1. “It is not the case that the largest banks are the same as other banks, just bigger“
2. “The largest banks are different is that they have something close to monopoly power”
3. “They are not open to outside competition because there are huge barriers to entry”
4. “They promote a noncompetitive industrial organization… by, among other things, creating informational asymmetries.  The innovative products they promote — both derivatives and consumer products — give them an informational edge over their customers. The trading operations they run do the same.”
5. “So if we want to curb the risk taking, too-big-to-fail conflicts, opacity, and the creation of informational asymmetries and complexity, we need to move them down to the scope and scale of the smaller banks. We need to break them up.”

 I hope Rick has a way of converting his personal views into those of the SEC and its staff.  It may have been catastrophic to let the banks fail in the midst of a panic (fall of 2008 – early 2009), because wealth destruction through leverage could have brought the whole fiat money system to a halt.  But if we have learned anything from this crisis, it is that we need to break up JPM and BOA sooner rather than later. 

 Let’s not stop with banks though.  We can extend the information asymmetry analogy to politics.  Profit/money/wealth that was accumulated in the past always tries to control the future by creating barriers to entry (information asymmetry).  It may be as indirect as placing former industry experts on boards of the FDA, RIAA, and don’t forget the Fed.  It all boils down to the battle for copyright of ideas.  It may seem like it has to do with music, but that’s just where the battle front is for now.  Music and culture always build (remix) the past music and culture.  If we are allowed to recursively rearrange Shakespeare’s ideas into books, plays, and movies, then there’s something to be said for balance of the ability to create and copy in all facets of life. 

I am of the opinion that the relatively recent boom in emerging countries has a lot to do with a phase shift in the ability to rip-off ideas.  Last I checked we sometimes call that learning.  Of course the standard counterargument is that one needs incentives to be creative and productive.  No one is denying that, but only to a degree.  The only argument I have is that IF the ability to copy an idea has become cheaper, then the copyright needs to shrink proportionately (but not exceeding the ability to create), whether we’re talking about cultures, ideas, wants or needs.  But scaricity is a very squishy concept.

If I invent the HIV vaccine, how much should I get paid?  How long should my copyright/patent last?  There is not enough information to answer these questions, because you first have to define what economic and political system I exist in as well as the cumulative benefits from an HIV cure and how much R&D is required.  The current state of the US system is moving towards that that of privatized gains and socialized losses.  You tell me what emerges from that!  France, Russia, China, Brazil all benefit from globalization by getting access to good ideas without having to invest as much in R&D.  That is the ecosystem that we exist in.  IF all the countries were one, what would the optimal (most balanced) system be?

But how do we quantify the value of removing scarcity (in this example – the abudnance of HIV)?  What if instead of fighting HIV, I choose to fight computer viruses and to create scarcity, I go out and hire people to create viruses for me to fight or at the very least prevent extermination of virus creators.  The RIP: Remix Manifesto refers to this as “Culture Jamming”.   Scarcity can be created artificially.  Yes, Beatles have a legendary standing.  So do the Rolling Stones, U2, and even Brittany at the very least if we look at their earnings.  They have all built empires remixing older music.  You tell me how much a musician ought to make.  If we can’t figure out music, we won’t make any progress with more important patents.

The whole movie is revolutionary, but these parts are critical:
RIP: Remix Manifesto – Part 7
RIP: Remix Manifesto – Part 9

If you want to jump ahead and become the teacher instead of the student, this is where the peanut butter to my current culture jam is:
The Incommensurability of Scientific Theories

Related posts:

1. Balance the past with Zeitgeist
2. Gene-culture Co-evolution
3. Last.fm Meet Research Networks

Kafka gave us The Metamorphosis.  We have the power to realize our own humility.  Being wrong is irrelevant if you learn from your mistakes and prevent systemic risk from such errors.  How can we be so content with our wisdom if we continually ignore this vital lesson.  As Wikipedia suggests, some people mistakenly dismiss The Zeitgeist Movement of being similar to Socialism, which could not be more wrong.  Emergent systems are the building block of The Zeitgest Movement, while socialism tends to ignore incentives between the group and the individual.  Most “losers” of history tend to argue that their system of beliefs wasn’t implemented correctly.  But they are right!  Thomas Sowell suggests that WHO is making the decision is the most important aspect of any system.  I urge you to skim this excellent summary of the book.

