Tom W. Bell paper

[Don Marti]

Paper about how to connect markets to R&D incentives
without monopolies:

http://agoraphilia.blogspot.com/2006/08/prediction-markets-whup-on-copyrights.html

    "Prediction markets offer another way to promote
    the sciences and useful arts. In general,
    prediction markets support transactions in claims
    about unresolved questions of fact. A prediction
    market specifically designed to promote progress
    in the sciences and useful arts - call it a
    scientific prediction exchange or SPEx - would
    support transactions in a variety of prediction
    certificates, each one of which promises to pay
    its bearer in the event that an associated claim
    about science, technology, or public policy comes
    true. Like other, similar markets in information,
    a scientific prediction exchange would aggregate,
    measure, and share the opinions of people paid
    to find the truth."

This is interesting, but is a market in science and
technology really a prediction market, if you could
use your cold fusion futures to hedge your oil stocks,
or use factoring algorithm futures to hedge your
quantum crypto startup?

--
Don Marti                    
http://zgp.org/~dmarti/
dmarti@...           LinuxWorld: August 14-17, 2006, San Francisco

[Stephen J. Turnbull]

Don Marti writes:

 > Paper about how to connect markets to R&D incentives
 > without monopolies:

That's a misstatement.  R&D inherently involves monopoly---the first
entity to discover something is by definition a monopolist, at least
at that instant.  What you mean is *government franchises*.

But this is not really practical, as far as I can see.  What you're
looking at here is a large collection of individual securities, each
subject to "events" that could imply swings of hundreds of billions of
dollars---and the inevitable bankruptcy risk on the side facing the
adverse change.  Would I buy a share on a market?  Not a chance,
unless it were ultimately insured by something with assets denumerated
in the trillions of dollars.  *A mortgage on Microsoft is not big
enough.*

Another problem you're going to run into is that by definition you're
looking at insider trading (another form of monopolistic
exploitation).  If insiders can't trade on their information, how are
they going to use this market to fund completion of their research?

I'm not saying that this proposal won't be an improvement over the
government franchise involved in intellectual property.  But it's not
a panacea, and I would be willing to bet that in the end making these
markets work will require large-scale government intervention.  I'm
very pessimistic that intervention on that scale will be much better
than what we currently have.

Steve

[Norbert Bollow]

Don Marti <dmarti@...> wrote:

> This is interesting, but is a market in science and
> technology really a prediction market, if you could
> use your cold fusion futures to hedge your oil stocks,
> or use factoring algorithm futures to hedge your
> quantum crypto startup?

Yes, if for any given question, the amount of capital
which knowledgeable market participants (such as hedge
funds employing scientists who have a good understanding
of the relevant scientific information which is available)
are willing to risk is large enough in relation to the net
risk that is being hedged.

Greetings,
Norbert.


--
Norbert Bollow <nb@...>                       http://Norbert.ch
President of the Swiss Internet User Group SIUG        http://SIUG.ch

[richbodo]

>
> This is interesting, but is a market in science and
> technology really a prediction market, if you could
> use your cold fusion futures to hedge your oil stocks,
> or use factoring algorithm futures to hedge your
> quantum crypto startup?

Some might say that as long as the purpose of the market is to
predict, it is a prediction market.  You could create a hedge fund
that included bets on the spex market, tho.

Mr. Bells definition of a prediction market's purpose is in large part
enumerated in a matrix that compares markets on page 16 of his paper.
In that matrix, he contends that the secondary purpose of a prediction
market is to promote discovery.

I would rather identify the type of market the usual way, by what is
bought and sold.  It's harder to say to what purpose a market is
created and used.  I think he should lose that matrix.  If we take
that approach, a spex is a prediction market in which assets are
bought and sold that are tied to scientific claims.

Some of Bell's other attempts at fundamentally differentiating a spex
from other prediction markets didn't work for me, either: "Because
markets in skill-based claims reward research, however, they tend to
stimulate it."  Although true, that does not differentiate a spex from
other prediction markets in principle.  You could make a similar case
for an assasination market.

Love the underlying motivation of the paper, and it's probably a good
legal howto, but I didn't feel he addressed just the type of question
you ask - the what, and it too quickly skims over the more intrigueing
"why?".

--

-Rich
http://rbodo.blogspot.com

[Stephen J. Turnbull]

stephen@... writes:
 > But this is not really practical, as far as I can see.  What you're
 > looking at here is a large collection of individual securities, each
 > subject to "events" that could imply swings of hundreds of billions of
 > dollars---and the inevitable bankruptcy risk on the side facing the
 > adverse change.  Would I buy a share on a market?  Not a chance,
 > unless it were ultimately insured by something with assets denumerated
 > in the trillions of dollars.  *A mortgage on Microsoft is not big
 > enough.*

*What* was I thinking?  I've been reading Penrose's "The Road to
Reality", maybe I'm so into "infinitesimal" I can't tell the
difference between "big" and "astronomical".

