Are You Long Yourself?

economics

I spend most of my time programming, but my formal academic education is a mixture of mathematics, statistics, and finance. I’ve recently been thinking about employment of programmers through the context of finance.

The value of financial assets, e.g. stocks, bonds, commodity futures, options, &c depends on the value of other assets1. For example, the value of an option has been shown to depend on the current “risk free rate”, the price of the underlying security, and the volatility of the underlying security’s price, and the time to expiration of the option.

For each of these factors, we can calculate our “exposure”, which is just the first derivative of the price of the security we’re interested in, taken with respect to the factor we’re interested in calculating our exposure to. For bonds (as an example), this concept of “interest rate risk exposure” is called “duration”; the dollar duration is (approximately) the expected change in price of the bond in response to a 1% parallel change in the interest rate curve.

But this concept can be extended to non-financial assets well. After all, the simplest model of a company is as a bundle of assets, have a certain value that is a random process, and a bundle of liabilities, which also have a certain value that is determined by a random process. The value of the equity - that is, the company - is simply the (positive) difference between these two values; if the value of the assets becomes less than the value of the liabilities, the company goes into bankruptcy. This is actually one method of pricing certain kinds of credit derivatives, including credit default swaps2.

And even though many assets don’t have straightforward pricing models - for example, there is no formula to give you the change in price on a stock based on a change in the price of oil, as you can calculate for bonds and interest rates - we can still calculate exposures using a mixture of fundamental and statistical methods.

This extends all the way down to your own work product. The hours you work generate a product - be it computer code, fine steak dinners, or something else - and the value of that work product is expected to change over time. This is the concept of “human capital” that is often bothers people who believe in a labor theory of value 3.

But, given that your current and future labor has value, it’s a good idea to figure out if you’re long or short that value. If you’ve entered into a freelance contract, or a regular employment agreement, you’ve agreed to sell your future work at a certain price at a certain time, repeatedly. You’ve entered into a futures contract. Are you long or short?

You’re short. You’ve sold your work product already; if it goes up in value in the mean time, you lose. If it goes down in value, you win, because you’ve already sold it. You are literally short yourself.

A certain amount of this is necessary. By working at a company, you gain access to resources that magnify the value of your work product significantly. And by shorting, you do get the peace of mind that comes with knowing how much you’ll get paid next week, month, or year, more or less.

But being short yourself means that you don’t get to benefit fully from your own learning, from your personal development, or from dumb luck or serendipitous ideas.

When do you want to be short? When you expect the underlying asset to go down in value. Do you think an hour of your time one year from now will be worth less than it is today? Do you want it to be worth less than it is today?

You’ll note that most wall street traders - perhaps those most familiar with the short/long dynamic - are (at least partially) long themselves, because they get paid a percentage of the profits they earn for the corporation. The more their work product goes up in value, the more they get paid.

Regardless of how you feel about wall street, there’s something to be learned from the traders.

At this point, many internet writers would urge you to go start your own company, and be 100% long your own work. I don’t think that is necessarily a good idea. There are huge advantages to not being 100% long your own human capital - diversification, reduced variance, peace of mind - and I firmly believe most people will be happier working for someone else, and being short themselves.

But, next time you’re discussing your work, think about what you’re short, and what you’re long. And if you are confident in yourself, maybe there’s a way to go long.


  1. Under the concept of “arbitrage-free pricing”, which is the most common paradigm for pricing these securities.

  2. This concept is variously called Merton’s Model of the Firm, but is related to a paper published by Black.

  3. I’m not rejecting a labor theory of value here - in fact, I think this framework can be quite productive for labor theory of value thinkers.