Zeitgest Movement is a school of thought that grounds itself in its humility and focuses on learning and technology to achieve a kind of Truthocracy I’ve been posting about.  The Zeitgesters are working to create a system for continual improvement where the incentives of the individual are aligned with those of the group.  Where the decision maker is in a continual iterative effort to harvest every drop of wisdom from the group prior to making the decision.  Let’s not be naive though – we have to be honest and humble in this pursuit and continually strive to improve the knowledge gathering algorithms.  We must also beware of students bluffing their way to teaching.

“The Internet was not the first technology to disrupt a few business models. From the printing press to the player piano, one generation is always calling the next a pirate”.  The aim of copyright law was to aid in learning by BALANCING the rights of the authors and readers (teachers and students).    Balance between the copyright and copyleft is the key.  Removing the obstacles for a balanced use of the rational and creative sides of the brain is the trick to achieving flow:
“Alice Flaherty argues that creativity is due to a balance of frontal and temporal lobe activity. In other words the trick is not, in fact, to get out of your “left brain” and into your right, but to increase activity in the right hemisphere (or reduce activity in the left) so it matches the activity on the other side.” Source

Awareness  vs “Bewareness” is the eternal and internal battle of the present imagination and past “experience”.  Our goal then must be to reduce obstacles to balance to create flow in all systems.

Rafe was here more than 2 years ago:
“- Cooperators and defectors co-exist
- “Cooperators survive in clusters”
- “Cooperators can invade defectors when starting from a small cluster”
- One interesting dynamic occurs when two self-sustaining “walker” sub-populations collide into a “big bang” of cooperation which largely takes over the population.”"

So it is very reasonable that I would have never learned this or learned it years from now if i didn’t start Googling my hypotheses.  Ultimately the resource focus of Zeitgest will revolve around the speed of learning, which resides within you – your own willingness to learn, teach, and stay humble.

Please watch the Zeitgeist Addendum, and RIP: Remix Manifesto

Then facebook and twitter it (buy a copyleft t-shirt to spread the word and create more balance).  You can’t have big bang without them.

Related posts:

1. Notes from TED
2. Decision Education Foundation
3. Peanut Butter and “Culture Jamming” Sandwich

and to explore Kevin’s question of what the rational pursuit in life ought to be.  First let’s think about Superintelligence. – I am the human with AI and you can choose to not use it and evaluate whether it is a superpower in your simulation or not.  Have you ever discovered that cartoons are solvable.  That a video game has a weakness in that you can use a certain spin move or scheme to win that doesn’t work in real life. In that sense you have “beat” that level or world.  Your ideas can die before, at the same time, or after you die biologically.  And like I suggested here, we don’t choose to get unplugged from the Matrix, we can only try to choose to get out of “learning”.

In the mean time, can one argue that we shouldn’t change all our (political and economic) systems to use AI because it will bring more good to the group than any “old school” human or non networked organization could.  The non-AI supporters will argue that they’re not getting a fair share of the profits and we’ll have an illusion of choice for those who think they can live without it.  We will continue to lie and some will continue to believe that a steak is way better than a hamburger, while the unk”they” eat lobster.  The non-AI supporters will also win, because they live in the present and over time in the past, so their choices are a hedge on biological life.  I haven’t worked out what a fair allocation is between those who learn, create, and discover new patterns and those who benefit from it.  However if we wish to truthfully and rationally pursue a question, we now CAN.  I think Rafe merely suggest that some humans NEED that and can fill that void.  The more important question is that we can now redefine what “life” is.  you ideas can exist after you’re gone, so in a way your students will be alive and following in your footsteps.  We merely create simulations that we find interesting.  We are learners and by default we create simulations for those who want to follow and at any given level if you can choose to “get off the train”.  The real question you should ask is “when should i get off?”  you’re on the train by merely existing.  You don’t have to be Aristotle or Einstein, but don’t be a party Popper either :) (yes, intended).

