERAGE THE PLATFORM GIANT In some cases, belonging to someone else’s platform can be very profitable. A big successful platform such as Amazon can dramatically reduce search and transaction costs for customers. The challenge for firms using the platform is to learn how to exploit the advantages without being run over by the platform itself. The answer often exists in platform governance rules that allow participants to pick their spots.9 Many creative businesses have found ways to belong to a platform, while mitigating that platform’s inherent power.

…

The Mood Change Until recently, the dominant mood in the business press (and in many business books on platform companies) was unbridled enthusiasm for the efficiency of platforms and awe at the speed at which they introduced both innovation and disruption. We and other authors have shown that many platforms are indeed amazing: They can reduce search and transaction costs, and fundamentally restructure entire industries within a few short years. We have seen this dynamic in computers, online marketplaces, taxis, hotels, financial services, and many other fields. Nonetheless, the tide of public perception seems to have turned: Media coverage of platforms has become increasingly negative.

India's Long Road
by Vijay Joshi
Published 21 Feb 2017

Public finance and public production do not have to go together because production could be contracted out to the private sector though the government pays for it (see below). Technical note: External effects may, in principle, be internalized by voluntary bargaining (see Coase 1960) but the feasibility of such internalization depends on the fulfilment of various stringent conditions, such as absence of transactions costs. State intervention to internalize externalities presents its own difficulties, however. For example, it may not easy to determine the rate of tax at which social marginal benefit and social marginal cost would be equated. For example, negative externalities are very important in finance. The social costs of bank failures are much greater than the private costs to the managers of the banks that fail.

…

India’s labour laws hugely raise the cost of labour and were enacted without taking into account the reactions of employers and workers. The fact is that there is a strong disincentive to hire workers if they are impossible to fire. No doubt, employers can evade regulations, but only by incurring G r o w t h a n d t h e Em p l oy m e n t P r o b l e m  [ 79 ] 80 higher transactions costs, hassle, and uncertainty. So most companies quite rationally try and minimize the use of labour, remain small and uneconomic in scale, and expand in a capital-​intensive manner. It is thus no surprise that the organized sector is lacking in enterprises that employ large numbers of workers producing labour-​intensive products like garments, shoes, or toys for a mass market: employers would be reluctant to be stuck with a workforce that they could not trim in response to business conditions.

…

The FDI policy regime switched from a positive list to a negative list, thereby expanding the range of industries which could attract foreign money. Inward FDI steadily increased throughout the 1990s, and moved into a higher gear in the next decade (see Table 12.6).6 Now foreign investors can, in principle, invest in most sectors with minimal government policy barriers (though transactions costs on the ground still remain [ 250 ] Political Economy 251 Table 12.5 INDIA , CHINA , SOUTH KOREA: SHARES OF WORLD MERCHANDISE EXPORTS (PER CENT) India China South Korea 1950 2.0 1.3a 0.5a 1980 0.4 0.9 0.9 1990 0.5 1.8 2.0 2000 0.7 3.9 2.7 2007 1.1 8.9 2.7 2010 1.4 10.4 3.1 a Chinese and South Korean data refer to 1953.

Profiting Without Producing: How Finance Exploits Us All
by Costas Lapavitsas
Published 14 Aug 2013

In contrast, banknotes normally leave no trail of use, thus being suitable for illegal and ‘grey’ transactions.57 Banknote anonymity also protects users against the attentions of a prying state. The third is that access e-money has limited ability to deal with very small payments. The difficulties involved can be gauged from the internet where it has proven very difficult to introduce a reliable system of e-money ‘micro-payments’ (a fraction of the unit of account). There are transactions costs – including plain inconvenience – to using access e-money for tiny purchases, leading internet users simply to avoid the latter.58 Beyond the internet, coin appears to be superior to access e-money in dealing with very small payments: it is easy to carry; it can be readily supplied in sufficiently small denominations; there is negligible profit from counterfeiting it; the cost is generally small if it is lost; it is also relatively cheap to produce and to put in circulation.

…

Second, does it also follow that functioning capitalists would continually increase leverage, thus raising the rate of profit of enterprise? Both questions are directly related to the Modigliani–Miller theorem, the cornerstone of mainstream theory of finance.28 The theorem argues that, if capital markets are perfect and there are no transactions costs and taxes, the level of leverage of an enterprise is irrelevant to its stock market valuation and to the cost of financing its liabilities. What matters instead is the combination of real resources mobilized by the enterprise – labour power, raw materials, technology, and so on. By the same token, financial decisions are irrelevant to overall profitability, and can be disregarded by economic theory.

…

Thus, an independent central bank was established to support a homogeneous money market with the explicit mandate of keeping inflation low; the Stability and Growth Pact was introduced, aimed at fiscal discipline to keep inflation under control, even though compliance was left to each sovereign state; competitiveness in the internal market, meanwhile, came to depend on productivity growth and on the fluctuations of nominal unit labour costs in each country.46 The institutional mechanisms of the eurozone have further reflected hierarchical relations among its member states. Core countries – particularly Germany – have deployed the euro as a means of control over lesser states in the union.47 German industrial capital has gained competitive advantages from the lowering of transaction costs across the internal market, and from the opportunity to outsource productive capacity. For other member states the euro has implied loss of the weapon of currency depreciation in the face of German exporting prowess. German financial capital has, meanwhile, benefited from the homogeneity of the money market within the European Monetary Union and from the global role of the euro as reserve currency.

Triumph of the Optimists: 101 Years of Global Investment Returns
by Elroy Dimson , Paul Marsh and Mike Staunton
Published 3 Feb 2002

Figure 4-1 shows the cumulative performance of US stocks, bonds, 45 46 Triumph of the Optimists: 101 Years of Global Investment Returns Figure 4-1: Cumulative return on US asset classes in nominal terms, 1900–2000 100,000 Cumulative index value (start-1900 = 1.0; log scale) Equities 10.1% per year Bonds 4.8% per year Bills 4.1% per year Inflation 3.2% per year 10,000 16,797 1,000 119 100 57 24 10 1 1900 1910 1920 1930 1940 1950 1960 Start of year 1970 1980 1990 2000 bills, and consumer prices (i.e., inflation) over the 101-year period from 1900 to 2000. It shows the wealth that would have accumulated at each year-end from 1900 through to 2000 from an initial investment of $1 in stocks, bonds, or bills at the end of 1899. It assumes that dividends and interest were reinvested, and that there were no taxes or transactions costs. Figure 4-1 also shows inflation, that is, the increase in consumer prices over time. For stocks, the investment strategy represented in Figure 4-1 is one of buying and holding the US equity market. Today, this would be most cheaply accomplished by investing in an index tracker fund. Back in 1900, some 70 years before tracker funds were launched, it would have meant investing in all NYSE securities in proportion to their market capitalizations.

…

A further factor that must surely have lowered required returns is that investors now have much more opportunity to diversify, both domestically and internationally, than they had a century ago. Diversification allows investors to lower their risk exposure without detriment to expected return. Transaction costs are also lower now than a century ago. Factors such as these, which led to a reduction in the required risk premium, have contributed further to the upward re-rating of stock prices. To convert from a pure historical estimate of the risk premium into a forward-looking projection, we need to reverse-engineer the factors that drove up stock markets over the last 101 years.

…

McL., 229 Lansdown, A., xii Lanstein, R., 141 Large capitalization stocks, 125–6, 133–6, 143, 146, 148, 212 Latin America, 15, 21, 22 Lebanon, 20 Lehavy, R., 188 Lettau, M., 57, 118 Levy, H., 56, 182 Index Li, B., 145 Li, H., 42 Li, L., 116, 117, 118, 123 Liquidity, 17, 18, 20, 81, 301 Litzenberger, R.H., 140 Loeb, G.M., 205 Lognormal distribution, 56, 182, 184, 203 London, xi, xii, 19, 22, 23, 27, 37, 38, 39, 43, 48, 122, 126, 142, 160, 279, 284, 299 London Business School (LBS), xi, xii, 27, 126, 299 London Share Price Database (LSPD), xii, 37, 142, 299, 300 London Stock Exchange (LSE), 19, 23, 39, 142, 160 Long bonds, 46, 49, 54, 74–90, 163, 169, 171, 173, 174, 239, 300, 301, 306 Look-ahead bias, 35, 41, 142, 222, 299 Longin, F., 117 Lorie, J.H., 38 Low yield stocks, 139–48 Lund, J., 244 Luxembourg, 20 Lynch, A.W., 35 Lystbaek, B., 244 Maddison, A., 22, 228 Maier, J., 254 Malaysia, 20 Malkiel, B., 57, 118 Manufacturing, 19, 24, 26–8 Marcus, A.J., 185, 239 Market development, 5, 18–28 Market failure, 41, 42 Market risk, 56, 105, 108, 118, 122, 164, 166, 179, 180, 181, 184, 188, 195, 205, 215 Market timing, 110 337 Market-to-book ratio, see book-to-market ratio Markowitz, H., xi Marquis, D.R.P., 224 Marsh, P.R., iii, v, xi, xii, 27, 35, 126, 130, 138, 184, 193, 299 Marston, F.C., 188 Maturity premium, 6, 74, 81–84, 89, 101, 204 Maynes, E., 239 McCulloch, J.H., 84 McLeod, H., 42, 279 Meghen, P.J., 259 Mehra, R., 180, 202 Merrett, A., 36 Merrill Lynch, 14, 15, 16, 17, 84 Mexico, 20, 21, 121 Michaely, R., 159, 160, 162 Michie, R.C., 19, 22 Micro capitalization stocks, 125–7, 130–2, 136, 137 Mid-capitalization stocks, 134, 146 Middle East War (1973), 50 Mid-maturity bonds, 75, 78, 81, 85–7 Miller, M.H., 218 Mitchell, B.R., 228, 234, 244, 284 Modigliani, F., 218 Moller, B., 289 Momentum, 208 Monetary system, international, 93–5 Murphy’s Law, 124, 131– 5, 138, 147–8 Mutual funds, 28, 35, 205– 8 Mutual fund fees, 205, 207–8 Myers, S.C., 185, 211, 218, 239 Nagel, S., xii, 142 Naik, N.Y., xi, 35 Nasdaq, 11, 23, 46, 158, 306 Nationalization, 17, 25, 26, 41 Nelson, C.R., 70 Netherlands, The, 200, 274–8 see also cross-country comparisons New York, 11, 19, 23, 24, 38, 43, 58, 124, 306 New York Stock Exchange (NYSE), 11, 19, 23, 24, 46, 48, 124, 125, 126, 133, 136, 142, 158, 306 New Zealand, 20, 21, 84 Nielsen, S., 244 Nigeria, 20 Nokia, 29 Normal distribution, 54– 6, 168, 182, 185 Norway, 20 NTT, 199 O’Brien, P., xii, 239 O’Shaughnessy, J., 140 Odean, T., 207 Odell, K.A., 20 Officer, R.R., 229 Oil, 25, 47, 50, 97, 117, 142 OPEC, 47, 50 Optimists, xi, 156, 176, 179, 185, 188, 224 Otten, R., xii, 274 Pakistan, 20 Panetta, F., xii, 264 Panjer, H.H., 239 Paredaens, J., 234 Paris, 19, 22, 122 Park, A., 35, 198 Parum, C., xii, 244 Passive management, 207–8 see also buy-and-hold strategies, indexation, index funds Payout, see dividend payout Peng, L., 23, 306 Pension plan, 216–7 Pettit, J., 198 Philippines, 20 Poland, 20, 21, 41, 67, 222 Portfolio risk, 108 338 Portugal, 20 Prescott, E., 180, 202 Primary market, 18–9 Privatization, 25, 26 Productivity, 43, 48, 97, 189, 223, 224 Purchasing Power Parity (PPP), 7, 91, 95–104, 219 Railroads, 19, 20, 24, 25, 26, 28, 37, 168 Rajan, R.G., 22 Ramaswamy, K., 140 Random walk, 153, 161 Ratzer, E., 294 Rau, P.R., 160, 161 Real exchange rates, 7, 91, 96–103, 105–8 Real interest rates, 68–73 see also interest rates, bond yields Real term premium, 74, 84–7 Recession, 50, 212 Regional exchanges, 20 Regional stock markets, 20 Regulated businesses, 216–7 Regularities, see anomalies Regulation, 3, 18, 163, 186, 216, 217 Reid, K., 141 Reinganum, M., 131 Reward-to-risk ratio, see Sharpe ratio Repurchases, 143, 149, 158–63, 177, 191 Risager, O., 244 Risk, 54–62 see also currency risk, default risk, market risk, portfolio risk, risk premium, volatility Risk aversion, 163, 179– 81, 188 Risk Measurement Service, 27 Risk premium, 4, 8–10, 34–44, 45, 53, 55, 61, 63, Triumph of the Optimists: 101 Years of Global Investment Returns 74, 81, 88, 89, 195–210, 211–9, 220–4 Risk premium, historical, 163–75 Risk premium, prospective, 176–94 Risk premium, relative to bills, 163–8 Risk premium, relative to bonds, 169–73 Risk-free rate puzzle, 202 Roden, D., 38 Romania, 20 Rose, H.B., xi Rosenberg, B., 141 Ross, S., 41, 211, 212 Rouwenhorst, K.G., 116, 117, 118, 123 Rowley, I., 145 Royal Dutch Shell, 29 Russia, 20, 21, 22, 41, 67, 222 Ryan, R., 156 Sallee, P., 249 San Francisco, 20 Sandez, M., 284 Schaefer, S.M., xi, 85 Scherbina, A., 177 Scheurkogel, A.E., 279 Schumann, C.G.W., 279 Schwartz, D., 135 Schwartz, E.S., 35 Schwartz, S.S., 199, 269 Schwert, G.W., 39, 70 Seasonality, 7, 8, 124, 135– 8, 223 Secondary market, 18–9 Second World War, 36, 58, 70, 71, 73, 76, 79, 94, 98, 116, 122, 152, 189, 195, 221, 224 Sectors, 4, 17, 23–28, 35, 36, 37, 138, 188, 299 Sell-in-May, 135, 138, September 11th 2001, 47, 58, 117, 168, 177, 178, 213 Shares, see equities Sharpe ratio, 105, 111–4, 208 Sharpe, K.P., 239 Sharpe, W.F., xi, 105, 111, 112, 113, 145, 180 Shell, 29 Shiller, R.J., 84, 158, 161, 176, 179 Shleifer, A., 141, 147, 180 Siegel, J.J., xi, 40, 126, 141, 156, 176, 195, 197, 201, 206, 222 Siegel, L.B., 206 Siegel’s constant, 195–202 Singapore, 20 Sinquefield, R., 88, 306 Size effect, xi, 4, 7, 8, 124– 38, 142, 144, 208, 223 Size premium, 8, 124–39, 142, 144 Slovenia, 20, 21 Small capitalization stocks, xi, 124–38, 144, 148, 212 see also size effect Small-cap reversal, 131–5 Smithers, A., 195 Solnik, B., 117, 118, 122 South Africa, 279–83 see also cross-country comparisons South Korea, 12, 15 Spain, 284–8 see also cross-country comparisons Spoerer, M., 254 Sri Lanka, 20, 21 Standard & Poors (S&P), 38, 239 Standard errors, 167, 168, 174, 182, 188 Stattman, D., 141 Stehle, R., xii, 254 Stewart, G.B., 181 Stock markets, 3–5, 11–4, 18–33, 40–4, 155–8, 188–94 Stock repurchases, see repurchases Stocks, see equities Stock-level data, 7, 38, 139 Stolper, G., 66 Suarez, J.L., 284 Index Success bias, 6, 34, 36–8, 42–4, 174, 197 Sui, J.A., 211 Sullivan, T., xii Summer effect, 135, 138 Surveys, 179, 185–7, 188 Survivorship bias, 34–8, 41, 142, 173–5, 202, 222, 299 Sweden, 289–93 see also cross-country comparisons Switzer, L., xii, 239 Switzerland, 294–8 see also cross-country comparisons Taiwan, 12, 20, 133, 161 Tax-loss selling, 135–8 Tax management, 205–6 Taxes, 9, 44, 46, 85, 104, 122, 135–8, 140, 158–62, 193, 205–7, 209, 212, 214, 218, 219, 254, 301 Taylor, A.M., 97, 99 Taylor, B., xii Technological change, 23–4, 189, 223–4 Technology, 23, 25, 26, 28, 199 Term premium, 74, 84–7 Terrorism, 3, 4, 58, 168, 210, 213 Thaler, R., 176 Thomas, J., 188 Thomas, W.A., 259 Time-of-the-day effect, 135 Timmermann, A., xii, 244 Transactions costs, 46, 189, 207 Treasury bills, see bills Treasury inflationprotected securities (TIPS), 74, 84–7, 90, 212 Treynor, J.L., xi, 207, 208 Triangles, 227, 228 Triumph of the Optimists, xi, 176, 224 Turkey, 20, 21, 22 Turn-of-the-year effect, 135–9 339 Twenty-first century, 17, 118, 119, 158, 184, 190, 195, 210 United Kingdom, 23–32, 36–8, 48–50, 63–5, 78, 84–7, 95, 126–9, 135–8, 142–5, 149–53, 190–3, 198–9, 299–305 see also cross-country comparisons United States, 23–32, 45– 7, 54–61, 63–5, 68–70, 74–8, 81–2, 84–9, 95, 124–6, 135–8, 139–42, 149–53, 158–61, 163–6, 169–71, 186–7, 190–3, 196–7, 306–10 see also cross-country comparisons Uppal, R., 117 Urquhart, M.C., 239 Uruguay, 20 US economy, 3, 35, 62, 166, 222 Valbuena, S.F., xii, 284 Valuation, 18, 139, 149, 155, 161, 162, 177–9, 191, 211–7 Value investing, 139–48 Value-growth effect, 139– 48 Value-growth premium, 139–48 Value stocks, 8, 139–48 van Nieuwerburgh, S., 234 van Schaik, F., xii, 274 Vandellos, J.A., 284 Velioti, A.M., xii Venezuela, 20, 21 Vermaelen, T., 160, 161 Violi, R., 264 Vishny, R., 141 Vodafone, 18, 23, 28, 30, 31, 218 Volatility, 54–62, 77–83, 91–9, 105–8, 114, 123, 144, 152, 161, 163, 178– 84, 187, 195–210, 219, 221 see also risk Wada, K., xii, 269 Wall Street Crash, 22, 47, 58, 116, 122, 224 Warnock, F.E., 120, 121 Weekend effect., 135 Weights, 24, 40, 279, 311 Weil, P., 202 Weisbach, M.S., 159 Welch, I., 185–7, 188 Westerfield, R.W., 211, 212 Weston, F., 211 Whelan, S., 259 White, E.N., 19 Williams, J.B., 139 Wilshire Associates, 46, 58, 306 Wilshire 5000, 46, 58, 306 Wilson, J.W., xii, 35, 39, 46, 306 Window-dressing, 135–6, Woodward, G.T., 85 World Bank, 12, 15, 93 World Index, 7, 10, 39–40, 108–14, 119, 123, 166, 167, 168, 171–5, 184–5, 187, 192, 193, 202, 216, 219, 220, 223, 311–5 World ex-US index, 109– 11 World markets, 5, 11–4, 32, 50–1, 123, 138 World Trade Center, see September 11th 2001 World wars, 36, 37, 44, 47, 58, 69, 70, 71, 73, 75, 76, 79, 93, 94, 98, 116, 122, 123, 152, 153, 189, 195, 221, 224 see also First World War and Second World War Wright, S., 195 Wydler, D., xii, 294 Xu, Y., 42, 57, 118 Yield, see bond yield and dividend yield Yield curve, 81 Yugoslavia, 20 Ziemba, W.T., 199, 269 Zingales, L., 22 

Walk Away
by Douglas E. French
Published 1 Mar 2011

The ongoing strength in the housing market has raised concerns about the possible emergence of a bubble in home prices. However, the analogy often made to the building and bursting of a stock price bubble is imperfect. First, unlike in the stock market, sales in the real estate market incur substantial transactions costs and, when most homes are sold, the seller must physically move out. Doing so often entails significant financial and emotional costs and is an obvious impediment to stimulating a bubble through speculative trading in homes. Thus, while stock market turnover is more than 100 percent annually, the turnover of home ownership is less than 10 percent annually—scarcely tinder for speculative conflagration.

