tag:blogger.com,1999:blog-17908317.post6760226780446588929..comments2024-03-28T03:15:14.875-07:00Comments on Unenumerated: Gas stations grant real optionsNick Szabohttp://www.blogger.com/profile/16820399856274245684noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-17908317.post-16379742435656424922008-04-15T18:46:00.000-07:002008-04-15T18:46:00.000-07:00another depot within range means that your movemen...<I>another depot within range means that your movement is bounded by how much fuel you can afford to buy -- so activity is increasingly defined by the marginal cost of staying in orbit, rather than the fixed cost of getting there.</I><BR/><BR/>Only true where materials native to space are used. Otherwise, the propellant you can afford to buy is also bounded by the cost of getting there. Nevertheless, even without native materials the value of propellant-related real options increase with the density of depots, possibly in a nonlinear fashion. But depots by themselves are insufficient -- the real option is really a tuple {interesting place to go, propellant to get there}. So the increase in valuable places to go, alternative things to do (like the long list of options now available to the car driver I discussed above) in a given orbital region is a crucial part of this growth.<BR/><BR/><I>...one could bet on future fueling depot construction (e.g. a contract that paid out $X per station per year over the next ten years -- you'd buy the contract, launch your first depot, then sell the contract once the estimated future number of depots increased).</I><BR/><BR/>I'm not sure I follow this. Who is the counterparty -- somebody selling insurance against competition? Has anybody done this historically? It's an interesting idea.<BR/><BR/>Perhaps one could arbitrage between competitors. Sell insurance to A against A losing too much market share, and to B against B failing to gain enough market share (for a given level of investment towards such growth), with the insurance company winning in the more likely case that B gains more than the insured amount of market share but A does not lose enough market share to go below their insured amount. Indeed, spread the market share risk across enough companies and the insurance company always wins (but so do all the companies through lower risk from competition). The usual problems of adverse selection and moral hazard arise, though. <BR/><BR/>If this was going to work, somebody would already have made it work, I suspect. It doesn't require computers. (Both insurance and derivatives were around in late medieval Italy. It's only when you want sophisticated simulations or function-fitting, especially when constructing synthetic assets from multiple derivatives, or when doing real-time arbitrage or hedging that computers are required). Also, in a stock market investors can do a similar kind of risk spreading by diversifying their investments across several competitors.<BR/><BR/>The most common way for the first mover to protect itself against copycat competition is through property, especially IP, but gaining physical rights over the best native propellant sources would also work well.<BR/><BR/>Another technique, really one that is crucial for growing networks of real options, is vertical integration. If, for example, you want to sell ethanol, it's no good just to start making ethanol and hope people will come buy it. No, you've got to sign up a large number of gas stations in an area to pump ethanol, and you have to get car companies to sell cars that take ethanol via the dealerships in that area. <BR/><BR/>Electric companies, back when electricty was not the norm and they were in a free market and actually trying to sell more of their electricity, often sold electric appliances at stores they set up in the same communities to which they were piping electricity, and often gave them away to people who signed up for electricity service. It's no good generating and piping electricity out to houses that have no electric appliances. The real option tuple here is {electricity piped to house, useful electric appliances sold locally}. <BR/><BR/>Back to space depots, an entrepreneur has to sell the real options they make possible, and has to vertically integrate enough to make sure those real options are delivered. For example to deliver extendable life satellites, one has to sell the satellites to satellite operators (e.g. communications companies) who want this feature, then make the satellites refuelable and implement a depot. Much easier than trying to sell existing comsat makers on the idea that they should sell their own customers on such features, make their own investments in redesiging their satellites to be refuelable, and so on. The space depot entrepreneur should also consider vertical integration into "more places to go" to complete the real option tuples {neat place to go, propellant to get there}.<BR/><BR/><I>I've tried to figure out how the economy will look when going long volatility is the best way to make money...the only way for a poor person to get rich is to create volatility and hope said volatility works out in his favor.</I><BR/><BR/>By "create volatility" do you mean just bet at long odds, or do you mean something active, like Marxist revolution? :-)<BR/><BR/>Rich people get lazy and that gives poor people with brains plenty of opportunity to make it rich. Somebody has to program those computers, advise the rich on their investments, heal the rich when they are sick (or just want to live longer), lawyer for the rich when they dispute, and so on. It won't be the fellow rich, they're too busy having fun and then feeling guilty about it and donating to Barack Obama.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17908317.post-63221926456993544092008-04-15T13:18:00.000-07:002008-04-15T13:18:00.000-07:00A few other points to consider:Will the accumulati...A few other points to consider:<BR/><BR/>Will the accumulation of assets as real options, versus the use of those assets for their discounted cash flow, slow down economic growth as economic volatility (and thus the volatility premium on those assets) increases?<BR/><BR/>Real options compound in value: one refueling depot allows you to move within the fuel-tank range of that depot, but another depot within range means that your movement is bounded by how much fuel you can afford to buy -- so activity is increasingly defined by the marginal cost of staying in orbit, rather than the fixed cost of getting there.<BR/><BR/>I would expect an easy analogy to be the growth of coal stockpiles in colonies (I know this happened in SE Asia, and I'm sure that wasn't the only place). Modern finance could allow derivatives to make this sort of project happen at a more sensible pace than before -- the first coaling station radically increases the value of future ones, so the first actor has to either accept a low fraction of the total value he creates, or make a huge initial investment. With derivatives, one could bet on future fueling depot construction (e.g. a contract that paid out $X per station per year over the next ten years -- you'd buy the contract, launch your first depot, then sell the contract once the estimated future number of depots increased).<BR/><BR/>This is a very interesting subject. I've tried to figure out how the economy will look when going long volatility is the best way to make money -- in a Singularity context, this would be because the resource that increases wealth (spare computing cycles) also increases its own utility -- so the very richest are also earning the highest returns. In that context, the only way for a poor person to get rich is to create volatility and hope said volatility works out in his favor. Since most of someone's assets would be real options of one kind or another, they'd expect a higher net worth from, say, a $20 trillion US GDP that had growth between -10% and 5% than from a $30 trillion GDP with expected growth between 4% and 8%.Byrnehttps://www.blogger.com/profile/01811615997458838025noreply@blogger.com