Markets

The Trust Ecology

NPR’s On The Media recently had a series of interesting segments on the future of the internet:

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

AudioPlayer.embed("audioplayer_1", {soundFile:"aHR0cDovL2F1ZGlvLndueWMub3JnL290bS9vdG0wODE0MDlwb2QubXAzA"});

A theme that ran through was how the security and utility of the internet is threatened by the complete lack of built-in trust mechanisms.  How do you know you can trust who you are dealing with online?  How do you know what information to believe that you read online?  How do you know your online accounts are not completely compromised by hackers right now, and that your bank account isn’t being drained as you read this?

Many people rightly fear that legislating or enforcing new internet protocols to address these issues would lead us down a slippery slope, trample our basic rights of free speech and freedom of assembly, and would ultimately toss …

Name That Financial Debacle!

The following quotes are from a book describing a real set of events:

[The incident] is an extraordinary example of what happens when you get… a dozen people with an average IQ of 160… working in a field in which they collectively have 250 years of experience… employing a ton of leverage.

It’s hard to overstate the significance of a [government-led] rescues of a private [corporation].  If a [company], however large was too big to fail, then what large [company] would ever be allowed to collapse?  The government risked becoming the margin of safety.  No serious consequences had come about in the end from the… near-meltdown.

Was the incident:

a) The savings and loan scandal

b) The collapse of Enron

c) The sub-prime mortgage meltdown

d) none of the above

First correct answer gets to invest in an exciting new bridge project I’m involved with in New York!…

Equity Micro-Investing

I’ve been having a serious discussion with two colleagues of mine about closing the gap that exists between two groups:

  1. People of my generation (40 and older) who have capital they want to invest in innovation but only know the VC for-profit-only value model and don’t have any true view into or understanding of social entrepreneurship business models;
  2. People coming out of college today (27 and younger) who are actually creating untold value for the world without taking on investors because they don’t (a) know how to attract them, and (b) have heard too many horror stories

Jay and I fall into category 1 and Michael falls into category 2.  All three of us agree that the gap above exists — due in part to rapidly declining startup costs — and represents a very real (and lucrative) investment opportunity if it can be closed properly.…

Are Realtors Really Making Too Much?

The Freakonomics guys have been on this rant for years, and until recently, I agreed with their logic.  But the mounting evidence (in my mind) is starting to swing the other way.…

Peer-Review vs. Info Prizes and Markets

I have been having a 140 character discussion with Ciarán Brewster (@macbruski) via twitter.  And while it’s kind of interesting to force complex subject matter into very few characters, it is limiting the discussion, so I will summarize it so far here and hopefully others can weigh in too.…

Stability Through Instability

A friend pointed me to a doubly prescient talk given by George Soros in 1994 about his theory of reflexivity in the markets.  Essentially Soros notes that there’s feedback in terms of what agents believe about the market and how the market behaves.  Not groundbreaking, but he takes this thinking to some logical conclusions which are in contrast to standard economic theory:…

Best Reader Comment Award

I’m giving my “2009 Q1 award for most concise, lucid comment” to Paul Phillips for this gem:

Viewed from a thousand miles, the financial system has a incalculably large incentive to fail catastrophically as frequently as it can do so without killing the goose that lays the golden eggs.

As long as there is such a thing as “too big to fail” and trillions of dollars are available for siphoning, according to what logic can this cycle be dampened? Nobody has to explicitly pursue this outcome (although there are many who will) for it to be inevitable; the system obeys its own logic above all else.

[ commenting on Alfred Hubler on Stabilizing CAS ]

The Good, The Bad & The Ugly

A few articles on the economy that were sent my way recently.

The Good: After Capitalism (Geoff Mulgan)

The era of transition that we are entering will be disruptive—but it may bring a world where markets are servants, not masters.”  I urge you to read this entire article, and leave your ideological biases at the door.  Despite the title, this is no polemic.  Here’s the punchline:

Contemporary biology and social science has confirmed just how much we are social animals—dependent on others for our happiness, our self-respect, our worth and even our life. There is no inherent contradiction between capitalism and community. But we have learned that these connections are not automatic: they have to be cultivated and rewarded, and societies that invest large proportions of their surpluses on advertising to persuade people that individual consumption is the best route to happiness end up paying a high price.

Alfred Hubler on Stabilizing CAS

With his permission, I am posting an email thread between myself and Alfred Hubler.  I had contacted him on the recommendation of John Miller when Kevin and I were posting on the possibility of dampening boom-bust cycles in the financial markets through policy or other mechanisms.  Here’s what Hubler had to say:…

Too Big to Fail = Too Big to Exist?

I asked this question on twitter/facebook and got a lot of variants of “I agree” and only one person who stated disagreement (but provided inadequate reason, IMO).  Jay Greenspan put it this way:

Interesting question this morning, and something I’ve been wondering about. I’ve yet to see anyone really argue that state of non-regulation we’ve been in for the last years has been a good idea.  I’ve heard some thoughtful conservatives talk about how their views have changed radically — coming to understand that forceful regulation is absolutely necessary.

