Small Brain: The Three Prime Assets

The Three Prime Assets sounds like something out of a religious text, or maybe the name of a covenant ship (y’know, from Halo?)… Anyways. You ever think about how the universe is fundamentally built around the ‘=’ sign? I mean, E=MC², the laws of thermodynamics, literally everything we understand about reality through physics, chemistry, etc all point to cause and effect, exchanges of one thing for another in order to balance the fundamental equations of reality. The omnipresent ‘=’ is inescapable. As humans, we live this way too. Constantly exchanging effort and time for value, exchanging value for more time (self-preservation) or for someone else’s effort. Gets exhausting after a while. Where were we?

Oh yeah, three prime assets. Already mentioned them; effort/skill, time and stored value. These are pretty much the variables in the human equation. The one thing we all seem to agree on is that our time is valuable, probably because our entire existence is defined by the inescapable knowledge that it will eventually come to an end. Since our time is limited, non-fungible and constantly experienced and spent whether we would like it to be or not, we tend to value our time based on the manner and environment in which we experience its passing, another subjective assignment of value.

Stored value can come in any number of arbitrary forms, but we tend to assign value to things which enhance our experience of time. Entertainment, our favorite foods, art, these are all things which enhance our subjective human experience and we collectively have assigned value to them. But being the fickle creatures that we are, our preferences for spending time changes often and with it, our estimation of the value of an object or experience changes too.

We’ve collectively decided to invent money because our collective delusion of it becomes a convenient method for exchanging value as mentioned in the last article. The reason it functions to store value is because we’ve created so many liquid markets for it that we are able to trust our money to be worth exchanging for.

Money is only as useful to store value as it is easy to exchange for assigned value. It is only as easy to exchange for assigned value as it is useful for storing value. And thus, the collective delusion.

So now we’ve established that the easiest way to measure how well a Thing Stores Value is whether people are consistently willing to exchange other assigned value for it. Money is worth owning because it’s easy to trade it for something you value. It’s easy to trade for something you value because it is worth owning.

Skill is a lever. If you have a skill which people value, you are able to spend less of your time in exchange for more money (or other form of value). Note that this has absolutely nothing to do with the difficulty of your skill, or the amount of effort required; only whether others are willing to give you something for it.

Skill is measured in value just like anything else; how much does it exchange for? To put it in 21st century terms; what’s the hourly rate? Just like any other market, that rate of exchange will be determined by supply and demand. Not measured by the difficulty of providing or acquiring it, only how much demand there is relative to the supply of that skill.

So. We’re all trading.. something.

All the time. You’re trading time reading this article for the chance to learn something and increase your skill, or perhaps because you prefer to experience your time by reading the ramblings of a schizophrenic smiley face on the internet. Either way, you have assigned enough value to the contents of this article that it is worth spending your time on. Let’s unpack the implications of that.

This article did not exist until I used my time (and arguably very little skill) to create it. I used a computer, a keyboard, an internet connection, this website, etc. All of which had to be conceptualized, constructed, maintained and all of which are agreed to have some value attached. This value did not come from an inherent quality of the materials used or their construction, this value was created. And upon creation, value was assigned to each of these things because enough people decided that these things enhance their lives, their time. Markets for these things were created, exchanges occurred and new value was added to the world.

But for new value to be created requires risk. The risk of lost time, wasted skill and resources in exchange for no value, no perceived enhancement to anyone’s life. Risk is uncomfortable and most would consider exposure to risk to be a negative effect on their experience of time. Often if a risk is known to exist, we will pay to avoid experiencing it. We have only to look as far as any sort of insurance policy to see this in action; we pay a regular premium to avoid the risk of suddenly having to pay a car repair bill. We exchange our skill and time with an employer for less than the value they generate in order to shield us from the risk of fluctuation in value for our skill. We talk ourselves out of decisions such as going back to school, taking a new job or trying a new restaurant because we don’t want to allow the uncomfortable possibility of regret.

And so we create the risk premium; those who go to school for the skill have fewer competitors and are able to charge a premium for their time. The person changing jobs can negotiate for better compensation with fewer qualified competing applicants. The new restaurant popping up is forced to provide an even better dining experience to attract customers, rewarding them for their curiosity. Value has been assigned to risk, which means that skillful risk-taking has perhaps more value-accretive potential than any other use of time.

Foundation of thought: markets are opinions about the value of both the asset and denominator, but both are measured arbitrarily by the degree to which they improve our experience of time. Comfort is consistently valued, risk reduces comfort and therefore the assumption of risk becomes a valuable service.

Now that we’ve tied it all together, we finally have a mental framework for how to think about markets as a concept. From here, we can build frameworks of thought about how to profit from them, but not before. In the same way that a child’s decision-making improves with his understanding of the world around him, we must understand the nature of markets before we can hope to participate wisely in them.

I wrote this article, there’s no financial advice in it or anything, insert usual disclaimers and follow me on twitter. Please clap.