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Commerce · III.06 · MMXXVI · daylight

La Bourse  /  Volume III  /  Nº III.06  /  Workbook — the student

WORKBOOK — THE STUDENT

Chapter III.06 · Mycelial Finance

A term of practice. Applied to a life, not to a firm.

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WHY THIS WORKBOOK IS DIFFERENT

Most of what you will be asked to do this term is to check a story against its sources and then rebuild something on the part that held. That is an unusual assignment and it is the most transferable skill in this entire volume.

The chapter you have just read exists because a beautiful idea — the forest that shares — turned out on inspection to rest on five mapping studies, two tree species out of about 73,300, and about seven Douglas-fir experiments, with the most quoted claim of all carrying no peer-reviewed evidence. And the argument did not collapse. It got better, because what the evidence actually supports — discriminating trade through an intermediary that takes a position — turns out to be a far more useful guide to money than generosity was.

You will do that move four times this term: once on the biology, once on a financial claim, once on your own household, and once on something you believe and have never checked.

You do not need money to do any of this. You need a notebook, a spreadsheet, and the willingness to divide.

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PART ONE — DISCOVERY

Weeks 1–4: find the trades you are already in

Begin where the chapter begins: not with what is missing, but with what is already running.

Exercise 1.1 — The reciprocity map. List every person or institution that has extended you something on credit in the last two years: money, time, a deadline, a benefit of the doubt, a place to stay, an introduction. For each one, write two columns: what they extended, and what signal they were reading about you.

Most people find the second column is easy to fill and has never been written down. That column is the local signal, and it is the most valuable asset in this chapter.

Exercise 1.2 — The species-versus-individual test. Take the claim you would most like to be true about how the economy works. Find the primary source. Read the abstract and the methods — not the press release, not the book that cites it. Then write one paragraph: what the paper actually establishes, and what the claim adds on top of it.

This is the same test as shared species is not shared individual. Two things that look connected are connected only if you can show the connection.

Exercise 1.3 — The rotating fund. Find a real rotating savings association operating near you or in a community you belong to: a susu, a tanda, a hui, a chit fund, a workplace Christmas club, a student flat's shared grocery kitty. Interview someone in it for twenty minutes. Ask: who decides who joins? What happens when someone cannot pay? Who does the arithmetic, and are they paid?

Write up half a page. You are looking at the oldest working version of everything in this chapter.

Exercise 1.4 — Absorption. Write down the three things you do where you lose track of time. This is not a detour. Chapter I.01 observed that the discovery phase is intrinsically absorbing; this chapter asks you to notice which kind of work absorbs you, because the answer determines what you should be building with the rest of the term.

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PART TWO — THE ARITHMETIC

Weeks 5–8: compute before you argue

Exercise 2.1 — Reproduce the loan floor. In a spreadsheet, build this:

  assessment cost per decision        (input)
  net spread per year                 (input)
  average duration in years           (input)
  margin on principal   = spread x duration
  breakeven ticket      = cost / margin

Reproduce the chapter's three figures: $33,333 at $3,000 per decision, $444 at $40, $278 at $25, all at a 9.0 percent margin. Then answer: what assessment cost would be needed to lend $100 profitably? What would that require to be true?

Exercise 2.2 — Your own version of the floor. You are already a lender: you extend time, effort and attention to projects and people. Pick one recurring commitment. Estimate the cost of deciding whether to take it on — the meeting, the reading, the thinking — and the return you expect. Compute your breakeven ticket. Most students find that their decision cost is so high that small commitments are systematically unprofitable, which is exactly the bank's problem and has exactly the same three solutions: automate the decision, push it to somebody closer to the information, or only take large commitments.

Exercise 2.3 — The household ledger. Take a monthly income of $3,200 and a revenue-indexed saving rule of 7 percent:

  3,200 x 7 %   =   $224 a month
  x 12          = $2,688 a year
  x 36          = $8,064 over three years

Now do the same on your own actual number, and then answer the question that matters: what happens in a month where your income falls by a third? Under a fixed rule you break the rule. Under an indexed rule the amount falls and the rule holds. This is the entire difference between a covenant and a revenue share, and it is available to you personally this week.

Exercise 2.4 — The Bayes. Reproduce the screening arithmetic: 1,000 applicants, 18 percent bad, a signal with 75 percent sensitivity and 85 percent specificity. Get to 742 approved, 6.06 percent post-screen bad rate, and 123 good borrowers refused. Then vary the specificity from 85 percent down to 60 percent and watch what happens to the number of good borrowers you turn away.

Write one sentence on what that means for anybody designing an admissions process, a hiring process or a grant panel. It is the same instrument.

Exercise 2.5 — Correlation. Build the portfolio-standard-deviation formula and reproduce the table: 0.176 percent at ρ = 0, 3.947 percent at ρ = 0.05, on 10,000 loans. Then set N to 1,000 and confirm that at ρ = 0.05 the sd barely moves — 0.03 percentage points for ten times the diversification.

Now write the honest negative in your own words, in two sentences, without using the word "however".

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PART THREE — DREAM AND DESIGN

Weeks 9–12: build the small instrument

Exercise 3.1 — Design a five-person facility. Five people you actually know. Each contributes a fixed share of their own monthly income — not a fixed amount — into a common pot. One person draws each month. Write the rules on one page: who joins, what share, what order, what happens in a thin month, what happens if someone leaves, and who holds the ledger.

You do not have to run it. You have to be able to defend every line of it against somebody who is looking for the failure.

