Mental Model: The Law Of Competing Standards (Gresham's Law) - Reactions To Scarcity Override Systems Of Morality

Basic Idea - what gets rewarded gets repeated, regardless of any ethical considerations.  Specifically “bad money drives out good”

History - named after Sir Thomas Gresham, who was an English Merchant in the 1500s.  Also attributed to Copernicus and Aristophanes.

Gresham brought to public attention that, in an economic system with fake coinage, the fake coinage will drive out the real coinage in circulation.  People will keep what is valuable and spend what is not.

A few ways to interpret this:

1. Things of value will tend to become more scare, while copycats and imitators will proliferate in a given market place
2. Systems of morality tend to fade away when practical benefits that appeal to human nature overshadow it

Example: savings and loans crisis in the 1980s

• Interest rates from the Federal Reserve started rising higher than the rate at which S&L’s were paying out interest on deposited funds...recipe for disaster
• S&Ls, instead of immediately becoming insolvent, began to invest in speculative ventures, reaching for yield
  • A lack of regulation contributed to this slow but painful downfall

Example: sub-prime mortgage crisis

• Comedian Kathleen Madigan: “sure, put down birthday clown”
• Anyone who wanted a mortgage could get one, as banks were thirsty to increase their profits without thoroughly accounting for the risks of their lending profile

Investing 

• look for management behavior within a particular company or industry.  Is a CEO taking some corporate action just because their competitors are doing it?  Even if it doesn’t make any sense?
• For-profit prisons - yes you can invest in them.  No I would never invest in them.
  • Simply because people have made money with privatization of prison systems around the world doesn’t mean it should be that way - morality enters the investing process and is highly personal
  • No matter how much an annual report (see GEO Group) talks about charitable donations or how many “participants” are awarded GEDs, the business model is fundamentally flawed because the success of the company’s owners is diametrically opposed to the progress of civilization...primarily because people are jailed against their will and subject to legal and cultural systems that do not have their best interest at heart
  • Prisons do need to exist at some level but I do not believe they should have a profit motive

Email: alex@stockstoriespodcast.com