The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction
by Richard Bookstaber
Published 1 May 2017

The principal reason that prices vary, especially in the short term, is the demand for liquidity that results from our apparent fickleness. If you want to buy or sell a stock—or if you have to—you are a liquidity demander. And what you are demanding when you demand liquidity is to do this quickly, and with low transaction costs. It is in the froth of liquidity where most trading profits are made. Not only does the demand for liquidity move prices, but the breakdown of liquidity is one of the primary drivers of crashes, as well. I assign the dynamics of liquidity to three types of agents: liquidity demanders, liquidity suppliers, and market makers.

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Stable, proportional relationships also broadly underlie the literature on liquidity measures ranging from standard measures such as turnover and bid/asked spreads to more sophisticated measures that seek to address relationships and common factors of liquidity across markets. Gabrielsen, Marzo, and Zagaglia (2011) classify many of these liquidity measures: volume-based, such as the turnover ratio; price variability–related, such as the variance ratio; and transaction costs–related, such as the bid/asked spread. 9. Bookstaber, Paddrik, and Tivnan (2014) present an agent-based model for fire sales that projects the dynamics of market shocks on the path of leverage, funding, and capital, tracing the cascades and propagation as the initial shock works its way through the system.

The Financial Crisis and the Free Market Cure: Why Pure Capitalism Is the World Economy's Only Hope
by John A. Allison
Published 20 Sep 2012

It appears more likely that the characteristics that cause people to be able to purchase a home, such as the self-discipline of savings, are the same positive characteristics that we observe in many responsible homeowners. It is certainly clear that home ownership is not necessarily economically efficient for everyone. For example, for young people who anticipate moving often, the transaction cost (which is material) of buying and selling houses may overwhelm the economic benefits of owning. Also, the risk of having to carry the cost of a house that one cannot sell for what one paid for it is significant for many young people. As all homeowners know, maintaining a home is expensive and time-consuming.

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As an example of how this process works, suppose a real estate developer has plans to build a subdivision that will cost $6,000,000 and result in 100 building lots that can be sold over time at a current price of $80,000 per lot, or a total of $8,000,000 (100 lots × $80,000). He has saved $1,000,000 and therefore needs $5,000,000 more to develop the subdivision. Based on the expected development period and sales period, it will take a total of five years for this $5,000,000 to be repaid. Because of the relatively small size of this project, the transaction cost in the capital markets would be so high as to make the project unfeasible. In addition, it would be extremely difficult for capital market participants to underwrite the project without intimate knowledge of the local real estate market. While, in theory, the builder/developer could ask local individuals to finance the project, it could be very difficult to find “friends” who would want their savings locked into one investment for so long.

The Wealth of Humans: Work, Power, and Status in the Twenty-First Century
by Ryan Avent
Published 20 Sep 2016

Within that hierarchy managers need not worry about rebidding a job each time they want to tweak an employee’s job responsibilities; instead, they can observe how staff assignments play out and adjust on the fly, safe in the knowledge that workers will do as instructed. A salary, then, is just as much a fee for the worker’s obedience as for their labour. Coase’s insight, though important, is incomplete. For one thing, creating a firm doesn’t magically eliminate transaction costs. Bosses are not all-knowing and all-powerful, and firms don’t suddenly gain the ability to monitor and influence a worker’s behaviour by making that person an employee of the firm rather than an independent contractor. Instead, firms have to build an internal incentive structure, which tells employees what behaviours will earn them promotions and bonuses (or get them sacked).

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While workers already in the rich world would probably experience continued slow wage growth as a result of immigration, the migrants themselves should enjoy a substantial rise in income. Relocating a larger share of the world economy inside countries with strong political and economic institutions might generate other benefits as well, from reduced transaction costs to a reduced ability for large firms with market power to play economies off against each other in search of the most lenient possible tax and regulatory treatment. Yet the distributional concerns of those already living within rich countries would hardly be alleviated by this sort of plan.

925 Ideas to Help You Save Money, Get Out of Debt and Retire a Millionaire So You Can Leave Your Mark on the World
by Devin D. Thorpe
Published 25 Nov 2012

On top of that, he’ll pay registration fees, sales tax on the difference and anything else the dealer and the state can think of to charge him while he’s got his checkbook out. When he leaves, Bob has an economically identical car to the one he drove in with, but he’s giving up 20 to 25% of the value in transaction costs to the dealer. (Bob wouldn’t do much if any better selling his car in the newspaper, on Craigslist, eBay, or parked on the corner.) Of course, Bob would never make this trade—he’d paint the car instead. But the hypothetical transaction helps to highlight a key point. The transaction of buying a car is very expensive.

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Consider this example: If you bought $100 worth of shares each month on the first day of the month in a mutual fund initially trading at $20, you’d buy 5 shares on the first day. If the price moves up to $25 for the next month, you’d acquire only 4 shares. If the price drops to $16.67, the next month, you’d acquire 6 shares. Maintaining this discipline over time will generally increase your returns over buying in bigger lumps—if you can avoid transaction costs. The worst thing to do is to try to beat the system by timing your purchases. Consider the scenario above. Presume that you had the courage to monitor the price for three months before making a purchase of $300 all at $16.67. That sounds brilliant, right? Not so brilliant if the price drops to $10 the next month.

Bitcoin Billionaires: A True Story of Genius, Betrayal, and Redemption
by Ben Mezrich
Published 20 May 2019

.… The second character that attracted a second wave was anonymity—people who thought they could conceal their behavior behind Bitcoin. In the last year and a half a set of people were attracted to two other aspects—first, it’s freeish, dramatically reducing transaction costs. And it’s programmable. This changed the nature of the Bitcoin population.” And, Liew added, this was a very good thing for those, like him, who wanted to invest in the new economy. “The market of radical libertarians is not very big. The market of criminals is not very big. But offering free transaction costs—you have a market of everyone in the world.” It was a VC’s answer to the question. The big money wasn’t interested in backing something dirty or illegal—not for moral reasons, but because those things weren’t good for business.

The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing
by Michael J. Mauboussin
Published 14 Jul 2012

Financial Analysts Journal 54, no. 6 (November–December 1998): 6–14; and Stephen Jay Gould, Triumph and Tragedy in Mudville: A Lifelong Passion for Baseball (New York: W.W. Norton & Company, 2004). 28. Russ Wermers, “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses,” Journal of Finance 55, no. 4 (August 2000): 1655–1695; and Laurent Barras, Olivier Scaillet, and Russ Wermers, “False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas,” Journal of Finance 65, no. 1 (February 2010): 179–216. Chapter 5—The Arc of Skill 1.

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Watts, Duncan J. Six Degrees: The Science of a Connected Age. New York: W.W. Norton & Company, 2003. Watts, Duncan J. Everything Is Obvious*: *Once You Know the Answer. New York: Crown Business, 2011. Wermers, Russ. “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses.” Journal of Finance 55, no. 4 (August 2000): 1655–1695. White, Hayden. Metahistory: The Historical Imagination in Nineteenth-Century Europe. Baltimore, MD: The Johns Hopkins University Press, 1973. Whitely, Peyton. “Computer Pioneer's Death Probed—Kildall Called Possible Victim of Homicide.”

WTF?: What's the Future and Why It's Up to Us
by Tim O'Reilly
Published 9 Oct 2017

Kilpi reflects on economist Ronald Coase’s theory of twentieth-century business organization, which explores the question of when it makes sense to hire employees rather than simply contracting the work out to an individual or small company with specialized expertise. Coase’s answer is that it makes sense to put people into one business organization because of the transaction costs of finding, vetting, bargaining with, and supervising the work of external suppliers. But the Internet has changed that math, as Kilpi observes. “If the (transaction) costs of exchanging value in the society at large go down drastically as is happening today,” he writes, “the form and logic of economic and organizational entities necessarily need to change! The core firm should now be small and agile, with a large network.”

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He adds: “Apps can do now what managers used to do.” As far back as 2002, Hal Varian predicted that the effect might be the opposite. “Maybe the Internet’s role is to provide the inexpensive communications that can support megacorporations,” he wrote. In a follow-up conversation, he said to me, “If transaction costs go down, coordination within firms becomes cheaper too. It’s not obvious what the outcome will be.” Of course, networks have always been a part of business. An automaker is not made up of just its industrial workers and its managers, but also of its network of parts suppliers and auto dealerships and ad agencies.

Analysis of Financial Time Series
by Ruey S. Tsay
Published 14 Oct 2001

. • What is the average annual log return over the data span? • What is the annualized (average) simple return over the data span? • Consider an investment that invested one dollar on the Alcoa stock at the beginning of 1962. What was the value of the investment at the end of 1999? Assume that there were no transaction costs. 4. Repeat the same analysis as the prior problem for the monthly stock returns of American Express. 5. Obtain the histograms of daily simple and log returns of American Express stock from January 1990 to December 1999. Compare them with normal distributions that have the same mean and standard deviation. 6.

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Its price on the Helsinki Stock Market must move in unison with the price of its American Depositary Receipts on the New York CO - INTEGRATION 331 Stock Exchange; otherwise there exists some arbitrage opportunity for investors. If the stock price has a unit root, then the two price series must be co-integrated. In practice, such a co-integration can exist after adjusting for transaction costs and exchange-rate risk. We discuss issues like this later in Section 8.6. 8.5.1 An Error-Correction Form Because there are more unit-root nonstationary components than the number of unit roots in a co-integrated system, differencing individual components to achieve stationarity results in overdifferencing.

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Here an arbitrage trading consists of simultane- THRESHOLD CO - INTEGRATION 333 ously buying (short-selling) the security index and selling (buying) the index futures whenever the log prices diverge by more than the cost of carrying the index over time until maturity of the futures contract. Under the weak stationarity of z t∗ , for arbitrage to be profitable, z t∗ must exceed a certain value in modulus determined by transaction costs and other economic and risk factors. It is commonly believed that the f t, and st series of the S&P 500 index contain a unit root, but Eq. (8.32) indicates that they are co-integrated after adjusting for the effect of interest rate and dividend yield. The co-integrating vector is (1, −1) after the adjustment, and the co-integrated series is z t∗ .

Digital Accounting: The Effects of the Internet and Erp on Accounting
by Ashutosh Deshmukh
Published 13 Dec 2005

Controls, Security, and Audit • Security Issues • Conceptual Framework • Standard Internal Controls • Anti-Intrusion Techniques • Automated Tools • Privacy and Assurance The costs and benefits of digital accounting decisions are intimately linked with targeted accounting processes, the information technology used and the knowledge needs for the proposed solution; as such, each decision is unique. For example, factors such as current document volume per period, percentage of digital documents, current cycle times and error rates, current transactions costs, security and control issues, and nature of accounting software or legacy systems all need to be considered in implementing new technologies and solutions. There is no silver bullet or a standard template for such decisions. Structure of the Book The changes and new developments in digital accounting are comprehensively covered in the coming chapters.

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EDI in any format provides robust security features for validity of transactions, mutual authentication of identity, data integrity and confidentiality, non-repudiation of origins, auditability of transactions and backups. Benefits of EDI include improved customer service, increased data accuracy, decreased cycle time, decreased transaction costs and improvements in existing workflows. There are, of course, upfront costs such as hardware, software, changes in existing workflows, training costs and trading partner costs; and recurring costs, such as administration and maintenance costs. The estimates of upfront costs vary from tens of thousands to millions of dollars, depending on the intensity of the EDI project.

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E-procurement began to facilitate the purchases of indirect materials, such as MRO items, office furniture, office supplies and machine parts; and services, such as janitorial, gardening and travel expenses. Costs associated with paperwork and approval procedures make these purchases very pricey. Generally, paper-based purchasing processes were not standardized, the number of suppliers could run in the thousands and approvals were time consuming, resulting in high transaction costs. SRM tools continue to provide the eprocurement functionality, which is also referred to as employee self-purchasing. The employee self-purchase process begins with identification of required items and then searching for those items in electronic catalogs. The catalogs developed by the suppliers can be hosted on the supplier portal and browsed from the desktop by users.

The Third Pillar: How Markets and the State Leave the Community Behind
by Raghuram Rajan
Published 26 Feb 2019

With little ability to verify when the cattle wondered off the ranch, or what the quality of their treatment was in the hands of the rancher who found them, lawsuits could proliferate. The system of implicit community responsibility and enforcement might be far more effective in protecting cattle and minimizing transactions costs than using explicit contracts and the legal system. Communities thus can be more than the sum of individuals who compose them. Finally, an important modern function of communities is to give the individual in large countries some political influence over the way they are governed, and thus a sense of control over their lives, as well as a sense of public responsibility.

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So she also needs compensation for the risk of default. Finally, the lender’s use for money, as well as her ability to buy goods with it when she gets repaid, may be very different from today. This is another risk she bears. The economically defensible interest rate therefore includes the time value for money plus transactions costs for making the loan plus the compensation to the lender for the risks she takes. The final piece that is tacked on is the lender’s profit, based on how pressing the borrower’s need is and what the alternative sources of loans are. So why would the ancient Hebrews prevent lenders from getting what modern economists think is their legitimate due?

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The benefits of a global competitive market are not just greater efficiency, but stronger and more independent private sectors in each country, and potentially stronger democracies. At the same time, we should be less eager to harmonize rules and regulations across countries unless absolutely necessary to avoid high transactions costs. The process of setting these rules at the international level is not transparent and is undemocratic. Furthermore, harmonization reduces variety and competition between jurisdictions. Binding international agreements reduce the sense people have of self-determination, and should be used sparingly—to secure low tariffs but rarely to force harmonization of other rules and regulations.

Nudge: Improving Decisions About Health, Wealth, and Happiness
by Richard H. Thaler and Cass R. Sunstein
Published 7 Apr 2008

Funds cannot be withdrawn until a year later, when the total amount is redeemed, just in time for the Christmas shopping season. The usual interest rate on these accounts is close to zero. Think about the Christmas club in economic terms. This is an account with no liquidity (you can’t take your money out for a year), high transaction costs (you have to make deposits every week), and a near-zero rate of return. It is an easy homework exercise in an economics class to prove that such an institution cannot exist. Yet for many years Christmas clubs were widely used, with billions of dollars in investments. If we realize that we are dealing with Humans rather than Econs, it is not hard to explain why the clubs flourished.

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Those who pollute (meaning all of us) do not pay the full costs that we impose on the environment, and those of us who are harmed by pollution (again, all of us) usually lack any feasible way to negotiate with polluters to get them to clean up their acts. People who celebrate freedom of choice are well aware that when “transaction costs” (the technical term for the costs of entering into voluntary agreements) are high, there may be no way to avoid some kind of government action. When people are not in a position to make voluntary agreements, most libertarians tend to agree that government might have to intervene. It helps to think about the environment as the outcome of a global choice architecture system in which decisions are made by all kinds of actors, from consumers to large companies to governments.

Work Less, Live More: The Way to Semi-Retirement
by Robert Clyatt
Published 28 Sep 2007

American stocks and bonds do represent about 40% of the world’s financial assets, but now that investing overseas has become safe, inexpensive, and convenient, it is time for Americans to look further afield. The goal is to find low-correlation asset classes with liquid markets, quality securities, and reasonable transaction costs. While emerging markets and the chances for shenanigans still put those securities at the furthest limit of acceptable risk, well-documented scandals in major American companies don’t measure up to a gold standard of corporate probity, either. In any case, the global marketplace is fast growing up, and foreign companies offer great potential for returns at reasonable prices.

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A Lipper and Wall Street Journal study explains and estimates the hidden trading costs incurred by mutual funds, cited in John Hechinger, “Deciphering Funds’ Hidden Costs,” Page D1, March 17, 2004. Appendix B | Resources | 349 Wermers. “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs and Expenses,” by Russ Wermers; The Journal of Finance, Vol. 55, No. 4, Papers and Proceedings of the Sixtieth Annual Meeting of the American Finance Association, Boston, Massachusetts, Jan. 7-9, 2000 (Aug., 2000). Safe Withdrawal Rates This section reviews the tools and resources that have attempted to quantify Safe Withdrawal Rates for retirees.

The Road to Somewhere: The Populist Revolt and the Future of Politics
by David Goodhart
Published 7 Jan 2017

Indeed, when imports of textiles and clothing from low-cost countries threatened jobs in rich countries special controls were introduced. This regime came to be seen as inadequate in the 1980s and a big push was made for what Dani Rodrik has called ‘hyperglobalisation’—the attempt to eliminate all transaction costs that hinder trade and capital flows. Tariff barriers were only a small part of this, it was also about all the domestic market rules and regulations, from product standards to national currencies, that required elimination or harmonisation. ‘The World Trade Organisation was the crowning achievement of this effort in the trade arena.

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But instead of the pause that Britain would have preferred, the early 1990s—partly as a result of German unification—saw a dramatic new integrationist surge, orchestrated by Delors, embodied in the Maastricht Treaty of 1992 with its flight path to the single currency (and its creation of the category of European citizen). There had been a long-standing interest in a single currency at the federalist margins, but German unification gave it a chance. A single currency linking economies at a similar level of development provides the obvious advantages of reduced transaction costs and greater predictability, especially in cross-border trade. Delors also believed Europe faced a particular problem that he thought a single currency would solve: he feared that the liberalisation of capital controls introduced by the single market would destabilise the ERM mechanism, which had since 1979 loosely linked EU currencies, which would in turn unravel the single market.

All About Asset Allocation, Second Edition
by Richard Ferri
Published 11 Jul 2010

Payable Date The date when dividends or capital gains are paid to shareholders. For mutual funds, the payable date is usually within two to four days of the record date. The payable date also refers to the date on which a declared stock dividend or bond interest payment is scheduled to be paid. Portfolio Transaction Costs The expenses associated with buying and selling securities, including commissions, purchase and redemption fees, exchange fees, and other miscellaneous costs. In a mutual fund prospectus, these expenses would be listed separately from the fund’s expense ratio. They do not include the bid-ask spread.

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Income from Treasury securities is exempt from state and local taxes but not from federal income tax. Treasury securities include Treasury bills (T-bills; 1 year or less), Treasury notes (T-notes; 1 to 10 years), and Treasury bonds (T-bonds; over 10 years). Turnover Rate An indication of trading activity during the past year. Portfolios with high turnover rates incur higher transaction costs and are more likely to distribute capital gains (which are taxable to nonretirement accounts). Unit Investment Trust (UIT) An SEC-registered investment company that purchases a fixed, unmanaged portfolio of income-producing securities and then sells shares in the portfolio to investors, usually in units of at least $1,000.

Rockonomics: A Backstage Tour of What the Music Industry Can Teach Us About Economics and Life
by Alan B. Krueger
Published 3 Jun 2019

Analyzing the ticket market is complicated because the behavior of buyers in the primary market is affected by the presence of resellers, and because resellers have multiple economic roles. If ticket brokers can swoop in and buy tickets that they anticipate they can resell at a higher price, it will be more difficult for fans to purchase tickets in the primary market. There are also substantial transaction costs associated with buying a ticket on the secondary market, as anyone who has paid the StubHub transaction fee can attest. Leslie and Sorensen built a sophisticated model of consumer and broker behavior to model the effect of resale markets on consumer welfare. They reached the provocative conclusion that while the opportunity to resell tickets on the secondary market does increase the allocative efficiency of ticket distribution (which is why Mankiw felt better off for being able to buy a ticket to Hamilton), this benefit is partly offset by increased competition for tickets in the primary market and by transaction costs in the secondary market.