Exercise 3.2 — Name your signal. For your facility, name the one signal the group can see without asking. Then apply the strict test: can it be read without a request? If the answer is no, redesign until it is yes, and note what you gave up to get there.

Exercise 3.3 — Price the refusal. Write the paragraph that tells a friend the group cannot take them. Read it back. Then write, honestly, what saying that would cost you and whether you would actually say it. This is the exercise students skip and it is the one the chapter was built around: the network's binding constraint is the price of saying no.

Exercise 3.4 — The intermediary's slice. Someone will hold the ledger. Decide what they get and what they are on the hook for. Try three versions — a flat fee, a share of the pot, and a retained position that loses first — and write one line on how each changes their incentive to admit a marginal member.

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PART FOUR — DESTINY AND DELIGHT

Weeks 13–15: make it hold, and notice what it feels like

Exercise 4.1 — The failure memo. Write the post-mortem of your facility as though it failed eighteen months from now. Name the cause specifically. The chapter gives you four candidates: the intermediary earned a fee rather than a spread; the reserve was sized to the mean and the loss came correlated; the local signal quietly became a form; the nodes were expected to work for money the spread could not pay.

Then go back and change one line of your design so that the memo you just wrote could not be written.

Exercise 4.2 — Correlation in your own life. List your sources of income, support and opportunity. Mark which of them would be affected by the same event — one employer, one city, one industry, one relationship. You are computing your personal ρ, and most students discover it is far higher than they assumed. Name one move that lowers it and take it this term.

Exercise 4.3 — The absorption check. Return to Exercise 1.4. Which parts of this term's work did you enjoy? The reading of sources, the spreadsheet, the design, or the conversation? Write a paragraph. This is genuine information about what you should do next and it will not be available to you again in such a clean form.

Exercise 4.4 — Delight. Go outside and lift a piece of decaying wood or leaf litter in a damp place. Look at what is under it. You are looking at an intermediary that has been running a book for four hundred million years without sentiment, and it is keeping the trees above you alive. Write four sentences. No economics.

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THE TERM PROJECT

One piece of work, carried the whole way

Build a claim audit and a rebuilt instrument.

Choose one widely repeated economic claim — about microfinance, about crowdfunding, about local currencies, about cooperative resilience, about crypto-lending. Then, in roughly three thousand words:

1. State the claim as it circulates, quoting three sources of the kind people actually read — a newspaper, a book, a policy document.
2. Trace it to the primary literature. Read the original. Say precisely what it established and over what sample, with numbers.
3. Separate what survives from what does not, in a table, claim by claim, in the format Karst and colleagues used.
4. Rebuild on the part that survives. Design a working instrument — a fund, a facility, a rule, a contract — that depends only on the surviving part.
5. Compute it. At minimum: a cost per decision, a breakeven size, an expected loss, and a correlation assumption with your evidence for the figure you chose.
6. State the honest negative. One threshold below which your instrument fails, with the arithmetic.

The mark is not for finding the claim false. It is for the quality of the thing you built on what was left — and a claim that survives inspection intact is an excellent result, provided you show the inspection.

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SELF-ASSESSMENT

Mark yourself honestly. Re-mark at the end of term.

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CARRYING IT FORWARD

Three things from this chapter are worth taking into every subsequent term, regardless of what you end up doing.

The first is the audit habit. A claim you have heard three times and never read is not knowledge. It costs about forty minutes to convert one into knowledge, and the forty minutes is almost always more interesting than the claim was.

The second is indexing. Any commitment you make — savings, study hours, money to family, contribution to a shared household — is more durable as a share of what actually arrives than as a fixed amount forecast in advance. Fixed commitments break in bad months and are not renegotiated upward in good ones. Indexed ones stretch, and the arrangement survives.

The third is the price of refusal. Every network you join, build or run will be limited by how expensive it is for you to say no inside it. Notice where that price is high. Design so that refusal is a rule rather than a personal act wherever you can, because a rule can be refused to a friend and a person cannot — and that is not coldness, it is what makes the arrangement survivable for everybody in it.

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A NOTE ON READING THE EVIDENCE

One methodological habit is worth naming separately, because it is the habit that produced this chapter and it will serve you in every field.

When a result is reported, ask what the experiment could not distinguish. In the mycorrhizal literature the decisive limitation is simple and was in the methods sections all along: a barrier that stops fungal hyphae also stops soil solution, and soil solution carries the same resources. So an experiment showing more transfer without the barrier than with it has established that something moves through the soil — not that it moved through a network. That is not a flaw in the experiments. It is a limit on what they can say, and the limit was disclosed by the authors and then dropped by the people citing them.

Practise stating the limit before you state the finding. In a seminar it sounds like this: "This shows that X and Y are associated in a sample of twenty-six studies, mostly under two years, mostly on one species, and it cannot separate the network route from the soil route." Nobody who says that sentence will later have to retract anything, and it is a far more interesting sentence than the confident version.

APPRECIATIVE QUESTIONS FOR YOUR SEMINAR

Six, to be asked out loud, in the 4D order.

1. Discovery. When has someone extended you credit of any kind on a signal rather than an assessment? What were they reading, and were they right?
2. Discovery. Which arrangement in your own community already moves small amounts between many people reliably? What holds it together?
3. Dream. If the smallest amount that could sensibly be lent fell from thirty thousand to five hundred, what would exist in this town next year that does not exist now?
4. Design. What signal about ourselves do we already emit that a fair lender could read without asking us anything?
5. Design. What would make it possible to refuse somebody in this room without either of you losing anything that matters?
6. Destiny. What would we want to still be running here in ten years, and what is the first thing that would tell us it was quietly becoming a form?