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[P]
The Policy Analysis Market: Why It is a Great Idea.

By khallow in Op-Ed
Thu Aug 14, 2003 at 09:48:59 PM EST
Tags: Technology (all tags)
Technology

You may recall hearing a story a couple weeks ago of a US Department of Defense project, a "terror" market trading in things like terrorist attacks and assassinations as if they were stocks trading on Nasdaq. Incredibly, it was run by ex-Admiral Poindexter, the same man responsible in the distant past for managing the Iran-Contra affair and more recently for managing the totally creepy "Total Information Awareness" (now the "Terrorism Information Awareness") office. What was going on?

The US Senate just destroyed one of the most innovative DARPA (Defense Advanced Research Projects Agency) projects ever.


What was PAM?

The Policy Analysis Market or PAM was designed by a host of people, including Net Exchange and the Intelligence Unit of the Economist for DARPA. A number of independent scientists helped with the design as well, mostly through Net Exchange which apparently maintains close ties with the academic community.

What did PAM trade in?

While the original announcement on July 28 by US Senators Ron Wyden of Oregon and Byron L. Dorgan of North Dakota claim that this was a terror market that traded in assassinations and terrorist attacks, the truth was that this market did not trade on those kind of events. What apparently occurred was that the company, Net Exchange had a couple of ill-advised examples. From a Washington Post article on Poindexter's resignation letter:

The letter contained no acknowledgement of personal error. In the case of the futures trading plan, he said, an unauthorized decision by an outside contractor -- the small California firm Net Exchange -- to post "some extremely bad examples" on the program's Web site gave critics ammunition to distort the effort as a proposed market in terrorism. The examples included the possibility of betting on the assassination of Palestinian leader Yasser Arafat or the overthrow of Jordan's monarchy.

Dr. Robin Hanson, an economics professor at George Mason University, and one of the architects of the PAM system had this to say:

The web page had an example of a regime change, which is very different from a terrorist attack. Typical claims would have been about the level of economic growth in Egypt in 2nd quarter 2004, or the level of civil instability in Saudi Arabia in the 3rd quarter of 2004, or the level military activity in Iran in the 1st quarter of 2005.

Later, he added as a clarification:

There was such an example on the web page, unfortunately. But the idea was that it was an example of regime change, and it is little like a typical individual terrorist attack. That is the sort of event that could have big repercussions in the middle east, and so the sort of events people would want to include in their scenarios they are forecasting.

In any case, PAM didn't trade in terrorist events or assassinations, but it did trade in things that the US and incidentally the target country would be deeply interested in.

OK, What Made PAM Special?

There were a number of things. First, PAM bet real money on real issues. While not everyone is interested in the Middle East, the point is that PAM would have traded on the likelihood of events that were important to the US. This is the first time that markets were attempted as a way of accumulating information in the intelligence community. And there are strong reasons to think that PAM would have worked. The key is that markets are the best way discovered so far for collaborating the knowledge of participants. Sometimes they are astoundingly accurate (as when assigning blame for the Challenger Space Shuttle accident in 1986) and sometimes not (the Dot Com Bubble), but what works better? The markets allow one to express their degree of confidence (by purchasing little if they're not very confident to a lot if they are), and they reward accurately those who are right and penalize those who are wrong. The simple truth is that we haven't found anything that does those simple things better.

Second, PAM was an special kind of an Idea Futures market. It's a betting market that trades in outcomes of events like one would trade stocks. PAM went much further. In additional to trading on these basic claims, you could trade a mix of claims at once. For example, you could assign probabilities to the huge number of possible outcomes for a large number of claims. If there were five states that Jordan's economy could be in, and two states for whether or not Jordan experienced regime change, then one could assign a probability to each of the ten possible outcomes (that is, an economic state crossed with whether or not regime change occurred). As I understand it, this could have be done for many claims yielding thousands or even millions of possible outcomes each with its own probability. Further, this was done in such a way that even incredibly low liquidity (say one or two people trading on these outcomes) would generate useful information. So add neat technology to the list.

Third, the market wasn't limited to government employees. How many programs in the history of government have built in, non-government participation. Even extreme views (like communists or libertarians) could participate in this market. And most controversially, the radically destructive elements like terrorists and assassins could trade here as well. I consider this a good thing (more on this later) because how else are you going to hear about attempting regime changes? Even though the civilian world isn't thought of as a knowledgeable pool concerning the Middle East, the simple truth is that there's a lot of people out there with knowledge. This market would have brought them together.

Finally, all trading would be anonymous. That means that the government employees who are forced to slant their reports the right way could still accurately report their views via the market. The insiders would trade, again improving the accuracy of the markets.

Now to answer some common questions about these markets. What's wrong and how it can be dealt with?

The bad guys could trade and profit.

Since the market was an experimental market, initial investment was limited to $100. Another little issue that the opposition never noticed. So in the short term, no one is going to fund their coups or assassinations off of this market. Even years later, PAM would be dwarfed by the stock markets which as in the 9/11 attacks have already been used to profit off of terrorist attacks. Further, this is an example what is called "moral hazard". That is, the buyer of a good engages in risky or dangerous activity due to the purchase. This is a known problem and it's dealt with in the stock markets, insurance markets, gambling markets, and many other areas every day. For example, billions of dollars are gambled on the Superbowl or the World Soccer Cup. However, we don't have trouble with cheating. Nor terrorism, assassinations, or any of the other behavior being associated with PAM. These risks are still present, but they have been managed to an acceptable level so that gambling on the games is uninhibited by it.

Insider trading is perhaps another concern. But PAM dealt with it in the proper way. It would reward those who trade, and hence who bring the information into the market. Also, insider knowledge is a vague term. A casual visitor to Jordan might end up having "inside" knowledge through some accidental observation. As a prediction market, it can't make a best possible prediction if this information is prohibited from entering the market.

Markets Don't Predict the future that well.

The recent example is the dot com bubble. The question shouldn't be why didn't the markets predict accurately the price of the dot com stocks, but rather who did better? The media didn't do better. The government didn't do better. Academics didn't do better. Public statements from companies, stock analysts, mutual funds, venture capitalists, and other self-interested parties certainly didn't do better. When you look at the aggregated sources of information, no source handled the Bubble very well.

Markets are efficient aggregators of information, but if that information is incomplete or wrong, then the market will be wrong as well.

PAM was just gambling.

Some people consider gambling immoral. I don't. For what its worth, PAM would have a special legal status (through negotiations with the SEC and IRS resulting in limitations like the $100 investment ceiling, I think) that would put it above usual gambling laws. But why should gambling on a sports game where it simply doesn't matter who wins be better than betting on how much a country's GDP goes up? At least with the latter, you get quality information on the future economic state of that country.

Also, in all markets you have speculation. Purchases with the expectation that the value of the purchase will increase in the short term. Generally, speculation is thought of as gambling. Sometimes, the level of speculation is much greater than the hedging transactions (purchasing the security to hedge a risk). Yet we don't treat this activity under the gambling laws. The trading in PAM is small and experimental, but if it were extended to large volume, could be used to hedge all sorts of business dealings in the Middle East.

Further, here's something to think about. By putting money in PAM or a similar market, you are saying something about the future and risking something at the same time while trying to be right. I think that sort of activity should be allowed.

PAM was US-centric. Why should the rest of the world care?

First, you may reside in a part of the world that would be covered by PAM. That information would be good for you to know too. Second, chances are that you live in a country that would be affected by any negative events in the Middle East, hence the knowledge that was so useful to the US would also be useful to you. Finally, the ideas behind PAM can be applied locally and nationally. Perhaps, your company needs to evaluate the success of a marketing project or of a new product. Perhaps, your town wants to determine the likelihood of certain natural disasters or project the future economic prosperity of the region, and your country most certainly would have national interests.

Finally, we have the opportunity to settle in a rational way debates on the relative harm of various global policies. That is, how harmful is the US's CO2 (Carbon Dioxide) production? The current ways are embarrassing. Basically, there's a pro-business side that states global warming is a chimera, there isn't a problem, and jobs are at stake! While the environmentalist side states that we're on the edge of global catastrophe and CO2 limits (or perhaps harsher regulations) should be imposed. The facts such as they are, don't really support either side. Yes, there's significant CO2 production and substantial build-up in the atmosphere, and yes, there is global warming, but what it really means and what we do about it is undecided. Or I should say, undecided by the masses, but not those with a prior agenda.

What's still out there?

Well, there's the new protest site, the American Action Market. No word on their technology and how it compares to PAM, but with such claims as when the next lie "breaks" in the White House, you know it's juicy. Currently, the winner in the news has been TradeSports which trades a growing number of non-sports claims in finance, entertainment, politics, and world events. Further on is the reputation betting site, the Foresight Exchange which trades on an extremely eclectic set of claims including some terrorism claims in the US and nuclear war. It's an old favorite of mine. There's a bunch more out there both real money and not. So don't take this as a comprehensive list.

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Poll
Was PAM a...
o Great idea! 19%
o Terrible idea! 29%
o Good idea with bad marketing. 29%
o A waste of $8 million, but better than toilet seats. 16%
o Who is Pam? Should I know her? 6%

Votes: 62
Results | Other Polls

Related Links
o "Terrorism Information Awareness"
o DARPA
o Net Exchange
o Intelligen ce Unit
o Economist
o Ron Wyden
o Byron L. Dorgan
o article
o Dr. Robin Hanson
o say
o he added
o Idea Futures
o American Action Market
o TradeSport s
o Foresight Exchange
o old favorite
o Also by khallow


Display: Sort:
The Policy Analysis Market: Why It is a Great Idea. | 112 comments (96 topical, 16 editorial, 0 hidden)
I thought the point /was/ cheating (3.00 / 1) (#2)
by jongleur on Wed Aug 13, 2003 at 05:06:07 AM EST

I guess some guy revealing his inside knowledge to make a buck would be useful but, how would you tell his bet from the ignoramuses? Surely there would be more of them?

I thought the point was to provoke assasinations, modelled after an earlier system.


--
"If you can't imagine a better way let silence bury you" - Midnight Oil
Does this answer your questions? (none / 0) (#7)
by khallow on Wed Aug 13, 2003 at 11:53:35 AM EST

I guess some guy revealing his inside knowledge to make a buck would be useful but, how would you tell his bet from the ignoramuses? Surely there would be more of them?

He would get it right more often and be wealthier than the ignoramuses.

I thought the point was to provoke assasinations, modelled after an earlier system.

I'm not sure what you mean here. I know that proposals to make idea futures markets in science often touted the ability of the market to act as an alternate incentive to the scientific community or even business world. Ie, one bets in favor of a scientific breakthrough which is heavily bet against, eventually pulls through, and gets rich. Sounds so far like it could equally be applied to assassinations. Two problems.

First, PAM never traded on assassination events. Second, assassinations normally are highly illegal. Hence, one not only has to avoid getting caught, but also figuring out how to obtain and keep that hypothetical profit they made. Since, assassinations of real business leaders rarely occur (at least to my knowledge) which would effect the corresponding stock price (a market much bigger than PAM aspired to), then clearly the disincentives in place work.

