Jan

4

Fred and Mike are pals who both trade for the same hedge fund. Their compensations depend mostly on their individual efforts, but also on each other, because if both gain for the firm there is more profit to divide at year end. In addition to this, there is a competitive status hierarchy related to individual results.

This seems close to the “Liberal Paradox”, exemplified here (an excerpt from Wikipedia) by ranked desires of a couple contemplating a chick flick:

Suppose Alice and Bob have to decide whether to go to the cinema to see a chick flick, and that each has the liberty to decide whether to go themselves. If the personal preferences are based on Alice wanting to be with Bob and thinking it is a good film, and on Bob wanting Alice to see it but not wanting to go himself, then the personal preference orders might be:

Alice wants: both to go > neither to go > Alice to go > Bob to go Bob wants: Alice to go > both to go > neither to go > Bob to go There are two Pareto efficient solutions: either Alice goes alone or they both go. Clearly Bob will not go on his own: he would not set off alone, but if he did then Alice would follow, and Alice’s personal liberty means the joint preference must have both to go > Bob to go. However, since Alice also has personal liberty if Bob does not go, the joint preference must have neither to go > Alice to go. But Bob has personal liberty too, so the joint preference must have Alice to go > both to go. Combining these gives

Joint preference: neither to go > Alice to go > both to go > Bob to go and in particular neither to go > both to go. So the result of these individual preferences and personal liberty is that neither go to see the film.

Now back to the traders … (+ = up, - = down):

Fred wants: [I](F+/M+,F>M) > [II](F+/M+,F(F+/M-,F>M) > [III](F-/M-,F>M) > [IV](F-/M-,F(F+/M+,F>M) > [V](F-/M+,F(F-/M-,F(F-/M-,F>M)

In scenarios I - III, individual competition shows because concern about the firm is mooted, (both traders are up). II > (III and IV) shows that the trader prefers the community wins, even if he is beaten by his friend. And V is the least preferable, with the community losing and the trader losing to his buddy.

Individual vs. community relates to team sports, the question of individual achievement over the team, competitive sales groups, and the dynamics of group endeavors in general. Even if there are advantages to trading solo, ostensibly they are out-weighed by owning part of the “house” (working with other’s capital) and reduced risk resulting from multi-trader strategy diversification.


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