No, this will work the same way as futures for agricultural products;
the swing per market will be millions of dollars at most, and there's
plenty of room for diversification by "large" participants.  In terms
of size, it's a very practical proposal.

I don't see a way around the "insider trading" problem, though.

[Don Marti]

begin stephen@... quotation of Fri, Sep 01, 2006 at 02:56:48PM +0900:

> But this is not really practical, as far as I can see.  What you're
> looking at here is a large collection of individual securities, each
> subject to "events" that could imply swings of hundreds of billions of
> dollars---and the inevitable bankruptcy risk on the side facing the
> adverse change.  Would I buy a share on a market?  Not a chance,
> unless it were ultimately insured by something with assets denumerated
> in the trillions of dollars.  *A mortgage on Microsoft is not big
> enough.*

You're inventing cold fusion in your basement, so
you hold, or control through options, a couple of
hundred thousand dollars worth of "cold fusion will be
invented" contracts.  You chose the market to enter
because you believe in and trust the chosen referees
and protocol for that contract: three physicists and
three stage magicians who have written a set of tests
that the proposed cold fusion apparatus must pass.
(Experts make extra money by acting as referees
for contracts, much as they make extra money now by
testifying as expert witnesses.)

The counterparties to your contracts are, besides
speculators, hundreds of energy customers who have
each invested in the "no" side of several predictions
that they believe would drive down the cost of energy.
(no cold fusion, no hot fusion, no free energy from
the AEther...)

So no one person or entity is on the hook for
trillions of dollars -- it's like big moves in the
oil market that way.  If you're a big R&D operation
or a big technology user, you have a big portfolio
of SPEX investments.

> Another problem you're going to run into is that by definition you're
> looking at insider trading (another form of monopolistic
> exploitation).  If insiders can't trade on their information, how are
> they going to use this market to fund completion of their research?

This morning, a corn farmer in Iowa came in from
inspecting his crop and made a trade on a corn
futures market.  He has information about that corn
that nobody else has, or may ever have.  Meanwhile,
a speculator in London, England, made a trade on the
same market.  "Insider trading" is a peculiarity of
public companies.  Other kinds of markets use "inside"
information all the time.

> I'm not saying that this proposal won't be an improvement over the
> government franchise involved in intellectual property.  But it's not
> a panacea, and I would be willing to bet that in the end making these
> markets work will require large-scale government intervention.  I'm
> very pessimistic that intervention on that scale will be much better
> than what we currently have.

Transaction costs will probably be between the patent
system and the existing futures markets.  They'll have
to be a little higher than regular futures markets
because there will need to be a unique set of referees
and protocol per contract.

--
Don Marti                    
http://zgp.org/~dmarti/
dmarti@...

[Don Marti]

begin Rich Bodo quotation of Fri, Sep 01, 2006 at 12:19:20AM -0700:

> Love the underlying motivation of the paper, and it's probably a good
> legal howto, but I didn't feel he addressed just the type of question
> you ask - the what, and it too quickly skims over the more intrigueing
> "why?".

I think Tom Lord and Hans Reiser have both made good
points that are relevant to the "why".  The existing
capital markets and patent system are optimized for
funding inventions that are already finished from a
research POV and well along in development.

I think Hans said only "governments and crazed
fanatics" do long-term R&D any more.

--
Don Marti                    
http://zgp.org/~dmarti/
dmarti@...           LinuxWorld: August 14-17, 2006, San Francisco

[Stephen J. Turnbull]

Don Marti writes:
 > begin stephen@... quotation of Fri, Sep 01, 2006 at 02:56:48PM +0900:
 >
 > > looking at here is a large collection of individual securities,
 > > subject to "events" that could imply swings of hundreds of billions of
 > > dollars---and the inevitable bankruptcy risk on the side facing the

I've admitted elsewhere that this was a brain implosion.

 > > Another problem you're going to run into is that by definition you're
 > > looking at insider trading (another form of monopolistic
 > > exploitation).  If insiders can't trade on their information, how are
 > > they going to use this market to fund completion of their research?
 >
 > This morning, a corn farmer in Iowa came in from
 > inspecting his crop and made a trade on a corn
 > futures market.  He has information about that corn
 > that nobody else has, or may ever have.  Meanwhile,
 > a speculator in London, England, made a trade on the
 > same market.  "Insider trading" is a peculiarity of
 > public companies.  Other kinds of markets use "inside"
 > information all the time.