Stating the obvious since 1969.
[ Parent ]

Wheat From the Chaff (none / 0) (#22)
by The Solitaire on Wed Aug 13, 2003 at 10:46:04 PM EST

He would get it right more often and be wealthier than the ignoramuses.

But he doesn't have to reveal anything to make that money! The system is anonymous. There is still no way to distinguish good information from the "gut feeling" of clueless investors. If there is no way to distinguish wheat from the chaff, my expectation is that you'll end up eating a lot of chaff.

One of the reasons the stock market works is that the same information is available to everyone. If it isn't, and you act on it, it's insider trading. Since the very purpose of the ideas market is to generate such information, you can't insist that everyone reveal exactly why they make their purchases. Or, if you do insist, it decimates the entire purpose of the market (read my earlier post to this effect).

I need a new sig.
[ Parent ]

Useful information? (4.80 / 5) (#16)
by The Solitaire on Wed Aug 13, 2003 at 09:24:21 PM EST

I'm not entirely clear how this market was supposed to provide useful information about upcoming world events. Say, for example, the market predicted an upcoming coup in Elbonia. What stops the leaders of the state of Elbonia to take that information, excecute a few known rabble-rousers, and efectively stop or postpone the revolution? Then the people that bet on this particular event lose out for being right, in a sense.

This would be even worse for the case of terrorist attacks, if they were to be included. Certainly if an attack is being strongly predicted, the US (or other) government will move to stop that attack, if at all possible. Again, the predictors lose out.

One concievable outcome (depending on the structure of the system, of which, I admit, I am somewhat ignorant) is that, fearing an intervention would lose them money, investors might not bet on a "sure thing" until the last possible moment, in order to assure that the event actually occurs. This means that relatively valueless (monetarily) information that might otherwise have been revealed might stay secret in order to turn a profit.

I need a new sig.

I guess that could happen (none / 0) (#18)
by khallow on Wed Aug 13, 2003 at 10:16:41 PM EST

But I think people would figure out a balance. And they couldn't cut it too close since someone else could find that information and trade on it first. After all, the market is about making predictions and the government its reactions to the market are just more factors to put in that prediction.

Stating the obvious since 1969.
[ Parent ]

Factors (5.00 / 4) (#20)
by The Solitaire on Wed Aug 13, 2003 at 10:37:30 PM EST

That's true, but factoring in the actions of the government can nullify the usefulness of the prediction. This is a classic case of "This sentence is false". If you make a prediction, and a government or other organization acts to prevent it, then you lose. So, you factor that in to the prediciton, and instead predict that the event won't occur. But then, the information that the government acted on is missing, and hence they don't act, allowing the event in question to come about. Screwed again.

I can see two possible winning strategies. First, you could hold your cards close until the very last second, thus depriving the powers that be of information that would allow them to intervene. Second, and much worse IMHO, would be to deliberately bet in such a way to mislead, and then switch your bet in order to capitalize on the mistakes of everyone else.

This sort of thing goes on in the real stock market. A good example is pump-and-dump. Basically you mislead the market into believing that a company is worth more than it is, then capitalize on that error. Why not plant information that some problem in the world is going to occur, then try to make money based on the fact that you know the information is false? In the real stock market, this can be avoided somewhat, using things like SEC filings, and such. But I don't see a quality "idea accounting" method that would stop similar issues from happening in an idea futures market.

Now that I think about it, even terrorists could use such a system, not to make money necessarily, but to plan attacks. If everyone thinks that there is going to be one sort of situation, then explicitly plan something different.

That being said, I am not an economist, nor am I an accountant, or anything of the sort. I can't say that the above scenarios would occur. But I think it is dangerous to just start up an unregulated market like this, especially one dealing with volatile world affairs. Great in theory (hell, I think it's a really interesting experiment), but too dangerous in practice, until we have a much firmer understanding of the social and economic dynamics of such a system

I need a new sig.
[ Parent ]

how do you get that knowledge? (4.50 / 2) (#26)
by khallow on Wed Aug 13, 2003 at 11:11:00 PM EST

I tend to agree with what you're saying. In a sense, there is this conflict between the government which wants information and wants to act on that information, and the market which wants to make money. I think pump and dumps are going to happen. In some of the futures markets I've been in, pump and dump has been quite successful. A classic example from the Foresight Exchange (reputation based betting market) is exactly the sort of thing you are talking about.

A claim called SolC23 (short description - "Especially high solar maximum") was to be judged true if by the end of 2001, the maximum sun spot count was about a certain number (as reported by the Royal Observatory of Belgium). One nefarious trader realized that several figures were actually reported and cunningly hatched a scheme. At some point during the summer of 2001, pretty much everyone in trading in SolC23 gets an email from an anonymous source pointing out a particular sun spot number which is well above what was necessary to judge the claim. Even the judge was surprised. Lots of vigorous but clueless trading followed.

Eventually it was determined that you can count a lot of sunspots depending on how sensitive your optics are. So some observatories routinely counted lots more than others. The Belgium observatory averaged these figures to get an index. The index stayed well below the threshold for the claim to trigger. Hence, Mr. Nefarious Trader made a real killing at the expense of less knowledgeable traders including me.

So yes, the Pump and Dump can work just as well as it works in the stock market.

That being said, I am not an economist, nor am I an accountant, or anything of the sort. I can't say that the above scenarios would occur. But I think it is dangerous to just start up an unregulated market like this, especially one dealing with volatile world affairs. Great in theory (hell, I think it's a really interesting experiment), but too dangerous in practice, until we have a much firmer understanding of the social and economic dynamics of such a system

First, the market was the initial experiment that would give us that understanding. Second, as you note, we have all these problems already with the stock market and similar markets that are used by millions of people. Obviously, the market was intended as a stepping stone to grander things, but it also was an experiment to see just how bad these effects you mention really were. I think the safeguards in place (eg, $100 investment ceiling, experimental status, etc) were probably sufficient for the risk involved.

Stating the obvious since 1969.
[ Parent ]

Hedge your bets (none / 0) (#39)
by awethu on Thu Aug 14, 2003 at 12:06:48 PM EST

Megalomaniac rulers of developing and highly impoverished countries round up and jail, execute or exile rabble-rousers regardless of sufficient evidence. I doubt that PAM would aggravate the situation. However, should your scenario materialize, players can always hedge their position by betting on a round up.

[ Parent ]
rusty is a stupid faggot (1.12 / 24) (#17)
by Spencer Perceval on Wed Aug 13, 2003 at 10:04:08 PM EST

PAM didn't trade in terrorist events or assassinations, but it did trade in ... [things like regime change in the Middle-East]

And how exactly do you think regime changes take place in the Middle East?


All the animals come out at night - whores, skunk pussies, buggers, queens, fairies, dopers, junkies, sick, venal. Someday a real rain will come and wash all this scum off the streets.

regime change (3.00 / 1) (#19)
by khallow on Wed Aug 13, 2003 at 10:22:58 PM EST

Well, the US invades the country and a good regime springs up like a mushroom after a clean spring rain. We, Americans call it "democracy".

Stating the obvious since 1969.
[ Parent ]

rusty is a stupid faggot (1.18 / 16) (#21)
by Spencer Perceval on Wed Aug 13, 2003 at 10:42:04 PM EST

I would think DARPA already knew when "regime change" at the behest of the US were to take place. The author clearly meant regime changes due to popular uprisings and such. That is the only true danger in the Middle East, the danger all regimes face and fear.


All the animals come out at night - whores, skunk pussies, buggers, queens, fairies, dopers, junkies, sick, venal. Someday a real rain will come and wash all this scum off the streets.
[ Parent ]
can you pls. change your title headline ? (3.00 / 1) (#30)
by mami on Thu Aug 14, 2003 at 08:12:11 AM EST

Thank you, I appreciate your cooperation in that matter. Looks kind of uneducated to have a title that doesn't refer to your comment's content.

[ Parent ]
rusty is a stupid faggot (1.06 / 16) (#35)
by Spencer Perceval on Thu Aug 14, 2003 at 09:33:17 AM EST

Pardon me kind lady, may I enquire as to the status of your education? What manner of PhD do you possess? I am far more educated than you could ever hope to be, you little wench.


All the animals come out at night - whores, skunk pussies, buggers, queens, fairies, dopers, junkies, sick, venal. Someday a real rain will come and wash all this scum off the streets.
[ Parent ]
M.A. in kindness (nt) (3.00 / 1) (#46)
by mami on Thu Aug 14, 2003 at 06:11:30 PM EST



[ Parent ]
OT: Stop bidding up BupCan (none / 0) (#41)
by lunatic on Thu Aug 14, 2003 at 01:22:14 PM EST

Karl - What insider information have you got that Canada's going to break up by 2020? 10 points seems awful friggin' high to someone that lives there... ;-)

[ Parent ]
heh, heh (none / 0) (#43)
by khallow on Thu Aug 14, 2003 at 02:16:39 PM EST

Karl - What insider information have you got that Canada's going to break up by 2020? 10 points seems awful friggin' high to someone that lives there... ;-)

I think the Quebec seperatists will rear up again. Then I'll cash in on all the dumb money coming up from the South (ie, the US). 10 is cheap!

Stating the obvious since 1969.
[ Parent ]

Timeline is too short... (none / 0) (#48)
by lunatic on Thu Aug 14, 2003 at 06:55:48 PM EST

Feh... The timeline is far too short. The Liberal's are in power provincially until 2007 at least. They will not call a referendum. This will take the wind out of the sails of the somewhat revitalized Western separatists. Even if the PQ _does_ get in, even if they do call a quick referendum (2008-2009), you're still going to have at least 5-6 years of fighting over what separation / sovereignty means. Even then, everywhere outside of Southern Quebec will fight to stay in Canada - the natives controlling the north of the province despise the nationalists more than they dislike the ROC. Now, given that the claim requires 3 or less provinces to remain part of Canada, I'm guessing that you're betting on Ontario, Manitoba, and possibly Saskatchewan or 1 Maritime province. Either way, you need Quebec, Alberta and B.C. to go to make the claim fly. So, let's say that Quebec splits before 2020, and northern Quebec doesn't stick around as part of Canada (I'd charitably peg this around 30% as it requires the election of a separatist party, and a successful referendum [where they've already had 2 failed attempts] at a time when a very popular (in Quebec) federalist is about to become prime-minister with little to no opposition). If Alberta goes, B.C. pretty much has to go... That said, separatism has never really polled all that high in Alberta, and has a serious difficulty getting past the 10% mark. Alberta has core federalist NDP / Liberal / Tory vote sitting close to the 50% range. I wouldn't pay more than 15% on Alberta / B.C. separation. So the conjunct of Alberta/B.C./Quebec is worth around 4.5 points (0.30*0.15=0.045), and you need another 7 provinces to come along. Newfoundland, Nova Scotia and PEI have very federalist populations, and likely won't want to be stranded on their own. New Brunswick may go with Quebec, because of cultural influences, but that's about it for the Maritimes. I don't see this claim legitimately sitting above the 3-4 point mark.