I think therefore I am.  I am no more a human than i am a collection of cells who live and die.  I am no more than a human trying to pass on genes.  I am also a collection of ideas, questions and answers who fight for the right to live. I form hypothesis and test them with empirical data.  I live and die many times on many levels of existence.  We simply choose where we live and we kill Tyler Durden in others and take the pill to get out.  Or not so simply.  Primer is going to be the next Matrix/Fight Club, because it asks “If you always want what you can’t have, what do you want when you can have anything?”  That is the question of our generation.  We don’t travel in time, we “slide” to different simulations of reality, kinda like the 90’s show Sliders.  Tyler Cowen creates his own economy.  To the degree you help others, you get rewarded for it.  at some points you feel like you want to finally eat the marshmallow and you definitely can, but the only rule is that you cannot force someone to not learn.  So what should we rationally want?  Not to die.  I’ve achieve a little more comfort with physical death now.  I’m not comfortable with mental death at all.  If you stop believing in your existence in the matrix you die outside of it as well.  Woody Allen also explores this topic in his latest work with Larry David in Whatever Works.  This works for me on a biological level.  Primer is way more complex however and i’ll be re-watching it many times in the future.

Related posts:

1. Truthocracy – Part II – Discovering Truth and Experts
2. Truthocracy – Part I – Reducing Collusion
3. Focusing on "Autonomy"

Evolutionary flaws in these systems can cross-contaminate each other with negative (un)intended consequences and if those consequences are not outweighed by the positives, then we need to improve our systems.  Democracy is merely the best system in terms of the balance between growth and stability that humanity has been able to come up with so far.  Free markets are necessary but not sufficient for efficient allocation of resources.   Our development doesn’t need to be a slave to a misdirected less sophisticated majority to the degree that it currently is.  We are committing simple behavioral flaws/mistakes on different levels (consumer, executive, and regulator) which are Nash rational for our self-benefit, but have free rider/tragedy of the common/agency issues/conflicts of interest consequences written all over them. Our systems can be improved if we only stop pretending that we’ve already perfected them!

SOLUTION
How, then, can we strip away these distortions and get to the core of what a better sytem “should” be?  How can we efficiently filter for and give more weight to unbiased experts and good ideas without appealing to authority, seniority, or majority? Enter the Bayesian Truth Serum (BTS).  I cannot summarize it better than the author of the article:

“BTS is a survey scoring method that provides truthtelling incentives for respondents answering multiple-choice questions about intrinsically private matters: opinions, tastes, past behavior. The method requires respondents to supply not only their own answers, but also percentage estimates of others’ answers. The formula then assigns high scores to answers that are surprisingly common, i.e. whose actual frequency exceeds their predicted frequency…The scoring system transforms a survey into a competitive, zero-sum contest, in which truthtelling is a strict Bayesian Nash equilibrium (Prelec 2004). 

We conduct a general knowledge questionnaire in which we ask respondents if they recognize various items: electronics brand names, historical figures, philosophy terms, etc… By including nonexistent foils alongside the real items, we can measure the degree of deception. When significant bonus payments are awarded to the survey takers with the highest BTS scores, people claim to recognize fewer foils than when bonuses are awarded randomly. The study also validates our claim that truthtelling is in the respondents’ interest: people do in fact achieve higher scores, and earn more money, when they deny knowledge of foils. 

In our second study, we investigate whether it is possible for survey takers to exploit the BTS system by engaging in strategic deception that they hope will be more profitable than answering truthfully. In four surveys, with content chosen to be neutral enough that we can plausibly treat actual answers as truthful, we compare information scores from actual responses to those resulting from various deception strategies. For example, we test whether respondents can score higher by giving the answers they believe will be most popular, rather than their true opinions. We also examine whether respondents do better by misrepresenting their demographic characteristics (gender), or by simulating the answers of some other person they know well. We find that genuine answers reliably outperform every deception policy we test, and that no identifiable subgroup of respondents can expect to benefit from deception.”

BTS KILLED THE DEMOCRACY STAR
In one of a handful of different experiments, MIT and Princeton students were asked to identify US state capitals where the named city was always the most populous in the state (ie ‘Is Seattle the capital of Washington?’).  Here are the results:
“

Expertise correlates with BTS scores but not with Conventional Wisdom.
Conventional wisdom is defined as the number of consensus answers (answers consistent with majority). The two top panels are taken from the MIT study; the bottom panels from the Princeton study. The y-axis is the number of correct answers out of fifty. The x-axis is: (left panels) the number of states where a respondent’s answer matches majority opinion; (right) for each subject r, the sum over 50 states of the BTS score for the answer that they endorsed (averaged across individuals who endorsed that answer)” Source

We can cultivate an ability to maneuver within any given system to discover the most surprising common answers.  If you can predict what others can’t predict, those who “lost”, should  trust your “expertise”, because you are best at discovering truth (the surprisingly common answer).