This analogy is broken.  "Insider trading" as defined in the
securities laws is trading while holding information important enough
to guarantee a big, immediate, favorable movement in price.  Your Iowa
farmer doesn't have that kind of information.  Ron Rivest, on the
morning RSA filed for their patent, did.

Whenever one sells "invention of a public key algorithm" shares,
people will assess that he knows something they don't.  This will
force the price down, perhaps to zero if he is a recognized expert in
the field.  So "players" in the crypto field will engage dummies, etc.,
to hide the identity of the actual traders.  This is not going to be a
very transparent market.

 > Transaction costs will probably be between the patent
 > system and the existing futures markets.  They'll have
 > to be a little higher than regular futures markets
 > because there will need to be a unique set of referees
 > and protocol per contract.

I think you're greatly underestimating the fees that will be charged
by competent referees, who will be in very short supply unless the
number of contracts is small.  You're also ignoring the costs of the
expert consultants who will be demanded by investors for every new
contract, and who will have to be on retainer (or salary) to evaluate
every piece of technical news.  There are also substantial costs of
making new markets per se.  The majority of these markets will be
horrendously illiquid, which will greatly increase risk, and
implicitly transactions costs.  Not to mention the opportunity cost of
all those smart people doing well- and regularly-paid referee and
consulting work rather than risky R&D.

Again, it *could* work well.  But it's going to be a lot more costly
and less efficient than one might hope.  Perhaps enough so that the
patent system can give it a good run for the money, at least with a
few of the reforms that have already been proposed.

Steve

[Thomas Lord]

Don Marti wrote:
>> I think Tom Lord and Hans Reiser have both made good
>> points that are relevant to the "why".  The existing
>> capital markets and patent system are optimized for
>> funding inventions that are already finished from a
>> research POV and well along in development.
>>
>>    

Sure, that is a reasonable summary of some things I've said.
(And thank you for that end-to-end check!)

I don't think that prediction markets help very much and
here is why:

Prediction markets are zero-sum markets:  some traders
win by the exact amount that other traders lose.  They are
not gambling markets because skill is involved.  That
is to say that  they are more like poker than they are like
the lottery.  These markets do not give a reward for
discovering a new vein of gold -- they give a reward for
guesstimating when the next vein of gold will be discovered.
These markets do not allocate shares in the vein of gold --
they divvy up a pot of bets placed by gamblers who think
they can spot when that vein will be discovered.  A pair
19th century gentlemen in Atlanta could make a friendly
wager that huge amounts of Gold would be found in
California by 18xx and one would win, the other lose -- but
neither would have any claim to the gold.  They would
just be reallocating their collective fortune, not investing
in a speculative share of future wealth.

Specifically, prediction markets *do not allocate* any of
the economic growth that results from a research
success.   Rather, prediction markets allocate some of the
risk of investment in research.  (But they perform that
allocation in an odd way, see below.)

In other words, if we have a big bag of money to spend
on research and we are trying to decide how to divvy it
up among competing research proposals, then there is
an argument  made that prediction markets are the
right tool to manage the allocation.   What prediction
markets *do not* do is provide incentive for increased
investment in research.   Well, mostly.

Of course, *if* it is the case that a prediction market does
a significantly better job of allocating a fixed pool of
research funds than other methods (say, a panel of experts
operating an NSF-style bureaucracy) then, yes, the
introduction of prediction markets may help to incrementally
grow the size of the big bag of money to spend on research.
This isn't any better, though, than just changing the NSF
committee rules to get incremental gains:  no new incentives
to invest in research have been created;  existing incentives
may or may not have been slightly improved.

Even given all of that, even assuming that we really, really
desire that incremental gain, it isn't clear that prediction markets
are a wise idea.  I suspect they would be a corrupting influence:

Prediction markets characterize research, in essence, as
the activity of attempting to verify certain hypotheses --
does the question people are trading certificates in have a
"yes" or a "no" answer?

That is a poor metric for the value of research.   For example,
the Michelson-Morley experiment was worth doing even
though (or perhaps because) it produced a negative result.
What would be the prediction market claim for that experiment?
"The aether will be measured by 1887?"   "The aether will
be disproven by 1887?"   Why would we want a market to
reward people making one of those predictions over the other?
There were no serious external reasons for anyone to invest
in hopes of a return from either outcome yet, as a society,
profound economic growth followed from investment in simply
addressing the question.   Not only did M-M establish an empirical
imperative that led to relativity, it had spin-offs of terms of the
propagation of more generally applicable experimental techniques.

(And please don't offer the alternative predictive market question:
"The hypothesis of the aether will be proved or disproved by
1887" because there was no question about that.   The answer
to that question was simply "yes, we know that."  Prediction
markets amount to a poker game for those already committed
to investing in research -- they are a way to split the bill and have
a little fun   They are not (aside, perhaps from the fun) a way to
bring new players to the table.)

