Tuesday, 6 April 2010

Tolstoy

I was thinking about the margin issue, on the back of past discussions and more recent comments relating to my post about bet365.

I wonder if it helps to think about it in these terms.

Every time I walk past our local pub on my way between the office and the tube, there's a blackboard outside it which has something relevant to next up-coming 'day of celebration'. For Mother's Day, for example, it was 'free pudding and a glass of champagne for every Mum this Sunday'. For St. Patrick's Day, it was 'bring in your Irish passport and have a Guinness on us'.

Now, what's that if it isn't the pub cutting its margin by means of a special offer? And why doesn't anyone bat an eyelid about it, except because it's blindingly obvious that the reason it does it is to increase the footfall on a given day? In other words, just because it gives something away more cheaply (free, even), it doesn't mean that it makes less money. On the contrary, the chances are that it makes more. If there were a levy on the pub based on its gross profits, the body receiving that levy would be better off. People who wouldn't have gone in at all will be attracted to the idea of an afternoon in the pub; people who would have gone in anyway will probably end up buying a complete round, or a bottle of bubbly for everyone.

Yet this type of activity is what the people complain about when they say that a fall in margin is automatically bad for racing.

Equally, imagine how laughable it would be if all the other pubs in the area went bleating to DCMS about how this mean little pub cutting its margin to attract more customers was unfair on them? What kind of short shrift would they get if they said that for years they'd run their pubs without having to compete with this kind of innovation; so why should they have to put up with it now?

This, meanwhile, is the type of argument regularly advanced by those large bookmakers who continue to push the idea that a drop in their margin is a reason for their slowing growth, and should result in their competitors being sanctioned in some way.

Put in those terms, is it so difficult to understand? Am I missing something?

Maybe I'm missing one thing, explained by a great quote someone sent me today, from Tolstoy.

It reads, "The most difficult subjects can be explained to most slow-witted man if he hasn't formed any idea of them already; but the simplest can't be made clear to most intelligent man if he's firmly persuaded that he knows already."

Quite.

2 comments:

  1. That's the intro quote to Michael Lewis' new book 'The Big Short'

    Which as an ex trader you should read

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