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09-Sep-2006
Beneficent Circles, by Victor Niederhoffer

To what extent do vicious circles and beneficent circles work? Here is one that works for economic growth inspired by the division of labor:

Increasing the division of labor leads to enhanced output from improvements in the productivity of labor. This increases incomes and demand, and leads to larger markets. With larger markets, more division of labor can occur starting the circle over again. A break down in the relation between any of the links in the circle can stop the circle from working, and a negative chance in any of the sources can turn the circle into a vicious one.

A trading circle might work as follows. Good research leads to enhanced trading results, which leads to more capital, which enables more research to be made. The problem is that as you get too big, you tend to use up all the easy opportunities for profits in your field. And your research tends to bring you into new fields where you are not specialized to succeed.

How often do we see that when a system is applied to one market that it has never been tested for it fails. I understand a trader applied his methods for US stock markets once to markets in S.E Asia and went under by not properly taking account of the importance of the division of labor. On another front, I hear of a company that made most of its money by trading futures markets, applying its methods to individual stocks with the hubristic thought that the methods are transferable, and that brain power is directly related to success, and that foreign brain power is much superior to American. I wonder when the circle break down and become vicious in that instance?