In short, prediction markets imply a hopelessly reductionist
view of the value of research.

To sum up:

Prediction markets allocate risk, not rewards from research
and therefore create no new incentive to invest in research.

The means by which prediction markets allocate risk involves
an unrealistic view of the value of research.

----------------------------

Towards alternatives:

We can regard the field of potentially useful consequences
of performing research as an infinite supply of unexplored
territory -- in principle, anyone can go and discover a new
island or continent and, as side effect, identify new trade winds
as they explore the ocean of truth.

Unlike physical territory, the truths discovered in the course
of research are inherently non-rival -- there is little point in
trading in them.

To find ways to increase research investment and direct
it more intelligently we must form opinions about *process*
rather than predictions about *outcomes*.

Our incentives should NOT be

   I'll invest $X in research because I think outcome Y
   is likely.

Our incentives should reflect:

   I'll invest $X in research services from A because
   I think that useful outcomes are likely given A's
   systematic approach to exploration.

Externalities and transaction costs -- the ways in which
research, though  essentially non-rival -- does not propagate
evenly in the short term -- that is the essence of where to
find investment models.  

Which brings us back, but in a better light, to the general
idea of "exclusive rights."    We just ought to be more
creative about what those rights entail.

If I had the start-up capital, I'd start a lab that would
be funded by newsletter subscriptions and paid
on-site visits.   Indeed, if there are investors who
would be interested in such an approach, please
get in touch -- we can start quite small.   I'd be happy
to describe my own "systematic approach" in the
field of practical, open source R&D.

-t

[richbodo]

> I don't think that prediction markets help very much and
> here is why:
>
> Prediction markets are zero-sum markets:  some traders
> win by the exact amount that other traders lose.  They are
> not gambling markets because skill is involved.  That
> is to say that  they are more like poker than they are like
> the lottery.  These markets do not give a reward for
> discovering a new vein of gold -- they give a reward for
> guesstimating when the next vein of gold will be discovered.

O.K. but don't you think that a spex would encourage the generation of ideas?

I'm in sort of an informal betting pool on the next thing that will
come out of google.  If we had an on-line pool that bet on the
implementation of these ideas, and members could describe the ideas in
a public wiki, then this could be an incubator for prior art.

This kind of spex would have both a cash incentive, *and* a bragging
rights incentive.  You could bet on stuff and work on stuff at the
same time.  Then, you would have all kinds of interesting dynamics,
where people would try to solve the problem *before* google solved it,
and the betting games would involve knowing the who the best and the
brightest users were, which would just feed the bragging rights fire,
etc.

If we can get the ideas out there *before* that 20 year government IP
franchise is granted - rock on.  As with any on-line resource, the
implementation of the spex matters, and will have a tremendous effect
on the outcome.

> If I had the start-up capital, I'd start a lab that would
> be funded by newsletter subscriptions and paid
> on-site visits.   Indeed, if there are investors who
> would be interested in such an approach, please
> get in touch -- we can start quite small.   I'd be happy
> to describe my own "systematic approach" in the
> field of practical, open source R&D.

That would have to be one cool lab.

--

-Rich
http://rbodo.blogspot.com

[Don Marti]

begin stephen@... quotation of Sat, Sep 02, 2006 at 04:23:35AM +0900:

>  > This morning, a corn farmer in Iowa came in from
>  > inspecting his crop and made a trade on a corn
>  > futures market.  He has information about that corn
>  > that nobody else has, or may ever have.  Meanwhile,
>  > a speculator in London, England, made a trade on the
>  > same market.  "Insider trading" is a peculiarity of
>  > public companies.  Other kinds of markets use "inside"
>  > information all the time.
>
> This analogy is broken.  "Insider trading" as defined in the
> securities laws is trading while holding information important enough
> to guarantee a big, immediate, favorable movement in price.  Your Iowa
> farmer doesn't have that kind of information.  Ron Rivest, on the
> morning RSA filed for their patent, did.

So you invent a lead-to-gold machine and start
buying lead and selling gold.  Just thinking common
sense here, you'd want people to be able to do that
even without a SPEX.  I understand the point of
not allowing people to make a trade that breaches
their duty of confidentiality to an employer, but
not the point of calling something "insider" trading
when it's information that the trader discovered or
invented independently.  Don't we want the laws to
provide incentives for people to discover and create?

> Whenever one sells "invention of a public key algorithm" shares,
> people will assess that he knows something they don't.  This will
> force the price down, perhaps to zero if he is a recognized expert in
> the field.  So "players" in the crypto field will engage dummies, etc.,
> to hide the identity of the actual traders.  This is not going to be a
> very transparent market.

So you'll have an incentive to use a discreet broker
who also handles the accounts of many people on the
other side of the deal from you.  Seems doable enough.

