Trading Places

David Swenson, who is chief investment officer at Yale University in charge of managing and investing its endowment assets, explained security selection as a tool of the investment professional: “One of the really important facts about security selection is that if you play for free, it’s a zero sum game. Because if you’re overweight on Ford and underweight on GM, there has to be some other investor, or group of investors, that are underweight on Ford or overweight on GM, because this is all relative to the market. And so, if you are overweight on Ford and underweight on GM, and somebody else is underweight on Ford and overweight on GM, but at the end of the day the amount by which the winner wins equal the amount by which the loser loses. And so it’s a zero sum game. But of course, if you take into account the fact that it costs money to play the game, it turns into a negative sum game.”

Professor Robert Shiller explained Fisher’s Theory of Interest by way of an example (i.e., Crusoe A and Crusoe B on an island): “You can see that both A and B have achieved higher utility than they did when they didn’t trade. So this is the function of a lending market. A who wants to consume a lot this period, the production point is here, and B lends this amount of consumption to A, so that A can consume a lot, A can consume this much. B, since he’s lent it to A, consumes only this much this period. But you see they are both better off. They’ve both achieved a higher indifference, a higher utility.”

So the question here is: What really happens when you “trade” with another?

  • (a) Are you better off if and only if your counter-party is worse off (as in the stock trading example with Ford and GM)?
  • (b) Are you both better off (as in the island economy with Crusoe A and B)?
  • (c) None of the above (John Locke said “words” like “trading” get us all confused)?

Is “trading” in the “financial market” fundamentally different from trading in David Ricardo's “goods and services” market? Does Ricardo assume perfect information about the market, known to all participants? Does the concept of time even play a role in Ricardo’s model?

Is this how we trade fundamentally related yet relatively mispriced assets? All based upon differences in one’s  preferences ,  circumstances , and  predictions  about the future?

Is this how we trade fundamentally related yet relatively mispriced assets? All based upon differences in one’s preferences, circumstances, and predictions about the future?

Philip Maymin offered a parable that illuminates interesting aspects of financial trading. It goes as follows: A non-Jew once approached the two leading rabbis two thousand years ago. He asked the first to teach him the whole Torah while standing on one foot: in other words, quickly. The first rabbi chased him away with a stick.

The non-Jew asked the second rabbi, named Hillel. Hillel answered, and his response encoded what has come to be known as the golden rule: “What is hateful to you, do not do unto others. This is the whole Torah; the rest is commentary. No go and study.”

According to Maymin, there are three important aspects here. First, the real Golden Rule of Hillel is not what you might usually think. He does not say to treat others as you would like them to treat you. Instead, he says to refrain from treating others as you would not like them to treat you. It is the difference between a command to do good and a command to abstain from evil. It is impossible to fulfill the duty to do good; one can always do more, and the goodness itself subjectively depends on others. But it is possible to fulfill the duty to abstain from evil: one can simply not hurt others, and the harm, if done, is more objectively noticeable.

Second, Hillel’s wisdom frames all ethical knowledge and teachings around this simple principle. In this way, when details begin to confuse, as they always tend to do, one can retreat to the big picture to see how it all fits in.

Third, Hillel points out that the Golden Rule is not the end of knowledge but rather the beginning. The important thing is not what you know, but what you have yet to find out.

If Hillel were a trader today, and a non-trader were to ask him to teach him all there is about financial hacking while standing on one foot, one would imagine Hillel might answer something like this: “Accumulate risks that are hateful to others; dispose of risks that are hateful to you. That is the whole of financial hacking; the rest is commentary. No go and trade.”


  1. Maymin, Philip Z. (2012). Financial Hacking: Evaluate risks, price derivatives, structure trades, and build your intuition quickly and easily. World Scientific.
  2. Sharpe, William F. (1993). Nuclear Financial Economics. Research Paper 1275, Stanford University. Retrieved from:
  3. Bouchaud, Jean-Philippe and Farmer, J. Doyne and Lillo, Fabrizio (2008, September 11). How Markets Slowly Digest Changes in Supply and Demand. Available at SSRN: or