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They reached the provocative conclusion that while the opportunity to resell tickets on the secondary market does increase the allocative efficiency of ticket distribution (which is why Mankiw felt better off for being able to buy a ticket to Hamilton), this benefit is partly offset by increased competition for tickets in the primary market and by transaction costs in the secondary market. When the dust settles, the big winners are the professional ticket brokers. As a whole, fans are likely made worse off by the existence of the resale market. Leslie and Sorensen conclude, “If the narrow goal is to maximize the surplus of those who ultimately attend the event, then restrictions on resale may be warranted.”

The Unusual Billionaires
by Saurabh Mukherjea
Published 16 Aug 2016

Thus, the positive contribution of the winners disproportionately outweighs the negative contribution of losers to eventually help the portfolio compound handsomely. Investing and holding for the long term is the most effective way of killing the noise that interferes with the investment process. As soon as you try to time that entry/exit, you run the risk of noise rather than fundamentals driving our investment decisions. With no churn, transaction costs are reduced which adds to the overall portfolio performance over the long term. A hypothetical portfolio started on 30 June 2005, with 50 per cent churn per annum for instance loses almost 1.2 per cent CAGR return when run for a ten-year period. Each of these four reasons is explained in more detail in Appendix 3.

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As soon as you try to time that entry/exit, you run the risk of noise rather than fundamentals driving our investment decisions. Reason 4: No churning By holding a portfolio of stocks for over ten years, a fund manager resists the temptation to buy/sell in the short term. With no churn, this approach reduces transaction costs, adding to the overall portfolio performance over the long term. I illustrate this with an example: Assume that you invest US$100 million in a hypothetical portfolio on 30 June 2005. Assume further that you churn this portfolio by 50 per cent per annum (implying that a typical position is held for two years) and this portfolio compounds at the rate of Sensex index.

Software Engineering at Google: Lessons Learned From Programming Over Time
by Titus Winters , Tom Manshreck and Hyrum Wright
Published 17 Mar 2020

Whenever it is efficient to do so, we should be able to explain our work when deciding between the general costs for two engineering options. What do we mean by cost? We are not only talking about dollars here. “Cost” roughly translates to effort, and may involve any or all of the below: Financial Costs (e.g. money) Resource Costs (e.g. CPU time) Personnel Costs (e.g. engineering effort) Transaction Costs (e.g. what does it cost to take action?) Opportunity Costs (e.g. what does it cost to *not* take action?) Societal Costs (e.g. what impact will this choice have on society at large?) Historically, it’s been particularly easy to ignore the question of societal costs. However, Google and other large tech companies can now credibly deploy products with billions of users.

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again
by Nicholas Dunbar
Published 11 Jul 2011

When my sources first told me about the deal in May 2003, two years after it had been completed, the price seemed shockingly high—some €500 million in return for concealing several billions in debt. It was not an explicit price in the sense of a negotiated fee, but rather an implicit spread on top of the swap payments that Goldman had calculated as being necessary to balance out the off-market value of the swap. Given that the transaction costs for standard, market-priced cross-currency swaps were a hundredth of this amount, it was not surprising that people were shocked when I published a story exposing the deal, and that Goldman and its public relations machine were anxious not to see the €500 million number in print. From Goldman’s perspective, the CDS was necessary because, like the “wrong” exchange rate transaction offered by the mythical bureau de change, the swap with Greece amounted to a secret loan from Goldman.

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A dapper man with a technocratic air, he started off sounding like a humble facilitator of basic services: “I’m a true overall service provider. I’ll give you perfect execution in swaps and bonds.”15 What he meant was that if a client wanted to use Barclays like an exchange, trading a standardized product with minimal transaction costs, then he would make that possible. Having thus established rapport with his client, Sartori then steered the pitch into more sophisticated territory. “But I also understand what you’re doing and what you’re trying to achieve.” While any successful salesperson must have empathy for the client, the derivatives masters like Sartori di Borgoricco, and his equivalents at J.P.

How Not to Network a Nation: The Uneasy History of the Soviet Internet (Information Policy)
by Benjamin Peters
Published 2 Jun 2016

For the market to be the ideal organizational mode, some economists assume that rational actors will rank the order of their preferences linearly: if rational actors prefer option A over B as well as option B over C, they also will prefer option A over C. Yet this view of the market has been challenged in recent decades. Markets hide transaction costs and information asymmetries. Behavioral economists have demonstrated how under a number of conditions (such as fear, regret, the threat of loss, cognitive dissonance, or peer pressure) the rational homo economicus is a fiction: a person may prefer apples to bananas, bananas to cantaloupes, and cantaloupes to apples, and there is no guarantee that there exists a rational solution to voting systems or daily choices involving three or more actors.24 By contrast, the concept of hierarchy (from the Greek term ἱεραρχία, “rule by priests”) reaches back fifteen centuries to religious roots.

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The history of the OGAS Project is akin to the history of a miscarried effort to perform an IT upgrade for the corrupt corporation that was the USSR itself. USSR, Inc., in other words, functioned as the world’s largest corporation, and its private interests were internal market capture, the avoidance of the transaction costs of the capitalist market, and the concentration of power to itself. The political need for the OGAS Project appears to represent the grander inability of the hierarchical state structure of socialist politics since Marx to build and sustain innovation and reform in the age of industrial and information capitalism that the Soviet Union straddled.

More Money Than God: Hedge Funds and the Making of a New Elite
by Sebastian Mallaby
Published 9 Jun 2010

But during the bond’s lifetime, the premium disappeared; the payout on a 30-year bond and a 29½-year bond were bound to come together by the time they hit their repayment dates. Meriwether’s team could simply sell the overpriced new bonds; buy the cheaper, older ones; and then wait patiently for the inevitable convergence. In ordinary times, admittedly, the profits from this strategy were barely enough to offset transaction costs. But when the market was panicky, the liquidity premium could balloon: Skittish traders wanted to own bonds they could sell in a hurry, and they were prepared to pay for the privilege. Meriwether’s lieutenants waited for these moments of panic, then put on the convergence trade. Larry Hilibrand, the LTCM partner who had campaigned against Salomon’s fancy catering unit, compared markets to Slinkies.

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In one simple example, the brain trust discovered that fine morning weather in a city tended to predict an upward movement in its stock exchange. By buying on bright days at breakfast time and selling a bit later, Medallion could come out ahead—except that the effect was too small to overcome transaction costs, which is why Renaissance allowed this signal to be public. Many of the patterns that Renaissance discovered were individually modest; to a first approximation, after all, markets are efficient. But by discovering a large number of minor inefficiencies and blending them into a single trading program, Renaissance built a system that racked up profits year after year, especially during periods of turbulence.

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Piergiorgio Alessandri and Andrew Haldane, “Banking on the State,” paper based on a presentation to the Federal Reserve Bank of Chicago, November 2009. 6. See Dean P. Foster and H. Peyton Young, “Hedge Fund Wizards,” The Berkeley Electronic Press, January 2008. 7. See for example Russ Wermers, “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses,” Journal of Finance 55, no. 4, August 2000. 8. Roger G. Ibbotson, Peng Chen, and Kevin Zhu, “The A, B, Cs of Hedge Funds: Alphas, Betas, and Costs” (Yale working paper, 2010). An earlier version of this paper showing similar findings appeared in 2006. 9. The three studies finding these returns for private equity are: Steven N.

A Culture of Growth: The Origins of the Modern Economy
by Joel Mokyr
Published 8 Jan 2016

Some pathbreaking research on the economics of culture and how beliefs can affect economic performance has recently been carried out by theorists and empirical economists alike.14 One mechanism through which culture is believed to have affected economic performance is through the idea that higher trust and cooperation reduce transaction costs and thus facilitate exchange and emergence of well-functioning markets. Another is civic-mindedness. A spirit of public consciousness and willingness to abstain from free-riding behavior in collective actions supports a higher supply of public goods and investment in infrastructure than is otherwise possible.

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As we have seen, culture can affect Smithian growth through the creation of an ideological environment (or, as some would prefer to call it, social capital) that is conducive to commerce and better-functioning markets. A Lockean belief in property rights, for example, or a belief that most people are trustworthy leads to the reduction of transactions costs and thus stimulates commerce. Related to trust is loyalty, which mitigates principal-agent problems. A belief in the virtuousness of loyalty to an employer or an organization saves monitoring costs and thus enhances both efficiency and trade. Public-mindedness (or asabiya in Ibn Khaldun’s famous formulation), is a third cultural element related to cooperation: the willingness to avoid free-riding and contribute to a collective good despite the incentive that each individual has to shirk.

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Whether such literacy (and the numeracy that usually accompanied literacy when children were taught the three Rs as a package) actually had much of an impact on technology and innovation is anything but clear. It did, however, allow correspondence, written contracts, computations, and bookkeeping which reduced transactions costs and thus facilitated commerce. At a more advanced level, education could train individuals to enable markets and trade through the work of lawyers, notaries, judges, accountants and the like. Some recent research has argued that the founding of universities in Germany in the late Middle Ages and the training of legal expert stimulated economic development through this kind of mechanism, an example of upper-tail human capital affecting the economy at large (Cantoni and Yuchtman, 2014).

NumPy Cookbook
by Ivan Idris
Published 30 Sep 2012

To put it simply, there are not a lot of rich people, and there are even less billionaires; hence the one percent. Assume that there is a power law in the closing stock prices log returns. This is a big assumption, of course, but power law assumptions seem to pop up all over the place. We don't want to trade too often, because of involved transaction costs per trade. Let's say that we would prefer to buy and sell once a month based on a significant correction (in other words a big drop). The issue is to determine an appropriate signal given that we want to initiate a transaction every one out of about 20 days. How to do it... First, let's get historical end-of-day data for the past year from Yahoo Finance.

With Liberty and Dividends for All: How to Save Our Middle Class When Jobs Don't Pay Enough
by Peter Barnes
Published 31 Jul 2014

Philippe van Parijs calculates that an EU-wide dividend of about $3,250 per year would require an increase in EU VAT rates of about 20 percent. Social European Journal, July 3, 2013, http://www.social-europe.eu/author/philippe-van-parijs. 5. CLEAR Act text, http://www.cantwell.senate.gov/issues/Leg_Text.pdf. 6. Robert Pollin and James Heintz, Transaction Costs, Trading Elasticities, and the Revenue Potential of Financial Transaction Taxes for the United States, Political Economy Research Institute (Amherst, MA: University of Massachusetts/Amherst, 2011), http://www.peri.umass.edu/fileadmin/pdf/research_brief/PERI_FTT_Research_Brief.pdf. See 2012 update at http://www.peri.umass.edu/fileadmin/pdf/ftt/Pollin—Heintz—Memo_on_FTT_Rates_and_Revenue_Potential_w_references6-9-12.pdf. 7.

Nomad Citizenship: Free-Market Communism and the Slow-Motion General Strike
by Eugene W. Holland
Published 1 Jan 2009

The final Im portant feature of the new system is that peer produc­ tion is based neither on incentives coming from the market nor on or­ ders coming from a boss or managing supervisor. A now-classic analysis of capitalist production spearheaded by Ronald Coase in the 1930s and developed subsequently by Oliver Williamson and others examined the relative transaction costs to a business firm of buying goods and services on the open market compared to hiring people to produce those same goods and services within the firm.95 Where transaction costs of buying on the open market are high, production is integrated into the firm and triggered by managerial command; where they are low, production is out­ sourced and triggered by market pricing mechanisms.

The Blue Sweater: Bridging the Gap Between Rich and Poor in an Interconnected World
by Jacqueline Novogratz
Published 15 Feb 2009

Because the commercial banks were writing off millions in bad debts to the richest sectors of society, they were in no mood to try lending to the poorest. I suggested to my boss that an experiment, even a small one, to lend to Brazil’s working class might actually provide better results than lending to the rich. He patted me on the head and reminded me of the poor’s lack of collateral, the high transaction costs of making small loans, and the culture of poverty, which would result in no one repaying—insinuating that I was naive and misguided. The conversation went from bad to worse. I disagreed with him on the culture of poverty and repeated my idea for an experiment. He told me the point was moot and that I should think about how and if I wanted to pursue my long-term career goals at Chase.

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A friend told me about Grameen Bank in Bangladesh, founded by an economist named Muhammad Yunus in 1976, which lent poor women tiny amounts of money—sometimes as little as a dollar—to improve their businesses. Since they had no collateral, poor women would form groups of five and guarantee that all would pay. If one did not, then all five would lose the privilege of borrowing. To address the question of high transaction costs, Grameen Bank charged higher interest rates. And it enjoyed nearly a 100 percent repayment rate, a lot higher than we were seeing in our collateralized portfolio to the wealthy! Twenty years after I first heard of microenterprise, Yunus and Grameen Bank were awarded the Nobel Peace Prize after successfully loaning billions to the poor and starting a social movement around the world.

Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money
by Nathaniel Popper
Published 18 May 2015

And even as their experiments failed, their ambitions grew beyond just anonymous money. Among other things, Back, Szabo, and Finney sought to overcome the costs and frustrations of the current financial system in which banks charged fees with every transaction and made it difficult to move money over international borders. “What we want is fully anonymous, ultra low transaction cost, transferable units of exchange. If we get that going (and obviously there are some people trying DigiCash, and a couple of others), the banks will become the obsolete dinosaurs they deserve to become,” Back told the Cypherpunk list soon after releasing hashcash. The Cypherpunk seekers were given a platonic ideal to shoot for when science fiction writer Neal Stephenson published his book Cryptonomicon in 1999.

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The diminishing interest in anonymity and central banks did not mean that the panelists had modest ambitions for Bitcoin. They talked about how this new form of money—and the ledger on which it ran—could allow for new kinds of stock exchanges and other things that hadn’t even been thought of yet. “When you are offering free, radically reduced transactions costs, and when you are offering the ability for programmable money that can put a lot of additional functionality on money, then you are talking about a market size of everybody in the world,” Liew said. All the panelists compared Bitcoin in its current form to the Internet in 1992 or 1993, before the first web browser.

Smarter Than You Think: How Technology Is Changing Our Minds for the Better
by Clive Thompson
Published 11 Sep 2013

To organize a widespread group around a task in the pre-Internet period, you needed a central office, staff devoted to coordinating efforts, expensive forms of long-distance communication (telegraphs, phone lines, trains), somebody to buy pencils and paper clips and to manage inventory. These are known as transaction costs, and they’re huge. But there was no way around them. As Shirky points out, following the analysis of economist Ronald Coase’s 1937 article “The Nature of the Firm,” you either paid the heavy costs of organizing or you didn’t organize at all and got nothing done. And so for centuries, people collaborated massively only on tasks that would make enough money to afford those costs.

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—they are engaging in the same collective decision making that was previously available only to well-funded organizations. This, again, is basic behavioral economics: If you make it easier for people to do something, they’ll do more of it. Finding your way around Skyrim or resolving conundrums like “Which movie are we seeing tonight?” are problems that traditionally couldn’t afford Ronald Coase–style transactional costs—they fell “under the Coasean floor,” as Shirky puts it. But things have decisively changed. “Because we can now reach beneath the Coasean floor,” he writes, “we can have groups that operate with a birthday party’s informality and a multinational’s scope. . . . Now that group-forming has gone from hard to ridiculously easy, we are seeing an explosion of experiments with new groups and new kinds of groups.”

Super Thinking: The Big Book of Mental Models
by Gabriel Weinberg and Lauren McCann
Published 17 Jun 2019

Coase showed that an externality can be internalized efficiently without further need for intervention (that is, without a government or other authority regulating the externality) if the following conditions are met: Well-defined property rights Rational actors Low transaction costs When these conditions are met, entities surrounding the externality will transact among themselves until the extra costs are internalized. If you recall the Boston Common example, the externality from overgrazing was internalized by setting a limit on the number of cows per farmer (regulation).

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The government also sets a fixed number of total permits, which serves as the emission cap in the market, similar to the imposed limit on the number of cows that could graze on Boston Common. Then companies can trade permits on an open exchange. Such a system satisfies the conditions of the Coase theorem because property rights are well defined through the permitting process, companies act rationally to maximize their profits, and the open market provides low transaction costs. If you’re in charge of any system or policy, you want to think through the possible negative externalities ahead of time and devise ways to avoid them. What spillover effects could occur, and who would be affected by them? Is there a common resource that free riders could abuse or that could degrade into a tragedy of the commons?

The Nature of Software Development: Keep It Simple, Make It Valuable, Build It Piece by Piece
by Ron Jeffries
Published 14 Aug 2015

Some pieces of software truly have no upside potential to rapid change and adaptation. In some industries, every release of software goes through expensive, time-consuming certification. Avionics and implantable medical devices come to mind. That creates inescapable overhead to cutting a release—a transaction cost. If you have to launch astronauts into orbit armed with a screwdriver and a chip-puller, then you have some serious transaction costs to work around. Of course, you can find exceptions to every rule. JPL deployed a hotfix to the Spirit rover on Mars;[83] and when Curiosity landed on Mars, it didn’t even have the software for ground operations. That was loaded after touchdown when all the code for interplanetary flight and landing could be evicted.

Tyler Cowen - Stubborn Attachments A Vision for a Society of Free, Prosperous, and Responsible Individuals
by Meg Patrick

In economic jargon, the positive interest rate equalizes marginal rates of substitution over time, or in other words, it expresses the value of a future dollar, relative to a current dollar. This argument does not require positive time preference. This argument, by the way, does not suggest that we accept observed market interest rates uncritically as a measure of how much we should discount the future. We must adjust market interest rates for risk, transactions costs, and other complicating factors, such as taxes. But still the market rate of interest would be a rough starting point for thinking about how much to discount the future.39 38 See Lind et.al.(1982), Arrow et.al. (1994), Broome (1994), Brennan (2007), and Gollier (2013). Cowen (2007) also discusses these issues. 39 This argument for discounting is more complex than is sometimes recognized.

Startup Weekend: How to Take a Company From Concept to Creation in 54 Hours
by Marc Nager , Clint Nelsen and Franck Nouyrigat
Published 8 Nov 2011

Researchers Friederike Welter and David Smallbone write in an Entrepreneur article that while the role of trust in entrepreneurship is not fully understood yet, one beneficial effect may be that “Not all business relationships need to be regulated via contracts, thus allowing [the entrepreneur] to reduce transaction costs.” Trust, in other words, can simplify matters and make business work more smoothly. We have certainly found that to be the case. However, we don&apos;t establish trust with others in a vacuum; and researchers have found that trust is not simply bilateral. It also depends on the norms and rules of the environment that surround the people who are forming a relationship.

Stubborn Attachments: A Vision for a Society of Free, Prosperous, and Responsible Individuals
by Tyler Cowen
Published 15 Oct 2018

In economic terms, the positive interest rate equalizes marginal rates of substitution over time, or, in other words, it expresses the value of a future dollar relative to a current dollar. This argument does not require positive time preference. This argument, by the way, does not suggest that we accept observed market interest rates uncritically as a measure of how much we should discount the future. We must adjust market interest rates for risk, transaction costs, and other complicating factors, such as taxes. Still, the market rate of interest would be a rough starting point for thinking about how much to discount the future.10 The opportunity cost argument expresses a powerful logic, but, if understood properly, it does not militate against caring deeply about the distant future.

A United Ireland: Why Unification Is Inevitable and How It Will Come About
by Kevin Meagher
Published 15 Nov 2016

These are significant and a report by the devolved assembly’s enterprise committee in March 2015 found that quitting the EU would cost Northern Ireland £1 billion a year – equivalent to a 3 per cent fall in economic output.24 The report’s author, Dr Leslie Budd from the Open University, argued that as well as damaging Northern Ireland’s attractiveness as an entry route into the single market, transaction costs for trading into the EU would ‘rise significantly’ and inhibit economic cooperation with the neighbouring Irish Republic – a clearly not insignificant factor given the plans to harmonise its corporation tax rates with the south. Leaving the EU would also cut off vital funding that has done so much to copper-fasten peace in recent years.