The super-conservatives I’ve seen are talking more about taxes, avoiding the subject. I’d be very interested to see a credible argument for a hands-off approach.

So how about it, anyone game to take up a considered argument for not mandating that companies who get big enough to affect the global economy should be broken up or otherwise handicapped?…

3 Interesting Articles on The Economy

1) The Quiet Coup

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

Betting on Recovery

I have a bet with a friend that Dow will exceed 14,000 at least once by October 12, 2012 (he says it won’t).

Click here to make your prediction on what year that will take place.

Comment below on why you think what you think.…

Radical Transparency

In a March 2009 Wired article, Daniel Roth calls for radical transparency in financial reporting as the path to recovery and a more secure financial system.  He argues that the reporting requirements today allow companies to obscure what’s going on and that the way to fix things is as follows.   Embrace a markup language with which bite-sized chunks of standardly defined pieces of financial data are thrown out to the world so that users can crowdsource the true picture of a company’s financial health.…

Complexity Economics

In Chasing the Dragon, I wondered aloud whether we could dampen boom-bust cycles in the financial system with an economic equivalent of a controlled burn.  Kevin suggested that “generic countercyclical policies” might work.  Underlying both mine and Kevin’s thinking is the idea that you can possibly do better (for the world as a whole) by (a) understanding the entire economic system better and (b) enacting policies which are in line with that understanding.  In contrast to these assumptions are a point of view articulated by one of the readers on a different thread:…

Chasing the Dragon

Kevin just posted about a great article by Felix Salmon in Wired.  I underlined three quotes in my reading of it:

  1. “Correlation trading has spread through the psyche of the financial markets like a highly infectious thought virus.” (Tavakoli)
  2. “…the real danger was created not because any given trader adopted it but because every trader did. In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust.” (Salmon)
  3. “Co-association between securities is not measurable using correlation…. Anything that relies on correlation is charlatanism.” (Taleb)

Social Entrepreneurship Tax Credit

I typed “social entrepreneurship tax credit” into Google and the top result was this page on BarackObama.com.  There are some good ideas there, and I hope they get implemented once he takes office.  But I’d like to see even more.…

Response to "Superorganism Considered Harmful"

This is a response to Kevin’s post responding to my post.

Rafe makes an analogy to cells within a multicellular organism. How does this support the assertion that there will only be one superorganism and that we will need to subjugate our needs to its own?  Obviously, there are many multicellular organisms. Certainly, there are many single-celled organisms that exist outside of multicelluar control today.  So where is the evidence that there will be only one and that people won’t be able to opt out in a meaningful sense?

Crowdsourcing Truthiness

Google Labs has a new service called “In Quotes” which might be tweakable to do a truth market of sorts.  Here’s the suggestion I just emailed them on this topic:

I would love to use Google “In Quotes” to crowdsource measures of truth.

For instance, I just saw this:

“In a world of hostile and unstable suppliers of oil, this nation will achieve strategic independence by 2025,” said Mr. McCain during a campaign speech. [ Wed, 29 Oct 2008 Washington Times ]

Out of Poverty

One of the more inspiring talks at Pop!Tech this year was Paul Polak’s talk about serving the “other 90%” with life-saving and transformative products using a for-profit micro-franchise model that scales.  Paul’s vision and track-record speaks for itself, check it out.…

Want to Influence Financial Crisis Policy Debate?

One of the talks at Pop!Tech this year sparked intense emotions regardless of whether people agreed with the premise or not:

Juan Enriquez (2008) Pop!Tech Pop!Cast from PopTech on Vimeo.

To address these intense feelings and the demand for public discussion, a wiki was created, in which you are invited to join the discussion.  This forum was designed as “a place for a rich, lively, respectful and facts-based dialog on what’s necessary to address the serious economic challenges confronting America today.”  Hope to see you there.

Click here to go to the policy debate.

Predicting the 2008 Presidential Election

I am a fan of prediction markets.   They have typically done much better than polls at predicting the outcome of elections.  Why?  Here’s a thought experiment.  Consider who you think is going to win the election (not who you want to win).  Now consider that I was going to bet you $10,000 of your hard earned money on whether your prediction comes true.  Did that change your thinking at all?  Some of you might have even switched candidates once money was on the line.  That’s the difference between a poll and a prediction market.…

Global Warming

A few months ago a friend of mine engaged me in a discussion about the controversy surrounding global warming.  If you are surprised to hear that there is still controversy, read on; I was equally surprised.…

Charity + Prediction Markets

A new prediction market site with a twist: your profits in the market get donated to the charity of your choice.

I was concerned that it may look noble but that they might be profiting from the bid/ask spread, so I wrote and asked them.  Here is their response:

No fees, except the 5% on top of any funds put into your account. That fee does little more than cover the credit card processing charge. For example, if you want to put $5 into your account, you will be charged $5.25, and you will have $5 in your account to trade with. After a while, maybe you’ll have grown your account to $50, all of which you can ask us to give away to the charity of your choice. No fees on donations. Another way of saying it is that 100% of the funds that are in trading accounts will eventually be given away to charities chosen by the winners.

Very cool, I hope …