>  > Transaction costs will probably be between the patent
>  > system and the existing futures markets.  They'll have
>  > to be a little higher than regular futures markets
>  > because there will need to be a unique set of referees
>  > and protocol per contract.
>
> I think you're greatly underestimating the fees that will be charged
> by competent referees, who will be in very short supply unless the
> number of contracts is small.

The exchange would have to cover the drafting of the
initial spec for the market, but some markets would be
launched once and never see a claim.  (The inventor
could be required to fund the testing of his or her
own invention, as claimants to The Amazing Randi's
prize are now.)

> You're also ignoring the costs of the
> expert consultants who will be demanded by investors for every new
> contract, and who will have to be on retainer (or salary) to evaluate
> every piece of technical news.  There are also substantial costs of
> making new markets per se.  The majority of these markets will be
> horrendously illiquid, which will greatly increase risk, and
> implicitly transactions costs.  Not to mention the opportunity cost of
> all those smart people doing well- and regularly-paid referee and
> consulting work rather than risky R&D.

Yes, which is the same problem we have now with the
patent system.   An advantage of the SPEX system here
is that multiple exchanges could compete to lower
costs, while a Patent Office has to be a government
monopoly.

> Again, it *could* work well.  But it's going to be a lot more costly
> and less efficient than one might hope.  Perhaps enough so that the
> patent system can give it a good run for the money, at least with a
> few of the reforms that have already been proposed.

--
Don Marti                    
http://zgp.org/~dmarti/
dmarti@...           LinuxWorld: August 14-17, 2006, San Francisco

[Don Marti]

begin Thomas Lord quotation of Fri, Sep 01, 2006 at 01:11:58PM -0700:

(This is a great set of comments on the SPEX idea --
Tom, have you written to Prof. Bell?)

> Specifically, prediction markets *do not allocate* any of
> the economic growth that results from a research
> success.   Rather, prediction markets allocate some of the
> risk of investment in research.  (But they perform that
> allocation in an odd way, see below.)

I'm thinking about ways that a SPEX (which I don't
think is really a prediction market) can be used to
hedge the "risk of non-innovation".

Let's say you have a big data center, and there's a
SPEX market trading predictions on "a computer will
complete a certain large task in one hour or less
using no more than 100 watt-hours of power".

As an electricity customer, you're already taking
risks in the energy market.  What if you could offset
those risks by taking a position on the "no" side
of the energy-efficient computer prediction market?
Yes, the market is just moving risk, but it's not just
moving it from one R&D area to another, but into R&D
from a non-R&D market.

Non-researchers won't siphon off researchers' rightful
gains from a SPEX for the same reasons non-assassins
won't siphon off assassins' rightful(?) gains from
an assassination market.

--
Don Marti                    
http://zgp.org/~dmarti/
dmarti@...           LinuxWorld: August 14-17, 2006, San Francisco

[Don Marti]

begin Rich Bodo quotation of Fri, Sep 01, 2006 at 05:19:47PM -0700:

> I'm in sort of an informal betting pool on the next thing that will
> come out of google.  If we had an on-line pool that bet on the
> implementation of these ideas, and members could describe the ideas in
> a public wiki, then this could be an incubator for prior art.

Anyone got Google CDN?  Like coralcdn.org, but on port
80, and only for domains that are AdSense customers in
good standing?  This makes sense for Google on so many
levels -- from ad price war to network neutrality --
that I'm surprised every day they don't do it.

--
Don Marti                    
http://zgp.org/~dmarti/
dmarti@...           LinuxWorld: August 14-17, 2006, San Francisco

[Don Marti]

begin Don Marti quotation of Fri, Sep 01, 2006 at 07:07:02PM -0700:

> Let's say you have a big data center, and there's a
> SPEX market trading predictions on "a computer will
> complete a certain large task in one hour or less
> using no more than 100 watt-hours of power".

Oops, bad paste... "energy".

--
Don Marti                    
http://zgp.org/~dmarti/
dmarti@...           LinuxWorld: August 14-17, 2006, San Francisco

[David Fetter]

On Thu, Aug 31, 2006 at 09:03:04PM -0700, Don Marti wrote:
> Paper about how to connect markets to R&D incentives without
> monopolies:
>
> http://agoraphilia.blogspot.com/2006/08/prediction-markets-whup-on-copyrights.html

The gyrations people of a certain economy-centered cluster of
religious faiths will go through rather than admit that there are
things which are good and necessary *that markets fail to do* are just
bizarre.  How about just copping to the fact that the only entities
that have ever done basic research to any significant degree, or are
going to do it in the future, are governments, consortia of
governments, and entities overwhelmingly funded--directly or
indirectly--by governments.