[ Parent ]
ah, I get it (none / 0) (#50)
by khallow on Thu Aug 14, 2003 at 07:09:54 PM EST

So you're saying that I could be buying this stuff for less! Why didn't you say so in the first place? ;-)

Stating the obvious since 1969.
[ Parent ]

yeah but then there was logic (4.28 / 7) (#23)
by turmeric on Wed Aug 13, 2003 at 10:57:14 PM EST

cheating in sports exists because of betting on sports. thats why betting is banned.

cheating in international geopolitics is caused by betting (currency speculation, stock market speculation, corporate speculation on things like oil or whatever). thats why betting should be banned.

 

a lot of people like to say that betting and investment are the same thing.

these people are generally lazy and rich.

rusty is a stupid faggot (1.31 / 16) (#25)
by Spencer Perceval on Wed Aug 13, 2003 at 11:10:08 PM EST

What the hell? "Cheating" in geopolitics is caused by betting? How about: there is no cheating in geopolitics because that would imply there are rules to be broken.


All the animals come out at night - whores, skunk pussies, buggers, queens, fairies, dopers, junkies, sick, venal. Someday a real rain will come and wash all this scum off the streets.
[ Parent ]
congratulations (2.33 / 3) (#28)
by DJ Glock on Thu Aug 14, 2003 at 04:48:33 AM EST

Spencer Perceval has posted 420 comments

*** ANONYMIZED ***
[ Parent ]

rusty is a stupid faggot (1.20 / 10) (#36)
by Spencer Perceval on Thu Aug 14, 2003 at 09:44:25 AM EST

100th diary draws near!


All the animals come out at night - whores, skunk pussies, buggers, queens, fairies, dopers, junkies, sick, venal. Someday a real rain will come and wash all this scum off the streets.
[ Parent ]
rules (none / 0) (#60)
by turmeric on Fri Aug 15, 2003 at 07:58:46 AM EST

actually there are rules. the golden rule. the rule that leaders shouldnt crap on their people. things like that.

[ Parent ]
People don't want to be told right (4.50 / 12) (#27)
by Seth Finkelstein on Thu Aug 14, 2003 at 12:08:31 AM EST

The reason this was a silly idea is simple:

The Policy-Analysis-Market has nothing to do with the Policy-Creation-Process.

That is, one of the things you discover in doing analysis, is that people often don't want to hear what's right - they want to hear that they are right. And that makes all the difference in the world.

If the Oracle Of Delphi, err, I mean, the Policy Analysis Market, said that there was a low chance of Weapons Of Mass Destruction in Iraq, would that have made a difference? No. The decision-makers would just have dismissed it by claiming that the market does not possess the ultra-secret information necessary to have an accurate estimation.

Accurate analysis is not in short supply. Decision-makers who care about accurate analysis, however, are what's in short supply. There's very little market for them.

-- Seth Finkelstein

guess what? (1.06 / 16) (#31)
by DJ Glock on Thu Aug 14, 2003 at 08:16:03 AM EST

your last name is fucking gay! hahaha.

*** ANONYMIZED ***
[ Parent ]

$100 ceiling would have made it worthless... (4.33 / 6) (#32)
by skyknight on Thu Aug 14, 2003 at 08:19:11 AM EST

I regularly played poker with friends in college. People at the table would put in ~$20 and we'd play for an evening. It was a good excuse to hang out with friends, but I didn't find it to be a real gambling experience, while some of them perhaps did. Why? At the time I was earning $35/hr at a programming job, whilst most of them were earning little better than minimum wage, assuming they had jobs at all. I could win or lose $100 in the course of an evening and it wouldn't be a big deal to me. If they were to do that, it would be glorious or catastrophic, respectively.

The simple fact is that if you want people to take something seriously, and this holds for anything in life, they have to have a vested interest in the outcome. This is why communism would never work, and why this program with a $100 cap would be doomed to irrelevance. If you don't have a serious interest in your share of the capital, then you are not transmitting information to the market, and the system consequently suffers.

Bill Gates just isn't going to stay up late at night in his study pouring over spreadsheets, fretting over his $100 in the market. If this system were to be of any use at all, every participant must be able to put in an amount of money that would sting to lose, and be able to win an amount of money that they would consider substantial. Failing that, we're just playing Candy Land.



It's not much fun at the top. I envy the common people, their hearty meals and Bruce Springsteen and voting. --SIGNOR SPAGHETTI
it all depends (none / 0) (#40)
by awethu on Thu Aug 14, 2003 at 12:16:32 PM EST

One would imagine that those with pertinent information actually live in developing countries, some of which has an annual per capita GDP of a few hundred dollars. A $100 bet would be significant to these players. Furthermore, one would imagine that the government is already privy to information available to well off business people and therefore PAM was not targeted at people such as Bill Gates and his ilk.

[ Parent ]
It depends if the money is the motivator (5.00 / 1) (#52)
by LGV on Thu Aug 14, 2003 at 10:02:46 PM EST

or being right is. According to Jack Welsh (the former CEO if GE) in his recent book, whenever Gates and Warren Buffet (the two richest people in the country) play golf, they be a dollar every time. If it's about pride in winning a given bet, and taking someone else's money, it can be a motivator. That being said, I think the $100 limit would have diminished the utility, but it would still have some validity.

[ Parent ]
There's the rub (none / 0) (#61)
by wumpus on Fri Aug 15, 2003 at 08:00:07 AM EST

There are also limits (so far) as to how much you pay US political candidates for "access". The limit is something on the order of $2k. Nevertheless, George W. Bush has plenty of "Pioneers" who "donated" over $100k to his campaign.

If Haliburton needed to justify a huge buildup in military bases, the investment required to "prove" that they are needed is trivial, especially with this artificial limit (which requires a conspiracy on the order of a company program to get around the rules).

Note that this artificial "limit" is shown as feature, without mentioning that it effectively destroys the ability of the market to predict anything.

Wumpus

[ Parent ]

but we are aware of this (none / 0) (#68)
by khallow on Fri Aug 15, 2003 at 12:33:20 PM EST

Literally, everyone who has discussed here the pros and cons of such a market already knows that a big fish investor can warp a small market easily. That and many other market flaws. The thing that gets forgotten here is that PAM was an experiment. Because we got morally outraged, we lost the benefits that running this experiment would give us.

It's real convenient to say that the market wouldn't have worked anyway. What's better? A information gathering process that is opaque and comes out with the wrong answers on a regular basis? Or a market-based process that is open to many people, it's mechanics are quite visible, and comes up with answers that may not be correct most of the time, but certain are better than the opaque process.

Stating the obvious since 1969.
[ Parent ]

How wrong are the present answers? (none / 0) (#70)
by wumpus on Fri Aug 15, 2003 at 01:30:27 PM EST

The "gathering process that is opaque and comes up with wrong answers on a regular basis" is certainly more accurate than the advisors who make up "data" to match the Bush administrations goals. Guess who is acted upon. I'm sure that many who oppose this expected the same small clique of "advisors" to finance "real data" to match whatever foreign policy Bush needs for integral support.

As a experiment, the whole idea is flawed. The only way to really test it is to use it to make decisions, while allowing those with a specific interest to attempt to game the system. If there is no reason to believe the system will be used, nobody need make a serious (and expensive) attempt to manipulate the market. As an inexpensive means of gathering data it appears wonderful, until you try to trust the data.

It would be interesting to see if such a beast actually gave answers remotely equal to actual events (I expect it would). Such an experiment would tell you nothing about whether it could be used for policy decisions.

Wumpus

[ Parent ]

You deserve an insulting title here - fill it in (3.50 / 4) (#33)
by mami on Thu Aug 14, 2003 at 08:57:41 AM EST

The US Senate just destroyed one of the most innovative DARPA (Defense Advanced Research Projects Agency) projects ever.

Well, yeah, I am always amazed how capable "innovative, intelligent people" are to trigger the worst behavior out of mankind.

The key is that markets are the best way discovered so far for collaborating the knowledge of participants. Sometimes they are astoundingly accurate (as when assigning blame for the Challenger Space Shuttle accident in 1986) and sometimes not (the Dot Com Bubble), but what works better?

Most of the time they are astoundingly inaccurate if not completely ridiculous and the fact that nothing "works better" just proves your own thesis wrong.

Apparently the "innovative, intelligent people in academia or DARPA", whose ideas you seem to admire so much, couldn't do better than to suggest to bet hard currency on fictional claims based on fear mongering.

Clearly, we need a "war on terrorism" to make this "policy analysis market" work. Without me.

I am already tired enough of the few obsessive compulsive terror hunting and regime change wishing hawks in various positions of the current administration. Not only are they dangerous, they are unfortunately so addicted to their own innovative ideas that they mess up major true intelligence operations, it seems.

The last thing we need are "innovative economists and statisticians" to put a "scientific" foundation under their mind's evil impulses.

Basically your article is such an outrageous insult in the face of any decent person that I have no idea how to fight you other than wishing you to shut up.

Your ideas are hate inciting of the supreme kind. I can just hope that there will be watchful, common sense people to help prevent you and your comrades in mind, who are hooked to "innovative intelligence", to stage another coup on the American people's values.

Are you serious? (2.50 / 2) (#42)
by khallow on Thu Aug 14, 2003 at 02:11:28 PM EST

It's times like this when I wish there weren't so many trolls on K5. I can't tell whether you're serious or pulling my leg.

Stating the obvious since 1969.
[ Parent ]

I asked myself the same question ... (2.75 / 3) (#47)
by mami on Thu Aug 14, 2003 at 06:17:48 PM EST

I can't tell whether you're serious or pulling my leg.

Why would that matter to you?

When I posted my comment I was so angry that I asked myself, if you really were serious or just a good troll. Then I decided that it doesn't matter at all. If you were serious, it's bad enough, if you were trolling it's even more than bad enough.

Hope that helps.

[ Parent ]

Let's think about this (3.66 / 2) (#49)
by khallow on Thu Aug 14, 2003 at 07:06:25 PM EST

Well, yeah, I am always amazed how capable "innovative, intelligent people" are to trigger the worst behavior out of mankind.

Sorry, I don't share your amazement. In fact, I don't see what you're talking about. Sure, innovative, intelligent people designs weapons capable of killing millions of people, were the technocratic corp of some pretty disfunctional governments that killed tens of millions of people in the 20th century. But overall, I say that intelligence and innovation are pretty nice things to have around. We might kill ourselves in the process, but it beats staying in the caves.

Most of the time they [markets] are astoundingly inaccurate if not completely ridiculous and the fact that nothing "works better" just proves your own thesis wrong.

Please, find a better way to predict the future than markets. Then tell me how wrong I am. The point is that a lot of research has been done on markets both their successes and failures. We understand these things. Now, show me someone, anyone who really understands the decision making process at the CIA?

Apparently the "innovative, intelligent people in academia or DARPA", whose ideas you seem to admire so much, couldn't do better than to suggest to bet hard currency on fictional claims based on fear mongering.

Clearly, we need a "war on terrorism" to make this "policy analysis market" work. Without me.

First, if you replaced "fictional claims based on fear mongering" with "factual claims on important things", then you'd be correct above. No reason you need participate on this market.

