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Thursday, September 27, 2012

 

A Look at the Logic

In The Rise and Decline of Nations, Mancur Olson examines several questions - why certain places and peoples thrive at certain times, fir example - and starts his analysis of the questions by looking at the logic that governs groups. Smaller groups can take action more effectively because each member has a stake in the outcome, whereas larger groups of people have less individual incentive to participate fully, because there is less individual gain, unless there is some kind of requirement or punishment for failing to participate.

An interesting extrapolation of this can be seen in the article "Futures exchange members get relief on margin rule," a Reuters article that I saw in the Chicago Tribune. As the article explains, there are two margin rates that futures investors pay. One is a lower rate for people who are not professional speculators, who pursue less risky money, and a "speculator" rate for those that do. However, the pro speculators have apparently been paying only the lower margin, because a rule is set to be enacted by the Commodity Futures Trading Commission that will require them to pay the higher margin.

So, in order to get the most from each trade, the speculators managed to pay the lower margin and therefore reap more of a return. And it makes a certain amount of sense; futures are risky even to those who understand them, so why not take every (legal) avenue to reduce that risk, even minutely? But this was at the expense of the trade organizations, the group that allows them to trade futures. Therefore, they were working in tune with the logic.

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