Cheers,
D
--
David Fetter <david@...> http://fetter.org/
phone: [phone]        AIM: dfetter666
                              Skype: davidfetter

Remember to vote!

[Thomas Lord]

Don Marti wrote:
> begin Thomas Lord quotation of Fri, Sep 01, 2006 at 01:11:58PM -0700:
>
> (This is a great set of comments on the SPEX idea --
> Tom, have you written to Prof. Bell?)
>
>  

Thanks.   Are you serious about writing to him?   What
is a good reason to?

He seems a charming and interesting fellow:

    http://www.tomwbell.com/graphics.html

but on the topic of prediction markets he has a definite
entrepreneurial agenda of his own:

     http://www.simonmarket.org/

including, pardon me but, a certain insect intruding upon
his posterior re environmental issues.   Not that he is
wrong about poor reporting per se but, really:

    "The Simon Exchange will offer a shortcut to the future,
      offering a uniquely fast, accurate, and inexpensive way
      to answer complex scientific questions."


Huh.  Really?   And he kept a straight face the whole time?

Well, the Simon market marketing deserves intellectual
evisceration on its own terms but I'm not sure *I* want
to put that much energy into it.  I wouldn't expect to generate
much light by taking on the "Prediction Markets Whup on
Copyrights and Patents" angle.   I don't have the impression
of an invitation to serious discourse.

Aw, hell, I'll throw a copy at his blog and let's see what happens.

-t

>> Specifically, prediction markets *do not allocate* any of
>> the economic growth that results from a research
>> success.   Rather, prediction markets allocate some of the
>> risk of investment in research.  (But they perform that
>> allocation in an odd way, see below.)
>>    
>
> I'm thinking about ways that a SPEX (which I don't
> think is really a prediction market) can be used to
> hedge the "risk of non-innovation".
>
> Let's say you have a big data center, and there's a
> SPEX market trading predictions on "a computer will
> complete a certain large task in one hour or less
> using no more than 100 watt-hours of power".
>
> As an electricity customer, you're already taking
> risks in the energy market.  What if you could offset
> those risks by taking a position on the "no" side
> of the energy-efficient computer prediction market?
> Yes, the market is just moving risk, but it's not just
> moving it from one R&D area to another, but into R&D
> from a non-R&D market.
>
> Non-researchers won't siphon off researchers' rightful
> gains from a SPEX for the same reasons non-assassins
> won't siphon off assassins' rightful(?) gains from
> an assassination market.
>
>  

[Thomas Lord]

David,

That put a smile on my face because of the well put
truth it points to, David, but I think you go to far.

In, let's say, "western" history of the past two
millennia, I think you'll find that most research
was *privately* funded and that, indeed, even
our very crude attempts to apply market forces
to research have yielded impressive results (even
if, from a contemporary perspective, the situation
is very frustrating).

Against the "test of time," research by patronage
funding seems to be what has created and sustained
us through the Enlightenment more than other factors.

Now, in support of what you say, even if I am right
and you are wrong -- we are both right that markets
have yet to prove themselves capable of carrying the
torch.  But (a) don't give up on the possibility of
creatively deploying markets -- patronage has plenty
of problems wanting remedy and markets reliably
do what they do when we figure out how to form them;
(b) don't leap to the conclusion that government sponsorship
is the right answer -- haven't you ever been to the DMV? :-)



-t


David Fetter wrote:

> On Thu, Aug 31, 2006 at 09:03:04PM -0700, Don Marti wrote:
>  
>> Paper about how to connect markets to R&D incentives without
>> monopolies:
>>
>> http://agoraphilia.blogspot.com/2006/08/prediction-markets-whup-on-copyrights.html
>>    
>
> The gyrations people of a certain economy-centered cluster of
> religious faiths will go through rather than admit that there are
> things which are good and necessary *that markets fail to do* are just
> bizarre.  How about just copping to the fact that the only entities
> that have ever done basic research to any significant degree, or are
> going to do it in the future, are governments, consortia of
> governments, and entities overwhelmingly funded--directly or
> indirectly--by governments.
>
> Cheers,
> D
>  

[Stephen J. Turnbull]

Don Marti writes:

 > So you invent a lead-to-gold machine and start
 > buying lead and selling gold.  Just thinking common
 > sense here, you'd want people to be able to do that
 > even without a SPEX.  I understand the point of
 > not allowing people to make a trade that breaches
 > their duty of confidentiality to an employer, but

Huh?  That is not what regulation of insider trading is about.
Confidentiality is dealt with by contract law, it is not an issue for
securities markets.  The problem with insider trading is that what
should be a bet is in fact known to be a sure thing by the
counterparty.  They win, you lose, you have no chance.  The optimal
thing for you to do is leave the market.  If everybody leaves the
market, an extreme case which can occur with plausible parameter
configurations, then the developer is left with zero opportunity for
funding via these markets.