Market Risk Analysis, Quantitative Methods in Finance
by Carol Alexander
Published 2 Jan 2007

Table I.1.3 Portfolio returns Year Price 1 Price 2 2003 2004 2005 2006 100 125 80 120 200 500 250 400 Return 1 25% −36% 50% Return 2 Portfolio return Portfolio value Holding 1 Holding 2 150% −50% 60% 75% −416% 54% 100,000 175,000 102,200 157,388 600 480 750 500 200 80 160 100 In practice neither portfolio weights nor portfolio holdings remain constant. To rebalance a portfolio continually so that the portfolio weights are the same at the beginning of every day or at the beginning of every week is difficult, if not impossible. Even at the monthly frequency where constant weights rebalancing may be feasible, it would incur very high transactions costs. Of course portfolios are rebalanced. The holdings do change over time, but this is normally in accordance with the manager’s expectations of risk and return. However, in theoretical models of portfolio risk and return it greatly simplifies the analysis to make the constant weights assumption.

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For instance, in enhanced indexation we would take holdings in the assets that are prescribed by the estimated regression coefficients. 3. Hold the portfolio over the investment horizon. For instance, if trades are made only once a week the trading horizon will be 5 working days. 4. Record the P&L on the portfolio over the investment horizon, including the transactions costs from buying or selling the assets at the beginning of the period. 5. Roll the historical sample forward over the investment horizon. For instance, for a weekly trading strategy the sample will be rolled forward 5 days. 6. Return to step 1 and repeat until all the historical data are exhausted, 7.

Falling Behind: Explaining the Development Gap Between Latin America and the United States
by Francis Fukuyama
Published 1 Jan 2006

Brazil, despite its supposedly weak political parties and strong federalism, moved in this direction with passage of the Fiscal Responsibility Law, while Argentina has failed to deal with this problem due to the entrenched power of state-level politicians.34 The fact that we can connect certain changes in institutional designs with certain behavioral outcomes does not mean that institutional change is easy to bring about; institutions are in fact very “sticky” or path dependent. The transaction costs of institutional change are often far greater than the transaction costs of weak or suboptimal institutions. Societies need to generate political will to bring about reform and to prevent new institutions from being undermined by losers in the initial struggle. Political Culture As noted above, most conventional analyses of the formal structure of political institutions would have come to the conclusion that Brazil would produce a weaker government than Argentina, given its openlist proportional representation system, weak political parties, and entrenched federalism.

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated)
by Charles Wheelan
Published 18 Apr 2010

The New York Times reported that this settlement was believed to be the first deal by a company to dissolve an entire town. “It will help the company avoid the considerable expense and public-relations mess of individual lawsuits, legal and environmental experts said.” Coase made one final point: The transactions costs related to striking this kind of deal—everything from the time it takes to find everyone involved to the legal costs of making an agreement—must be reasonably low for the private parties to work out an externality on their own. Stuart and I can haggle over the fence in the backyard. The American Electric Power company can manage to strike a deal with 221 homeowners.

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After all, Iowa has never had a financial meltdown because Illinois investors took their capital back across the Mississippi River. There are benefits to broadening a currency zone; this was the logic of the euro, which replaced most of the individual currencies in Europe. A single currency across Europe (and in the fifty U.S. states) reduces transaction costs and promotes price transparency (meaning that it’s easier to spot and exploit price discrepancies when goods are all priced in the same currency). But here, too, there is a trade-off. Remember, monetary policy is the primary tool that any government possesses to control the “speed” of its economy.

The Great Delusion: Liberal Dreams and International Realities
by John J. Mearsheimer
Published 24 Sep 2018

Although lying to Congress is a felony, Clapper was not charged and was not fired from his job.79 Pervasive obfuscation inevitably creates a poisonous culture of dishonesty, which gravely damages any body politic but especially a liberal democracy. Not only does lying make it difficult for citizens to make informed choices about candidates and issues, it also undermines policymaking. If government officials cannot trust each other, the transaction costs of doing business are greatly increased. Furthermore, in a world where distorting or hiding the truth is commonplace, the rule of law is severely weakened. Any legal system, to work effectively, demands public honesty and trust. Finally, if lying becomes pervasive in a liberal democracy, it may alienate the public to the point where it loses faith in that political order and becomes open to authoritarian rule.

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Third, a system of rules can increase the amount of information available to the participants in cooperative agreements, which permits close monitoring. Raising the level of information discourages cheating by increasing the likelihood cheaters will be caught. It also provides victims with early warning of possible cheating, enabling them to take protective measures before they are badly hurt. Finally, rules can reduce the transaction costs of individual agreements. When institutions perform the tasks described above, states are able to devote less effort to negotiating and monitoring agreements, and to hedging against possible defections. By increasing the efficiency of international cooperation, institutions make it more profitable and thus more attractive.

Mastering Ethereum: Building Smart Contracts and DApps
by Andreas M. Antonopoulos and Gavin Wood Ph. D.
Published 23 Dec 2018

Therefore, the maximum amount of ETH you will spend is 3 * 21,000 gwei = 63,000 gwei = 0.000063 ETH. (Be advised that average gas prices can fluctuate, as they are predominantly determined by miners. We will see in a later chapter how you can increase/decrease your gas limit to ensure your transaction takes precedence if need be.) All this to say: making a 1 ETH transaction costs 1.000063 ETH. MetaMask confusingly rounds that down to 1 ETH when showing the total, but the actual amount you need is 1.000063 ETH and you only have 1 ETH. Click Reject to cancel this transaction. Let’s get some more test ether! Click the green “request 1 ether from the faucet” button again and wait a few seconds.

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In contrast to Bitcoin, whose transaction fees only take into account the size of a transaction in kilobytes, Ethereum must account for every computational step performed by transactions and smart contract code execution. Each operation performed by a transaction or contract costs a fixed amount of gas. Some examples, from the Ethereum Yellow Paper: Adding two numbers costs 3 gas Calculating a Keccak-256 hash costs 30 gas + 6 gas for each 256 bits of data being hashed Sending a transaction costs 21,000 gas Gas is a crucial component of Ethereum, and serves a dual role: as a buffer between the (volatile) price of Ethereum and the reward to miners for the work they do, and as a defense against denial-of-service attacks. To prevent accidental or malicious infinite loops or other computational wastage in the network, the initiator of each transaction is required to set a limit to the amount of computation they are willing to pay for.

The Empire Project: The Rise and Fall of the British World-System, 1830–1970
by John Darwin
Published 23 Sep 2009

There was also the threat, widely discussed in the 1870s and after, that large parts of the world beyond Europe would be walled off by tariffs – an economic partition to match the diplomatic division of spheres in Southeast Asia and Africa, and (as seemed increasingly likely) the Near East and China. These actual or possible barriers to trade were a forceful reminder that success in the new global economy depended on being able to meet the transaction costs it imposed. As Douglass North pointed out, in modern large-scale economies, the costs of coordinating productive activity usually exceed the cost of production itself.3 Settling the terms of exchange for different commodities, grading their quality, and securing the claims to property rights over them (a complex operation in tradeable goods) were elaborate tasks.

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The long train of agents that brought products to market, and then to the consumer, cost time and effort to manage. The key to success was commercial intelligence. ‘Information’, remarked one profound economic observer, ‘is one of the principal commodities that the economic organisation is engaged in supplying.’4 The risks and transaction costs of global trade and investment were lowest where (more or less) reliable information was cheap and accessible. Their burden was lightest where commercial institutions responded most quickly to new products, new markets, new forms of exchange and the need for new kinds of investment. It was here that London's long lead as the world's principal entrepot conferred a crucial advantage.

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In West and East Africa, the chartered companies were meant to limit imperial liability while protecting a commercial interest. In both cases, they proved more successful at increasing the liability than in guarding the interest. Both were as much political as commercial enterprises whose ‘virtual’ assets could only be realised if the transaction costs of external protection were transferred to the imperial government. It was the peculiarity of tropical Africa in the 1890s that the technical, administrative and financial cost of transfer was so low; the mobilisation of public interest sufficient; and the diplomatic argument so pressing: conditions which favoured a sudden, swift and complete partition.

The Rise of the Network Society
by Manuel Castells
Published 31 Aug 1996

And the venerable Chicago Board of Trade was in turmoil, with its leadership fighting over how to adapt to the new technological medium after it had to concede its position as the world’s largest futures and options exchange market to Eurex.130 Why does the technology of transactions matter? How does it affect the finance industry? It reduces transaction costs (as much as 50 percent in the late 1990s in the US), thus attracting a much broader pool of individual investors, and reducing the cost of active trading. It also opens up investment opportunities to millions of individual investors, assessing value and seizing chances on the basis of on-line information.

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Multinational Enterprises, Transnational Corporations, and International Networks The analysis of East Asian business networks shows the institutional/cultural production of organizational forms. But it also shows the limits of the market-driven theory of business organizations, ethnocentrically rooted in the Anglo-Saxon experience. Thus, Williamson’s influential interpretation130 of the emergence of the large corporation as the best way to reduce uncertainty and minimize transaction costs, by internalizing transactions within the corporation, simply does not hold when confronted with the empirical evidence of the spectacular process of capitalist development that took place in the Asian Pacific between the mid-1960s and the early 1990s, based on networks external to the corporation.131 Similarly, the process of economic globalization based on network formation seems also to contradict the classical analysis by Chandler132 that attributes the rise of the large multi-unit corporation to the growing size of the market, and to the availability of communications technology that enables the large firm to take hold on such a broad market, thus reaping economies of scale and scope, and internalizing them within the firm.

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However, in Ernst’s analysis, the organizational effects are exactly the opposite of those expected by the traditional economic theory: while market size was supposed to induce the formation of the vertical, multiunit corporation, the globalization of competition dissolves the large corporation in a web of multidirectional networks, which become the actual operating unit. The increase of transaction costs, because of added technological complexity, does not result in the internalization of transactions within the corporation but in the externalization of transactions and sharing of costs throughout the network, obviously increasing uncertainty, but also making possible the spreading and sharing of uncertainty.

Red-Blooded Risk: The Secret History of Wall Street
by Aaron Brown and Eric Kim
Published 10 Oct 2011

These are the kinds of portfolios we would expect investors to hold under IGT CAPM; and until MPT CAPM pushed investors to huge portfolios, typical portfolio sizes were eight to 40 stocks, even among professional managers. While in theory investors might have improved their Sharpe ratios slightly by holding more stocks, it’s quite possible that the additional transaction costs would have offset the benefit. Also, with fewer stocks investors have more opportunity to monitor and even influence their companies. These factors can make small portfolios rational even under MPT CAPM. There are many people who unconsciously internalized a super-duper-strong law of large numbers that basically says ρ always equals 0 so all risk can be diversified.

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If there is a lot of positive autocorrelation, you make money buying stocks that just went up, and a lot of negative autocorrelation means you should buy stocks that just went down; either way you arbitrage the autocorrelation away. Back in graduate school, I had a lot of faith in arbitrage to keep simple inefficiencies small. I thought it was a combination of data errors and transaction costs that made things look more autocorrelated than they really were. Incidentally, I changed my view quickly when I came to Wall Street and there was money on the line. I was more concerned with heteroskedasticity. That’s also not independent. It means if yesterday’s move was big in either direction, today’s move is likely to be bigger than average, although equally likely to be in the same or opposite direction.

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money
by Steven Drobny
Published 18 Mar 2010

They might correct sooner, but if they don’t, we thought we would have the balance sheet, the funds, and the stability to carry them to maturity if needed. During the second half of 2008, we lost a lot of money buying even more insurance protection than usual and reducing our balance sheet, which meant incurring significant transaction costs. We exited the year with a balance sheet that was roughly three times our equity, with virtually all government bonds. This level of leverage is insignificant for a fund that primarily trades government bonds. Meanwhile, we went into the mispriced trades much too early. With three- to five-year U.S.

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On the other hand, if a trade is very crowded because people are looking at the same instrument through non-macro goggles, it could be driven far from fair value, which to me is an ideal situation to think about going the other way. How important is liquidity, and how do you measure it? Liquidity is important and I measure it primarily through transaction costs and looking at turnover data from authorities like the Bank of International Settlements (BIS), or exchanges and counterparties. It will show up in volatility. Cost and volatility are two of the factors that I use to adjust my sense of a trade’s attractiveness. Liquidity conditions changed drastically in 2008.

The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good
by William Easterly
Published 1 Mar 2006

If they were too small, all fishing was forbidden, and anyone who secretly fished the lake at this time was outcast, excluded from the formal and informal groups that formed the village’s social structure. Those who committed this breach of trust were often shunned by the whole community; no one would speak to the offender, or even acknowledge his existence for a year or more. When the value of the land increases, formal titles are worth the transaction costs—in return for greater ownership security. Now loose customary arrangements will not hold up; ignoring custom pays too well. Hence, a growing economy moves from customary law to formal law, but outsiders cannot know enough to engineer such a transition. One example of how not to do it is having Western lawyers and accountants rewrite the legal code overnight from the top down, as the West tried in Eastern Europe after 1990.

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THE RICH HAVE MARKETS, THE POOR HAVE BUREAUCRATS 1.World Bank, “Assessing Aid,” 1998. 2.World Bank, Africa Development Indicators, 2002. 3.A brilliant review of the feedback problem and principal-agent theory in foreign aid is Bertin Martens, Uwe Mummert, Peter Murrell, and Paul Seabright, The Institutional Economics of Foreign Aid, Cambridge, UK: Cambridge University Press, 2002. 4.For a review, see Avinash Dixit, The Making of Eccentric Policy: A Transaction Cost Politics Perspective, Cambridge, MIT Press, 1996. 5.http://www.murphys-laws.com/murphy/murphy-laws.html. 6.World Bank, “The World Bank in Action: Stories of Development,” Washington, D.C., 2002. 7.Anirudh Krishna with Urban Jonsson and Wilbald Lorri, “The Iringa Nutrition Project: Child Survival and Development in Tanzania,” in Anirudh Krishna, Norman Uphoff, and Milton J.

The Trade Lifecycle: Behind the Scenes of the Trading Process (The Wiley Finance Series)
by Robert P. Baker
Published 4 Oct 2015

For example, if I sell a call option on an equity, I could buy 65 Derivatives, Structures and Hybrids the underlying equity as a hedge. If the price rises, I will lose money on the option, but that loss will be exactly offset by the gain in holding the underlying (the hedge). Although there may be a transaction cost in putting on the hedge, the exposure to the equity price will be covered and the risk is controlled. Hedging will be discussed in greater detail in Chapter 10 on risk management. Other examples of leveraged positions include the following. Selling short This means entering a trade with a commitment to selling an underlying in the future that the trader does not hold at time of execution.

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Orders may be aggregated to make trading more efficient. 91 Trade Lifecycle TABLE 8.1 Orders Order type Buy Sell Buy Buy Sell Net Size (pounds of aluminium) 70,000 60,000 95,000 85,000 90,000 Buy 100,000 For example, metals trader Mandy has the orders in Table 8.1 on her books. She will execute one trade to buy the balance, which is buy 100,000 pounds thus satisfying the five individual orders and reducing her transaction costs. Risks associated with orders An order is an instruction to trade and therefore it is important that orders are correctly input and processed. As orders and trades may not match one to one, it is useful to have a means by which trades can be reconciled against their composite orders for audit or tracking purposes and to prevent mistakes.

Vulture Capitalism: Corporate Crimes, Backdoor Bailouts, and the Death of Freedom
by Grace Blakeley
Published 11 Mar 2024

Here was an economist born in 1910 into a working-class family—both his parents were telegraphists for the Post Office56—who had initially considered himself a socialist.57 But while at university, he came to moderate his socialist principles with a belief in the “virtues of a competitive system.”58 Coase’s socialist leanings (discarded later in life) were perhaps what allowed him to pay such close attention to the inner workings of the firm—and particularly the relationship between workers and bosses—whereas most other economists had glossed over this important subject. Coase developed the “transactions cost” theory of the firm.59 Without businesses, he argued, producers would have to write new contracts every time they wanted to buy something or employ a worker, and this would be expensive and time-consuming, especially when it came to employment contracts. When you started your job, you probably weren’t completely aware of what you’d be doing every day, even if you’d read every page of your employment contract.

