Friday, February 22, 2013

Beginning with the letter-A: Arbitrage

Another in a series beginning with the Letter-A:

It’s better to understand arbitrage in the light of the circumstances that generate it, than to consider its success in the light of the disadvantaged.

“Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures, the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind and greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the U.S.A.” (quote by Gordon Gekko, from Wall Street, a Sony Pictures movie ©2001). Replace “greed” in Mr. Gekko’s speech with the word arbitrage.

Arbitrage: the root of a French word for referee or umpire, seemingly natural but at the same time unfair: jungle rules of market economics are realistic but not pretty. A mismarked item in a retail store rarely comes to the attention of the manager; on the contrary, a typical consumer buys as many mismarked widgets as they can afford.

Used as a verb, arbitrage means to make a strategic play, taking advantage of a situation for a quick gain: if we arbitrage futures on crude oil prices, based on our proprietary research, the profits can be huge!

Arbitrageurs gain an advantage because of sudden price differences between markets, statistically seizing the vyigrysh or “winnings” in Hebrew; however in another way, arbitrage means taking the lead, in a mismatch of circumstances and at a disproportionate risk ratio, compared to another. Gordon Gekko rose to Wall Street prominence by legally flipping real estate: buying distressed assets and quickly making them ready to market. But in a larger sense, Gekko’s evolutionary spirit expressed in arbitrage can be analyzed in light of the idea expressed by Jewish philosopher Leo Strauss, “it is better to understand the low in the light of the high, than the high in the light of the low.”

While price gouging after a hurricane is illegal, and illegal interest is called usury; in some cases, arbitrage means getting on top of the opponent when the opportunity arises. As an example, arbitrage could be perceiving a tendency of a quarterback on third down and returning an interception for a touchdown. It’s the right thing to do; arbitrage works within the rule of law.
In non-economic terms:

The emotional needs of young, gifted kids are as unique as emotionally challenged kids, but the funding does not reflect it. It is reverse-arbitrage. Does no child left behind require that no child can get ahead?

I realize educators are presented with a wide range of children labeled as gifted: from quiet and emotionally sensitive to chatty and rambunctious; and these students can be very challenging to engage in the teaching routines of a normal school day. However, a 2008 Fordham Institute report found that, while low-achieving students have made gains, and are tracked and funded assiduously; advanced-learners (making up 6% of students) are "languishing," and that teachers must spend the majority of their time with struggling students even though they know that others in the classroom need attention as well. This anti-arbitrage educative scenario is risky for our future.

Is the US willing to lose innovative leaders and develop fewer breakthroughs because of the untapped potential of its gifted & talented young people?

During the Sputnik crisis of 1958, education programs were initiated to foster a new generation of engineers; the country appreciated the need for gifted students to be funded, supported, nurtured, and developed, so that for strategic reasons America was competitive in the space exploration race. We don’t see a shiny-orbed satellite racing across the night sky to remind us that we are falling behind. The reminders trudge off to elementary and middle schools every academic cycle, not reaching their GT potential for lack of attention, and funding; the opportunity to take the lead in the world, passes us daily.

©Mark H. Pillsbury

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