How can we discover truth by applying the BTS scoring methodology to change our industries, press, entertainment, and politics into institutions that will breed good ideas instead of merely focusing on the short-term profit potential?  A BTS “forum” provides a possible answer.  The people in the forum would have “competitions” to ask each other questions.  If someone asks a predictable question where most others are able to accurately predict what the answer distribution will be, the information value of the question will be 0 (and the person asking won’t have anything to gain himself).  If someone on the other hand can ask a question that is unpredictable, it will hold BTS Information value and most importantly people answering will have the ability to score positive  BTS points and display their expertise, while filtering out nonexperts (negative BTS scores).

For example, ten people ask each other ten questions.  At the end of the game, the scores are tabulated and the people with more BTS points are deemed to have more expertise than the losers.  Top three experts move on to the higher division, bottom three move down to a lower division.  Ten games are played and the league divisions are then changed using a similar rule, with Experts moved up and the “losers” moved down.  Quite similar to promotion/relegation in futbol leagues, tennis, and chess rankings.  (The forum idea is not mine and I am speculating as to what the best way to set it up would be.  There’s a working paper on this that the author has requested to not be cited, but it doesn’t go into much on the topic, yet).

This forum would simulate the evolutionary or emergent (?) learning environment, similar to sports and other competitions.  We ask hypothetical problems of each other and “weed out” the people who agreed on the reply the most where the majority wasn’t able to predict that reply.  It’s a way to test “self awareness” of your own group/sample – your ability to predict the “average” (and possibly even the SHAPE (other statistical parameters) of the distribution).

Please understand that we don’t merely identify experts, which is a grand accomplishment in itself; we also discover “surprisingly common answers” (even to the experts themselves).  For example, people consistently underestimated the degree to which others would find the Humor questionnaire funny (read the first study).  So the BTS methodology allowed us to discover that the Humor questionnaire is indeed surprisingly funny!

I modeled the BTS scoring methodology in excel.  Knock yourself out.  Think of different deception strategies and see if you can break it (I can only think of one that may work, but it’s easily identifieable and thus can probably be corrected for).  I highly suggest reading the paper first, because they unsuccessfully test quite a few deception strategies and truth-telling tends to win the vast majority of the time.

Related posts:

1. Truthocracy – Part IV – www.hunch.com
2. Truthocracy – Part I – Reducing Collusion
3. Truthocracy – Part III – MIT Center for Collective Intelligence

 I’ve been meaning to do a post on the Bayesian Truth Serum (Prelec), but Tyler Cowen’s post on Range Voting has inspired me to do a series of posts on Truthocracy.  It is an idea that we can cut out the highly biased and conflict-ridden middle man that is the Politician in our search for good ideas and policies.  It will all come from crowdsourcing with artificial intelligence to reward and filter truth and sophistication.  The first post focuses on reducing collusion, which is the dominant strategy in a democracy and a tough force to battle in illiquid (Truth) markets.  The second post will focus on defining and discovering truth (yes, there’s an app for that!).  Can you even imagine a world where lying and collusion are incentivized away?  What are the implications?  A discussion is magnitudes more productive than one way communication, so all feedback is encouraged.

Collusion-resistant, Incentive-compatible Feedback Payments (Radu Jurca – Google Zurich, Boi Faltings )
Those with short attention spans please just read the bolded parts and table below.

- If you thought politicians were lying, colluding monsters, just imagine what software agents can do: 
“A key ingredient for all reputation mechanisms is honest feedback.  The future online economy may be dominated by rational, utility maximizing software agents, that will exploit such misreporting opportunities. Hence the need for designing reputation mechanisms that are incentive-compatible: i.e., rational agents and it in their best interest to report the truth.”

- Goal and Methodology: reward truthfull reporters based on how well their feedback improves the predictor model:
“Intuitively, payment mechanisms encourage truth-telling because reporters expect to get paid according to how well their feedback improves the current predictor of the reference report. Every feedback report modifies the reputation information, which acts as a predictor for future observations. The payment received by the reporter reflects the quality of the updated predictor, tested against the reference report. Assuming that the reference report is honest, every agent has the incentive to update the current reputation such that it mirrors her subjective beliefs. Agents thus report honestly, and truth-telling is a Nash equilibrium.”