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liberal definition of nation-state and, 149–50 in Russia (former Soviet Union), ix social contract theory and, 143–52 socialism vs., 66 state as rule-setter vs. planner, 148–52, 165, 204 state as social creation and, 157–62 State Street, 133, 134 Stein, Jill, 251 Stiglitz, Joseph, 51, 200, 201 Stolen (Blakeley), 257, 258 Stone, Brad, 80 Stonecipher, Harry, 4–6, 8 Streeck, Wolfgang, 36 Strike Debt campaign/Rolling Jubilee (2012), 249–50 structural adjustment programs (SAPs), 198–202 Suez Canal, 61–66 Ever Given crisis (2021), 62–63, 64 Suez crisis (1956), 61–62 Suharto, 191 Sukarno, 190–91 Sunak, Rishi, 156 Sunstein, Cass, 162–63 supply chain financing, 152–59 surveillance capitalism, 27, 54–58, 94, 98–100, 155 Sweden, Meidner Plan, 255 Sweezy, Paul, 93–94, 96, 97, 99 Syngenta, 90–91, 124 T taxes and taxation corporate tax exemptions and tax breaks, 7–8, 54–55, 59, 65–66, 79–80, 93, 106, 187, 207 international tax avoidance and evasion, 42, 45, 79, 131–32, 199, 208, 263–64 private law and, 131 undervaluing assets and, 188 in Zambia, 205, 207 Taylorism, 99–100 technology, see computer technology Teflon, 91 Teleperformance, 98–99 temporary monopoly power (Schumpeter), 85–88, 96 Tencent, 57–58 Tepper, Jonathan, 89 Tester, John, 141 Texaco, 194 Thaler, Richard, 162–63 Thatcher, Margaret, 15, 31, 33–34, 62, 160, 161–62, 218, 220–21, 230–31 Tillerson, Rex, 140 Total, 46 trade agreements, 261–62 Trades Union Congress (UK), 60 trade unions, see labor movements transactions cost theory of the firm (Coase), 83, 84 Travis, Gregory, 5 Treasure Islands (Shaxson), 131–32 Tripartite Committee, 27–28, 30, 160 Troubled Asset Relief Program (TARP, 2008), 29, 49, 53 Trudeau, Justin, 136 Trump, Donald, 8, 9, 33, 43, 59, 104, 140 TRW, 218 tulip bubble (1630s), 126 TurboTax, 106 Twitter/X, vii, 54 U Uber, 111 Ubico, Jorge, 187 UBS, 124 Ukraine, 44, 64, 201 Unchecked Corporate Power (Barak), 107 Union Carbide India Limited, 90 Union of Farm Workers (Spain), 229 unions, see labor movements United Auto Workers (UAW), 26–29 United Fruit Company (UFC, now Chiquita), 186–89 United Kingdom (UK) al-Yamamah arms deal with Saudi Arabia, 220–21 BAE Systems, 220–21 Barrow Alternative Employment Committee, 220 bureaucratization and, 34–35 collective ownership proposals, 254, 255 corporate welfare programs and, 31–32 COVID-19 aid to corporations, 45–46, 155–57 COVID-19 pandemic response and, 53–61, 155–57, 162–63 East India Company (EIC), 22, 103–4, 183 emergence of central banks and, 124–25 European Union membership, 154 Greater London Enterprise Board, 216–17, 219–20 Green New Deal proposal, 69, 248 immigrant policies, 163–64, 263 imperialism of, 177, 179–81, 182 Labour Party, 158, 217, 250, 255, 256 Levellers and Diggers, 271 liberal revolution and, 258 London Docklands Development Corporation (LDDC), 230–31 London Energy and Employment Network (LEEN), 220 London Olympics (2012), 101 Lucas Aerospace Corporation/Lucas Plan, xix, 215–22, 226, 229, 231, 247, 248, 266 New Economics Foundation, 255 New Economy Organisers Network (NEON), 250 Nudge Unit, 162–64 Occupy movement, 250 People’s Plan for the Royal Docks, 230–31 Post Banks proposal, 256 Preston Model, community wealth building (CWB), 237–38, 247, 255 resistance to the labor movement, 15, 31, 33–34, 62, 64–65, 77–78, 160, 216–17, 218, 220, 221 UK Border Agency, 102 Wales, Blaenau Ffestiniog economic development program, 238–40 wealth inequality in, 60–61 We Own It (think tank), 254 United Nations (UN) Climate Change Conference (COP26, 2021), 70–71 Conference on Trade and Development (UNCTAD), 184 Human Development Rankings, 206 United States (US) Central Intelligence Agency (CIA), 175, 189, 241 Chicago school of neoliberalism, 150–51, 199 colonialism and, 173–79, 209–10 COVID-19 aid to corporations, 41–45 Export-Import Bank (EXIM), 243 Green New Deal proposal, 69, 248 Green Party, 251 “green” stimulus packages, 69 Keystone XL pipeline, 251 military-industrial complex, 9–10, 23, 25, 191–93, 217–20, 244 New Deal reforms, 26, 28 Non-Aligned Movement and, 190–91 Occupy movement, 249–50 power in the global economy, 151, 198, 205 prison-industrial complex, 33–34 resistance to the labor movement, 31, 62 US dollar as global reserve currency, 178, 209–10 wealth inequality in, 60–61 US Air Force, 8 US Central Intelligence Agency (CIA), 175, 189, 241 US Congress, COVID-19 aid to corporations and, 42–44 US Department of Defense, 8, 191–93 US Department of Energy, 29 US Department of Health and Human Services (HHS), 56–57 US Department of Justice McKinsey & Company settlement, 55 price-fixing convictions, 94 US Department of the Treasury, 141 COVID-19 pandemic and, 9–10 financial crisis of 2008 and, 49–50, 53 US Department of Veterans Affairs (VA), 56 US Federal Aviation Administration (FAA), 5–7 US Federal Emergency Management Administration (FEMA), 56–57 US Federal Reserve, 9, 126–29, 141 COVID-19 pandemic and, 42 financial crisis of 1987 and, 126–27 financial crisis of 2008 and, 49–50, 127, 209–10 quantitative easing (QE) and, 127–28, 129, 136 US dollar as global reserve currency, 178, 209–10 Volcker shock, 198, 205 US Occupational Safety and Health Administration (OSHA), 77 US Securities and Exchange Commission (SEC), 55 US Small Business Administration (SBA), 41 United Technologies, 218–19 universal basic income (UBI)/universal basic services, 253 Up & Go (cooperatively owned app), 254 Urry, John, 37 US Virgin Islands, US colonialism and, 173, 174 UTC Aerospace Systems, 218–19 Utopia of Rules, The (Graeber), 35 V Valeant, 55 Vanguard, 133, 134 Vattenfall, 197 Veblen, Thorstein, xv, 13 Vietnam War, 175–76, 181, 227 Vivendi, 46 Volcker, Paul, 198, 205 Volkswagen, viii, 46–47 Volvo, 28 von Mises, Ludwig, 146–47, 161–62 vulture capitalism, 202–11 in apartheid South Africa, 202–4 in Zambia, 205–8, 210 W wage suppression, 60, 63, 92–93 Wainwright, Joel, 70 Wales, Blaenau Ffestiniog economic development program, 238–40 Wall Street crash of 1929, xi Walmart, 88, 134, 264, 265 War on Want, 196 Washington Consensus, 200–201, 210 Washington Post, acquisition by Amazon, 80 Water Defenders, The (Broad and Cavanagh), 197 wealth inequality, 60–61, 87, 89, 97, 98 Wealth of Nations, The (Smith), 145 Weber, Isabella, 65 Welch, Jack, 4 Wengrow, David, 224–25 We Own It (UK think tank), 254 WeWork, 109–13, 117 William III (King of England), 124–25 Williams, Roger, 42 Wood, Leonard, 174–75 worker ownership Mississippi, Cooperation Jackson program, 236–37, 247, 251–52, 255 Sweden, Meidner Plan, 255 UK, Preston community wealth building (CWB) program, 237–38, 247, 255 Workers’ Unity Collective (Spain), 229 World Bank, 176–77, 198–99, 206–8 WorldCom, 119–20 World Economic Forum, 135 World Health Organization (WHO), 90 World Transformed festival (UK), 250 World War II, xi Bretton Woods institutions following, 51 financial institutions established after, 198–200 Ford Motor Company and, 23–24, 25 Germany and, 158, 181 Japan and, 175–76, 190, 191 new industrial capitalism (Galbraith) following, 37 Philippines and, 175–76 social democratic state following, 24–25 X X/Twitter, vii, 54 Y Yahoo!

Alternatives to Capitalism
by Robin Hahnel and Erik Olin Wright

In a world in which people are ecologically conscious about waste, a market in second-hand goods might be quite a significant market and account for a sizable part of total consumption. What is the optimal way of organizing the distribution of secondhand goods? A market solution might simply be better than participatory planning for the allocation of second-hand goods consumption—less hassle, quicker, fewer transaction costs, etc. Or consider a quite different kind of example: the allocation of tickets and seats in the performing arts. Getting tickets to a particular performance matters much more to some people than to others, as does getting the best seats. As long as the underlying income structure is just by egalitarian standards, I don’t see any reason why the price of theatre tickets shouldn’t be a simple reflection of what people are willing to pay for better and worse seats for a given production.

The Dhandho Investor: The Low-Risk Value Method to High Returns
by Mohnish Pabrai
Published 17 May 2009

In contrast, think about how many private businesses are on sale within 25 miles of your home at any given time. There is just no comparison. 6. At the racetrack, the track owner takes 17 percent of every dollar bet. The frictional costs are very high. Even when you buy a tiny private business, transaction costs between the buyer and seller are usually between 5 percent to 10 percent of the purchase price, which doesn’t include the considerable time and effort expended. You can buy or sell a stake in a publicly traded company for under $10. With a $100,000 portfolio and even at a hyperactive 50 trades a year, frictional costs are 0.5 percent—and they keep getting lower (as a percent) as the value of the portfolio rises over time.

Drive: The Surprising Truth About What Motivates Us
by Daniel H. Pink
Published 1 Jan 2008

The newly ascendant field of law and economics held that precisely because we were such awesome self-interest calculators, laws and regulations often impeded, rather than permitted, sensible and just outcomes. I survived law school in no small part because I discovered the talismanic phrase and offered it on exams: In a world of perfect information and low transaction costs, the parties will bargain to a wealth-maximizing result. Then, about a decade later, came a curious turn of events that made me question much of what I'd worked hard, and taken on enormous debt, to learn. In 2002, the Nobel Foundation awarded its prize in economics to a guy who wasn't even an economist.

The Scandal of Money
by George Gilder
Published 23 Feb 2016

And the very process that validates the transaction would prohibit spam. There would be no hassle of bartering content for advertising revenues at some aggregator such as Google. Aggregators with advertising clout would merely add inefficiency to an automated system that rides a learning curve to minimize transaction costs. The Internet would have a money system of its own with a granularity commensurate with its huge variety and with the many gradations of value transacted as an Internet user. With a low market price for goods and services—Google and other players could charge millicents for their services and still make a mint—the Internet economy would transcend its current den of thieves and hustlers of spuriously free goods.

The End of Loser Liberalism: Making Markets Progressive
by Dean Baker
Published 1 Jan 2011

Before considering the prospects for the reform of Fannie and Freddie, it is worth discussing the benefits of homeownership. Over the last seven decades, politicians from both parties have pushed homeownership as a ticket to the middle class. This view of homeownership ignores much evidence and shows sloppy thinking. First, homeownership involves large transaction costs. The combination of realtors’ fees, mortgage origination fees, inspection fees, and other costs associated with buying and selling a home are likely to push the combined purchase and sale costs to close to 10 percent of the home’s price, or $20,000 on a $200,000 home. Averaged over a long period these costs will diminish, but for someone who lives in a home for five years or less they loom large.

Principles: Life and Work
by Ray Dalio
Published 18 Sep 2017

Until then our systems had been completely discrete—we would flip from a fully long position to a fully short one when we crossed a predetermined threshold (much as we switched from bonds to cash for the World Bank). But we weren’t always equally confident in our views, and we’d also get killed paying transaction costs when we crossed back and forth. That drove Bob crazy. I can remember him running laps around the office building to calm himself down. So at the end of the year, we moved to a more variable system that allowed us to size our bets in relation to how confident we were. These and other improvements Bob made to our systems have paid off many times since.

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I believed strongly that we should bring problems and disagreements to the surface to learn what should be done to make things better. So Ross and I worked to build out an “error log” in the trading department. From then on, anytime there was any kind of bad outcome (a trade wasn’t executed, we paid significantly higher transaction costs than expected, etc.), the traders would make a record of it and we would follow up. As we consistently tracked and addressed those issues, our trade execution machine continually improved. Having a process that ensures problems are brought to the surface, and their root causes diagnosed, assures that continual improvements occur.

Crisis and Leviathan: Critical Episodes in the Growth of American Government
by Robert Higgs and Arthur A. Ekirch, Jr.
Published 15 Jan 1987

Freedom and Reform: Essays in Economics and Social Philosophy (Indianapolis: Liberty Press, 1982), p. 231. For an exceptionally full and careful treatment of this important issue, with a valuable survey of the related economic literature and an illuminating empirical application, see Charlotte Twight, "Government Manipulation of Constitutional-Level Transaction Costs: An Economic Theory and Its Application to OffBudget Expenditure through the Federal Financing Bank," (Ph.D. diss., University of Washington, 1983). 12. Nordlinger, Autonomy, p. 76. Also Dye, Understanding Public Policy, pp. 197-199; W. Lance Bennett, Public Opinion in American Politics (New York: Harcourt Brace Jovanovich, 1980), pp. 218, 269; Barry D.

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Chicago: University of Chicago Press, 1975. Thaler, Richard H. "Illusions and Mirages in Public Policy." Public Interest (Fall 1983). Tufte, Edward. Political Control of the Economy. Princeton, N.J.: Princeton University Press, 1978. Twight, Charlotte. "Government Manipulation of Constitutional-Level Transaction Costs: An Economic Theory and Its Application to Off-Budget Expenditure through the Federal Financing Bank." Ph.D. diss., University of Washington, 1983. Wallace, Donald H. Economic Controls and Defense. New York: Twentieth Century Fund, 1953. Weidenbaum, Murray L. Business, Government, and the Public. 2nd ed.

Connectography: Mapping the Future of Global Civilization
by Parag Khanna
Published 18 Apr 2016

We should not underestimate the intrinsic value of digital connections in a hybrid reality. Critics such as Harvard’s Robert Putnam and MIT’s Sherry Turkle who point to digital life as eroding family bonds ignore the importance of these new and more diverse relationships, as well as how digital communications reduce transaction costs and free up time for new kinds of engagement, learning, consumption, or investment. For example, Skype calling minutes increased by 500 percent from 2008 to 2013, no doubt bringing many families closer together while also enabling individuals to more easily afford to learn everything from the piano to Mandarin.*9 We should also remember that in low-trust societies such as Latin America, social media are essential to circulate accurate information to circumvent elite lies.

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While Silicon Valley technology companies employ fewer workers than their industrial-age counterparts such as General Motors, their global services platforms facilitate portable and digital work for the connected masses whether posting advertisements, verifying addresses, photographing for registries, comparing prices for companies, or performing other basic tasks. A digital middle class is emerging whose prerequisite is not a broad consumer base or even a market economy but online connectivity. Economists such as Ronald Coase sought to determine the optimal size of firms to reduce transaction costs in carrying out certain functions efficiently. Today’s network structures that leverage growing frictionless connectivity shatter previous assumptions by expanding in scale without commensurate growth in size. Even as traditional productivity metrics still fail to capture all the benefits created by such connectivity, innovation itself very much depends on it.

More: The 10,000-Year Rise of the World Economy
by Philip Coggan
Published 6 Feb 2020

So bankers operated at the fairs, acting as clearing houses for all the trades; a merchant would end up with a credit or debit that could be settled later, or simply rolled over to the next fair. In this way, credit allowed more trade to occur; as one author wrote, “credit enabled a small investment of hard cash to go to work simultaneously at more than one place”.14 Financial innovation thus lowered transaction costs, allowed cash that would otherwise be hoarded to be put to work, and allowed merchants to take more risk. Without it, trade would not have flourished as it did. There was a general shortage of coins in Europe in the Middle Ages. At the start of the period, Europe was surviving with the help of coins from the Byzantine and Islamic worlds.

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Retailers can keep track of which goods are selling well, and order more when supplies start to run low. This saves them tying up capital in excess stock. Fishermen and farmers can find out the current market prices for their produce, and sell them where they are most profitable. And consumers can easily compare prices to stop themselves from being ripped off. Third, transaction costs have fallen. The internet can eliminate the role of middlemen. Booking a holiday, for example, used to involve a visit to a travel agent and a trawl through brochures, but now everything can be purchased online. Part of this cost saving is in the form of time, as doing an internet search means that consumers can find the goods they desire much more quickly.

Empire of Cotton: A Global History
by Sven Beckert
Published 2 Dec 2014

Some, such as the Browns, in a savvy move, had already mostly exited the cotton business before the Civil War. Others, such as the Rathbones, accumulated huge losses after the war, and then retreated from the trade. Lower transaction costs meant lower profits for people invested in the cotton trade, giving a premium to those able to secure a vastly increased quantity of goods. One of the nineteenth century’s greatest authorities on the global cotton trade, Thomas Ellison, estimated that between 1870 and 1886 transaction costs, as a percentage of the value of the traded cotton, fell by 2.5 percent.13 The role of merchants also changed because, as the result of the state-driven transformation of the countryside, connecting growers and producers of raw cotton had become much simpler.

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Yet ironically, under manufacturers’ pressure to deliver the cheapest possible cotton, the commission-intensive business of importers, brokers, and factors were increasingly squeezed as well, and eventually replaced by a much simpler—and much less expensive—system of trade. In fact, so successful had merchants become in connecting distant growers and manufacturers to one another that their own labor had become less and less important. Pressured by manufacturers who sought to cut transaction costs, the myriad intermediaries who had moved cotton from the plantation to the factory before the 1860s consolidated, to be replaced by a few vertically integrated cotton dealers. New characters now strode onto the cotton empire’s stage, people who would connect growers directly to manufacturers.

The Start-Up of You: Adapt to the Future, Invest in Yourself, and Transform Your Career
by Reid Hoffman and Ben Casnocha
Published 14 Feb 2012

Networks and networking were always associated with job hunting because it was so costly in time and effort to deploy your network that you’d only do it for really important things—like finding a job. But now it’s easy and inexpensive to access the information bouncing around the brains of our connections. With everyone connected, the transaction costs of engaging your network are so low that it makes sense to pull intelligence from your network not only for the big career challenges—like finding a good job—but on a broad range of day-to-day issues. The individuals we’ve met in previous chapters turned to their network on a regular basis as they navigated their careers.

America at the Crossroads: Democracy, Power, and the Neoconservative Legacy
by Francis Fukuyama
Published 20 Mar 2007

International legitimacy, on the other hand, requires working through international institutions that are inherently slow-moving, rigid, and hobbled by cumbersome procedures and methods. Legitimacy is ultimately based on consent, which is in turn a by-product of a slow process of diplomacy and persuasion. International institutions exist in part to reduce the transaction costs of achieving consent, but under the best of circumstances they necessarily move less quickly than security requires. A Different Kind of Foreign Policy It is doubtful whether we will ever be able to create truly democratic global institutions, particularly if they aspire, like the United Nations, to be globally representative.

The Gig Economy: A Critical Introduction
by Jamie Woodcock and Mark Graham
Published 17 Jan 2020

Here there are both extended interactions between workers and clients and repeated interactions between those same workers and clients: leading to the danger of disintermediation for platforms. For those reasons, platforms such as Homejoy in the US have struggled. Yet some platforms in this line of work still thrive by reducing transaction costs and offering a mechanism for trust to be built between worker and client. Degree of explicit coordination We then see that geographically tethered platforms tend to exert a high degree of control over their workforce. Most platforms need to control the locations of workers, manage the time it takes for them to carry out their jobs, set the rates that they receive to do that work.

Seriously Curious: The Facts and Figures That Turn Our World Upside Down
by Tom Standage
Published 27 Nov 2018

It is often cheaper to direct tasks by fiat than to negotiate and enforce separate contracts for every transaction. Such “exchange costs” are low in markets for uniform goods, wrote Coase, but are high in other instances. But his answer only raised further tricky questions. For instance, if the reason firms exist is to reduce transaction costs, why have market transactions at all? To address such questions, economists have developed a theory of contracts, which makes a distinction between spot transactions and business dealings that require longer-term co-operation. Most transactions take place in spot markets. They are well suited to simple, low-value transactions, such as buying a newspaper or taking a taxi.

The Gone Fishin' Portfolio: Get Wise, Get Wealthy...and Get on With Your Life
by Alexander Green
Published 15 Sep 2008

The fund’s non-inflation-indexed holdings may include the following:• Corporate debt obligations • U.S. government and agency bonds • Cash investments • Futures, options, and other derivatives • Restricted or illiquid securities • Mortgage dollar rolls The fund may invest up to 20% of its total assets in bond futures contracts, options, credit swaps, interest rate swaps, and other types of derivatives. These contracts may be used to keep cash on hand to meet shareholder redemptions or other needs while simulating full investment in bonds, to reduce transaction costs, for hedging purposes, or to add value when these instruments are favorably priced. Losses (or gains) involving futures can be substantial—in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for the fund. Similar risks exist for other types of derivatives.

The Orbital Perspective: Lessons in Seeing the Big Picture From a Journey of 71 Million Miles
by Astronaut Ron Garan and Muhammad Yunus
Published 2 Feb 2015

Co-Laborers After we have set aside the limited framework that may represent the largest impediment to mutual understanding, we have set the stage to form relationships and undertake global collaboration. Effective collaboration isn’t easy. Creating and maintaining relationships takes work, collaboration can come at the expense of building new capabilities within existing organizations, and partnerships can incur high transaction costs. There’s also much con- T h e K e y I s “ W e ”â•…  85 fusion about what collaboration means, and a tendency to reduce it to a buzzword. Nonetheless, the first step is to filter global collaboration through the lens of the orbital perspective, to begin to view our Earth as one community, as a complex, living system, rather than simply as an arena for self-interested competition.

Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa
by Dambisa Moyo
Published 17 Mar 2009

Firm-Level Evidence’, The World Bank Policy Research Working Paper WPS2485, November 2000 Forbes, Kristin J., ‘The Asian Flu and Russian Virus: Firm Level Evidence on How Crises are Transmitted Internationally’, NBER Working Paper No. W7807, July 2000 Foster, Mick and Adrian Fozzard, ‘Aid and Public Expenditure: A Guide’, Centre for Aid and Public Expenditure, Overseas Development Institute, Working Paper 141, October 2000 Freund, C. and N. Spatafora, ‘Remittances: Transaction Costs, Determinants, and Informal Flows’, The World Bank Policy Research Working Paper WPS3704, 2005 Genesis, ‘Evolving Opportunities and Constraints in Remittances: A View from SADC’, presentation at the 2nd International Conference on Migrant Remittances, London, November 2006 Gimbel, John, The Origins of the Marshall Plan, Stanford: Stanford University Press, 1976 Giridharadas, Anand, ‘India hopes to wean citizens from gold’, International Herald Tribune, 16 March 2005, at http://www.iht.com/articles/2005/03/15/news/gold.php.

