The introduction of option pricing theory, terminology and various forms of hand waving does nothing but confuse the central argument with gross misapplication of theory.
I wanted to write an informal introduction to options using a more tangible example for those who are put off by the maths but still would like to gain an intuitive understanding. At the same time I wanted to show things I found were interesting in the data.
It may have been better to separate the two ideas. As you rightly say, one is confusing the other in the current form.
Only if supply is saturated by demand. I'd rather get paid to sit in traffic than be idle.
Medallion owners earn more when their cabs complete trips faster. What they pay their drivers is a matter of their contract.
I make this clarification because it has muddied policy waters before. Some cabbies own their medallion. But most are independent contractors to a corporate owner.
In general medallion owners do not "pay their drivers". Most drivers pay the medallion owners to lease the taxicab (or the medallion alone).
The cab driver is constantly playing bird in the hand is worth two in the bush - do I take less per minute with this customer but take a long time, or take the customer quickly, get paid more, but then also have the risk I won’t pick anyone up for long enough that I am worse off?
I think most people go for bird in hand is the issue.
He's covering a lot of ground and might have done better to lead with the graph that he made with his product, which shows that the average speed of cabs has gone down a lot.
The options curves that he talks about then involve: (1) how does slower driving impact the earnings of cab drivers and (2) is a cab driver motivated to drive faster or slower?
If log-normal distributions, greek coefficients and such were really relevant they should be realized to something like "delta was 0.2 in 2011 and 0.4 in 2012 because of X and with the consequence Y"
I am still left wondering how do the following factors combine:
- increasing traffic from increasing population and economic activity
- increasing traffic from increased ride hailing competition (those yellow cabs have a quota, but the challengers don't)
- increasing traffic from deteriorating conditions on public transit
- cab drivers deciding to drive faster or slower because of what they learned at the Chicago School of Economics
and that's were "gross misapplication of theory" comes in. When profit is the small difference between two large numbers it is easy to lose a whole basketball team's worth of shirts pricing options -- every crisis a new generation of quants learn the hard way that Marx had a point about the "declining rate of profits".