I am already tired enough of the few obsessive compulsive terror hunting and regime change wishing hawks in various positions of the current administration. Not only are they dangerous, they are unfortunately so addicted to their own innovative ideas that they mess up major true intelligence operations, it seems.

The last thing we need are "innovative economists and statisticians" to put a "scientific" foundation under their mind's evil impulses.

Come on. They already have a host of compliant think tanks and committees with lots of Big, Important People to rubber stamp everything they do. An $8 million low-key experimental project doesn't add "credibility". And it's more likely than those think tanks to come up with a unapproved answer (IMHO).

Basically your article is such an outrageous insult in the face of any decent person that I have no idea how to fight you other than wishing you to shut up.

Your ideas are hate inciting of the supreme kind. I can just hope that there will be watchful, common sense people to help prevent you and your comrades in mind, who are hooked to "innovative intelligence", to stage another coup on the American people's values.

First, aside from the US Senate, I don't insult anyone in my article. Second, I think I make a credible case that some decent people will agree with. I'm not staging coups on American people's values either (such as they are). Don't conservatives complain all the time about the undermining of American values? And "hate inciting of the supreme kind"? Who hates who more just because I wrote this article?

Far as I can tell, we just have wildly divergent viewpoints. I can live with that. I wrote this story, because I think the Policy Analysis Market and the people who made it got a raw deal. It's like you and your house get caught in some giant tornado and brought to a different world. Then whe you stumble outside, all these weird people are celebrating because the evil Witch of the Right Poindexter got squished. It's nice that he's toast, but why couldn't it have been somebody else's house?

Stating the obvious since 1969.
[ Parent ]

You think about it, without me - (none / 0) (#55)
by mami on Fri Aug 15, 2003 at 12:11:45 AM EST

1. paragraph: I don't talk about innovations in weapon building, I talk in "innovative abuses" of people's basic instincts.

2. paragraph: Why do you need to predict the future? To make a profit? Poor boy. You don't understand the decision-making process of the CIA? Kudos to CIA, the moment you would understand their decision-making process, they had lost the battle.

3. paragraph: I don't need to participate in the market? Oh, so I just am a silly bystander who becomes a victim of other people's compulsive betting with money they don't own over fears the gamblers induced?

4. paragraph: The 8 million low-key project adds highly dangerous legislation as the consequence of people's reactions to overheated markets. Who needs credibility from gambling, profiteering, criminal, free market loving libertarian ideologists anyway?

5. paragraph: True, you don't stage a coup on current American values. That has already been done successfully and even your project can't compete with it.

6. paragraph: Who hates whom more? Me you, of course. Wasn't that what you had in mind to accomplish with your article? Your article insulted my intelligence and now I hate you, surprise, surprise.

7. paragraph: I am too dumb to understand your last paragraph. If you want to rewrite it, I might read it again, but I don't guarantee it.

[ Parent ]

the mysterious last paragraph (4.00 / 1) (#67)
by khallow on Fri Aug 15, 2003 at 12:24:28 PM EST

7. paragraph: I am too dumb to understand your last paragraph. If you want to rewrite it, I might read it again, but I don't guarantee it.

I meant that I thought the real reason reaction was so harsh to PAM was because it was part of the same group under Poindexter who had come up with "TIA" (Total Information Awareness) which among other things had the Illuminati pyramid (pyramid with an eye on the top) as its symbol. That didn't go over well. Then when the anti-TIA crowd sees this market apparently trading in terrorism and other naughty stuff, they saw their excuse. Nevermind that the original accusations were bogus. That market didn't trade in terrorism, assassinations, or "atrocity futures". The Bush administration crumpled like a soggy noodle and Poindexter was out the door. Everybody is happy.

If no political points could be scored then I doubt they would twitched a muscle. After all, the Senators knew of the program months in advance and did nothing except request that the program progress be reported to the Senate. OTOH, maybe this was a political assassination by the financial community. Ie, Chase Morgan or some other influential donor might get PAM nailed anyway. Who knows?

Stating the obvious since 1969.
[ Parent ]

Assasination Politics, by Jim Bell (3.00 / 1) (#34)
by ip4noman on Thu Aug 14, 2003 at 08:59:25 AM EST

I'm surprised more people haven't drawn an analogy between PAM and the system described in Assasination Politics, which landed Bell in prison for writting it: http://www.antioffline.com/apol.html

Does anyone know if he's still in jail?

--
Breaking Blue / Cognitive Liberty Airwaves

so try it already. (4.00 / 2) (#37)
by pb on Thu Aug 14, 2003 at 09:59:40 AM EST

There are websites out there that have their members making trades with imaginary money on an imaginary stock market; there are websites making trades with real money on the real stock markets; and there are websites gambling with either real or fake money on a variety of endevours. You know what? I bet you could go start a website for this as well!

If using 'real money' is somehow essential to your plan, get a PayPal button. And if you're afraid of running afoul of gambling laws, then just make sure your site is based in an appropriate locale and has all the right disclaimers on it.

Anyhow, if you think it's a good idea, then go for it. I don't see why DARPA would have to be involved. If you were the guy who invented the internet, (Al Gore or otherwise) chances are, you'd be filthy stinking rich right now. But instead, DARPA did it, so no $$$ for you. Now's your chance!
---
"See what the drooling, ravening, flesh-eating hordes^W^W^W^WKuro5hin.org readers have to say."
-- pwhysall

Markets (3.66 / 2) (#38)
by krek on Thu Aug 14, 2003 at 11:41:39 AM EST

See, there is a difference between 'The Market' and 'the stock market', 'The Market' is something that just is. Like religion and sexual tension it exists as a emergent property of every day human interactions. We did not invent 'The Market', we only came to recognize it's existence and to discover some rather loose rules that seem to govern it's behaviour.

'The stock market', on the other hand, was explicitly created as a means to control, focus and predict the effects of 'The Market'.

Ultimately, any efforts to control 'The Market' will simply result in greater instability. Imagine trying to still the waters of a pond by smoothing the ripples with your hand. It would seem that similar difficulties would present themselves when trying to control, focus and predict 'The Geo-Political Market', especially through the use of a 'geo-political stock market'.



What the hell? n/t (5.00 / 1) (#45)
by guidoreichstadter on Thu Aug 14, 2003 at 06:10:10 PM EST




you are human:
no masters,
no slaves.
[ Parent ]
assumptions versus reality (3.25 / 3) (#51)
by bcrowell on Thu Aug 14, 2003 at 10:02:21 PM EST

Markets are efficient aggregators of information, but if that information is incomplete or wrong, then the market will be wrong as well.
Economists have some pet assumptions: (1) markets are perfectly efficient, (2) information flows freely, (3) individuals act rationally, in their own self-interest. The problem is that these are just assumptions used to make it possible to do certain calculations. When the assumptions don't apply, you shouldn't use a theory that's based on them.

In this situation, the real problem is the lack of access to information. The people participating in the market coldn't have aggregated information unless they had access to the information in the first place. Al Qaeda doesn't make annual reports to its shareholders, nor does the CIA.

For comparison, imagine using trying to sell this to the detective at your local police department: ``You can just use markets to determine who killed Ms. Purple in the library with the wrench.'' Well, the murderer is probably keeping his secret to himself, not giving it out at press conferences so that it can be discussed on the Motley Fool web site.

The Assayer - book reviews for the free-information renaissance

On the other hand (none / 0) (#54)
by khallow on Thu Aug 14, 2003 at 11:14:51 PM EST

Economists have some pet assumptions: (1) markets are perfectly efficient, (2) information flows freely, (3) individuals act rationally, in their own self-interest. The problem is that these are just assumptions used to make it possible to do certain calculations. When the assumptions don't apply, you shouldn't use a theory that's based on them.

First, this is a strawman argument. My original remark is based on observed behavior of such systems as stock markets not on theory.

Second, economic theory can and is successfully applied in situations where the original assumptions don't hold completely. Markets aren't perfectly efficient, but sure look pretty efficient on long time frames. Information doesn't flow freely (otherwise we'd have no need for PAM), but it does flow better in a market. And people don't behave rationally in their self-interest all the time, but once you understand their wants and needs, and what their "self-interest" really are, then you find again that this is a reasonable assumption. People act rationally a lot of the time, and that's usually good enough.

As far as your murder example goes, the existence of a sizeable market might give organizations with considerably more resources that the local police department incentive to discover who killed who.

Stating the obvious since 1969.
[ Parent ]

A little knowledge is a dangerous thing (none / 0) (#76)
by enkidu on Fri Aug 15, 2003 at 06:23:10 PM EST

Calling something a strawman doesn't make it so.

I suggest you read Dr. Stiglitz's critique of the "terrorism market" this Los Angeles Times editorial. I'm no economist but I'll trust his judgement over yours.

[ Parent ]

you are correct (none / 0) (#87)
by khallow on Sat Aug 16, 2003 at 04:08:33 AM EST

I was identified with the notorious "economists with pet assumptions" category which isn't the strawman logical flaw. My point was that the original poster really did a job on economists with pet assumptions, but didn't address me, my assumptions, or my arguments. That's why I called it a strawman argument.

Stating the obvious since 1969.
[ Parent ]

Jim Bell Assassination Politics NOT PAM (3.00 / 3) (#53)
by Seth Finkelstein on Thu Aug 14, 2003 at 10:05:09 PM EST

There's only a very superficial similarity between Jim Bell's essay on "Assassination Politics" and the Policy-Analysis-Market. People are thinking there's a connection because of the idea of a bet. But in AP, the "bet" is just a figleaf for the hitman to establish his identity. It's someone saying "My login is the account of the assassin, because I'm going to kill X at time Y". There's also a bit of Libertarian silliness of thinking that a confession can be disguised as "bet", and then it's somehow free speech or otherwise protected ("I'm not confessing to crime, I'm betting on an event"). There's no concept of predicting anything novel (except maybe that many people hate someone's guts, but that's usually obvious), or establishing a rough consensus from conflicting views.

Anyway, Jim Bell is indeed still in jail, and will be for many years. The truth is that his legal problems had comparatively little to do with the AP essay, that was way hyped-up by both sides because it made for a "sexy" story. In fact, his court charges and being convicted had much more to do with his (stink) bombing an IRS office, writing threatening messages and trashing mail for what he thought were Federal agents (except he had the wrong people!), and refusing to work with his defense attorney. As well as self-destructing on the witness stand by admitting to more crimes than he was originally charged with.

You'll basically never hear about that, though, because it's not the revolutionary censorship fantasy that's spun out of it.

-- Seth Finkelstein

What works better than markets (5.00 / 5) (#56)
by michaelp on Fri Aug 15, 2003 at 03:50:39 AM EST

for 'collaborating knowledge': directed research via the scientific method shared, evaluated and synthesized via peer reviewed journals & conferences.

Its disturbing to even have to point this out.

Markets are a great way to distribute material resources, but don't work so well with knowledge, which was the real lesson we have yet to learn of the dot coms: its much easier for untrained or 'street' trained minds to evaluate the relative worth of a load of concrete, an oil well, a good corn harvest. It takes specialized training to evaluate the worth of a killer app, a new biotech technique, a new way of networking, etc.

