The entrepreneur shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.
- Jean-Baptiste Say
Welcome to part 10 of the series on “How to be a game changer”. You can find the previous posts here 1, 2, 3, 4, 5, 6, 7, 8, 9.
Mountains, rivers, borders, gatekeepers, regulations, fees - obstacles are a part of life. Obstacles create a border and games converge towards different equilibria on each side. For example, jewelry and alcohol are cheaper in Andorra than in neighboring France and Spain due to taxes. Grocery in Alaska can be more expensive, as they need to be imported over a long distance.
When we find ourselves in a game with obstacles, one way to change that game is to look for an arbitrage. The word arbitrage might have a negative connotation in your mind, as the person doing the arbitrage might not be creating a genuine value, but just taking advantage of the situation. In my opinion, how we look at arbitrage depends on whether the arbitrage is against a natural or artificial obstacle. When the obstacles are outside the game, arbitrage often creates a win-win scenario.
One of my favorite examples of arbitrage is when on April 20, 2020, during the covid pandemic, demand for oil decreased to the point where oil prices became negative, at minus $37 a barrel. The world needed somewhere to keep all the extra oil that was in the supply chain, which wasn’t bought by consumers, so people were paying others to take their oil. Speculators then ordered space on tankers, and due to the negative prices got paid to take the oil, chilled for a bit, and sold the oil when the market price was positive again.
These speculators saw a natural obstacle - the pandemic, and that the oil supply chain will act different before and after. With quick thinking, they created a win-win. Consumers didn’t run out of space, and suppliers and distributors gained time to adjust their capacity. In electrical engineering terms - speculators created a temporary capacitor for the oil supply chain. If they hadn’t, the situation might have been much worse. If the governments had to figure out where to put the oil, they would’ve most likely failed to find such a good solution so quickly. They may neither have the knowledge of how to arbitrage, nor the connections to negotiate with the varied participants. A centralized government doesn’t have the “human computation” resources that the whole population as a whole has. In that case, the ability to do arbitrage provides another win for everyone else - they live in a society where problems actually get solved, and the system improves.
When speaking of arbitrage, I think it is important to contrast it with regulatory capture. Regulatory capture is when artificial obstacles, such as regulation and barriers to entry protect an exiting business that was already established. Such obstacles are not external to the game - they were added by the players - and they make it harder for anyone else to compete. As a result customers get less value for their money. Regulatory capture is not arbitrage, it is actually what prevents others from doing arbitrage.
Another favorite example of arbitrage comes from my backyard. Last summer, birds stole cherries from my cherry tree, and at first I felt disappointed, as there were less cherries for me. But then I realized that the cherry tree is supporting my local fauna, which I enjoy at other times. If the birds had nothing to eat, they would not hang around, and may also not contribute to the local ecosystem. I still had plenty of cherries to eat, and the cherries the birds ate were better spent on them. The birds created a happiness arbitrage by eating these last cherries - they created more enjoyment for me, as I was able to enjoy observing them.
Right now I’m sitting by a sunny window, enjoying the brightness, and wrapping myself with a throw blanket to stay warm. Few days ago I got covid, and I’ve been trying to rest more than usual. Fingers crossed, my case is not too bad, but I definitely feel my energies reduced. It definitely feels suboptimal, but I found some silver linings and things I can arbitrage. First, I realized that video meetings make me feel more tired - so I pushed all non-essential video meetings one week back. Having a nearly free schedule is giving me some space to think and reflect. Time to detach and reflect is normally at a premium, and I’m rewarded with a lot of it these days, and even though my head tires more easily, I see the benefits. Second, for the duration of covid, I’m pausing my keto diet, and I’m allowing myself to eat more carbs, to give easy energy to my body. Hello blueberry cake, pumpkin pie and popcorn - now I can hang out with you, like in the good old days.