The old saying is that knowledge is power. And it is, of course. Sharing it is also power, but only for those people who know how to create value rather than just have the private knowledge of it. For those people whose skill is not in value creation, but in value trading, differential knowledge is a source of profit.
Adam Smith talked about it when he wrote of efficient markets where information that is relevant to differential advantage in the marketplace, i.e., where value is traded, can create an advantage for as long as the information stays private.
Smith went on to say that maintaining that knowledge differential is difficult to do, because the act of trading reveals more and more of the information that was once held privately.
Soon the market pricing incorporates all that is known about the valued asset in question, and the trading price accurately represents the “true” value of the asset. This means that the price settles to the point that represents the balance of negotiating power between supply and demand.
The finance industry supplements its access to differential knowledge by using its own language. The vocabulary and grammar of that language is intended to make complex ideas easy to communicate among the finance practitioners. It is also designed to ensure non-finance individuals fail to grasp the knowledge embedded in communications that employ the specialized language.
There are even unique “dialects” within each investment company which serve to allow public dialogue without fearing loss of private, advantageous information.
Let’s take one example: “volspace.”
Spoken quickly in a compound sentence, the listener might not exactly hear what was said. Since it’s not a common word and hasn’t found its way into the American Standard Dictionary, the listener would probably think they heard something else.
The listener might not want to stop the speaker (who looks and acts and speaks very authoritatively) to ask humbly what that word meant, thereby revealing ignorance.
It means “volatility space.”
Pressed further, the speaker would explain that it is indeed simply volatility, the magnitude of price variance over the measurement time period.
Why did the word evolve into this form? What is served by using the word “space,” for example?
“Space” emerged in the business and investment lexicon during the dot-com boom period. There were a lot of new words, acronyms and phrases invented during the late 1990s to partner with the “new economy.”
The popular business models of the time included no profit, growth measured in non-financial metrics, and huge valuations for public offerings based on market greed and ignorance of the meaning behind the language of technology startups.
“Space” meant a defined segment of a defined market. The problem was that the definitions were not fast in coming or explanatory when they did.
Putting the two together, “volspace” means the part of the market for trading an asset that exhibits a particular rate and magnitude of price variability, to be defined. That segment could be the “low volspace,” the “medium volspace” or the “high volspace.”
If high variability is desired, because it might provide higher potential returns, then the trading entity might pursue that segment as an investment, for example.
In old language, the term would be simply “risk level.” It means the same thing. So why do people make up new words and phrases for concepts that have been around for a very long time, and which were previously described in terms that were quite functional?
My theory is that new language is invented to create exclusivity among collaborators who wish to communicate in the open without being understood, thus ensuring a differential advantage in trading (or other activities that rely on the power of information).
Anyone who has traveled to a foreign country where you don’t know the language understands the disadvantage of not knowing how to communicate or understand what is being said.
Anyone who has walked into a group of people discussing a topic with words you haven’t heard before knows how exclusionary it feels. And that’s the point: to exclude.
It’s not conscious, it’s just the way we’re built. Language is a particularly well-developed human skill. Our psychology is built around ancient behavior trends of cooperation and reciprocity on the one hand, and an urge to dominate on the other. We use our high level of skills to exemplify those underlying instincts. And yes, they can be in conflict.
So when I heard, “You know, target date funds achieving a significant alpha by composing investments according to an index that follows a medium volspace can only do so if PM fees don’t employ hidden soft revenue compensation to the custodian,” I knew I was being excluded from understanding.
To combat this disadvantage, one must be ready to pitch the ego out the window and simply ask, “What the heck are you talking about?!” Or, more diplomatically, “Excuse me, what does ‘volspace’ mean?”
Admission of ignorance to the speaker forces them to reveal their knowledge and now include you in the club of those who understand the language. They have to show you the secret handshake.