May 22, 2007 – the date seems innocuous… what of it? For those of us involved in the SL Finance community it is the birth date of the SL Capital Exchange, or rather its predecessor, AVIX. For most of us the journey has been one long, strange trip indeed; enduring one crisis after another, scam upon scam, and ban upon ban. Regardless, we’ve persevered in spite of the actors and actions that have preyed upon this loose confederation of souls thrown together from all walks of life in pursuit of what?

One common goal? Highly unlikely, but let’s pursue that thought for a moment. For as long as I’ve been here, SL CapEx’s marketing tag line has been a very simple question, “Can you beat the market?”

For the majority of us the answer has been a resounding NO. It does beg the question, “Can anyone?”

December 13, 2009 – another seemingly innocuous date, but one that should be remembered for a long time by those of us that have studied Economics with any degree of sincerity. For on this date the most influential economist of the 20^th century, Paul Samuelson, passed away at 94 years young.

So why is Samuelson important to us? Foremost, he was the first American economics Nobel laureate, author of the textbook “Economics”, first published in 1948 and used in most every college finance curriculum world-wide. More important to our quest, however, Samuelson is regarded as the champion of post-Keynesian or neo-classical economic synthesis upon which most of the intervention policy decisions of SL CapEx are based.

Huh? Let me explain… whereas Keynesian theory argues that Private Sector decisions lead to inefficient markets thus REQUIRING Public monetary and fiscal policy via Central Bank intervention, such policies generally conflict with approaches that assume a general tendency toward equilibrium. In a marketplace such as Second Life, where the “Central Bank” (Linden Lab) monetary policies tend toward a laissez-faire bias (notwithstanding LL’s pegged Exchange rate – we’ll get into that some other time) some “Other” intervention policy must be introduced – thus SL CapEx’s adoption of neo-classical economic synthesis.

Neo-classical synthesis overlays many of the Keynesian macro-economic concepts on a micro-economic based foundation where the theory and condition of general equilibrium allow for price adjustment to achieve policy goals. While I’ll admit that this basic explanation is rudimentary and somewhat flawed (we can debate Economic theory some other time) it may help some of our readers better understand the rationale for SL CapEx’s recent relaxation of its Circuit Breakers for a short time frame. Whereas in a Keynesian-based model, the regulatory body would introduce additional capital into the marketplace (much like the US FED’s $700+ Billion bank bailout), our very brief intervention simply REDUCED regulation until general equilibrium was achieved. Dare I say that such “policy” is more effective given SL’s unique Central Bank and our own relatively small role in the overall SL economy?

“Free markets do not stabilize themselves. Zero regulating is vastly suboptimal to rational regulating. Libertarianism is its own worst enemy!” – Paul Samuelson

So, on to 2010, I’ll reiterate “Can you beat the market?” Paul Samuelson would have argued that it’s statistically impossible. In 1965 he published a paper explaining that in well-informed and competitive speculative markets, price movements over time will be essentially random. This concept forms the basis for a theorem called “the efficient-market hypothesis”. While I can’t claim that our marketplace is always well-informed, it is certainly competitive and surely speculative. Basically, the efficient-market hypothesis asserts that financial markets are “information efficient”, or, that prices on exchange-traded assets (i.e.; stocks, bonds, etc.) already reflect all known information, and instantly changes to reflect new information. Therefore, according to theory, it is impossible to consistently outperform the market by using any information that the market already knows, except through luck.

I’ll leave you with a final thought. I’ve noticed that discussion of Put and Call Options in the SL Capital Markets has ebbed considerably over the last few months. Could it be that the purveyors of such products have recognized the critical flaw in their Pricing methodologies? Our hero today, Mr. Samuelson, is also largely credited with the rediscovery of French mathematician Louis Bachelier, whose ideas underpin the Black-Scholes Option-Pricing Model. Perhaps we’ll discuss that more next time.

Regards,