 > not the point of calling something "insider" trading
 > when it's information that the trader discovered or
 > invented independently.  Don't we want the laws to
 > provide incentives for people to discover and create?

Yes.  The point of talking about insider trading is two-fold.  First,
it requires legal changes before it will be practical for inventors to
trade in claims.  This is a substantial hurdle.  Second, even with the
legal changes, these markets may suffer from a severe "market for
lemons" problem, which will result in underfunding of desirable
projects.

> > Whenever one sells "invention of a public key algorithm" shares,
 > > people will assess that he knows something they don't.  This will
 > > force the price down, perhaps to zero if he is a recognized expert in
 > > the field.  So "players" in the crypto field will engage dummies, etc.,
 > > to hide the identity of the actual traders.  This is not going to be a
 > > very transparent market.
 >
 > So you'll have an incentive to use a discreet broker
 > who also handles the accounts of many people on the
 > other side of the deal from you.  Seems doable enough.

Sure.  But lack of transparency increases the risk, and reduces the
informational content of the market---but that's exactly the opposite
of what these markets are supposed to be about.

I went and took a closer look at Bell and his paper.  First off, he's
at George Mason; these guys are by and large so right-wing that even
Chicago economists consider them wackos.  Of course, James Buchanen
who recently won the Nobel Memorial Prize in Economics (deservedly) is
one of those wackos---So this doesn't necessary affect the quality of
the research, but you should remember that Bell is very likely
politically, not academically, motivated.

In fact, he more or less admits this.  The paper *assumes* benefits to
science and technology development, and then goes on to propose that
in order to achieve these benefits we "must" free these markets from
the burden of government regulation.

This agenda suggests two issues, which he does not address.  First,
there are already many play-money and toy real-money prediction
markets which do function very well as information aggregators.  One
wonders, however, if they would do so well if there was "real money"
to be made.  With more "reputation" than money at stake, people will
do a good job of playing according to the spirit of the game.  But
when money comes to the fore, some players (who care little about
their scientific reputation) will start taking the letter very
seriously, especially if it offers loopholes they can exploit.  There
is no evidence on offer that I can see that says these markets will do
a better job of anything if they have larger turnover.

Second, as far as I can tell from background reading of Bell's
citations to economists (the George Mason website is down or
something, I couldn't access any of his or his colleagues' other
papers), not to mention his own Table 1, nobody in the field takes the
"capital provision" role of prediction markets seriously.  It's all
about information aggregation.  The people who know the subject best
make money by guessing the tenor (not the content) of future news and
betting accordingly, and price becomes a (good) estimate of
probability.  Nobody talks about the benefits to society that come
from rich traders.

That doesn't mean a capital provision role can't happen, but it does
mean that at present advocating it is rather like investing in
swampland in Death Valley.

 > The exchange would have to cover the drafting of the
 > initial spec for the market, but some markets would be
 > launched once and never see a claim.  (The inventor
 > could be required to fund the testing of his or her
 > own invention, as claimants to The Amazing Randi's
 > prize are now.)

It doesn't matter who pays, it's still a transactions cost that
inhibits trade.

 > > You're also ignoring the costs of the
 > > expert consultants who will be demanded by investors for every new
 > > contract, and who will have to be on retainer (or salary) to evaluate
 > > every piece of technical news.  There are also substantial costs of
 > > making new markets per se.  The majority of these markets will be
 > > horrendously illiquid, which will greatly increase risk, and
 > > implicitly transactions costs.  Not to mention the opportunity cost of
 > > all those smart people doing well- and regularly-paid referee and
 > > consulting work rather than risky R&D.

 > Yes, which is the same problem we have now with the
 > patent system.   An advantage of the SPEX system here
 > is that multiple exchanges could compete to lower
 > costs, while a Patent Office has to be a government
 > monopoly.

But it's *not* the same problem.  Currently, each currently traded
company (ie, I'm talking about additional stock issues, not VC
funding) specializing in, say, hard drive technology must devote some
of its expertise that could go into R&D to dealing with patent issues.
That's more or less a wash, it will be true in the SPEX system (for
dealing with claim issues) too.  But in the current system the
investors generally get to hear glowing predictions of future
developments and announcements of actual patents.  They do not get to
see actual R&D interim results or the patent applications and evaluate
them, so they need pay no experts on patent applications.  But in the
SPEX system, not only do investors need expertise on the specific
claim, they need it on a daily basis (or at least every time "news"
occurs---but that assumes they can recognize important "news" without
their technical consultants).  This is a potentially big transactions
cost (depending on the content of the claim) that the patent system
does not have to pay at all.  The reason is that we know what a patent
does, so once you've learned that, you don't need an outside expert.
But these claims are free-form, and while there are likely to be
standard forms, there are also likely to be lots of them, and for new
ones to arise with some frequency.