Impact: Reshaping Capitalism to Drive Real Change
by Ronald Cohen
Published 1 Jul 2020

So far, most SIBs are quite small: the median number of beneficiaries of each of them is around 600, with a median upfront capital commitment of only around £2 million ($2.7 million).25 The largest SIB in the world, which supports teenage mothers in South Carolina, is still only $30 million. SIBs are more complicated to design and implement than grants, as they involve three stakeholders: the outcome payer, the delivery organization and the investor. This is currently leading to higher transaction costs relative to capital deployed, but the ease and speed of implementation are improving all the time. As experience grows, terms and outcome metrics will standardize, and both professional outcome funds and SIB/DIB investment funds will enter the market and allow impact bonds to scale. SIBs and DIBs should ultimately be judged according to the cost per successful outcome and the number of successful outcomes they can achieve, both of which I expect to be significantly more favorable than can be achieved through a traditional grant.

The Great Economists Ten Economists whose thinking changed the way we live-FT Publishing International (2014)
by Phil Thornton
Published 7 May 2014

While these concepts are normally the domain of economists, all have become part of the language not only of business people and analysts but also, particularly in terms of supply and demand, of the man and woman in the street. Finally, the whole discipline of industrial economics has its roots in Marshall’s thinking on industrial districts, external economies and the firm as an organisation rather than simply an arena for reducing transaction costs. The areas of industrial dynamics, which looks at the growth of capabilities within an industry rather than just a firm, and economic geography, which looks at how economic activity is organised, that feed into today’s government business policies, are in part a reflection of the way that Marshall saw the world.

Debtor Nation: The History of America in Red Ink (Politics and Society in Modern America)
by Louis Hyman
Published 3 Jan 2011

Successful applicants received a Charga-Plate for identify.58 Using the ChargaPlate, the bank could exploit all the cost savings associated with centralized accounting, billing, and collections.59 Daily, stores would send the bank a slip with the charges and the bank would, that same day, credit the store’s account, even before the customer paid the bill. The bank then used a “National Class 31 (18) cycle billing machine,” like the department stores used, to send notices to the customers.60 Centralized, mechanized credit, pioneered by department stores using Charga-Plate in the 1940s, made the per transaction cost of the Charg-It system much lower and more reliable. Descriptions of the system explicitly stated that the “mechanics of the system parallel[ed] the system used in any department store.”61 The lax collection policies and accounting of small shops would be replaced by professional, mechanized collection systems of the bank.

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Commercial paper markets were deep, allowing the commercial paper issues to be easily resold, which gave investors the liquidity that they prized. Without that liquidity, card bonds commanded a premium. Banks could move large or small amounts of receivables off their books to the subsidiary, which could flexibly issue paper against the receivables. Securitization, with a shallow market and higher transaction costs, still posed obstacles. But that would change quickly, as a recession collided with changes in banking regulation to make securitization come to the fore of consumer debt financing. While in the late 1980s securitization offered a clever maneuver to find additional funds, by the early 1990s securitization became necessary for banks’ profitability if banks were to comply with the new regulations resulting from the Basel Accord.154 Securitization was not required by Basel, but to comply and to profit, securitization was necessary.

Advanced Stochastic Models, Risk Assessment, and Portfolio Optimization: The Ideal Risk, Uncertainty, and Performance Measures
by Frank J. Fabozzi
Published 25 Feb 2008

In 2006, more than half of the total traded FX volume was executed through electronic trading.171 Some advantages that ECNs provide to market participants are increased speed of trade execution, lower transaction costs, access to a greater number and variety of market players, opportunity for clients to observe the whole order book, etc. The growth of algorithmic trading strategies is related to the expansion of electronic trading. An algorithmic trading strategy, in general, relies on a computer program to execute trades based on a set of rules determined in advance, in order to minimize transaction costs. Depending on the complexity of those rules, such computer programs are capable of firing and executing multiple trade orders per second.

Bernie Madoff, the Wizard of Lies: Inside the Infamous $65 Billion Swindle
by Diana B. Henriques
Published 1 Aug 2011

But he was, and some of the biggest names on the Street would send him small arbitrage orders to execute for their customers, he said. “They liked to send me the business,” he recalled. “They thought I was a nice Jewish boy.” Madoff was well positioned to earn honest arbitrage profits. Because transaction costs would wipe out most arbitrage profits, which tended to be paper-thin, arbitrage trading was usually pursued only by market insiders who could trade at far less cost than retail customers—market insiders such as Madoff. Speed mattered in other ways, too. If it took too long to complete the paperwork involved in converting a bond into its equivalent shares of stock, the opportunity for a locked-in profit could vanish.

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Those robust returns, which did not include cash dividends, were challenged in Paul F. Jessup and Roger B. Upson, Returns in the Over-the-Counter Stock Markets (Minneapolis: University of Minnesota Press, 1973), which argued that the total return on OTC stocks did not significantly outperform New York Stock Exchange returns after adjusting for transaction costs and including cash dividends. Jessup and Upson’s findings were too arcane to have shaped public opinion about the OTC market, however, and their methodology was occasionally quite odd. For example, for some reason they decided to exclude banks and insurance companies from their sample of OTC stocks, although virtually all such companies traded only in the OTC market and virtually all of them paid cash dividends.

Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition
by Kindleberger, Charles P. and Robert Z., Aliber
Published 9 Aug 2011

Previously the United States bought silver from Mexico which was then shipped to China to finance the US trade deficit; then the silver was shipped to Britain to finance China’s trade deficit. The institutional innovation was that American merchants sent bills of exchange that specified payment in the British pound for China’s imports; the Chinese then shipped these bills to Britain to finance their trade deficit. The transactions costs involved in making cross-border payments using bills of exchange were much smaller than those that involved the shipment of silver. The result of this innovation was that the silver stayed in the United States so that the US money supply did not decline.2 The global boom of the 1850s followed from the combination of new gold discoveries, the formation of new banks in Britain, France, Germany, and the United States, the establishment of clearing-houses by the banks in New York and in Philadelphia and the expansion of the London clearing-house.

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Amazon developed the technology for the sale of books and electronic products. Peapod allowed individuals to shop for most of their groceries at home. Millions of accounts were established at the discount broker Charles Schwab and at its competitors. Firms were established that enabled investors to trade stocks using the computer at extremely low transaction costs. ‘Day traders’ emerged: individuals who quit their regular jobs to trade stocks either from their computers at home or from desks in specially designed shops. Priceline enabled airlines and hotels to sell seats and rooms at sharply discounted prices. Entrepreneurs were able to get the cash to develop these ideas from venture capitalists (VCs) who provided seed money.

Elsewhere, U.S.A: How We Got From the Company Man, Family Dinners, and the Affluent Society to the Home Office, BlackBerry Moms,and Economic Anxiety
by Dalton Conley
Published 27 Dec 2008

What’s more, pricing the formerly unpriced brings many once shadowy relationships out in the open. Where prices are not explicit, there lurks the potential for exploitation. Think about hidden fees in credit cards. The more explicit such costs are, the better informed the consumer is, and the more we can make good choices for ourselves. This would all be fine and dandy if there were no transaction costs—that is, costs inherent in just enforcing such fairness and efficiency. And it would be okay if it stopped at lousy airline food and other “stuff.” But pricing the formerly priceless has spread to every nook and cranny of our lives, thereby eroding other sorts of economies. When we move to price marriage (through divorce settlements or prenups) or physical comfort (by paying masseuses) or even a friendly ear (through psychotherapy), we destroy the desire, need, and ability to exchange such “priceless” things through nonmarket channels, and we thereby add to our sense of alienation from one another.

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression
by Richard A. Posner
Published 30 Apr 2009

So the terms of the security itself or some notion of fiduciary duty may oblige the servicer to obtain the unanimous consent of the owners of the different tiers (which would require compensating the owners of the lower tiers—a requirement of unanimity empowers holdouts) in order to be entitled to modify one of these mortgages in the pool of mortgages that backs the security, and this will increase the transaction costs of modification. An economic-legal team at Columbia University has proposed that to facilitate modification and thus reduce the foreclosure rate, Congress should pass a law that would allow the mortgage servicer to modify a mortgage without the consent of all the owners but would provide government compensation for the lower-tier investors.

The Wide Lens: What Successful Innovators See That Others Miss
by Ron Adner
Published 1 Mar 2012

The proposition was inspired by the fact that, while 81 percent of Kenyans did not have access to a bank account, 27 percent of its citizens owned mobile phones, and an additional 27 percent had access to one—and those numbers were rapidly increasing. (By the end of 2010, 63 percent of Kenyans were mobile phone subscribers.) M-PESA sought to deliver a basic banking function to Kenya’s huge unbanked population, facilitating commerce and entrepreneurship by increasing access to capital while reducing transaction costs—and to do it profitably. In 2005, M-PESA (M is for “mobile” and pesa is Swahili for “cash”) launched a pilot test of its proposition by partnering with a local microfinance institution, Faulu Kenya. Faulu Kenya, which distributed small loans to groups of small business borrowers who would then assume a collective responsibility to pay back the money, provided the customer base for the pilot program while M-PESA provided the technology and delivered the mobile services.

Getting Better: Why Global Development Is Succeeding--And How We Can Improve the World Even More
by Charles Kenny
Published 31 Jan 2011

“The Colonial Origins of Comparative Development: An Empirical Investigation.” American Economic Review 91, no. 5. Acemoglu, D., and J. Robinson. 2006. The Economic Origins of Dictatorship and Democracy. Cambridge: Cambridge University Press. Acharya, A., A. Fuzzo de Lima, and M. Moore. 2006. “Proliferation and Fragmentation: Transactions Costs and the Value of Aid.” Journal of Development Studies 42, no. 1. Aisbett, E. 2005. “Why Are the Critics So Convinced That Globalization Is Bad for the Poor?” NBER Working Paper 11066. Andersson, N., C. Whitaker, and A. Swaminathen. 1998. Afghanistan: The 1997 National Mine Awareness Evaluation.

Bitcoin: The Future of Money?
by Dominic Frisby
Published 1 Nov 2014

The Bitcoin protocol offers enormous savings for people who wish to do business with each other using it – particularly at the smaller end of the business scale. These savings and efficiencies mean that many exchanges that would not be possible under existing payments systems can now happen. It is by exchange that people prosper and progress. I asked Nick Szabo if Bitcoin can change the world. ‘Yes it can,’ he said. ‘By lowering transaction costs for a wide variety of people that are shut out of the current financial system.’ Goldman Sachs IT analyst Roman Leal has made some rough calculations as to the savings that Bitcoin could have made possible globally in electronic payment in 2013. There’s no proving the block chain could yet manage such levels of volume, and Leal makes the point that regulatory and operating costs for Bitcoin could quite easily rise, while the competition it brings to existing payment services means these costs will probably fall.

The Complete Guide to Property Investment: How to Survive & Thrive in the New World of Buy-To-Let
by Rob Dix
Published 18 Jan 2016

Because we’re professionals, we run the project like a military operation and finish on time and on budget, finally achieving the anticipated sale price of £140,000. With the property sold, it’s time to calculate the profit. The difference between the purchase price (£90,000) and sale price (£140,000) is £50,000 – from which we need to deduct: Refurbishment: £18,000 Stamp duty: £2,700 Bridging interest and fees: £6,300 Legal fees and other transaction costs (for both purchase and sale): £3,000 That leaves a profit of £20,000. I said I was going to leave tax aside for these models, but it’s more straightforward to calculate with property trading: if the property was bought within a limited company (generally a good idea for buy-to-sell projects, as we’ll see later), we’ll pay corporation tax (currently 20%) on the profits.

The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality
by Brink Lindsey
Published 12 Oct 2017

Taylor, “Leveraged Bubbles,” National Bureau of Economic Research Working Paper no. 21486, August 2015, http://www.nber.org/papers/w21486.pdf. 18.Quoted in Anat Admati and Martin Hellwig, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It (Princeton, NJ: Princeton University Press, 2013), p. 6. 19.The Modigliani-Miller theorem also assumes no transaction costs and no market inefficiencies like asymmetric information. 20.John H. Cochrane, “Equity-Financed Banking and a Run-Free Financial System,” 2016, https://faculty.chicagobooth.edu/john.cochrane/research/papers/run-free_talk_mn_2016.pdf. 21.Gregory Phelan, “Financial Intermediation, Leverage, and Macroeconomic Instability,” unpublished working paper, January 20, 2016, http://papers.ssrn.com/sol3/papers.cfm?

Empires of the Weak: The Real Story of European Expansion and the Creation of the New World Order
by Jason Sharman
Published 5 Feb 2019

Patrons, Clients, and Empire: Chieftaincy and Over-Rule in Asia, Africa, and the Pacific. Oxford: Oxford University Press. North, Douglass C. 1990a. Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press. North, Douglass C. 1990b. “Institutions, Transaction Costs, and the Rise of Merchant Empires.” In The Political Economy of Merchant Empires: State Power and World Trade 1350–1750, edited by James D. Tracy, 22–40. Cambridge: Cambridge University Press. North, Douglass C., and Robert Paul Thomas. 1973. The Rise of the Western World: A New Economic History.

Blockchain Basics: A Non-Technical Introduction in 25 Steps
by Daniel Drescher
Published 16 Mar 2017

Stanford Institute for Economic Policy Research Working Paper (2004): 3–18; Leyshon, Andrew. Scary monsters? Software formats, peer-to-peer networks, and the spectre of the gift. Environment and Planning D: Society and Space 21.5 (2003): 533–558. 22 Step 3 | Recognizing the Potential processing time and incurs high transactions costs. In a peer-to-peer system, the same transfer would be much simpler and it would take less time and costs since it could be processed as what it is: a transfer of bits and bytes between two peers or nodes, respectively. The advantage of peer-to-peer systems over centralized systems is that direct interactions occur between contractual partners instead of indirect interac- tions through a middleman, hence, there is less processing time and lower costs.

A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan
by Ben Carlson
Published 14 May 2015

Table 3.1 Annual Returns by Decade Stocks Bonds 1930s –0.9% 4.0% 1940s 8.5% 2.5% 1950s 19.5% 0.8% 1960s 7.7% 2.4% 1970s 5.9% 5.4% 1980s 17.3% 12.0% 1990s 18.1% 7.4% 2000s –1.0% 6.3% 2010s 15.7% 4.2% Source: Aswath Damodaran. You also have to remember that these long-term performance numbers for stocks don't include any fees, taxes, or transaction costs. They're simple historical performance numbers. But they also aren't 9.6 percent per year because someone traded in and out of them when they felt like it. They aren't 9.6 percent because an investor side-stepped the latest market crash. They are 9.6 percent including the really good times and the really bad times—wars, recessions, bubbles, crashes, and everything in-between.

Safe Haven: Investing for Financial Storms
by Mark Spitznagel
Published 9 Aug 2021

Both Mark and I were pit traders before doing quantitative stuff. While our work has been based on detecting mathematical flaws in existing finance models, our edge has been linked to having been in the pit and understanding the centrality of calibration, fine‐tuning, execution, orderflow, and transaction costs. Remarkably, people who have skin in the game, that is, self‐made successful people with their own money at risk (say a retired textile importer or a former shopping center developer), get it right away. On the other hand the neither‐this‐nor‐that MBA in finance with year‐end evaluation filed by the personnel department needs a helping hand—they can neither connect to the intuitions nor to the mathematics.

Money: The True Story of a Made-Up Thing
by Jacob Goldstein
Published 14 Aug 2020

The Washington Post called it a “love fest.” What was going on? Silicon Valley had started to seize on bitcoin as the next big thing. There was less bitcoiny talk about ending the tyranny of democracy and more about offering lower transaction fees for online purchases. “The appeal of zero transaction costs is really strong and extremely disruptive for a massive industry, the payments industry,” a venture capitalist told the Wall Street Journal in May 2013. (“Extremely disruptive” and “massive industry” are venture-capital speak for “there are boatloads of money to be made here.”) This view lacked the world-historical punch of the crypto anarchist manifesto, but it was very exciting to rich people seeking to become more rich.

Kings of Crypto: One Startup's Quest to Take Cryptocurrency Out of Silicon Valley and Onto Wall Street
by Jeff John Roberts
Published 15 Dec 2020

Officials in the state of New York piled on, telling the New York Times that—contrary to Fred’s claims—the company had been operating without a license. Worse was soon to come. Fred had created a PowerPoint deck for investors that highlighted four benefits of bitcoin, including the obvious ones like low transaction costs and a reduced risk of fraud. But the first bullet on that list explained that bitcoin was “immune to country-specific sanctions,” citing Russia as an example. This may have been true—governments in many cases could not stop the flow of bitcoin—but advertising this on a company slide amounted to saying, “Our product can subvert US banking sanctions.”

Walled Culture: How Big Content Uses Technology and the Law to Lock Down Culture and Keep Creators Poor
by Glyn Moody
Published 26 Sep 2022

A report on the topic by the World Intellectual Property Organization (WIPO) in 2002 explained: “In the framework of a collective management system, owners of rights authorize collective management organizations to monitor the use of their works, negotiate with prospective users, give them licenses against appropriate remuneration on the basis of a tariff system and under appropriate conditions, collect such remuneration, and distribute it among the owners of rights … although a collective management system serves primarily the interests of owners of copyright and related rights, such a system also offers great advantages to users who, thus, may have access to the works they need in a simple manner from one single source, and—since collective management simplifies negotiations with users, monitoring uses and collecting fees—at low transaction costs.”577 Yet the history of such collective right organisations (CROs)578 is not a happy one. The nature and scale of the problem is indicated by two reports published by Infojustice, an initiative by the American University Washington College of Law, in 2013 and 2018. The episodes in the first report ‘reveal a long history of corruption, mismanagement, confiscation of funds, and lack of transparency [by CROs] that has deprived artists of the revenues they earned’.579 Countries where CROs have been engaged in one or more of these activities in the 21st century include Australia, the Bahamas, Brazil, Canada, China, Columbia, Ghana, Italy, Kenya, the Netherlands, Nigeria, Romania, Senegal, South Africa, Spain, Sweden, Russia and the United States.

More Guns, Less Crime: Understanding Crime and Gun-Control Laws
by John R. Lott
Published 15 May 2010

Depending upon how responsive victims are to these threats, the coefficient for a variable like the percent of young males in the population could be zero even when the group in question poses a large criminal threat. 23. Edward L. Glaeser and Bruce Sacerdote, “Why Is There More Crime in Cities?” Harvard University working paper, Nov. 14, 1995. 24. For a discussion of the relationship between income and crime, see John R. Lott, Jr., “A Transaction-Costs Explanation for Why the Poor Are More Likely to Commit Crime” Journal of Legal Studies 19 (Jan. 1990): 243–45. 25. A brief survey of the laws, excluding the changes in the rules regarding permits, reveals the following: Alabama made no significant changes in these laws during the period. Connecticut law gradually changed its wording from “criminal use” to “criminal possession” from 1986 to 1994.

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“Juvenile Delinquency and Education: A Comparison of Public and Private Provision.” International Review of Law and Economics 7 (Dec. 1987). ———. “Should the Wealthy Be Able to ‘Buy Justice’?” Journal of Political Economy 95 (Dec.1987). ———. “The Effect of Conviction on the Legitimate Income of Criminals.” Economics Letters 34 (Dec. 1990). ———. “A Transaction-Costs Explanation for Why the Poor Are More Likely to Commit Crime.” Journal of Legal Studies 19 (Jan. 1990). ———. “An Attempt at Measuring the Total Monetary Penalty from Drug Convictions: The Importance of an Individual’s Reputation.” Journal of Legal Studies 21 (Jan. 1992). ———. “Do We Punish High-Income Criminals Too Heavily?”

Thank You for Being Late: An Optimist's Guide to Thriving in the Age of Accelerations
by Thomas L. Friedman
Published 22 Nov 2016

Fast trading does keep markets liquid, Nature noted, which can “benefit trade in the same way that free-flowing traffic helps transport. Such markets tend to have low ‘spreads’—the difference between the prices at which one can buy or sell a stock, which reflects the fee that dealers demand and thus transaction costs for investors.” But there are real downsides, it added: “The algorithms they use to trade profitably make more errors and are programmed to get out of the market altogether when markets get too volatile. The problem is exacerbated by the similarity of the algorithms used by many high-frequency trading firms—they all bail out at the same time.