 - Unfortunately constant reporting strategies (always good/bad, COLLUSION) pay more than honesty:
“In previous work [13] we show that all binary incentive-compatible payment mechanisms suffer from the same drawback: there are lying equilibria that generate higher expected payoffs than the truthful equilibrium.”

- RESULTS: Collusion can be incentivized away (in a realistic world):
Collusion Strategies

The Bayesian Truth Serum takes a slightly different approach and focuses on defining truth as opposed to reducing collusion, but that’s for Part II.  Please stay tuned… 

 More details on Scenario 3 and 4 for those who are interested.  At the top of page 2 in the paper above there is a simple plumber reputation example.
Scenario 3 – Fraction, Full Coordination, No Sharing
- THEORETICAL BOUND - When more than 50% of reporters collude, “any sequence of honest reports, can be `corrected’ by a carefully chosen sequence of colluding reports, such that lying is profitable”. 

- PRACTICAL BOUND - As # of colluders increases, “the design problem becomes more constrained, and therefore, the budget required by the reputation mechanism is likely to grow”. Practical bound for coalition size is <=33% of total responders.
“relative cost of the collusion-resistant mechanism (i.e., divided by the cost of the mechanism that is not collusion-resistant)…  the cost starts increasing exponentially when the payment mechanism must deter coalitions of more than one third of the agent population. This suggests that the practical bound on the coalition size should be around one third of the number N of reporters”
 

 Scenario 4 – Single Strategic Entity, Shared Winnings
- THEORETICAL BOUND – “One anonymous honest report is enough to design incentive compatible, collusion-resistant payments”:
“An apparently more difficult collusion scenario allows the design of payments that are resistant to bigger coalition fractions. The explanation resides in the choice of the solution concept for “[Scenario 3]”. There, honest reporting is the dominant strategy, so that each colluder reports the truth regardless of the reports of the other colluders. In the present scenario, on the other hand, individual colluders are allowed to lie, if the coalition as a whole reports the truth. The constraints are therefore feasible for higher coalition fractions.” 

 - PRACTICAL BOUND – Higher marginal cost, but linear growth <50% coalition size:
“The cost grows linearly for coalitions that span up to one half of the population; for larger coalitions, the cost grows exponentially. Nonetheless, by comparing Figures 2 and 1, we see that for the same coalition size, the collusion-resistant payments are cheaper if we assume a setting with non-transferable utilities.”  

Related posts:

1. Truthocracy – Part III – MIT Center for Collective Intelligence
2. Game Theory and Military Planning
3. Truthocracy – Part II – Discovering Truth and Experts

Hypothesis: Vaccination is something that is good at the societal level but bad at the individual level.  That is, it is a tragedy of the commons.  You want all your neighbors to get vaccinated so they don’t pass on the germs to you, but there is enough risk from the vaccination process (at least for certain ones) that you’d rather not do it yourself.

The mathematics of the commons tragedies suggests that there are two ways out.   One is to change the payout/incentive structure, in other words, make the vaccine’s less risky to the individual, or at least change the perception of the individual risk (as the Wired article suggests).  The problem with manipulating perception is, what if you’re wrong?  The marketplace of ideas can be efficient, crowd wisdom can be greater than individual understanding.  And even in the cases it’s not, the market can remain irrational longer than you can remain alive.

The good news is there’s another way out.  Just as with the Prisoner’s Dilemma, you can iterate.

What would this mean in the case of vaccines?  It would mean that as a society we must recognize that if we “play the game” enough times we will find that not vaccinating as a whole leads to poorer outcomes to the the individual.  That means YOU.  And thus it becomes recognized that taking the “I’m not going to vaccinate” stance is immoral, or at least unacceptable.  Sure there will be “defectors”, just as there are people who don’t vote.  But those who don’t vaccinate — just like those who don’t vote — do so quietly.  They don’t shout it from the rooftops or let their neighbors know.  And sometimes they even lie and say that they did vote when they really didn’t….

The level of defection is inversely proportional to the level of transparency — the less your neighbor can find out about your behavior, the more likely you are to defect.  Thus, we solve the dilemma by making public the record of everyone who vaccinates, along with their address.  Those not on the record are assumed to be defectors.

