Realignment of Incentives

How do we reconnect risk producers with consumers?

In a free market, risk producers consume the risk. It is not disconnected and consumers are empowered to sanction producers, not the other way around.

In a free market, producers are directly accountable to consumers. This is what it means to "take the risk." Risk does not accumulate systemically but distributes divisibly. Divisibility empowers consumers until industry and markets consolidate to avoid the risk (and consolidate power).

Consolidation does not avoid or reduce risk. It accumulates risk into a crisis (non-pluralistic, gamma-risk) proportion like we have now. Risk producers maximize reward by offsetting risk--sticking consumers with all the risk by minimizing the ability (the power) to control it.

"The risk" is always present. It is constant but can be proportionally manipulated to cause economic expansion (add supply) or contraction (reduce demand). Making sure the proportion is modeled pluralistically adds supply and is SPO (Strong Pareto Optimal). Consumers are fully empowered to sanction and producers make a profit and get rich without accumulating systemic-risk detriment.

Allowing the free market to consolidate reduces demand and causes the need for government authority and spending. The risk becomes disconnected and the power to self-determine becomes more and more authoritarian (consolidated) with the philosophical legitimacy that "We the People" are too unsophisticated to rule our own lives. This lack of sophistication is, however, nothing but the lack of pluralistic modeling that empowers "We the People" to self-determine.

Self-determination is exactly what our want-to-be rulers do not want us to have. It is what our fearless leaders fear the most. If everybody actually has the power to self-determine, then it is possible to determine "We" do not want, or need, them. Not only is it more possible, it is more probable because it forces them to take the risk rather than make it.

A more pluralistic model will realign the incentives, reconnecting risk producers with consumers.

The Gamma-Risk Proportion

The latest example is supply added from the Strategic Petroleum Reserve.

Remember, not too long ago, traders were warned on this web site not to be surprised when a sudden SAR occurs in the energy market. With a cartel fixing the price, extensive horizontal and vertical integration, and copious amounts of speculative demand, the support for prices seems firmly in "control." There is, however, significant political risk that accumulates with the reward (see the article, "When Risk Converges with Reward").

Accepting accumulation of political risk to be a predictive indicator is cognitively dissonant because we are supposed to be working with a free-market model that ontologically processes risk in a legitimate, "uncontrolled," pluralistically consensual proportion. It is critical, however, not to ignore all the risk. Whether balancing the household budget or the national budget, it is critical to model the fullest extent of the risk proportion. Including all the risk factors will accurately model the probable direction of risk, which determines the position of the reward at any particular time.

Nor should traders be dismayed with the sudden reversal. If you were surprised--being long oil, for example, when you should have been short--it is because of faulty, analytical modeling. If you were using a pluralistic model, you failed to see the sudden change because of an ideological, confirmation-bias that falsely assumes we are operating with a free-market legitimacy. We are not!

The predictive model is the bureucratic model. While this model has pluralistic elements, it is largely dependant on executive administration of power. Whether big-business or big-government, risk is deliberately managed to consolidate into a gamma (accumulatively political), administrative proportion. Risk is deliberately organized to be in command and "control" from the top down (i.e., to minimize its otherwise probable, consensual direction).

Identifying the proper predictive model to arbitrage profits from false assumptions largely begs the question, however.

Will ensuring a more pluralistic, consensual, working model stabilize our economy? Are we not more likely to promote growth (cause a distribution from the accumulation) and pay down debt by deconsolidating the risk proportion rather than continue its deliberate, organized consolidation into a too-big-to-fail (gamma-risk) proportion?

Is being even more too-big-to-fail the cure for being too-big-to-fail?