I am having difficulty understanding the outrage against JPMorgan. Well, I understand the story and what media is trying to say. But that is not the whole story. More importantly, if any measures are taken and they are based on incomplete information lead to unintended results, ironically, similar to JPMorgan loss, again. That is, the “monster” replicates itself over and over again.
Let me clarify my point.
- JPMorgan made bad decisions.
- JPMorgan lost the money.
- Other parties made the money – no one bothers even to suggest who made the money. I do not even mention suggesting why other parties made a good decision. But it is clear, wealth does not disappear that easy.
- The government wants to introduce more regulation based on incomplete information. Sadly enough, that regulation would apply to those who make bad decisions and those who make good decisions, but would cost almost equally for many market participants.
- If regulation is based on incomplete information, it leads to unintended results.
- Like I already said, the situation repeats.
So I do not understand why it is okay for other investors to loose money and not okay for JPMorgan and why it is okay for JPMorgan to profit and not okay for other investors.
After my post I received a couple of arguments:
- “You are confusing concepts of price and cost“. I guess I gave a bad example. A better example would be a market of wireless spectrum or a competition between airlines for airport takeoff and landing allocation. I am standing still on the fact that these examples tell a lot about revealed preferences. I have more to add to this topic (below).
- “Multilateral exchanges involving multiple resources should be considered in monetary equivalents“. I disagree with this point as multilateral exchanges with multiple resources appeared well before the invention of money, shortly after human started experimenting with division of labor in early ages.
Right after my post I decided to search for papers on this topic and came across an excellent work (from which I gave examples to respond to argument #1) done by David Parkes et al. at Harvard University. As I wrote in my comment, based on this paper, what I am looking at is a combinatorial exchange that combines and generalizes two different mechanisms: double auction (multiple buyers and sellers, an identical good) and combinatorial auction (single seller has multiple heterogeneous items up for sale). The concept of price does appear in the context of combinatorial exchanges. It also appears that combinatorial exchanges are able to handle much more complex logic, like AND, OR, XOR.
Putting complexity aside, combinatorial exchanges (and even combinatorial auctions) allow to get much more accurate picture of demand (even with very few buyers) thanks to revealed preferences. This lands itself for great opportunities in marketing and not only there. But one should use this information with caution as complexity may skew numbers.