Live smart: Identifying your personal “arbitrage”

It would be difficult to explain this point without first mentioning who introduced me to this idea –

He’s a figure of some controversy among students and staff at the university. I vividly remember sitting down with a sort of course counselor (but more like a mom to the students at the business school), and mentioning the class – Applied Financial Derivatives.

Up to this point, I’d had friends – alumni of this class – relay onto me the importance and depth of this class with what I can only describe as a religious zeal. Like me, you might be wondering how this topic could inspire this feeling… financial derivatives sounds pretty straightforward, pretty dry.

So, it piqued my curiosity when the counselor -respected for being a woman of few words – confirmed the mystery around the class by likening the class to “drinking the Koolaid.”. 

Whether I told myself I’d be a sort of investigative journalist, or whether I really wanted to experience the mystical, I can’t say. But I signed up for the class!

I’ll never forget the 3.5 hour lectures (scheduled for 1.5 hours), the feeling of futility when trying to follow along with the professor, who is clearly a very brilliant man, the hours studying for tests with arcane questions like “Explain the meaning behind The Matrix using concepts you’ve learned.”

The professor unfortunately had many health complications. He would be driven to the university in a van, constrained in a wheelchair. But sitting upright was painful – so the class (mainly two helpers, teacher’s aids) would assemble a futon-like pad on the floor in front of the classroom. The professor would lie down, connect his tablet to the projector, and get going.

He was a veteran applied mathematician and theologian – rare to say in the same breath. But the deeper he dove into math, the more it confirmed his convictions. He would commonly recall religious anecdotes to illustrate his points – from the late-life musings of Newton, to using Jesus as an example of an arbitrageur.

Arbitrageur… this concept is inherent in finance. If you can pick up apples at Safeway for $5/lb, drive a mile to a farmer’s market and sell them for $6/lb, you’ve secured a $1/lb arbitrage profit for yourself. There was no risk taken (let’s assume you’re a good driver), but a profit to be had, whereas most times in life, return will require risk. More realistic examples include people trading foreign currencies, or, related to financial derivatives, taking advantage of the “put-call parity” that existed in the markets before most people knew it existed (no need to go into what that is here).

In the world of finance, because it deals with hard cold cash, and that happens to be something that everybody wants / needs, any arbitrage is scooped up in a moment’s notice and traded away. People may spend their whole lives consistently seeking a thousandth of a percent of arbitrage (which adds up if you’re trading millions of dollars)… hence where the math required to seek such a unicorn of finance ramps up incredibly. Some even doubt that arbitrage truly exists anymore in the markets.

However, the professor for this class, as you may be able to tell, relies heavily on drawing parallels. Unsurprisingly he had a million dollar word for this – isomorphisms. The idea is that there are connections among all things worldly and unworldly, to the point that a discovery in one field must have an attributed impact and value in other fields. Think of discovering a pure math model for explaining a certain aspect of networking theory, which also applies to communications on a social networking site. But it also eerily explains the spread of an infectious disease on a heavily populated land mass. Neat!

I respect the professor to a point where I won’t divulge his ultimate mathematical expression or his personal meaning from the final class – but that’s probably not important to us here. What I can say is that the most important takeaway from those many hours of deep mathematical, logical and mystical dives, that informed his personal philosophy, is the idea of finding personal arbitrage. Not to make heaps of money for yourself, or to make you the next Nobel prize winner, but finding something that can help you and therefore help others by realizing that there are some “shortcuts” that exist in certain areas of life, some risk-free “profit” opportunities, that will make your life a lot better, and much more wholesome, enabling you to reach out and help others.

Some concrete examples focused solely on you may include – setting goals for yourself outside of earning a specific dollar figure. Letting go of much of what is unnecessary materially speaking (see “hedonistic adaptation”). Investing in yourself where you can see unparalleled returns (education, health).

Examples that pertain to other people (although some say there is no such thing as true altruism – in which case this is all stuff that will just make you feel good!) – donating to a charity, volunteering, or just resolving to make one other person’s day better, where it has no direct benefit to you (you may even be sacrificing something like your time or your personal comfort).

Where there’s a definite path, a “rut”, that we are expected to follow – the usual, taking care of ourselves and maybe our immediate family, maximizing our nest egg and spending – there is vast opportunity to do something different, disruptive. I think that this is what people seek when they seek freedom and self-actualization.

It is important to sit and really think – take minutes out of the day – to strategize this, and identify what you might be doing that is giving you returns in exchange for your happiness and freedom. Is that a career that might not be the best fit, but pays your bills? Is it a relationship that you know should have ended months ago? Has it gotten tiring trying to maximize solely your own happiness as an end-goal in life?

I certainly have a long way to go and much thinking to do. I definitely look forward to potentially hearing from some people out there on what your personal arbitrage may be, and whether you’ve found an effective goal to work toward.


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