Finance is a good source for metaphors, and many ideas that are most cleanly expressed in markets can be applied more widely than that. Why? Markets are a deliberately over-simplified version of the real world, and they exist to convert vague approximations into precise statements—the present value of all future profits that Walmart will produce is an open question, but Walmart’s stock is a liquid and easily-tracked measure of the world’s collective judgment on that question. And the list of what things could go wrong with a company can be endless, while the way bonds and options react to news roughly quantifies them. Physical commodities are not perfectly fungible; a barrel of West Texas Intermediate is not identical to a barrel of Arabian Heavy. But futures markets use somewhat standardized definitions so we can all generally agree on statements like “Oil went up yesterday.”

Because these definitions are powerful and tricky—and sometimes powerful in proportion to how counterintuitive they are—The Diff sometimes produces a detailed writeup on how a specific financial concept works and how you can apply it in other areas—and we call it Capital Gains.

The Alchian-Allen Effect

One of the most delight paradoxes of microeconomics was first observed by Aermen Alchian and Willian Allen in the early 1980s. With it, you can explain why Michelin star restaurants agglomerate in NYC and SF, why cybersecurity companies have pricing power, and why it can be used as a guiding light in career navigation. This post breaks down those examples by fitting them to the same model.

Money Manager Fees

Management fees, performance fees, and pass-through fees—from mutual funds to crypto prop trading firms, all funds charge different fees and to different degrees. To understand why that's the case, it's helpful to think about funds on a spectrum of skill. This post breaks down money manager fees using that model.

The Supply Chain Economy

Since one company's expenditures is another company's revenue, it's helpful to think about the global economy as a set of interlocked supply chains. This model helps investors think about booms and busts, time industry cycles, and spot second- and third-order outcomes of news. This post breaks down how to think about it with some examples.

Interest Rates

Interest rates matter the most to two diametrically opposed kinds of businesses: (1) highly-levered, capital-intensive old economy firms, and (2) high-growth, asset-light, and future-focused companies. But why? This post breaks it down by explaining where interest rates come from and why they exist.

Duration & Convexity

Bond Math is mostly the province of Bond People, but it gives us some powerful tools for understanding why assets are sensitive to interest rates, how that sensitivity changes over time, and how to think about other kinds of sensitivity as well. This post goes into much more detail. Convexity in particular is a powerful tool. Think of personal networking: if you know a handful of people, you have a limited set of useful introductions you can make. But once you know just about everyone, you can help any of them find a specific person they really need to meet.

Discounted Cash Flow

The value of a financial asset is the total value of all future cash flows, discounted back to the present at some rate. Somehow, by introducing two unknowns (what will cash flows be, and at what rate should they be discounted) we have not dramatically simplified the problem. Not to worry: it's a surprisingly complex topic.