The value of an act of co-operation

If we use a games theory approach to gaining co-operation, similar to the way Schelling approaches situations of conflict, we can think of using two possible tactics: promise and threat. The promise is essentially, "If you co-operate with me you will get a reward" and the threat is "If you don't co-operate with me you will suffer a penalty or loss of some kind". As the goal is to get co-operation, any threat involving a penalty would almost certainly backfire, so, the only valid threat that can be made is the loss of some kind of future co-operation and the rewards that might go with it.

Games theory gives us a very simple framework in which to view an act of co-operation. Each potential co-operator has only two choices: to co-operate or not co-operate. For an act of co-operation to take place, each must be able to see a clear benefit in a decision to co-operate over a decision not to co-operate.

Despite the apparent simplicity of this decision framework, valuing the relative merits of co-operating or not co-operating are far from straight forward. This was not nearly such a problem in the Industrial Age because of the slower rates of change and the reduced level of competition. The traditional Industrial Age business environment allowed more rigid and more permanent associations to be established, where it was relatively easy to see the potential benefits of any association or act of co-operation.

In a rapidly changing world like e-commerce, technical competence and experience have transitory values. A sound and well established expert in one situation may be totally unsuitable for a similar situation at a later time. Rapidly changing technology can create reputations in weeks and who is to know how long their expertise will be in vogue as technologies and favored competitive strategies change? Worse still, who is to judge the value of an association or act of co-operation when the judgement involves assessing the abilities of someone where you have no way of truly measuring their worth.

As problematic as judging the value of an expert's co-operation, is the corollary: how can an expert or a specialist provide proof of their value to someone else. Maybe you can work out the value of somebody else's co-operation to you, but, this information is purely academic if they see little or no value in having an association with you.

This yields another paradox: the Internet provides a perfect environment to offer ample choice in partners for co-operation. It is a perfect environment to communicate with potential co-operators. Yet, it is almost impossibly difficult to make decisions about who to co-operate with.

To resolve this paradox, we need some Zen-ness: a mental model that will enable us to make shrewd judgements. We need to have some way of approximating the possible value of an act of co-operation before it takes place. We need to know how to get somebody else to see the value of us co-operating with them.

For such a model we can do no better than go to the masters of game theory in conditions of competition and uncertainty: the professional investors. Although they may seem far removed from the problems of establishing acts of co-operation in the Information Age, at an abstract level they are coping with an identical situation. An act of co-operation involves a time commitment or a financial commitment. This is an investment. It makes sense then to look at how the professionals in the more experienced world of investment handle the valuations in their world - which is just as changeable, competitive and uncertain as the world of e-business and e-commerce.

We can use the models used by professional investors because we can readily translate time invested and energy expended in an act of co-operation into a monetary sum. Employees generally work for a salary, sub contractors and contractors work for a fee, companies will make a charge and entrepreneurs will want a profit. All these values will be based upon a combination of a number of factors but each will include money going direct to people, money for overheads and money for research and development. It doesn't matter how the relevant values are assigned they will all boil down to a rate of payment for time, i.e., so much per hour, per day, per month or per annum.

Professional investment managers know how to deal with rates of money spread over time. They are used to looking at incomes and converting them into lump sum values. They are equally adept at converting lump sum values into incomes. It is the ability to perform these tricks expertly that give professional investment managers their skills.

The key to making these investment valuations is in using relative values instead of absolute values. This is because there are so many unknowns and uncertainties involved in the value of a future income that it is impossible to work out with any degree of certainty a precise value. So, the professional investor will have in mind a base value to which all other incomes can be compared.

For professional investors, the base value of an income is the current value of a pure income that is almost certain to be paid. This value can be obtained by looking at the price of annuities that are issued by issuers who have virtually no chance of running out of funds (Note: annuities are guaranteed perpetual incomes that are bought for a lump sum of money).

There are many different companies and organisations that will offer such incomes. Usually the safest are backed by large and established finance houses or stable governments. Once arranged and paid for, these incomes can be traded just like any other commodity and they will have a value depending upon the credibility of the prime issuer.

For example, an annuity of 10,000 dollars per annum will have a higher value if the issuer is the Bank of America than if the issuer is a little known offshore trust. Once you know the current rate for a "(near) hundred percent safe" annuity" - such as the Bank of America - you can value all other annuities by discounting for any risks. For a little known off-shore trust, you discount for the risk of the income not being honoured.

Say an offshore trust offers an annuity of 10,000 dollars per annum. This would be judged by a professional investor as having a risk associated with it. The professional investor will investigate the credentials of the issuer and may judge that there is a twenty percent chance that the issuer will default on this promise to pay a fixed income to perpetuity. Professional investors are not put off by this risk because they will be dealing with many annuities and so will be able to spread the risk.

If the same annuity, of 10,000 dollars per annum, is offered by a safe issuer for say 200,000 dollars, the professional investor will discount the risk by valuing the off shore trust's annuity at twenty percent less than the safe issuer's price. Thus the value of the offshore trust's offered income of 10,000 dollars per annum would be seen as being worth 160,000 dollars. In this way, the investor will discount the risk, so that effectively, the value of an offshore trust's annuity will compare favorably to that of a safe annuity. If the off-shore company offered their promise of 10,000 dollars per annum for only 150,000 dollars, the professional investor might well see this to be better value than the near hundred percent safe investment.

The value of the safe annuities is constantly changing with the average of total market expectations. It will be discounting all the factors involved in expectations regarding the stability of the currency in which the income is arranged. It will also be discounting all the factors that reflect the general view as to inflation and the state of the economy. By using relative values, professional investors don't have to worry about any of these aspects because they will be common to all annuities. So, the only calculation needed to value any particular investment is to discount the risk factor against the vale of the perfectly safe annuities.

Abstracting this principle across to arranging acts of co-operation through the Internet, the vital considerations become clear. Any act of co-operation has a value that is not absolute but is dependent upon the risk factors being discounted by the parties involved in the contemplated co-operation. This value is relative to the going current rate for a known and proven co-operator.

The skill then, in being able to effect acts of co-operation, is not only to be able to value the other party's co-operation to you, but, also to be able to estimate the value of your co-operation to them AS SEEN FROM THEIR POINT OF VIEW. It is this matching of valuations that is vital to any proposed co-operative association.