Which is why information markets are and will be so easily manipulated by hypsters who appear knowledgeable, and will remain so until the general participants gain a high degree of the sort of advanced technical & scientific knowledge it takes to sort the hype from the hyperdrive.

Or at least their bots do.

Which means that this load of highly hyped pork (PAM PAM PAM PAMity PAM!) is probably better defunded, esp. in times when proven but less ideologically correct methods of evaluating complex information are facing cuts!

As far as predicting the bursting of the dot com, actually if you were paying attention there were several of each catagory publishing well researched and referenced, but terribly dry and boring, analyses that accurately predicted the bubble's burst.

The fact that they were ignored until it was too late is too often the fate of folks who don't jump on the latest, greatest, shortcut.

"Every gun that is made, every warship launched, every rocket fired, signifies in the final sense a theft from those who hunger and are not fed, those who are cold and are not clothed."

the true inspiration for idea futures (5.00 / 1) (#66)
by khallow on Fri Aug 15, 2003 at 12:03:20 PM EST

for 'collaborating knowledge': directed research via the scientific method shared, evaluated and synthesized via peer reviewed journals & conferences.

Its disturbing to even have to point this out.

You will be surprised then to find out that the flaws of the scientific process, knowledge distribution, and peer review (hereafter just called the "scientific process"), and other current social concensus-making processes were what inspired Idea Futures in the first place.

For example, Dr. Robin Hanson (mentioned as well in the original story) wrote this article this article about idea futures back in 1992. He uses as an example, a graduate student with an outrageous idea who makes it work despite the hostility of the scientific community due in large part to the workings of an idea futures market.

Obviously, that doesn't mean that he is correct, but it does mean that the scientific process has been taken into account on the market side.

One of the purposes (IMHO) for the original idea futures market was to improve the scientific process. So let me give some examples of failures of the scientific process.

First, despite conclusively proving that there's no such thing as perpetual energy machines, we still have people attempting to make these devices, people still attempt to square the circle, etc. Ie, what is common knowledge among scientists sometimes doesn't get distributed that well among the masses. A lot of people are scientifically illiterate. In general, the scientific community does a poor job IMHO of spreading knowledge outside the core group interested in the problem. It's so bad that scientists often look down on those who dare popularize science.

Second, science is slow. If it is overwhelmed by a fad (Superstring theory for example dominates theoretical physics right now), a false theory (polywater, cold fusion), or dominated by a few personalities with a particular dogma or agenda, then that can waste the time of a whole generation. For example, black holes were discovered as a logical consequence of general relativity within two years of the initial coherent presentation of general relativity by Einstein (1917 or so). It wasn't till the 30's that Subrahmanyan Chandrasekhar discovered that for stars significantly larger than the Sun (ie, more than 1.4 solar masses) electromagnetism forces couldn't keep the star from collapsing. He in turn was aggressively and publically attacked personally by his advisor A. Eddington for that work. It wasn't till the 50's (after Eddington's death in 1945) that people started working with the theory of black holes and actually looking for them.

In the Social Sciences, irrationality can take root indefinitely. For example, here's an story about one (knowledgeable in the film industry) dad's brush with his daughter's theory of filmmaking class at UC Santa Barbara. Apparently, much of the program has been taken over by some breed of Marxist Post-Modernist. These people survive because the scientific process fails altogether in filmmaking. No one can contradict what views they have though the views have little to do with filmmaking. Instead, one gets the real lessons when they enter the working world. Because there, films must be made and sold to the public. Here the market works a lot better than the scientific process.

Stating the obvious since 1969.
[ Parent ]

Interesting that (none / 0) (#69)
by michaelp on Fri Aug 15, 2003 at 12:56:50 PM EST

your criticisms are of scientists who allowed their personal feelings to blind them to the truths (or that would have been revealed had they allowed it to happen) revealed by the scientific process.

The reliance on the market which is currently the fad seems to me to be a learned helplessness response rather than one of wisdom: science is too hard, its too slow, it tells us things we don't want to hear, so lets find another way of running things that doesn't require all this work.

True, markets are easy and fast ways to set prices, distribute goods, etc. But they don't and can't solve the problem of getting at what is really going on, because they are just as morphable by personal hopes, dreams, ideologies, and fantasies as are scienctists who abandon science.

So how do you know when the market is wrong? Disaster, crash, drought, wildfire. The bears come. Its back to the good old days when folks slashed and burned and hunted with abandon until the local resource base ran out and there was famine.

The scientific process is all about finding a better way to find a fact than spectacularly crashing into it.

Sure it gets undermined by personalities, superstitions, egos, and cherished notions. But it contains a mechanism of self correction, the scientific method, which swiftly can burst a bubble, if it is used, as demonstrated by cold fusion and perpetual motion. The fact that other aspects of a person's personality may lead them to ignore or avoid the scientific process is hardly a valid criticism of the process itself.

These people survive because the scientific process fails altogether in filmmaking.

First, I don't think you can say the scientific process failed if it wasn't applied. To even apply it you'd first have to define what you wanted film to do before you can use the scientific method to determine whether a particular film achieves your goals.

The Marxist film maker or film critic may well be using the process to see if his methods are achieving his goals of promoting a belief in dialectical materialism. Likewise, the process can be applied to see if dialectical materialism is in fact a correct hypothesis for how human beings interact.

But obviously, film making or film critique itself, alone, is not the right tool for investigating whether dialectical materialism is correct, you might as well say science has failed bicycle manufacture because we don't have a bike that we can ride to the moon;-).

"Every gun that is made, every warship launched, every rocket fired, signifies in the final sense a theft from those who hunger and are not fed, those who are cold and are not clothed."

[ Parent ]

let's get something straight (none / 0) (#72)
by khallow on Fri Aug 15, 2003 at 03:24:49 PM EST

You're talking about an ideal process which doesn't exist, and I'm talking about the scientific process as it is implemented in the real world. I also talk about markets as they are operated in the real world. One key factor is that neither is working if the outside world doesn't understand what the process or the market is saying. Here markets have the advantage because people understand them better.

The reliance on the market which is currently the fad seems to me to be a learned helplessness response rather than one of wisdom: science is too hard, its too slow, it tells us things we don't want to hear, so lets find another way of running things that doesn't require all this work.

Well, in that case you are wrong. Instead, it is about how to find out things in a better way. Is it "wisdom" to ignore or supress ideas because the scientific process is subverted by emotions and politics? Presumably as someone interested in the scietific process, you would be interested in methods that help scientists reach a proper concensus in a more efficient manner. Markets can do this. They also can reward hard work and correct guesses.

So how do you know when the market is wrong? Disaster, crash, drought, wildfire. The bears come. Its back to the good old days when folks slashed and burned and hunted with abandon until the local resource base ran out and there was famine.

The scientific process is all about finding a better way to find a fact than spectacularly crashing into it.

And how do you know when scientists are wrong? Same stuff happens except no scientists risked anything by being wrong. "Boy, we're real sorry our theories didn't hold up." And this is better than the market how?

Markets are very good at evaluating risks and the likelihood of events. Scientists as evidenced by the debate on global warming or other dangers to environment or humanity currently tend to be poor estimators of risk even as a community. And their message to the outside world is often garbled and misinterpreted. So how do they prevent the "crashing" part if no one is listening?

First, I don't think you can say the scientific process failed if it wasn't applied. To even apply it you'd first have to define what you wanted film to do before you can use the scientific method to determine whether a particular film achieves your goals.

My point precisely. Remember, I'm talking about the scientific process as it is implemented in human society. Here we have an example where the process has all but wasted away. We have the production of hypotheses, but no attempt is made to test these hypotheses or subject them to proper rigorous peer review.

But obviously, film making or film critique itself, alone, is not the right tool for investigating whether dialectical materialism is correct, you might as well say science has failed bicycle manufacture because we don't have a bike that we can ride to the moon;-).

A better analogy IMHO is making hypotheses about the workings of bikes (or perhaps bikes that fly to the Moon), and never testing those hypotheses.

Stating the obvious since 1969.
[ Parent ]

What 'real world' do you live in? (none / 0) (#75)
by michaelp on Fri Aug 15, 2003 at 05:08:22 PM EST

You're talking about an ideal process which doesn't exist, and I'm talking about the scientific process as it is implemented in the real world.

The scientific process works very well most of the time, better in fact than any other process human beings have ever discovered: evidenced by the fact that we had markets for tens of thousands of years that brought very little in the way of advances in knowledge compared to the scientific revolution of the past few centuries.  You have just pointed out a few times when the scientific process briefly failed, and in those times very little actual damage (compared to that caused by market failures) was caused.

And how do you know when scientists are wrong? Same stuff happens except no scientists risked anything by being wrong.

When scientific hypotheses are falsified, it generally happens in the lab or with experimental data. The scientists reputation may be damaged, but generally no one gets hurt.

Again, your examples of perpetual motion and cold fusion were both discovered to be false without losing millions of dollars, blowing up anything up, or crashing.  

"Boy, we're real sorry our theories didn't hold up." And this is better than the market how?

The consequences of failure are greatly reduced, see above.

Presumably as someone interested in the scietific process, you would be interested in methods that help scientists reach a proper concensus in a more efficient manner. Markets can do this.  

Disconnect. Yes its good for scientists to reach a 'proper' consensus. You have offered no evidence that "markets can do this". What obviously can do this is more and better general science education, increasing readership of peer review and the spread of the peer review process to other disciplines, more disciplines learning to use the scientific method (and developing tools to enable them to use the scientific method), etc.

In other words, TANSTAAFL, despite the fervent belief that the magic wand of market forces will solve any problem better, cheaper, and with a shine you can see yourself in, markets appear to have little to do with this ongoing process except in an ancilliary fashion: better science will produce better products, services, and more accurate information faster, and markets will probably reflect this, but I don't expect them to add to the actual creation of new information, except for the scientists who study markets;-).

Markets can do this. They also can reward hard work and correct guesses.

Maybe, but probably not hard scientific work, as the payoff for such is often years to decades in the future. As far as 'correcting guesses' this is much better handled by the scientific method than any random process with unknown variables: even it it did seem that a market move corrected a "guess", well scientists don't make "guesses" they make and test hypotheses, and they need a system with as few unknown and/or uncontrolled variables as possible, which the market cannot offer.


"Every gun that is made, every warship launched, every rocket fired, signifies in the final sense a theft from those who hunger and are not fed, those who are cold and are not clothed."

[ Parent ]

markets can supplement the scientific process (none / 0) (#79)
by khallow on Sat Aug 16, 2003 at 12:23:19 AM EST

The scientific process works very well most of the time, better in fact than any other process human beings have ever discovered: evidenced by the fact that we had markets for tens of thousands of years that brought very little in the way of advances in knowledge compared to the scientific revolution of the past few centuries. You have just pointed out a few times when the scientific process briefly failed, and in those times very little actual damage (compared to that caused by market failures) was caused.

So we're ignoring a process that's been shown to work for tens of thousands of years in favor of a process that at best has a few hundred years of track record? I agree that markets don't develope new scientific discoveries nor advance human knowledge by themselves. That was never my point, though I may haven't made it very clear. My point is that given scientific discoveries are made, the market efficiently propagates that information to people.