Related posts:

1. Game Theory and Military Planning
2. Should You Use Sunscreen?
3. Dangerous Ideas

 “How does it work? At the basic level, students can “drag and drop” research papers into the site at mendeley.com, which automatically extracts data, keywords, cited references, etc, thereby creating a searchable database and saving countless hours of work. That in itself is great, but now the Last.fm bit kicks in, enabling users to collaborate with researchers around the world, whose existence they might not know about until Mendeley’s algorithms find, say, that they are the most-read person in Japan in their niche specialism. You can recommend other people’s papers and see how many people are reading yours, which you can’t do in Nature and Science. Mendeley says that instead of waiting for papers to be published after a lengthy procedure of acquiring citations, they could move to a regime of “real-time” citations, thereby greatly reducing the time taken for research to be applied in the real world and actually boost economic growth. There are lots of research archives. For the physical (but not biological) sciences there is ArXiv, with more than half a million e-papers free online – but nothing on the potential scale of Mendeley. Around 60,000 people have already signed up and a staggering 4m scientific papers have been uploaded, doubling every 10 weeks. At this rate it will soon overtake the biggest academic databases, which have around 20m papers.” via Guardian.

There are probably better collaborative platforms out there, but this will get Mendeley a following in the community, which is far more important.  How long before these scientists make the data open source?

Or how about Wikibooks?  It is a free library of education textbooks that can be edited by anyone.  We are only one iteration away from having summaries, reviews, and discourse of ALL books available for free.  If you think there’s a copyright issue, this my help.  Amazon.com has plenty of summaries in the reviews section.  The music model is changing from distribution to performance and so will other intellectual property.  Just because you have a good idea, doesn’t mean you get to sell a stack of pages.  The lag in my opinion is due to our obsession with entertainment (music and movies) over education.   What do you guys think?

Related posts:

1. Radical Transparency
2. The Challenge
3. Truthocracy – Part I – Reducing Collusion

Prediction markets occasionally exist concerning a single event of an individual company, but this represents only a fraction of the market opportunities that can be made available. I propose creating a large number of prediction markets, perhaps 500-1000, covering all types of companies: Those near liquidity like Facebook and Twitter, those that recently received Series A or B venture financing, and even those that are running on seed or angel funding, or with no outside investment at all. Each company could have a series of markets to assess its current value and prospects for success. While verifiable information concerning private companies is often hard to come by, there are a variety of metrics that could be used as the basis for markets:

- If and when a company goes public, as well as its closing IPO valuation

- If and when a company is sold, as well as its sale price (if disclosed.)

- Number of registered or active users.

- Website traffic (this is most applicable for certain types of companies, like Social networking)

I like to think there are many more applicable measures of success that can be used and would love to hear any suggestions from our readers. Most likely each sector has some specific metrics that are applicable to evaluating success or failure. With enough volume, a market for valuing private companies would emerge. This might not be as far off as you think.

The Commodity Futures Modernization Act allows for real money prediction markets that operate as an Exempt Board of Trade (EBOT.) The American Civics Exchange (ACE) is one of the first companies to take advantage of EBOT status. While today they have only a few markets, which concern tax changes and other political actions, they anticipate expanding to include contracts that allow individuals and business to hedge against a legitimate risk. Examples could include FDA drug approval, the outcome of major class action lawsuits, and even health care reform. Unfortunately, trading in these markets is restricted to high net worth individuals, and contracts relating to the success of private companies is likely prohibited. Still, this exchange represents a step in the right direction.

Recently, Google, Yahoo, and Microsoft co-wrote a letter to the Commodity Futures Trading Commision (CFTC) asking for “small stakes” real money prediction markets. They believe that real money prediction markets have the “potential to provide significant public benefit.” My guess is they believe there is significant money to be made as well, but that is ok with me. Momentum is building, and an actual real money stock market for private companies may not be far away.