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Jonathan Haidt, a social psychologist at the NYU Stern School of Business, made the case for why in an essay in The American Interest on July 10, 2016, entitled “When and Why Nationalism Beats Globalism.” “Having a shared sense of identity, norms, and history generally promotes trust … Societies with high trust, or high social capital, produce many beneficial outcomes for their citizens: lower crime rates, lower transaction costs for businesses, higher levels of prosperity, and a propensity toward generosity, among others … The trick … is figuring out how to balance reasonable concerns about the integrity of one’s own community with the obligation to welcome strangers, particularly strangers in dire need.” Minnesota right now is wrestling with that trick—as are other communities in America.

Antifragile: Things That Gain From Disorder
by Nassim Nicholas Taleb
Published 27 Nov 2012

So this tells us that if, instead of having one very large bank, with Monsieur Kerviel as a rogue trader, we had ten smaller banks, each with a proportional Monsieur Micro-Kerviel, and each conducted his rogue trading independently and at random times, the total losses for the ten banks would be close to nothing. FIGURE 15. Small may be beautiful; it is certainly less fragile. The graph shows transaction costs as a function of the size of the error: they increase nonlinearly, and we can see the megafragility. About a few weeks before the Kerviel episode, a French business school hired me to present to the board of executives of the Societé Générale meeting in Prague my ideas of Black Swan risks.

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Costs of execution: “Price impact,” that is, execution costs, increase with size; they tend to follow the square root—meaning the total price is convex and grows at exponent 3/2 (meaning costs are concave). But the problem is that for large deviations, such as the Société Générale case, it is a lot worse; transaction costs accelerate, in a less and less precise manner—all these papers on price impact by the new research tradition are meaningless when you need them. Remarkably, Bent Flyvbjerg found a similar effect, but slightly less concave in total, for bridges and tunnels with proportional costs growing at 10 Log[x] of size.

Termites of the State: Why Complexity Leads to Inequality
by Vito Tanzi
Published 28 Dec 2017

This is often the case with some environmental problems, including the contamination of rivers, the diversion of the water of rivers, the acidification of oceans, the excessive exploitation of fishing in the oceans, global warming, or even the exploitation of loopholes in international aspects of taxation (see Castellucci, 2014; Sandmo, 2003; Tanzi, 2016a). Often, the transaction costs are high, especially when lawyers need to get involved. Because of growing economic activity and population density, and also because of the globalization of economic activities, multinational or global externalities have become common in recent decades, although they have always existed. The “discovery” of America by Columbus generated enormous global externalities (both positive and negative) in the years that followed (see Mann, 2011).

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They would also make the constitutions potential tools of powerful governments to manipulate majorities, or of current majorities to reduce the rights of minorities, as the late James Buchanan stressed in some of his works, and as Mussolini undertook in Italy. Current developments in Poland and in Venezuela point to this danger. The economic laws and the rules that exist in a country must aim at facilitating economic relations and at reducing the transaction costs that legitimate exchanges involve. They must keep low the cost of legitimately dealing with other individuals and also of dealing with the government, making these costs affordable to most. It can be argued that in some areas the costs of dealing with the government have increased considerably over the years, giving as a result more power to those who have higher means to cover those costs (see Rakoff, 2016).

Big Debt Crises
by Ray Dalio
Published 9 Sep 2018

This will run through the system with the speed of a hurricane (over the next four to six months), and it will leave weaker financial credits dead or damaged and stronger financial credits in the catbird seat… …We have a game-plan (developed over many years) that we have confidence in because we planned for times like this, but for safety’s sake, we are checking that all the hatches are battened down and that the expensive radar we’ve developed is working well. That game-plan doesn’t just pertain to our investment strategy; it includes our strategy for handling counterparty risks and transactions costs in an environment of extreme risk-aversion and illiquidity. What I was referring to as a game plan for this is what we called a “Depression gauge.” Because big debt crises and depressions had happened many times before and we had the template explained in this study, we had created this gauge as a simple algorithm based on the proximity of interest rates to 0 percent, a few measures of debt vulnerability, and indications of the beginning of debt deleveraging that would lead us to change our overall portfolio and risk controls (including our counterparty risks).

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If everyone is asking these questions the natural path is to cut back on trading and concentrate positions with a few firms. But these few firms have the incentive to ration their capacity to the highest quality financial institutions and managers. The inevitable result is substantially lower liquidity, higher transactions cost, and higher volatility. Higher volatility then feeds back into the real economy because people and businesses transact at these prices. And capital constraints in the financial sector mean that credit growth remains low, which undermines economic growth. We are getting very close to crossing this line.

The Handbook of Personal Wealth Management
by Reuvid, Jonathan.
Published 30 Oct 2011

Adding fine art to a diversified portfolio is likely to produce a slightly greater return for each unit of risk and a significantly better return with less volatility than stocks and bonds on their own. Based on data from 1980 to 2006, Campbell found that contemporary art offered the highest returns; Old Masters had the lowest, while also being the least volatile. She recommended an optimal asset allocation of 4.19 per cent including transaction costs, and 2.82 per cent when hedge funds are part of the portfolio. Another study by Clare McAndrew and Rex Thompson (2005), based on a study of Impressionists sold between 1985 and 2001, concluded that ignoring unsold (bought-in) art led to the downside risk being understated by as much as 50 per cent.

The Inner Lives of Markets: How People Shape Them—And They Shape Us
by Tim Sullivan
Published 6 Jun 2016

Jean Tirole and Jean-Charles Rochet convey this point more precisely in a 2006 article where they show that two-sided markets are only necessary when the Coase Theorem fails. This theorem, more a conjecture provided by economist Ronald Coase, essentially argues that free markets maximize efficiency in the absence of externalities or transaction costs. Andrei Hagiu and Julian Wright explore the continuum of reseller and pure marketplace in “Do You Really Want to Be an eBay?” Harvard Business Review, March 2013. 7. We thank Pierre Azoulay for this. 8. David S. Evans and Richard Schmalensee, “Markets with Two-Sided Platforms,” Issues in Competition Law and Policy (ABA Section of Antitrust Law) 1, chap. 28 (2008); Joe Nocera, A Piece of the Action: How the Middle Class Joined the Moneyed Class (New York: Simon & Schuster, 1994).

Broken Markets: A User's Guide to the Post-Finance Economy
by Kevin Mellyn
Published 18 Jun 2012

Also, don’t take for granted that money market funds are risk free in today’s world. Stay Debt Free Fifth, not spending money is as good as earning more money in a repressed economy. For starters, if your portfolio is doing a bit better than the market, but you are paying substantial management or advisor fees, it can cancel out. Transaction costs and taxes can also dilute your returns. Beyond avoiding excess investment costs, there is a good case for simplification and even downsizing of our lives to assure that we live within our means across the board. Any lifestyle that requires the accumulation of consumer debt and does not fit into current income is unsustainable over time and extremely stressful. 

Humans Are Underrated: What High Achievers Know That Brilliant Machines Never Will
by Geoff Colvin
Published 3 Aug 2015

Competition is getting more intense as performance is measured more rigorously, and we’re being paid according to what we deliver. Technology is advancing and disrupting all around us, doing wonderful things but increasingly making our business, whatever it is, more commoditized, leaving us struggling to achieve and maintain some kind of competitive advantage. A friction-free economy—in which information costs, transaction costs, and switching costs are dropping rapidly to zero—is more efficient but also more merciless; in an always-on environment, stress and burnout are increasing. As technology takes over cognitive tasks, deep human connection becomes more economically valuable. We’re all discovering what the health care industry has already discovered—that empathizing responds to all those challenges.

Spam Nation: The Inside Story of Organized Cybercrime-From Global Epidemic to Your Front Door
by Brian Krebs
Published 18 Nov 2014

After all, the transactions in which they engage are in most cases illegal. To combat any such “ripping” activity, forums enforce a strict code of ethics so that members caught trying to cheat fellow members are quickly ostracized or banned. For starters, most established forums will offer an escrow service—a small percentage of the transaction cost—that will hold the buyer’s funds until he is satisfied that the seller upheld his part of the bargain. Legitimate and longtime forum members tend to insist on the use of escrow for all transactions, while cheapskates and less experienced members eschew this offering at their own risk. Much like the online auction house eBay encouraging users to leave positive or negative feedback based on the quality of the transactions they conduct with other members, a fraud forum member’s standing is governed in part by the number of reputation or “rep” points he has accrued during his time on the forum.

Borrow: The American Way of Debt
by Louis Hyman
Published 24 Jan 2012

With the default risk on the bank and not the retailer, retailers didn’t provide as much “negative information” as the banks would have liked.5 Promotional costs were high, since this form of credit was brand-new.6 Perhaps most important, the programs could not capture economies of scale. The per transaction costs were extremely high and, without sufficient scale, made profits impossible. For small transactions, low processing costs were the key to success.7 The programs flopped. While bank cards failed, T&E cards—which superficially seemed very similar—flourished. The business behind the two cards couldn’t have been more different despite their surface similarities.

In Defense of Global Capitalism
by Johan Norberg
Published 1 Jan 2001

Criticism of the Tobin tax has focused on the impossibility of introducing it. In practice, all countries would have to agree on it; otherwise transactions would go through nonsignatory countries. And if it could be introduced, more and more trade would go to the major currencies in order to avoid transaction costs. Perhaps nearly the entire world economy would end up using U.S. dollars. But there is a more serious objection to the Tobin tax: even if it were possible to introduce, it would be harmful. This tax would actually be more harmful to the financial market than regulations by individual countries.

The Economic Singularity: Artificial Intelligence and the Death of Capitalism
by Calum Chace
Published 17 Jul 2016

When you take possession of a car, it could be tagged with a cryptographic signature, which would mean that you are the only person who could open and start the car.[cccli] The revolutionary benefit of the blockchain is that all kinds of agreements can be validated without setting up a centralised institution to do so. By removing the need for a central intermediary, the blockchain can reduce transaction costs, and it can enhance privacy: no government agents need have access to your data without your permission. Most importantly, for our present purposes, the blockchain may make possible the decentralised ownership and management of collective assets. Collective ownership Imagine a future in which it is apparent to many people that we are heading towards the scenario of the gods and the useless.

Unhappy Union: How the Euro Crisis - and Europe - Can Be Fixed
by John Peet , Anton La Guardia and The Economist
Published 15 Feb 2014

One was theoretical: the literature on shared currencies that began with Robert Mundell’s 1961 article outlining a theory of “optimum currency areas”. Mundell, a Canadian economics professor, posited that substantial welfare gains were to be had if a group of countries shared a currency – because of more transparent prices, lower transaction costs, enhanced competition and greater economies of scale for businesses and investors. But these gains needed to be weighed against the possible costs from losing both monetary and exchange-rate independence.10 Such costs, according to optimal currency-area theory, risked being especially high if the countries concerned suffered from internal labour- or product-market rigidities, had very different economic structures or were likely to be subject to asymmetric shocks.

Global Governance and Financial Crises
by Meghnad Desai and Yahia Said
Published 12 Nov 2003

As this trend will occur in successive waves modulated by the speed of aging, a potential for higher growth and higher rates of returns in quite large non-OECD countries than in the OECD area is a distinctive prospect. A technological catching-up process might enhance the growth differential. Indeed information technology channeled by world networks and multinational companies exhibits both decreasing transfer costs and decreasing transaction costs in access to world markets. Assuming that these trends will take hold, the distribution of economic and financial power in the coming decades will look different from the present state of affairs. If risk-adjusted real rates of return are higher in large non-OECD countries which make the institutional overhaul required to mobilize their human resources, financial savings and technology will be attracted where human capital stands.

The Unbanking of America: How the New Middle Class Survives
by Lisa Servon
Published 10 Jan 2017

She works part-time at a daycare center on New York’s Upper East Side and goes to school in the evening. She beams when she tells us that her younger brother is in college and that her sister will be starting as a freshman in the fall. The networks created and reinforced through ROSCAs spread information about members, enabling those involved to reduce the risks and transaction costs of lending to one another without having a typical credit-scoring system. This pooling of information offers “stronger economies of scale when small amounts are involved” and helps “predict individual repayment probabilities.” These informal practices are not confined to lower-income communities or to people who are credit-constrained.

The Growth Delusion: Wealth, Poverty, and the Well-Being of Nations
by David Pilling
Published 30 Jan 2018

Will Page, director of economics at Spotify, the Swedish music-streaming service, says, “GDP faces a square peg, round hole dilemma” because it was “originally designed to measure tangible manufactured goods, which are losing relevance in the modern economy.”1 When I went to see Page in Spotify’s London offices—open plan, help-yourself drinks fridge, mandatory games room—I had to print out my own security badge and attach it to my lapel, a job that would once have been done by a receptionist. “The goal of disruptive technology companies, in the statistical sense, is to reduce GDP,” Page said when I found him lurking in one of the corridors. “To wipe out transaction costs, which are being measured, and to replace them with convenience, which is not being measured. So the economy is shrinking, but everyone is getting a better deal. Lots of what tech is doing is destroying what wasn’t needed. The end result is you’re going to have less of an economy, but higher welfare.”

The Knowledge Economy
by Roberto Mangabeira Unger
Published 19 Mar 2019

From the standpoint of the main line of economic theory since the late nineteenth century, however, the division of the world into economies separated by national frontiers and governed by different laws is an accident without economic significance, if it is not a costly embarrassment. There might just as well be a unified world economy under the aegis of a world government and its laws, free of the transaction costs and of the complications and risks, including armed conflicts as well as trade wars and real wars, that result from state sovereignty. It is as if the neo-Darwinian synthesis in evolutionary theory were reduced to half of its present composition: the half about Darwinian natural selection unaccompanied by the other half about genetic mutation and recombination.

How to Predict the Unpredictable
by William Poundstone

The momentum system skipped the 1929 crash and both crashes of the 2000s with remarkable timing. It sold near the top of the 1901 and 1966 bubbles, though it bought back in before the ultimate low. Here’s a chart of portfolio value. These are real gains after allowing for the diminishing dollar (but not transaction costs, management fees, and taxes). During this 132-year period an investment in ten-year US Treasury bonds might have turned an initial $1,000 into $18,704, inflation adjusted. I do not chart that because the line would hug the axis so closely as to be indistinguishable from it. A buy-and-hold stock investor in the S&P 500 and its precursor companies would have turned $1,000 into about $2,932,653.

The Great Leveler: Violence and the History of Inequality From the Stone Age to the Twenty-First Century
by Walter Scheidel
Published 17 Jan 2017

In the judgment of a leading expert, “the Akkadian governing elite enjoyed resources far in excess of what Sumerian notables before them had known.” 45 Empire building had the potential to influence the distribution of income and wealth in ways that were unrelated to returns on economic activity and turned material inequality into a by-product of the underlying restructuring of power relations. Political unification on a large scale could improve overall conditions for commercial activity by lowering transaction costs, by boosting demand for high-end goods and services, and by enabling entrepreneurs to capitalize on networks of exchange established for extractive purposes, thereby widening the gap between capital holders and others. It spurred urban growth, especially in metropolitan centers, that exacerbated material imbalances.

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The degree of inequality was therefore at least in part a function of the sheer scale of imperial state formation. Building on mechanisms of capital investment and exploitation that had first been developed thousands of years earlier, these empires raised the stakes ever higher. Greater profits were to be had from state office; lowered transaction costs for trade and investment over long distances benefited those who had income to spare. In the end, imperial income inequality and wealth polarization could be terminated and reversed only by dismemberment through conquest, state failure, or wholesale systems collapse, all of them intrinsically violent upheavals.

The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses
by Eric Ries
Published 13 Sep 2011

In addition to quarterly reports on profits and margins, companies on the LTSE would report using innovation accounting on their internal entrepreneurship efforts. Like Intuit, they would report on the revenue they were generating from products that did not exist a few years earlier. Executive compensation in LTSE companies would be tied to the company’s long-term performance. Trading on the LTSE would have much higher transaction costs and fees to minimize day trading and massive price swings. In exchange, LTSE companies would be allowed to structure their corporate governance to facilitate greater freedom for management to pursue long-term investments. In addition to support for long-term thinking, the transparency of the LTSE will provide valuable data about how to nurture innovation in the real world.

A Primer for the Mathematics of Financial Engineering
by Dan Stefanica
Published 4 Apr 2008

The short is closed by buying the share (at a later time) on the market and returning it to the original owner (via the broker; the owner rarely knows that the asset was borrowed and sold short). We will not consider here these or other issues, such as margin calls, the liquidity of the market and the availability of shares for short selling, transaction costs, and the impossibility of taking the exact position required for the "correct" hedge. 106 CHAPTER 3. PROBABILITY. BLACK-SCHOLES FORMULA. By letting dS -+ 0, we find that the appropriate position .6. in the underlying asset in order to hedge a call option is ac .6. = as' which is the same as .6.

Automate This: How Algorithms Came to Rule Our World
by Christopher Steiner
Published 29 Aug 2012

He’s a symbol of all that’s different between the two worlds. One side uses bots and algorithms to chop up subprime mortgages and peddle them to unsuspecting German banks that end up eating the debt for pennies on the dollar—sorry about that!—and to trade stocks at fast speeds that do in fact benefit the public in lower transaction costs, but also cost them in the way of higher volatilities and the possibility of epic chaos. The other side, Silicon Valley, uses similar brains and technology to create a game that may keep you entertained for fifteen minutes a day. The best products from the Silicon Valley help you keep in touch with relatives, trace your family’s origins, teach your daughter calculus, or smooth your relationship with your health insurer.

A Brief History of Neoliberalism
by David Harvey
Published 2 Jan 1995

While neoliberals admit the problem and some concede the case for limited state intervention, others argue for inaction because the cure will almost certainly be worse than the disease. Most would agree, however, that if there are to be interventions these should work through market mechanisms (via tax impositions or incentives, trading rights of pollutants, and the like). Competitive failures are approached in a similar fashion. Rising transaction costs can be incurred as contractual and subcontractual relations proliferate. The vast apparatus of currency speculation, to take just one example, appears more and more costly at the same time as it becomes more and more fundamental to capturing speculative profits. Other problems arise when, say, all competing hospitals in a region buy the same sophisticated equipment that remains underutilized, thus driving up aggregate costs.

Flash Boys: A Wall Street Revolt
by Michael Lewis
Published 30 Mar 2014

Standing in front of the whiteboard, Brad now reviewed the problem at hand: It was unusual for an investor to direct his broker to send his order to one exchange, but that is what investors were preparing to do with IEX. But these investors had no way of determining if the Wall Street brokers followed their instructions and actually sent the orders to IEX. The report investors typically received from their brokers—the Transaction Cost Analysis, or TCA—was useless, so sloppily and inconsistently compiled as to be beyond analysis. Some of it came time-stamped to the second; some, time-stamped in tenths of microseconds. None of it told you which exchange you traded on. As a result, there was no way to determine the context of any transaction, the event immediately before it and the one immediately after.

Losing Control: The Emerging Threats to Western Prosperity
by Stephen D. King
Published 14 Jun 2010

Imagine, also, that the use of the renminbi in this way led to a partial displacement of the dollar. How would China fare in these circumstances? The likely appreciation of the renminbi against the dollar would leave China nursing losses on its foreign-exchange reserves. However, the wider use of the renminbi around the world would lower transaction costs for Chinese individuals and businesses. Ultimately, whether China gained or lost overall from this process would be an empirical question. Nevertheless, China’s own dependency on a monetary system created in Washington would gradually fade. In practice, of course, turning the renminbi into a reserve currency poses all sorts of difficulties.

Rethinking Money: How New Currencies Turn Scarcity Into Prosperity
by Bernard Lietaer and Jacqui Dunne
Published 4 Feb 2013

The demurrage fee thus ensures the Terras’ usage as a mechanism of exchange and not as a mechanism of savings. • Terra Operational Cost Coverage. The Terra demurrage fee is calculated to cover the costs of the entire operation of the Terra mechanism (e.g., storage costs of the basket, administrative overhead, transaction costs in future markets). The demurrage fees for a particular Terra transaction can be calculated by the following formula: (Terra Operation Costs/time unit) × (Terra holding period) × (Terras on account) = Demurrage Fee Let us assume that the TRC’s operation costs are evaluated at 3.65 percent per year, or 0.01 percent per day.