The problem is that in society there is currently a huge disconnect between those who make the discoveries, test the hypotheses, and do the hard work, and the society that depends on this knowledge. Markets can fill that gap. Better scientific education is a great idea, but it still turns out that people don't need to know all about each scientific field even if it were possible to somehow "know it all". The problem is that the cost of education people can outweigh the benefits. In large part, all people really want to know is how does this discovery X effect my problem Y. Markets can bring that out.

I still think that markets can provide better evaluation of science than peer review can. There's a lot of cases where bad ideas lingered longer than they should and good ideas were delayed. My concern is that the scientific process can be subverted to the point where it stops working without anyone really being the wiser. As you note, we only have a few centuries of knowledge about the scientific process, what does gross failure of the process look like? If discoveries slow down, is it because everything is harder and requires more work, or because the process is broken?

Markets are subvertable as well, but the open nature of the market makes such failures more obvious. Ie, market subversion always deviates from a "perfect" market, and someone can and will eventually profit from that. For example, the California energy crisis was brought on by market subversion. We might not understand who did what, but it was pretty obvious that it was broken. Also, as has been indicated by the discussion on this story, people have a good understanding of what can go wrong with markets. I doubt we really understand how scientific progress can fail yet.

My point was not that markets could replace completely the scientific process, but that they could suppliment it and back up some of the existing mechanisms for evaluating the quality and importance of the work produced.

Maybe, but probably not hard scientific work, as the payoff for such is often years to decades in the future. As far as 'correcting guesses' this is much better handled by the scientific method than any random process with unknown variables: even it it did seem that a market move corrected a "guess", well scientists don't make "guesses" they make and test hypotheses, and they need a system with as few unknown and/or uncontrolled variables as possible, which the market cannot offer.

Guessing ultimately must deal with randomness and uncertainty. Markets excel at guessing. So when you take that slimmed down model and want to apply it to the real world, then why not use the method that works, and has been used for thousands of years? That is the rational thing to do.

Stating the obvious since 1969.
[ Parent ]

Market consensus (none / 0) (#103)
by paranoid on Sun Aug 24, 2003 at 08:09:28 AM EST

What markets do is generate some sort of average metric for the numerical value (say stock price). Far from being consensus, it's simply a value at which the number of people selling at it or lower is equal to the number of people buying at it or higher.

This is often praised as a unique advantage of the market mechanism, while in reality it's just a neutral characterisitc of the way markets work. When Soviet Union collapsed in early 90s, food became scarce and you had long queues and coupons for bread and other foodstuffs. Store shelves were empty. Then in what was later widely touted a successful market reform, prices were liberated, setting a hyperinflation in motion for a few years. Apparently with free prices the market reached an equilibrium and stores were filled with food, leading one to believe that free market helped feed the country.

Market affectionados don't like when someone points out that actual consumption didn't increase. Markets didn't set fair prices, they simply set equilibrium prices, the level which doesn't have anything to do with efficiency, fairness or anything else, just with the technical aspects of market functioning.

[ Parent ]

when is a concensus a concensus? (none / 0) (#104)
by khallow on Mon Aug 25, 2003 at 01:41:28 AM EST

What markets do is generate some sort of average metric for the numerical value (say stock price). Far from being consensus, it's simply a value at which the number of people selling at it or lower is equal to the number of people buying at it or higher.

Why shouldn't this be called a concensus? It is after all a value collectively determined by a group of traders?

This is often praised as a unique advantage of the market mechanism, while in reality it's just a neutral characterisitc of the way markets work.

This "neutral characteristic" of the market happnes to be a big advantage (and perhaps "unique").

Market affectionados don't like when someone points out that actual consumption didn't increase. Markets didn't set fair prices, they simply set equilibrium prices, the level which doesn't have anything to do with efficiency, fairness or anything else, just with the technical aspects of market functioning.

Who decides what prices are "fair prices"? I also disagree with your accessment about the price. Market function tends over the long term to efficient, perhaps "fair" prices. One could call the vote power of a citizen of a democracy a "technical aspect", but that doesn't consider what the citizen uses that vote for, or how having that vote enables the citizen to have some degree of power over their government. The motive power of an automobile is a "technical aspect", but consider the increased mobility of the driver of the automobile and the increased costs to society of using that automobile.

My point is that markets naturally function in a way that works well for society.

Stating the obvious since 1969.
[ Parent ]

agreement of the majority in sentiment or belief (none / 0) (#107)
by paranoid on Mon Aug 25, 2003 at 06:22:31 PM EST

I've written a lengthy reply, but it seems that it got lost somehow. :( So I'll be very brief this time. Sorry, it's too late and I don't want to retype all that...

consensus: agreement of the majority in sentiment or belief [syn: general agreement]. The equilibrium market price is not consensus.

Markets are anything but fair. Under markets it's assumed that the more money you have, the more important your happiness is for the society. Simple example. Bill Gates obviously gets less utility from the next 1$ than you or me. Still, the society (capitalist society) decides that he should spend this dollar (I mean the dollar earned by MS for him) and not you. Since BG gets much less utility from this (100s of times may be), it can be reasoned that the society judges his utility (his happiness) 100s times more than yours or mine. How is that fair? Same can be said about the situation in Russia in early 90s. You can't prove that market-based situation was fair, you can only start with the assumption that markets are good and then smile when you see prices reach equilibrium.

Regarding efficiency. In simple cases markets work great. But for the whole economies their efficiency in allocating the resources is offset by their inefficiency in setting the goals/criteria. Even the perfect market (which does not and cannot exist) can only help us reach Pareto optimal solution. It can't make better. You can't prove that markets bring optimal solutions (and there have been a lot of criticism of market/capitalist-based metrics, such as GDP, etc.), you can only believe in that. The idea that "market == fair" is ingrained in the minds of many Westerners, especially Americans, which make this issue an excellent material for debate. :) Too sad that this prevents people from seeing the very real disadvantages of markets.

[ Parent ]

fair/unfair, other things (none / 0) (#108)
by khallow on Mon Aug 25, 2003 at 11:29:53 PM EST

consensus: agreement of the majority in sentiment or belief [syn: general agreement]. The equilibrium market price is not consensus.

On the contrary, when a price stabalizes in the market, then it is a true concensus since any one trader can continue to trade if they have the capital. Ie, the price doesn't settle until all buyers and sellers respectively have satisfied their desire to purchase or sell the good or service in question.

Markets are anything but fair. Under markets it's assumed that the more money you have, the more important your happiness is for the society. Simple example. Bill Gates obviously gets less utility from the next 1$ than you or me. Still, the society (capitalist society) decides that he should spend this dollar (I mean the dollar earned by MS for him) and not you. Since BG gets much less utility from this (100s of times may be), it can be reasoned that the society judges his utility (his happiness) 100s times more than yours or mine. How is that fair? Same can be said about the situation in Russia in early 90s. You can't prove that market-based situation was fair, you can only start with the assumption that markets are good and then smile when you see prices reach equilibrium.

What do markets have to do with "happiness"? Now that I understand better what you mean, I think that markets are neither fair nor unfair in that sense. From my point of view, it's mistaken to talk about Gates's personal "happiness" per dollar earned by Gates while ignoring that Gates's investments and work has enabled tens of thousands of employees of Microsoft in turn to pursue their own happiness. Or the value of the various Microsoft programs to the outside world and how that creation of value helps the happiness of others. Also, I get the impression that because you consider the situation "unfair" that Gates should be compensated less, even if it means generating a net loss of happiness as a result.

In other words, if Gates was getting paid a lot more for doing the same thing that everyone else is doing, then that is unfair. but I think that given what he does and did, that his current wealth is quite reasonable compensation.

Stating the obvious since 1969.
[ Parent ]

reality of the stock market and other markets (none / 0) (#109)
by paranoid on Tue Aug 26, 2003 at 06:20:50 AM EST

On the contrary, when a price stabalizes in the market, then it is a true concensus since any one trader can continue to trade if they have the capital. Ie, the price doesn't settle until all buyers and sellers respectively have satisfied their desire to purchase or sell the good or service in question.

In perfect markets may be, but then one of the common assumptions of perfect markets is that all participants have the same information and share same opinions about the stock. You don't even need the market to have a consensus there. ;)

In reality estimates of stock value vary greatly. So I may be valuing stock X at 50% of it's market price, but if I don't have any of it to sell, what can I do? Of course, it theory I can short-sell it, but in practice there are margin limits and other problems. I may be valuing the stock at twice the market price, but what if I don't have enough money or what if my investment in this stock is too much and I can't risk investing more without proportionally investing extra in other securities.

There is also additional risk of correct evaluation (models usually simplify the risks), so the value of the next share bought would be decreasing because of this risk, thus creating additional limits. That doesn't mean that I value the stock lower, it's just the valuation is no longer a single scalar value. There is now expected value, there is distribution of values, there are ideas about how others value it and will value in the future, as well as probabilities that my valuation is somehow "correct".

The lack of desire to purchase or sell does not mean that the consensus is reached as I have shown above. Again, you try to claim that the market price is more than it is. I've wrote about this problem in my lost post, so here is the original idea (although we might actually agree on that). I can't think of any characteristic of market price which is always true except for its very definition - the price at which the demand equals supply (and in case of the stock market both also equal zero).

What do markets have to do with "happiness"? From my point of view, it's mistaken to talk about Gates's personal "happiness" per dollar earned by Gates while ignoring that Gates's investments and work has enabled tens of thousands of employees of Microsoft in turn to pursue their own happiness.

You assume as self-evident that a capitalist should be rewarded as much as he can get from his enterprise. You think that if Microsoft makes 50 billion next year in profit, Bill Gates should get 25 billion (whatever his share in MS is, let's assume it's 50%), because it is the only correct thing to do and how could anyone think otherwise. Other people sometimes shout "you, dirty commie" at this moment. :) What I am talking about are economy's goals. One can reasonably argue that the goal of any self-respecting economy should be maximising the total happiness, well-being or utility of all citizens or somthing like that. Of course, there is a problem of valuing the happiness of different people (to sum it all together), but we can certainly make some estimates. But the market economy refuses to comply. It completely ignores the happiness of others and says "no matter what, you can't take anything from Bill Gates to improve someone else's life, even if Gates would hardly notice that and another person would greatly benefit. The only valid way is voluntary exchange".

The Gates examples is just intended to prove that, making two assumptions that

  1. we can somehow calculate the total happiness
  2. importance of happiness of different people does not vary hundreds or thousands of times
even a perfect market does not maximise the total happiness at all - the Pareto-optimal solution of the market economy has total happiness much lower than in other possible cases.

Of course there are many other examples in real life. And don't forget that real markets aren't perfect, so they work even worse.

[ Parent ]

seeking happiness, concensus (none / 0) (#110)
by khallow on Tue Aug 26, 2003 at 02:56:45 PM EST

First, markets are terrible for dealing with intangible items of value. The happiness of society (as some aggregate of the happiness of its members) is a good example. How can you buy or sell something like that? Such things are invisible to the market. However, one can introduce them into markets (and frankly I consider this the best way to handle intangibles) by imposing costs or benefits on the good or service. Eg, if a good causes pollution then impose a tax or require a tradable license for it.

