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> Since then, pricing using a replication portfolio in this way has been a cornerstone of financial maths - the price of a thing and a perfect hedge/replacement

by runeks 5y ago

> Since then, pricing using a replication portfolio in this way has been a cornerstone of financial maths - the price of a thing and a perfect hedge/replacement for the thing must be the same. And the reason for this is arbitrage. If you can perfectly hedge your position in Asset A using Asset B (and vice versa), then you can make a profit by simultaneously buying the lower-priced asset while selling the higher-priced asset[1]. Thus causing the prices of the two assets to converge. [1] Many of these assets are simply contracts, which means you don’t have to buy the asset before you can sell it: you simply create a new instance of by “writing something on a piece of paper” and sell that.

lifeisstillgood 5y ago
Is the implication here that if we had a Black/Scholes/Merton method for salaries we would see a readjustment of salaries across the board as people could identify their value as wins above replacement - probably a huge shock to CEOs. Is it possible that automation provides that arbitrage opportunity?
- sokoloff 5y ago
  The gap between the perfect fungibility of two contracts for asset A or B and the hopelessly imperfect fungibility of two employees is too wide for this to hold. (I think.)
  - lifeisstillgood 5y ago
    But ... Amazon for example redesigns i are ouse picking to make employees fungible. I am pretty sure project management is becoming totally fungible - the reporting and chasing and so forth, can be replaced by automation and is becoming so despite best efforts of millions of "mqnagers" Something intrigues me about this idea. The film / book "Moneyball" showed how to re-create great players "in the aggregate". I think that we will soon enter a phase of "MOOP" - measuring our daily activities on a deep basis, phone calls to colleagues and clients, tonality, agreements and actions etc. And at this point redesigning an organisation to recreate CFOs or salespeople "in the aggregate" becomes ... possible? And if you can do that you get close to the ability to create that fungible option - and close to valuing the job.
    - sokoloff 5y ago
      Your first line has some auto-correct line noise in it, but I think I get the gist of your post. Moneyball to me was a lesson and framework on how to make great teams, not great [individual] players. Focusing on under-valued qualities allowed the A’s to build a pennant-winning team on a low budget, by selecting free-agent players the baseball operations groups at other teams were over-looking/under-valuing. Coming back to software, I think many of us know the three people we’d go form a startup with and the 50% of people who might be okay but we’d never sign up to start a company with. I don’t know if that is amenable to a Moneyball-style spreadsheet analysis though. If it is, VC firms would pay billions in aggregate for a working system.
  - seanhunter 5y ago
    Well one interesting implication of your insight here is that the more fungible/replaceable your skills are as an employee, the easier it is for the market to accurately price your labour and the less pricing power you have. Conversely niche skills would mean a large variance in compensation due to price uncertainty ("I can't just go out and hire an exact replacement for sokoloff!"), and if there is demand for those niche skills it should mean high comp overall. And that's what we see in general in the labour market.
    - sokoloff 5y ago
      Agree. I think an additional corollary is the wider gap between say $50K/yr and the value possible to create (as roughly capped by the gross margin fraction of sales/employee), the more variability you’ll see. For a Subway sandwich artist, not only is the production process standardized (making “exact [practical] replacement” possible), but the value is also capped by how many sandwiches are sold on a given shift. No sandwich artist will make 5x as many as another. Rarely will excellence in an individual employee result in a sharp uptick in sales. For a company that sells online ads, cloud computing, streaming services, or software that cap is so much higher as to be practically irrelevant for many roles.

by runeks 5y ago

lifeisstillgood 5y ago

Is the implication here that if we had a Black/Scholes/Merton method for salaries we would see a readjustment of salaries across the board as people could identify their value as wins above replacement - probably a huge shock to CEOs. Is it possible that automation provides that arbitrage opportunity?

sokoloff 5y ago
The gap between the perfect fungibility of two contracts for asset A or B and the hopelessly imperfect fungibility of two employees is too wide for this to hold. (I think.)
- lifeisstillgood 5y ago
  But ... Amazon for example redesigns i are ouse picking to make employees fungible. I am pretty sure project management is becoming totally fungible - the reporting and chasing and so forth, can be replaced by automation and is becoming so despite best efforts of millions of "mqnagers" Something intrigues me about this idea. The film / book "Moneyball" showed how to re-create great players "in the aggregate". I think that we will soon enter a phase of "MOOP" - measuring our daily activities on a deep basis, phone calls to colleagues and clients, tonality, agreements and actions etc. And at this point redesigning an organisation to recreate CFOs or salespeople "in the aggregate" becomes ... possible? And if you can do that you get close to the ability to create that fungible option - and close to valuing the job.
  - sokoloff 5y ago
    Your first line has some auto-correct line noise in it, but I think I get the gist of your post. Moneyball to me was a lesson and framework on how to make great teams, not great [individual] players. Focusing on under-valued qualities allowed the A’s to build a pennant-winning team on a low budget, by selecting free-agent players the baseball operations groups at other teams were over-looking/under-valuing. Coming back to software, I think many of us know the three people we’d go form a startup with and the 50% of people who might be okay but we’d never sign up to start a company with. I don’t know if that is amenable to a Moneyball-style spreadsheet analysis though. If it is, VC firms would pay billions in aggregate for a working system.
- seanhunter 5y ago
  Well one interesting implication of your insight here is that the more fungible/replaceable your skills are as an employee, the easier it is for the market to accurately price your labour and the less pricing power you have. Conversely niche skills would mean a large variance in compensation due to price uncertainty ("I can't just go out and hire an exact replacement for sokoloff!"), and if there is demand for those niche skills it should mean high comp overall. And that's what we see in general in the labour market.
  - sokoloff 5y ago
    Agree. I think an additional corollary is the wider gap between say $50K/yr and the value possible to create (as roughly capped by the gross margin fraction of sales/employee), the more variability you’ll see. For a Subway sandwich artist, not only is the production process standardized (making “exact [practical] replacement” possible), but the value is also capped by how many sandwiches are sold on a given shift. No sandwich artist will make 5x as many as another. Rarely will excellence in an individual employee result in a sharp uptick in sales. For a company that sells online ads, cloud computing, streaming services, or software that cap is so much higher as to be practically irrelevant for many roles.