When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants
by Steven D. Levitt and Stephen J. Dubner
Published 4 May 2015

So there would still be men out there afraid of their wives finding out, and I still wouldn’t want to share my job title with my family. Q. Dubner and Levitt wrote that you have some economics training. Has that informed the way you think about your occupation? A. Sure, here are some examples: Dinner with friends = opportunity cost Perfect information = review sites Transaction cost = setting up an appointment Repeated game = reputation Product differentiation = not a blonde Seriously, I wish I had known then what I know now. Freakonomics Radio Gets Results (SJD) It’s nice to have a podcast that is popular, but it’s another thing to have a podcast that actually changes the world.

Nine Crises: Fifty Years of Covering the British Economy From Devaluation to Brexit
by William Keegan
Published 24 Jan 2019

At the time of the intense discussions that took place after our adventures with the ERM, when the pioneers were preparing to embark on the single currency – which began for the banking system in 1999 but for the European public, with notes and coins, in 2002 – much was made of the convenience the Eurozone would provide for both business and the public: no need to change into another currency within the euro area, and no transaction costs! This was of obvious appeal to the general public, not least for making holiday travel easier. The same issue arose when the Blair–Brown government went through the laborious process of weighing up the pros and cons of joining the single currency. But there were many other considerations than the convenience of travel, not least the sacrifice of sovereignty over monetary policy, and the freedom to devalue the currency against others – the loss of which the Italian economy has suffered from vis-à-vis competition from the much less inflation-prone German economy.

Skin in the Game: Hidden Asymmetries in Daily Life
by Nassim Nicholas Taleb
Published 20 Feb 2018

His style is so rigorous that he is known for the Coase Theorem (about how markets are very smart about allocating resources and nuisances such as pollution), an idea that he posited without a single word of mathematics, but which is as fundamental as many things written in mathematics. Aside from his theorem, Coase was the first to shed light on why firms exist. For him, contracts can be too costly to negotiate due to transaction costs; the solution is to incorporate your business and hire employees with clear job descriptions because you can’t afford legal and organizational bills for every transaction. A free market is a place where forces act to determine specialization, and information travels via price point; but within a firm these market forces are lifted because they cost more to run than the benefits they bring.

Mastering the Market Cycle: Getting the Odds on Your Side
by Howard Marks
Published 30 Sep 2018

Yet the one thing we know for sure is that, on average, all investors are average. Thus logic tells us they can’t all make above-average judgments. Empirical—Performance studies show that very few investors are consistently more right than others about those judgments. Most investors do worse than the markets, especially after the subtraction of transaction costs, management fees and expenses. That’s the reason for the rising popularity of passive index investing. That’s not to say no one beats the market. Lots of people do so every year, but usually no more than would be the case under an assumption of randomness. A few do it more consistently than randomness would suggest, and some of those become famous.

How Did We Get Into This Mess?: Politics, Equality, Nature
by George Monbiot
Published 14 Apr 2016

By extending intellectual property rights over every aspect of production, by developing plants which either won’t breed true or which don’t reproduce at all, it ensures that only those with access to capital can cultivate.13 As it captures both the wholesale and retail markets, it seeks to reduce its transaction costs by engaging only with major sellers. If you think that supermarkets are giving farmers in the UK a hard time, you should see what they are doing to growers in the poor world. As developing countries sweep away street markets and hawkers’ stalls and replace them with superstores and glossy malls, the most productive farmers lose their customers and are forced to sell up.

Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies
by Reid Hoffman and Chris Yeh
Published 14 Apr 2018

Companies like Uber subsidize their customers in an attempt to manipulate the demand curve to reach that tipping point faster; the bet is that losing money in the short term may allow you to make money in the long term, once you’re past the tipping point. One challenge that this approach produces is the (eventual) need to eliminate the subsidies in order to make the unit economics work. When I was at PayPal, one of the things we did to encourage adoption was to proclaim that the service would always be free. This meant eating the transaction costs of accepting credit card payments. I wish I could say we had a grand plan. We had hoped that we could make up for the credit card transaction fee subsidy by making money off the float—the funds being kept in PayPal. Unfortunately, this came nowhere close to offsetting the fee subsidies, and the company was hemorrhaging money.

Exodus: How Migration Is Changing Our World
by Paul Collier
Published 30 Sep 2013

But even so, those migrants who wish to honor their commitment may wish regularly to signal to their family back home that they are doing their best. This may explain one of the current paradoxes in the analysis of remittances, namely that migrants typically choose to make small regular payments home.7 From the naive economic perspective, small and regular is stupid. The transactions costs of making remittances include a fixed charge that heavily penalizes small transfers. It would be much cheaper for the migrant to accumulate cash and occasionally send a single large payment. The only big winner from the prevailing pattern of small-and-frequent appears to be the wire agency Western Union.

DIY Investor: How to Take Control of Your Investments & Plan for a Financially Secure Future
by Andy Bell
Published 12 Sep 2013

It should also be pointed out that investing directly into less developed markets overseas also carries political and regulatory risk. You can never be sure how politicians or other pressure groups are going to change the terms under which companies are allowed to operate in less developed economies. Tax considerations for overseas equities While UK share purchases attract stamp duty of 0.5 per cent of the transaction cost, overseas equities do not. That said, France has introduced a transaction tax, and with governments around the world looking for new ways to raise cash, there is no guarantee others won’t follow suit, so check online what the rules are in the country you are planning to invest in before making too many trades, as these dealing costs will hit your returns.

After the Gig: How the Sharing Economy Got Hijacked and How to Win It Back
by Juliet Schor , William Attwood-Charles and Mehmet Cansoy
Published 15 Mar 2020

But what if the early optimism was partly right, in the sense that the technology could help satisfy those aspirations? While technology doesn’t guarantee outcomes, it does open up possibilities. Digital technology is remaking the economics of many sectors by offering convenience through reducing transactions costs, creating new mechanisms for ensuring trust, and developing ways to deploy excess capacity. The enthusiasts got that part right. What they missed was that in order to realize the full benefits of the technology, the social relations under which people are “sharing” also have to change.63 Instead of private ownership and a conventional market orientation, which have pulled the companies toward business-as-usual, the sector would need to go deeper into sharing.

Ask Your Developer: How to Harness the Power of Software Developers and Win in the 21st Century
by Jeff Lawson
Published 12 Jan 2021

Thanks to software, it’s just as easy to do that for medical staff as it is for ride shares. Only the delusion that there’s no connection between software and patient care prevents that from becoming the norm. The digital revolution is fundamentally rewriting the rules of general management. Software simultaneously lowers transaction costs, demolishes barriers to entry, and accelerates the pace of change. Companies—and institutions—that cannot cope with this pace and intensity will cease to be relevant. There are few people in the world who are experienced both as software developers and as business executives. That’s what makes Jeff so unique: he has feet in both worlds.

Framers: Human Advantage in an Age of Technology and Turmoil
by Kenneth Cukier , Viktor Mayer-Schönberger and Francis de Véricourt
Published 10 May 2021

“No matter who you are, most of the smartest people work for someone else,” chirped the consummate Silicon Valley geek Bill Joy in the 1990s. Even if an organization is able to attract diverse members to its teams, the most appropriate mental models may be held by individuals elsewhere, especially for tough reframing challenges. The internet lowers the transaction costs of involving outsiders, underpinning the open-innovation, crowdsourcing platforms like InnoCentive and Kaggle. They don’t simply bring together different people but their diverse frames. At times the approach works extremely well. The Japanese company Cuusoo created a site for fans to share Lego ideas.

Networks, Crowds, and Markets: Reasoning About a Highly Connected World
by David Easley and Jon Kleinberg
Published 15 Nov 2010

The one qualification that is necessary in Coase’s argument (that initial ownership is irrelevant) is that it ignores transaction costs and simply assumes that negotiation beginning from any assignment of property rights will lead to an efficient outcome. As we noted in the smoking example this is not plausible when many individuals are involved in the negotiation. Similarly, in the case of pollution, establishing marketable pollution rights is more likely to minimize transaction costs and lead to socially optimal outcomes. 24.2 The Tragedy of the Commons In a 1968 article in Science, entitled “The Tragedy of the Commons” [204], Garrett Hardin offered a compelling story about the inevitable “tragedy” of commonly shared resources.

…

It is worth pointing out that social optimality is unlikely to mean there would be no pollution. Instead, it simply requires that the amount of pollution, like the amount of all other goods, is determined so that there is no reallocation that improves welfare. But also just as in the case of the restaurant, the transaction costs involved in negotiation between the power plant and all those affected by its activities may be prohibitive. Mechanisms for Determining Socially Optimal Allocations. One difficulty with using property rights and mutually agreeable compensation to determine the socially optimal allocation in our power plant example is the following: how do we discover the true amount of harm created by the pollution?

What Would Google Do?
by Jeff Jarvis
Published 15 Feb 2009

Tobaccowala defines advertising as “the economics of information” (the title of a 1961 essay by Nobel laureate and University of Chicago professor George J. Stigler). Advertising is supposed to tell us about a product or its price so we can save effort, time, and money in our search for it. The internet has made that much more efficient. If the customers’ goal is to reduce their transaction cost—the effort to find the right product at the right price—then doesn’t the internet itself replace advertising? Often, yes. A 2007 economics honors thesis by Daniel A. Epstein compared the pricing of similar cars listed in expensive newspaper ads with cars listed for free in craigslist. His hypothesis was that sellers who pay to advertise would want to price cars lower to sell more quickly so they would spend less on advertising.

The Power of Pull: How Small Moves, Smartly Made, Can Set Big Things in Motion
by John Hagel Iii and John Seely Brown
Published 12 Apr 2010

Second, during the 1950s, another generation of business leaders broadened their horizons to scale push programs beyond national boundaries to take advantage of trade liberalization and to serve global markets. It is no coincidence that the famous British economist Ronald Coase wrote his path-breaking essay, “The Nature of the Firm,” in 1937.4 He effectively captured the primary thrust of institution-building during this period, arguing that firms existed to reduce the transaction costs that made coordinating activity across independent entities difficult. For this insight, he won the Nobel Prize in Economics. As firms deployed these new push-based approaches, other institutions underwent similar transformations. Educational systems were rationalized through push-based programs of their own—standardized curricula—that were designed to mold students into predictable participants in the workplace.

Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown
by Detlev S. Schlichter
Published 21 Sep 2011

Holding the monetary asset thus involves opportunity costs. The one essential advantage that the monetary asset has over all other goods and services is its general acceptance in return for goods and services. Like no other asset, it can be exchanged for any other good or service instantly and with no or minimal transaction costs. This marketability gives its owner a flexibility that no other good can provide. The demand for money is demand for readily usable purchasing power. People have demand for money because they want to be ready to trade. The demand for money can also be called the demand for cash holdings although the term demand for money will be used here.

Monte Carlo Simulation and Finance
by Don L. McLeish
Published 1 Apr 2005

In this case, the equation specializes to −rV + ∂V ∂V σ2 S 2 ∂ 2 V = 0. + (r − D0 )S + ∂t ∂S 2 ∂S 2 (2.38) Note that we have not used any of the properties of the particular derivative product yet, nor does this differential equation involve the drift coefficient µ. The assumption that there are no transaction costs is essential to this analysis, as we have assumed that the portfolio is continually rebalanced. We have now seen two derivations of parabolic partial differential equations, so-called because like the equation of a parabola, they are first order (derivatives) in one variable (t) and second order in the other (x).

The Data Revolution: Big Data, Open Data, Data Infrastructures and Their Consequences
by Rob Kitchin
Published 25 Aug 2014

It is generally argued by open data advocates that securing a stable financial base for open data within and outside the state is best achieved by direct government subvention of the costs. Proponents of this approach argue that the increased public expenditure is offset in four ways. First, enabling direct access to the data can reduce some of the producers’ transaction costs, such as staffing required for marketing, sales, communicating with customers, and monitoring compliance with licence arrangements (Pollock 2006). Second, the open model can leverage free additional labour and innovation from the crowd of users that adds significant value to the dataset and for the organisation in terms of data quality, analysis and derived knowledge, new products and innovations, and new relationships and partnerships (de Vries et al. 2011; Houghton 2011).

Starstruck: The Business of Celebrity
by Currid
Published 9 Nov 2010

Mark Lorenzen, a professor at the Copenhagen Business School in Denmark and expert on the Indian film industry, explains that Bollywood creates stars through very informal networks. The industry is almost completely organized through very close ties among people who have worked together year after year. “The family-based system tends to govern the whole system,” Lorenzen says. “On one hand, [this system] has controlled the negotiations and transaction costs. On the other hand, it has limited Bollywood from becoming really professional like Hollywood. No publishing houses, no conglomerates, no real agents. The stars are represented by their wife or secretary. Everyone knows everyone so you don’t really need an agent. Everybody is in the inner circle: There are twenty to twenty-five producers and directors, and in that inner circle maybe one hundred people who know everyone.

Traders at Work: How the World's Most Successful Traders Make Their Living in the Markets
by Tim Bourquin and Nicholas Mango
Published 26 Dec 2012

It’s like putting a scale or a ruler or some measuring device against a rhythm and a pattern that you’re very familiar with, and you’re getting confirmation of that with technical analysis. Bourquin: How does being a member of the CME give you an advantage in your trading? Miller: Reduced transaction costs. And for those that do engage in frequent transactions over the course of the day, which I certainly do, and as an incentive to help increase the liquidity in the markets, the exchanges allow people to either buy seats on the exchange or, in my case, lease a seat for a very modest monthly amount.

Market Sense and Nonsense
by Jack D. Schwager
Published 5 Oct 2012

In effect, the intrinsic value is that part of the premium that could be realized if the option were exercised at the current market price. The intrinsic value serves as a floor price for an option. Why? Because if the premium were less than the intrinsic value, a trader could buy and exercise the option and immediately offset the resulting market position, thereby realizing a net gain (assuming that the trader covers at least transaction costs). Options that have intrinsic value (i.e., calls with strike prices below the market price and puts with strike prices above the market price) are said to be in-the-money. Options that have no intrinsic value are called out-of-the-money options. Options with a strike price closest to the market price are called at-the-money options.

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe
by Greg Ip
Published 12 Oct 2015

Starting in the early 1980s, state antiusury laws were repealed and lenders began extending credit to groups that had long been denied, in particular minority and lower-income families. Loan denial rates dropped sharply, marking the birth of the subprime loan market. In the mid-1990s, Bill Clinton pushed hard to ease financial barriers to home ownership; his National Home Ownership Strategy pressed lenders and regulators to lower down payment requirements and reduce transaction costs in an effort to boost home ownership, “fueled by the creativity and resources of the private and public sectors.” That making home ownership easier would be politically popular was neither surprising nor new. What is striking when we look back at the 1990s and 2000s is that economists, who knew very well the risks of excessive debt, were so sanguine.

No Ordinary Disruption: The Four Global Forces Breaking All the Trends
by Richard Dobbs and James Manyika
Published 12 May 2015

A platform that started out allowing people to trade used Beanie Babies and baseball cards has evolved into an international bazaar where everything from small cities (Bridgeville, California, has been auctioned three times since 2002) to a $28,000 partially eaten grilled cheese sandwich bearing an image of the Virgin Mary changes hands.1 The $2,642 worth of goods that trade on eBay every second symbolizes the peer-to-peer business opportunities it has enabled for small businesses.2 By 2002, when eBay grew to become a $1 billion revenue business, many believed it to be unstoppable.3 With its low transaction costs and overhead, eBay forged a business model that could scale rapidly—and posed a threat to a host of retailers. In 2003, eBay, fresh off its success in the United States, plunged into the nascent Chinese e-commerce market. By 2005, according to Forbes, eBay had one-half of the country’s $1 billion e-commerce market.

The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies
by Erik Brynjolfsson and Andrew McAfee
Published 20 Jan 2014

.* Remember that productivity growth has been in the neighborhood of 2 percent per year for most of the past century, so contribution of new goods is not a trivial portion. Reputations and Recommendations Digitization also brings a related but subtler benefit to the vast array of goods and services that already exist in the economy. Lower search and transaction costs mean faster and easier access and increased efficiency and convenience. For example, the rating site Yelp collects millions of customer reviews to help diners find nearby restaurants in the quality and price ranges they seek, even when they are visiting new cities. The reservation service OpenTable then lets them book a table with just a few mouse clicks.

Rethinking the Economics of Land and Housing
by Josh Ryan-Collins , Toby Lloyd and Laurie Macfarlane
Published 28 Feb 2017

Increasingly, the model favours the generation of profits through the securitisation and selling on of loans, with the most popular type of securitised loan being residential mortgage-backed securities. The imperatives of short-term shareholder value both incentivise excessive risk-taking and mean that lending to SMEs – involving high transaction costs for relatively small loans – does not make business sense for larger banks (Berger and Udell, 2002). By contrast, in other countries, for example Germany, Switzerland and Austria, there is a much stronger culture of ‘relationship banking’. In Germany, two-thirds of bank deposits are controlled by either cooperative or public savings banks, most of which are owned by regional or local people and/or businesses.

The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril
by Satyajit Das
Published 9 Feb 2016

Unlike businesses, houses, once constructed, produce limited income, profits, employment, or investment. Overinvestment also reduces the mobility of workers, creating an inflexible labor force. The ability to follow employment opportunities is restricted by fluctuations in house prices, the time often needed to sell properties, and high transaction costs (buying and selling can cost 5–15 percent of value). Overinvestment also limits wage flexibility, as workers are constrained by their mortgage payments. The link between higher rates of home ownership and the wealth of nations is tenuous. The US, UK, and Australia have home ownership rates of around 65–70 percent.

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett
by Jack (edited By) Guinan
Published 27 Jul 2009

A mutual fund sold without a sales charge or commission. This is the opposite of a load fund, which charges an up-front commission, usually levied as a percentage, for example, a 3% front-end load, or as a level-load for as long as the investor holds the fund. Investopedia explains No-Load Fund Because there is no transaction cost to purchase a no-load fund, all the money is invested in the fund. For example, if an investor 202 The Investopedia Guide to Wall Speak purchases $10,000 worth of a no-load mutual fund, the whole $10,000 will be invested in the fund. In contrast, if an investor buys a load fund that charges a front-end load (sales commission) of 5%, the amount actually invested in the fund is only $9,500.

Barometer of Fear: An Insider's Account of Rogue Trading and the Greatest Banking Scandal in History
by Alexis Stenfors
Published 14 May 2017

Instead, the behaviour failings were seen as a convention that ‘had anticompetitive consequences and was harmful to the interests of investors’.21 In 2014, the European Commission fined a handful of market makers for agreeing: to quote to all third parties wider, fixed bid–offer spreads on certain categories of short-term over-the-counter Swiss franc interest rate derivatives, whilst maintaining narrower spreads for trades amongst themselves. The aim of the agreement was to lower the parties’ own transaction costs and maintain liquidity between them whilst seeking to impose wider spreads on third parties. Another objective of the collusion was to prevent other market players from competing on the same terms as these four major players in the Swiss franc derivatives market. In this case, the collective behaviour of RBS, UBS, J.

What Algorithms Want: Imagination in the Age of Computing
by Ed Finn
Published 10 Mar 2017

In 2014, Google exceeded the market capitalization of ExxonMobil, leaving it second only to Apple among the most valuable companies in the world.16 The typical Google advertisement nets the company some tiny fraction of a penny to serve up to a customer, but over the volume of the tens of billions of ads it serves each day, those fractions add up to a kind of minimal transaction cost for using the Internet, collected by its most powerful gatekeeper.17 The functionality of AdSense is in fact a kind of HFT arbitrage in its own right: every time a user navigates to a site serving advertisements via Google’s network, a rapid auction takes place for the marketers with the highest bids to serve their ads.