In reality estimates of stock value vary greatly. So I may be valuing stock X at 50% of it's market price, but if I don't have any of it to sell, what can I do? Of course, it theory I can short-sell it, but in practice there are margin limits and other problems. I may be valuing the stock at twice the market price, but what if I don't have enough money or what if my investment in this stock is too much and I can't risk investing more without proportionally investing extra in other securities.

This is my point precisely. If nothing is risked or gained and people never change their minds, then there will never be a concensus. However, once you are risking finite resources, then you become much more discriminating about what purchases you make even if you never change your mind.

It is a concensus of the price of the good or service. I grant that that may not be the same as the value of the same, but I don't see a more effective method out there for determining such things.

What I am talking about are economy's goals. One can reasonably argue that the goal of any self-respecting economy should be maximising the total happiness, well-being or utility of all citizens or somthing like that. Of course, there is a problem of valuing the happiness of different people (to sum it all together), but we can certainly make some estimates. But the market economy refuses to comply. It completely ignores the happiness of others and says "no matter what, you can't take anything from Bill Gates to improve someone else's life, even if Gates would hardly notice that and another person would greatly benefit. The only valid way is voluntary exchange".

I think there are a number of arguments against maximizing the total happiness. For example, many people's happiness seems to be rather fickle. There's no obvious algorithm for making a person "happy". Second, once you've provided for basic human needs which I'll grant certainly isn't guaranteed by a market (food, water, shelter, family), there's no indication to me that more money means more happiness. Of course, you pretty much state that with the declining value of money to buy happiness.

Further, it's clear to me that very few people just want as their only goal in life to be "happy". Usually, we have complex wants and needs that may or may not make us more happy. It's not clear to me how you resolve these conflicts with your goal of maximizing happiness. Plus, you ignore the value that the producers of society provide. What makes you think that Bill Gates is overpaid? How much happiness is he providing for his pay?

Instead, a better goal is merely to enable the pursuit of happiness. I think that most western governments have done a fair job of this. I really think that government's ability to improve the happiness of its people is limited.

Stating the obvious since 1969.
[ Parent ]

seeking consensus, happiness (none / 0) (#111)
by paranoid on Wed Aug 27, 2003 at 05:33:37 PM EST

Well, introducing intanglibles to the market is an interesting idea that sometimes works, but don't be misleaded. By the very nature of markets, once the intangible is traded, there will be an equilibrium price. But that's all. Please don't call that a "value of happiness" or a "consensus", for it is neither. It's just a current equilibrium price. And anyway, there is currently no way to trade in happiness vouchers.

The thing is - either we can agree on what "consensus" means and that means using the word in it's traditional meaning as defined in a dictionary, or we can't do that and then it is much better to avoid this word like a plague, but instead specifically describe what do we mean.

Happiness might be fickle, but this is economics, after all. We have to deal with models that describe the world to some extent and there are some pretty decent models describing the idea of utility functions and rational behaviour of the consumers. If we assume efficient markets, rational investors (and therefore customers) follow. In addition to that we don't need an algorithm for making people happy, we just need to assume that there are utility functions (each combination of goods corresponds to a scalar value) and consumers are rational (they prefer more of the good to less). It is traditionally believed (in the economics) that more money leads to more happiness. If we assume it is not so, then why don't we scrap the markets, making the economy less efficent, but people happier? :) Your comment about complex needs is also irrelevant. It all can be counted towards one final value of hte utility function.

Now about the value that producers provide. You probably don't really notice how you assume that markets are fair and are the "one true way" even when discussing the very fairness of the markets. :) Who said that Bill Gates should get the whole economic effect of his actions? What do you mean "it's written in the Market Bible"? We are discussing the correctness of the Market Bible right now. :) It's irrelevant how much happiness Bill Gates is providing. What is relevant is how can we distribute the wealth other then in the market way. Imagine that MS paid a dividend and sent it to the shareholders in envelopes, each with one US dollar.

Here we have this 1$ in an envelope addressed to William Henry Gates III. There are two dividend distribution advisors discussing what to do with this 1$. The market advisor says that it should be sent to BG and there can be no other way. The alternative advisor asks to reconsider. He explains how this 1$ can feed a person in Africa for one day. Obviously that is a lot of happiness for the humankind. Alternatively we can send this 1$ to BG, which is (even if we value BG much more than that anonymous African) probably not a whole lot of happiness. The alternative advisor thus says that if we want to make Earth a better place to live, we should sometimes ignore market rules.

The idea that capitalist society allows to pursue the happiness is also very misleading. Google for "economics happiness" or smth like that. There have been a lot of interesting research on this topic (here is one link) that suggests that Western governments did a much worse job of this than one may think.

[ Parent ]

Argument, please (5.00 / 1) (#81)
by greenrd on Sat Aug 16, 2003 at 12:50:38 AM EST

Markets are very good at evaluating risks and the likelihood of events. Scientists as evidenced by the debate on global warming or other dangers to environment or humanity currently tend to be poor estimators of risk even as a community.

Here you are implying that markets are better estimators on global warming etc. If that is not what you mean, I think you are being intellectually dishonest.

If it is what you mean, please explain:

  1. Which actually-existing markets you are talking about
  2. How you interpret these markets in the case of a concrete question like "Is human-induced climate change a real threat to humanity?"
  3. Why we should believe your interpretation
  4. Why we should believe that your interpretation of the market's view of the risk to environment or humanity is more accurate than "the scientific community"

"Capitalism is the absurd belief that the worst of men, for the worst of reasons, will somehow work for the benefit of us all." -- John Maynard Keynes
[ Parent ]
a hypothesis - ocean levels rise (5.00 / 1) (#82)
by khallow on Sat Aug 16, 2003 at 02:57:21 AM EST

To start off with, thank you for asking a real question. Seriously, one can't discuss how good or bad markets are without this. I wish I had thought about doing this earlier. :-(

Here you are implying that markets are better estimators on global warming etc. If that is not what you mean, I think you are being intellectually dishonest.

Yes. Here's the list: stock markets, behavior of publically traded companies, real estate markets, insurance markets particularly with respect to fires and flooding, and the Foresight Exchange, an experimental idea futures market. Part of the reason the list is so large is because many of these markets provide indirect information that makes it difficult to answer the question.

The hypothesis:

How you interpret these markets in the case of a concrete question like "Is human-induced climate change a real threat to humanity?"

First, we need testable hypotheses, let's start with just one. First, we know that a prediction of global warming is that the water levels of the ocean will rise. A secondary factor is that huricanes, cyclones, and typhoons should increase in strength. The testable hypothesis is that we should see increased risk of damage to a unit of ocean front property on the US Atlantic coast. Literally tens of billions of dollars of property lie just a few feet above sea level.

So how do we look in the markets? First, look for companies that insure coastal property against damage. In particular FEMA, the Federal Emergency Management Agency and its National Flood Insurance Program dominates this field. They output their statistics on who buys policies, who claims losses, and some other information by state. Increases in flood insurance can indicate that prospective customers perceive greater risk of flooding. Increases in claims, loss amounts, and insurance rates indicate actually increases in losses due to floods. We really want to know the amount in dollar value of losses on the coast divided by the property value of the stuff on the coast.

Here's indications that insurers are experiencing increased levels of claims on the Atlantic coast. The problem is that part of this increase is probably due to the increased value of property on the coast rather than an increase in risk of damage to that property. So it is an ambiguous signal.

A similar measure is the property value of real estate along the coast. It should be expected to decline if increased risk of flooding is expected. This signal can be dampened considerably if FEMA's flood insurance is too generous. I believe figures by county are readily available.

Plus for the truly diligent, they can always access county records and assessed property values since those are public record. County assessments can deviate from actual sales prices but such problems are fairly easy to spot (compare sale price of property to assessed value of said property. If the sales price is much lower than the assessed value of property, then that could be a warning sign of significant decline in beachfront property values.

Such should be compared to inland property to determine whether the decline in value is due to filter some unrelated factors.

These are probably sufficient market-derived information for determining the market's opinion on the vulnerbility of the coast to the effects of global warming.

There are probably publicly traded companies that either build or trade properties on the coast, or that have large investments on the coast. I'd have to research who owns what to give a better answer here. But increased risk from storm flooding and general rise in ocean level will effect the price of these companies (IMHO).

Finally, the Foresight Exchange is the only market that I know of explicitly trading a security (although in reputation currency not real money). It forecasts a 25-26% chance of a one meter rise in the sea level by 2030. Take it as you will.

A one meter rise in sea level would have a strong negative effect on ocean front property worldwide, and would definitely be a strong signal of global warming. Hence, this market is claiming roughly a one in four chance of this serious consequence occuring without direct evaluation on whether or not global warming is occuring. I'd interprete this data as a strong indication that these market participants predict some increased risk of damage to ocean-front property from increasing sea levels.

In summary, I think a cursory view of the commentary on flood insurance market data indicates increased damages are being paid, and that these are in part due to the increased buildup that has occured in beach areas. Whether or not this indicates an increase in flood risk to a particular location is harder to determine, but the insurance data combined with the market price of the property should give a good answer there. OTOH, the buildup in ocean-front property seems to be the strongest signal that runs counter to the ocean rising hypothesis. Obviously, there are other factors, in particular the increase in demand for ocean front property, that can account for this. So I still say that insurance rates are the best predictor here. They do not disprove the hypothesis to the extent that I've studied the figures.

Other sources are less reliable either because the connection to the problem is pretty indirect (as in the case of stock insurance) or the market is experimental (as in the case of the Foresight Exchange). The latter indicates a significant risk of serious rise in ocean levels, for what its worth.

Stating the obvious since 1969.
[ Parent ]

Testing the hypothesis (none / 0) (#90)
by greenrd on Sat Aug 16, 2003 at 02:35:28 PM EST

The testable hypothesis is that we should see increased risk of damage to a unit of ocean front property on the US Atlantic coast.

That's a good hypothesis.

My first question is: how far in the future do insurers calculate risk before they discount it as being either "too far in the future" or "difficult to reason about"? Because the biggest risk increases could be associated with decades in the future, not years.

My criteria for the "meta-experiment" to test whether the "scientific community" or your market models are better predictors, are that one must take a series of pairs of concrete predictions made at the same times in the past (without the benefit of hindsight, obviously), pairs selected without bias, and compare their accuracy with respect to what actually happened. In other words, a scientific meta-experiment.

Until that happens, I will be asking the same question that the physics Nobel prizewinner apocryphally asked the economics Nobel prizewinner "So - how exactly do you empirically test your hypotheses?"


"Capitalism is the absurd belief that the worst of men, for the worst of reasons, will somehow work for the benefit of us all." -- John Maynard Keynes
[ Parent ]

excellent point (none / 0) (#91)
by khallow on Sat Aug 16, 2003 at 03:15:03 PM EST

My first question is: how far in the future do insurers calculate risk before they discount it as being either "too far in the future" or "difficult to reason about"? Because the biggest risk increases could be associated with decades in the future, not years.