While I would like to personally bet on the success and failure of many companies, I’m also curious how accurate the markets will be in predicting success. I think that the younger (not necessarily in absolute time) a company is, the less predictable its prospects become. Kevin Dick believes small groups like angel investors and venture capitalists can’t pick winners at the seed stage. But what about large groups and the “wisdom of crowds”? Perhaps aggregating information via prediction markets can yield better signals about a company’s prospects for success. Assuming it can, this data will be of interest to a number of parties including potential acquirers, partners, analysts, and even customers. You don’t really want to use a company’s products if you think they are going bust, do you? Today, if you have that opinion, there isn’t much for you to do other than decline to buy its products. But soon you might be able to bet on it and turn a profit.

Related posts:

1. Charity + Prediction Markets
2. Peer-Review vs. Info Prizes and Markets
3. Radical Transparency

In a single round game with a payoff matrix similar to that proposed by Gash there is a clear Nash equilibrium, representing the optimal strategy both parties will adopt. In this case, both villages choose to support the Taliban. But, supporting the Taliban or Coalition is not a single round game, it is continuous game, with significant but unknown number of rounds. Not only may villages switch allegiance at any time, but if the Taliban is defeated or cleared from the area, the game may abruptly end.

In his seminal work, “The Evolution of Cooperation,” Robert Axelrod explores how cooperation surprisingly trumps competition in a similarly styled prisoner’s dilemma game. Based on an iterated prisoner’s dilemma tournament, Axelrod found that strategies which always defected, (or in the case of Gash’s example, supported the Taliban) performed the worst. The best strategies were mixed, and tended to copy their opponents previous actions, leading to cooperative alliances.

Extending this theory of cooperation to the actions of Afghan villages, we can infer that over time they are likely to discover that cooperation and supporting the coalition is the best strategy. While Gash correctly concludes that changing the cost/benefit value (incentive) for supporting the coalition may speed up the process, it is not necessary to achieve the optimal cooperative solution.

Related posts:

1. Evolutionary Game Theory and Archaeology
2. Must Read Paper On Overconfidence
3. Evolution Favors Cooperation Over Competition

Given my previous post, you’d probably suspect that I think this is a good idea.  And at first blush it is.  But the article misses two important points which render the plan fairly impotent.  The first is that since public disclosure only applies to public companies, the radical transparency plan erodes further the incentive for companies to go (or remain) public,* hence driving the creative accounting underground.  And that’s assuming that such disclosure has the potential of making public companies more financially transparent.**  Let’s assume for the moment that it does have such potential, the next question is, will it?  I think not.

The issue is that it’s not data that produces transparency, but rather data plus analysis.  Yes, you have to start with accurate data for the analysis to be effective, but good data alone is not sufficient to produce the kind of price-correcting (aka naive-investor-protecting) transparency that Roth believes will result.  Or more to the point, good data by itself will enable sophisticated traders and quantitative arbitrageurs to make more of a profit, but that excess profit will be at the expense of the average investor.  In theory — as Roth points out with his LendingClub example — good data levels the analysis playing field, but in practice the field will never be level as long as there is profit to be made by deeper analysis.  The only way true financial transparency will be achieved is if there is incentive for the best possible analysis to be open-sourced.***

Maybe someone here will come up with a clever mechanism (like this one) that aligns the market incentives with the policy goals.  If so, that would be great.

But I think we need an even more radical form of transparency.  I read about the concept a while ago in John Allen Paulos’ book A Mathematician Plays the Stock Market.  Paulos suggests that the concept of insider information should be abolished and that we should allow all employees and stakeholders to buy and sell shares of their own companies without penalty.  A corollary is that there should also be no penalty for giving “inside” information to outsiders (except possibly in cases of trade secret or non-disclosure violation).

When I first thought about Paulos’ proposal, I dismissed it as unworkable and an idea with many bad unintended consequences.  But the more I think about it and challenge my assumptions about what’s important for individual companies to thrive and for the markets to be more bubble-free, the more it makes sense to me.  Thoughts?

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* Let’s face it, the only real reason for a company to go public is to provide an exit for early stage investors and liquidity (read giant payday) for founders and employees.  This is a great economic driver and not something I advocate doing away with.  But now there are so many private and pseudo-public ways for stake-holders to get their paydays without the burden of public scrutiny and company accountability that it doesn’t make sense to undermine the incentive to IPO.  If anything, we should be providing extra incentive for companies to be public and to take on the concomitant burdens.

** If it doesn’t, then what’s the point?

*** Note that the real transparency benefits claimed from the LendingClub example came when LendingClub itself decided to post not only the data but also good algorithms for analyzing that data.

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