These trends can be easily seen in the markets for financial
derivatives, and they're very expensive in absolute terms; it's just
that when a market sees $100 billion or so in annual transactions, a
tiny spread means you can afford thousands of analysts.

As for being a government monopoly being a "disadvantage" of a Patent
Office, yes, and no.  The patent system turns on the award of
monopolies, and that has to be a monopoly.  The SPEX system need not
be a monopoly because there are no monopolies---in fact, the market is
zero sum.  But that's a *big* problem for our purposes, because we
want to be able to extract funding for R&D.  But there's no net
surplus to be extracted.

To see why this matters, consider the following.  Suppose you want
money *now*.  You have web 3.0 in development, so you set up a claim
on web 3.0.  To get money, you must *sell* claims, right?  You are now
liable to pay somebody a lot of money if web 3.0 actually works.
That's OK, you're going to make much more profit than that, and in the
end your VC is backing this play, it's no more your money in this
scenario than in the patents world.  Problem is, *I* invent web 3.0
*first* and get the lion's share of the market.  Now how do you plan
to pay off those claims?  Of course, actually the VC pays, but since
"IPOs" in these markets typically trade at a small fraction of the
claim value, the loss is a multiple of the amount of research they
were able to fund through it, while if they succeed, the profit is a
fraction of what they could have made.  This just doesn't make sense
unless VCs (or inventors) are *extremely* cash constrained now but
expect to be very rich in the future regardless of the success of the
project.

Alternatively, you could write the claim as "don marti invents web 3.0
on or before Dec. 31 2010", so you wouldn't have to pay in the event I
get there first, but you know what?  That's not very much a prediction
market, much more like a junk bond.  Ie, this kind of claim doesn't
really fit Bell's definition of prediction market, as it's really a
security (the holder gets an interest in the success of a particular
project).  So you see we already have very similar securities but few
R&D projects are funded that way.  Furthermore, the presence of the
patent system only makes this kind of funding more attractive, because
it increases the payoff when you "win".  Without the patent system,
you should see less.

So if we get rid of the patent system, prediction exchanges are not a
way to replace whatever incentives patents provide for R&D.

Steve

[Stephen J. Turnbull]

Don Marti writes:
 > As an electricity customer, you're already taking
 > risks in the energy market.  What if you could offset
 > those risks by taking a position on the "no" side
 > of the energy-efficient computer prediction market?
 > Yes, the market is just moving risk, but it's not just
 > moving it from one R&D area to another, but into R&D
 > from a non-R&D market.

No, it's just moving it from a non-R&D, non-prediction market into a
non-R&D, prediction market.  As Tom points out very carefully, this is
not at all a market for R&D.  It's a market for hedging.  That's good
for the electric company and its investors, which may have
"trickle-down" effects on R&D.  But no funds from the market itself
will be automatically allocated to R&D, and there is no guarantee of
trickle-down effects, as the board may decide they'd prefer to spend
the freed-up reserves speculating in prediction markets.

Steve

[Thomas Lord]

Don Marti wrote:

> I'm thinking about ways that a SPEX (which I don't
> think is really a prediction market) can be used to
> hedge the "risk of non-innovation".
>
> Let's say you have a big data center, and there's a
> SPEX market trading predictions on "a computer will
> complete a certain large task in one hour or less
> using no more than 100 watt-hours of power".
>
> As an electricity customer, you're already taking
> risks in the energy market.  What if you could offset
> those risks by taking a position on the "no" side
> of the energy-efficient computer prediction market?
> Yes, the market is just moving risk, but it's not just
> moving it from one R&D area to another, but into R&D
> from a non-R&D market.
>
> Non-researchers won't siphon off researchers' rightful
> gains from a SPEX for the same reasons non-assassins
> won't siphon off assassins' rightful(?) gains from
> an assassination market.
>
>  

Wouldn't that hedge be more efficient if I did it by shorting
shares in projects that aimed at bringing to market patented
implementations of energy-efficient computing?

I'd be all in favor of some cautious relaxations of securities
regulations for ordinary offerings but the indirection of
trying to end-run around regulations with prediction markets
doesn't seem to me to offer any benefit.

(One of Prof. Bell's motivations seems to be to create
markets that act as signals to journalists.   For example,
in his view, such markets would create more accurate
environmental reporting.   Maybe he doesn't read the same
press I do.   In what I read, markets are taken very much
as signals.   For example, real estate speculation in prime
locations for massive data centers is a good indication of
the consensus about future improvements in computing
costs relative to demand.)


-t