Capital asset pricing model (CAPM) pricing and ‘efficiency’ that was mandatory orthodoxy when I was a finance MBA major has simply failed usnin the real geopolitical world. Especially, as you illustrate, in critical commodity supply chains. Eg fossil fuel energy and critical minerals. I do remember in mid 1980s a key mantra in Finance 101 was ‘diversify your equity portfolio to about 20 stocks’…in a way this is an offshoot of that. But we did mot apply diversification portfolio theory to commodities and geopolitical risk. The battle between efficiency v sufficiency and resilience is a real competition in the real disrupted and disruptible world. A narrow idea of ‘efficiency’ meaning cheapest is always best has led some countries down a dangerous path on multiple fronts. Efficiency is just not sufficient. Very good you are trying to address this via open sourced modelling. Nice work kiddo!
Add in the politics in many democracies with 2 and 4 year time horizons and the incentives for longer term thinking in this space is essentially null. I think you point to Japan as an outlier of success which to me indicates the politcal economic model there - one where economic decisions are driven by a process (behind the doors knock down drag out fight - but public consensus) that achieves a longer term risk horizon for its firms and policy to support such arrangments. Add to this the fact that the number of political appointees in Japan is extremely small. I would say it is much like Germany...but where did the Germans go so wrong? :)
Germany is interesting - part of it is Mittelstand not really doing buyers clubs or the like for EU anticompetition rules, another has been religious belief in Wandel Durch Handel.
German industry is fairly split - thus the lack of action - with larger businesses still enthralled by Wandel Durch Handel and the Mittelstand realizing they are getting ripped off or picked off one by one but no cover from political leadership.
Very naive take from my end but this reads a bit like you want to eventually roll this into some kind of real options framework for when you are evaluating imports v. domestic subsidy or to engage in storage. Do you have a duration cost then on the storage or spoilage that might be something like the dividend component of an options pricing model? Literally thinking out loud.
Storage cost is in the model but the issue with trying to infer distributions and option pricing is its all endogenous to all the agents elasticity of demand and markov risk.
Capital asset pricing model (CAPM) pricing and ‘efficiency’ that was mandatory orthodoxy when I was a finance MBA major has simply failed usnin the real geopolitical world. Especially, as you illustrate, in critical commodity supply chains. Eg fossil fuel energy and critical minerals. I do remember in mid 1980s a key mantra in Finance 101 was ‘diversify your equity portfolio to about 20 stocks’…in a way this is an offshoot of that. But we did mot apply diversification portfolio theory to commodities and geopolitical risk. The battle between efficiency v sufficiency and resilience is a real competition in the real disrupted and disruptible world. A narrow idea of ‘efficiency’ meaning cheapest is always best has led some countries down a dangerous path on multiple fronts. Efficiency is just not sufficient. Very good you are trying to address this via open sourced modelling. Nice work kiddo!
The model at least covers some aspects of real world risks, not pure financial ones like VAR. Maybe it should be called RSAR (real shit at risk).
Add in the politics in many democracies with 2 and 4 year time horizons and the incentives for longer term thinking in this space is essentially null. I think you point to Japan as an outlier of success which to me indicates the politcal economic model there - one where economic decisions are driven by a process (behind the doors knock down drag out fight - but public consensus) that achieves a longer term risk horizon for its firms and policy to support such arrangments. Add to this the fact that the number of political appointees in Japan is extremely small. I would say it is much like Germany...but where did the Germans go so wrong? :)
Germany is interesting - part of it is Mittelstand not really doing buyers clubs or the like for EU anticompetition rules, another has been religious belief in Wandel Durch Handel.
German industry is fairly split - thus the lack of action - with larger businesses still enthralled by Wandel Durch Handel and the Mittelstand realizing they are getting ripped off or picked off one by one but no cover from political leadership.
Very naive take from my end but this reads a bit like you want to eventually roll this into some kind of real options framework for when you are evaluating imports v. domestic subsidy or to engage in storage. Do you have a duration cost then on the storage or spoilage that might be something like the dividend component of an options pricing model? Literally thinking out loud.
Storage cost is in the model but the issue with trying to infer distributions and option pricing is its all endogenous to all the agents elasticity of demand and markov risk.
If policy makers fail to take simpler and more naive policy actions in this direction, why would they be informed by more complex, more robust models?