We all use math every day; to predict weather, to tell time, to handle money. Math is more than formulas or equations; it’s logic, it’s rationality, it’s using your mind to solve the biggest mysteries we know. Introduction to each episode said by Charlie Epps
I positively loved the TV series Numb3rs. I say loved because the series ran from 2005 to 2010 and is now sadly over. The premise of the show was that mathematics can be used to solve crime. The lead characters were brothers Charlie (a math genius and professor) and Don (Lead FBI agent) Epps who worked together to solve crime using both of their skills.
I have just finished re-watching all 6 seasons and was struck by how often they used game theory to find the villain in the piece. One instance was particularly funny when Charlie shows the payoffs of a prisoner’s dilemma game to a group of suspects because he suspected that they don’t really understand the math to play the game correctly. (The traditional version has the suspects separated.) Once the mathematics is made clear, they of course then confess.
Numb3rs was the most popular show on Friday nights for the first 4 seasons with both mathematicians and mathphobes loving it. The mathematicians loved it because the mathematics is correct and interesting. Mathphobes love it because it is easy to become committed to the cast of characters. This show was typical of the new connection between academia and TV series, the most recent of which is the hit series Breaking Bad. For Numb3rs, I regret to say that their number was up.
“I am not interested in what you think you know about baseball, or what you think I don’t know about it. I am not interested in guts or heart or determination or anything else the fans or what your mothers love about you. I’m interested in getting you on base. If you can do that, we win.” Taken from MONEYBALL (the movie pg 75 of script.)
Economists always teach how consumers maximize utility (happiness) subject to a budget constraint or how firms minimize costs subject to a production level. These are known as optimization problems. It seems to me that Moneyball is a combo of the two. The Oakland A’s set out to maximize their wins subject to a salary cap much like a consumer going shopping except the Oakland A’s are a firm trying to make a profit–and wins help the bottom line.
Moneyball also uses the concept of exchange or trades to solve this problem. Statistically overvalued players are traded for undervalued players much like overvalued currencies or stocks are bought with overvalued ones. Players are traded to get the right mix that accomplishes the goal of maximizing wins. Furthermore, these trades can include money but not necessarily. In other words, the trades are partly barter. The movie showed a multi-player trade which beautifully demonstrates the nail-biting concept of arbitrage and coincidence of wants which is the rationale for why money is the common medium of exchange in the wider economy.
Who knew that baseball could teach us so much about Economics?
Sam Rogers (Kevin Spacey): “You cannot be doing what you are thinking of doing.” Margin Call 2011
One of the basic principles of a well-functioning capitalist system is trust. In fact the word credit comes from the latin word creditum which has the same root as the religious word creed (which usually start with the words “I believe”). Furthermore, this trust needs to be systemic to work effectively. Indeed like marriage, a capitalist system doesn’t usually work when trust is difficult. It only makes good business sense for a person to give credit if they trust the recipient and believe they will pay back the loan. The surest way to make sure your counterparty will do that is to know and like each other. Bankers often talk about building relationships because relationships build trust, reciprocity and profits . That is why Margin Call is so depressing.
The normal marginal benefits of a relationship (the profits) between competing investment bankers usually exceeds the marginal costs of acquiring those profits. Investment bankers sell or swap assets with each other. They know each other’s names and maybe even go out for drinks later. Ongoing successful relationships are about this give and take. But that all changes when the game is about to end. In Margin Call, the 20% who weren’t fired the day before are given exorbitant amounts of money to sell what they know to be junk to their counter parties (or friends) in other firms. It is all about taking as quickly as possible because the system is going down and these brokers are asked to use these trusting relationships to make their final score. The friendships will never be the same again.
In the movie, the head honcho or CEO John Tuld (Jeremy Irons) preaches three ways to become rich: 1) Be first, 2) Be smarter, 3) Cheat. He declares with great pride that he doesn’t cheat but in a way he does. He is cheating on the relationships by discarding them. With his actions he is saying that the marginal costs of the numerous relationships are now too high when compared to the marginal benefits of saving his company. He needs to be first out of the gate to do that. As the CEO he gets to make that margin call.