The Conceptual Foundations of Investing

2THE ECONOMIC STRUCTURE OF INVESTMENT MARKETS

A typical major league pitcher throws a fastball at 95 miles per hour or 42.47 meters per second. Ignoring air resistance, if you were to drop a baseball from a building how high would the building have to be for the ball to be traveling at 95 miles per hour when it hits the ground?

This is what we call a game against nature. The task is to find the rules by which nature operates and apply them to solve the problem. In this case, Isaac Newton has already solved the problem and the answer is 92.1 m or 302.2 ft.¹ Once the problem has been solved, the nice thing is that it always works. It does not matter whether you drop the ball today, tomorrow, or next week. If the building is 302.2 ft. tall, the ball always hits the ground at 95 miles per hour. In fact, the law held even before Isaac Newton was born. Nature does not care if we know her laws or not. She follows them one way or the other.

Now consider a soccer player facing a crucial penalty kick. What is the best place to kick the ball? High? Low? Left? Right? While there might be a best answer in one particular instance, there is no general, timeless, solution to the problem. If the answer was always high right, the goalie would move to the right and be ready to jump. But if the goalie did that, the answer would now be low left. This is a game against an intelligent agent and it has no static solution – there is not a best place to kick the ball.

Games against markets are of