The best measure here IMHO is the risk-free rate of return. The lower it is, the better the signal and longer in term it will be.

A lot of discussion on a real idea futures market includes using as a currency a security or commodity likely to hold its value over long periods of time. For example, I participated in a short-lived market that traded units of the Nasdaq index. For all but economically destructive events, this security is a good fit since it tends to do better than the risk-free rate of return. Gold is a commodity that would make a good currency for an idea futures market, particularly one which deals with disastrous events effecting all of human society.

Until that happens, I will be asking the same question that the physics Nobel prizewinner apocryphally asked the economics Nobel prizewinner "So - how exactly do you empirically test your hypotheses?"

I think your request is reasonable. I should point out that some work has been done along these lines. Ie, if a big accident or disaster occurs where the party responsible for the event is currently unknown, we can see how the market reacts to the event. For example, the Challenger accident in 1986 (which resulted in a pretty strong same-day signal on the markets that Morton Thiokol was responsible). Perhaps who was responsible for the recent blackout (eg, is it the US or Canada that's to blame?) would be an interesting test. In these cases, we can see how the stock markets penalized the various publically traded companies involved in the event, and later read the official report (or investigative journalism reports) on what really happened.

One notable failure is September 11. We had large purchases of airline (and perhaps reinsurance company) put options prior to the attack (strong signals there), but no signals from the US stock markets for several days afterwards due to the closing of the markets. The markets can't help if they're closed.

Stating the obvious since 1969.
[ Parent ]

two different things (none / 0) (#93)
by speek on Sun Aug 17, 2003 at 09:17:01 PM EST

Pointing out that someone predicted the burst after the fact shows nothing. You could go back and find the apparent historical indicators for any past event or trend, and you would not find any useful predictive ability in that indicator going forward. In other words, you have found a factor that fits the historical data, but as any market researcher knows, you'd be a fool to go risk your money on that factor in the future.

Also, the rest of this thread seems to me a case of two people talking about two different things. Comparing science's ability to discover new information to a market's ability to centralize distributed knowledge. Different things. You don't ask a scientist to use the scientific method to discover where the terrorists are - you send in covert ops. Using a market is a sly way of converting many people into potential spies.

for 'collaborating knowledge': directed research via the scientific method...

I don't think the scientific method says anything at all about how to distribute knowledge; and journals, conferences and peer reviews are more about validating knowledge than about synthesizing and distributing it (though it is certainly a consequence, on a relatively small scale).

--
al queda is kicking themsleves for not knowing about the levees
[ Parent ]

The CFTC not the SEC would be the regulator (5.00 / 1) (#57)
by hughk on Fri Aug 15, 2003 at 04:39:08 AM EST

As a futures market the regulating authority would not be the SEC, who just regulate the share and bond markets, it would be the ,Commodities Futures Trading Commission or CFTC. Although it may seem counterintuitive, they regulate all futures and options that can not be considered bets.

The main difference between a futures contract and a bet is that the contract is enforceable by law but a bet is essentially considered a debt of honour if you lose (although try exmplaining that to big Luigi when he comes to collect).

I work with F&O markets, and there is a big cross over with gambling. However one vital point is the ability to finely denominate contract price and thus risk. For example, you can bet on who wins the world cup, but you could make a futures contract on the total number of goals scored over the tournament with the contract price set per goal.

The problem with the PAM is that if you predict regime change in Jordan, this is more like a bet than a futures contract. However, it would be possible to design a contract around GDP, except that it is a rather imprecise statistic and subject to fiddling with by the authorities in many countries.



huh? (none / 0) (#62)
by jjayson on Fri Aug 15, 2003 at 08:08:31 AM EST

Futures contract on goals in a game? A futures contract is just a type of forward contract; it specifies a delivery of goods or instrument at a specified date at specified price.

Now how do I get soccer goals delivered to me?

By the way, you can bet on the number of points scored in a game. It is called the over/under (although you cannot set an exact number, but that is not needed for the betting instrument).
--
This space for rent.
[ Parent ]

Soccer Goals - Delivery thereof (none / 0) (#94)
by hughk on Mon Aug 18, 2003 at 08:18:44 AM EST

Actually, you can have the deliveable as cash, calculated as the number of goals times some price. This is more or less the same as the deliverable for a future on an index. Theoretically, you could deliver the underlyings, but the reality is that you could easily end up with some major settlement issues. It is easier to deliver the cash equivalent (hence the term cash settled products).

[ Parent ]
finely denominating risk? (none / 0) (#65)
by khallow on Fri Aug 15, 2003 at 11:19:53 AM EST

However one vital point is the ability to finely denominate contract price and thus risk.

I don't consider this particularly "vital" and I doubt the CFTC does either (though you may have counter-evidence). There's already derivatives out there that aren't finely denominated in the way you mean. It also neglects that you could hedge PAM investments with related claims, and even trade on the culmative outcomes of a number of claims at once. For that last ability to work (at least as I saw it), you need to have claims with a finite number of possible outcomes. Anyway, it appears to lead to a degree of hedging that the normal markets can't touch without a lot of leverage.

Stating the obvious since 1969.
[ Parent ]

Either/or investing (none / 0) (#95)
by hughk on Mon Aug 18, 2003 at 08:38:55 AM EST

The important thing about a derivatives market is that the resulting contract is tradeable. Generally speaking there is a market of buyers and sellers, each of whom can see an advantage in the transaction.

The current price of an index is something that is easy to determine. I can then predict that the index in 3 months will have a value of X, and I can say that I'm prepared to pay Y dollars for it now. The math is simple, even if the outcome isn't, but I can at least put a probability against my position and continually adjust that probability as we get closer to contract maturity.

I can't really see how one can easily relate this to the betting on an event, such as a change of government in Jordan. GDP is somewhat like oil output, you have a value to measure now so you can relate your prediction to it. Otherwise we are looking at the odds on a horse.

[ Parent ]

Ugly idea, wierdo implementor (1.00 / 2) (#58)
by Craevenwulfe on Fri Aug 15, 2003 at 05:12:24 AM EST

The guy that carried this project out is rather much of a wierdo who's attached to a cult style sect thing for rich people who basically views poor people as scum.

Believing that markets can do everything for the planet (including voting), is just ludicrous.

we already have markets for voting (none / 0) (#64)
by khallow on Fri Aug 15, 2003 at 11:06:22 AM EST

Believing that markets can do everything for the planet (including voting), is just ludicrous.

Ok, maybe that is ludicrous. But markets mixed with democracy do already occur. Every so often corporations (the kind with stock ownership) have elections where the shareholders decide such things as the makeup of the board and certain big decisions are left to the share holders. It turns out that companies with active shareholders do better long term than those with passive shareholders.

For example, here's a piece about corporate governance. If you look at "Box 2", you'll see the benefits of active versus passive governance for a few large shareholders that agressively changed their control from passive to active. I've seen reports of other studies that show large improvements in the functioning of a corporation when the shareholders were active versus passive. Can't locate those studies though. Of course, if you own 0.00008% of a company, then you have incredibly little voting power by yourself.

Stating the obvious since 1969.
[ Parent ]

Eh? (4.00 / 1) (#89)
by Craevenwulfe on Sat Aug 16, 2003 at 11:51:49 AM EST

What does corporate governance have to do with a trading system for votes?

[ Parent ]
my point on corporate governance (none / 0) (#100)
by khallow on Wed Aug 20, 2003 at 05:34:23 AM EST

What does corporate governance have to do with a trading system for votes?

Share voting is a working example of this kind of system. And the more involved the shareholders are, the more profitable the company is.

Stating the obvious since 1969.
[ Parent ]

Its important to evaluate information sources (4.50 / 2) (#98)
by Symmetry on Tue Aug 19, 2003 at 02:16:03 PM EST

"The guy that carried this project out is rather much of a wierdo who's attached to a cult style sect thing for rich people who basically views poor people as scum."

So you read that article too?

The thing is, the article is almost completly wrong about them. I've been lurking for a while on their mailing list, and for starters they are not all white (though the ones that post a lot seem to be well educated), the handshake is just as much a joke as the "bean dip catastrophy," I've never seen anyone on the mailing list mock the poor or stupid, many seem to have policies with Alcor, but the description of their relationship with cryonics is otherwise inaccurate, and I won't go on because almost every paragraph in that section has several glaring factual errors.

The article did get a few things right, like the fact that most seem to be left or right libertarians, but that hardly excuses a piece of drivel like this. I mean, when someone starts trying to tie the futures market in with subversive CIA conspiracies, you can usually assume what he says has zero information content.


Never attribute to malice what can be explained by stupidity. Don't assign to stupidity what might be due to ignorance. And try not to assume you opponent is the ignorant one-until you can show it isn't you. -M.N. Plano
[ Parent ]
Markets... (3.66 / 3) (#59)
by 0xA on Fri Aug 15, 2003 at 05:15:49 AM EST

The recent example is the dot com bubble. The question shouldn't be why didn't the markets predict accurately the price of the dot com stocks, but rather who did better?

Okay, what you are trying to say here is that markets are somehow able to really figure out what a slice of a company or truckload of whatever are worth. We'll use stocks as an example. When we want to figure out what our slice of the company is worth we have all sorts of metrics to use. Pick up any decent book on the subject and you'll soon be thinking PE ratios and growth trends and blah blah blah. You figure that at the current earnings per share company foo is at a much better price than company bar as it made twice as much money per share last quarter. Simple stuff right?

Wrong

You aren't, ever, trying to figure out what a share of that company is worth. You're trying to figure out what somebody will pay for it now or in the future. Period. Doesn't matter what it's worth.

This is even easier with commodities, a barrel of oil is worth X BTUs, a truckload of potatoes is worth X calories. When you go to trade something it gets anoying to figure out how many BTUs you are willing to swap for 20000 calories so we setup this abstraction called money. All in all this works pretty good but it is an abstraction. When I go to buy poatoes with my oil money I have to remember not only how many BTUs I get for a dollar but how many calories worth of potatoes I traded to get that dollar. More complexity. Maybe I am cold right then and need the oil badly or maybe the oil guy took a look at the rice field and decided potatoes were going to be a big deal next winter, so the price structure moves around.

So back to the dot com thing. We had a newish idea based on new technology that looked like it would change a lot of things. Companies started up to mess with the new thing and after two years started issuing stock (this was changed just before the bubble, a company used to have to be 5 years old to go public). The metrics that we'd come to know and love we chucked out the window, companys that expressed thier PE ratios in negative numbers had very high valuations. Most of them weren't worth anything but they were expensive to buy because people would pay for them. Everybody wanted in to the new, hot, shiny thing.

Eventually somebody listened to the few voices who had been saying "this is bullshit" for the whole time and told his friends all was not right. Then everyone else caught on and it imploded. Nobody that isn't a complete fool was surpised to see this happen, it was just faster and harder than most people expected.

Now if we try and apply this to a futures maket that works on political events I suspect it will be a massive failure. Not only are we abstracting an event like who will win the next election in Iran (4 potatoes = $2) we are trying to decide if that is a big deal (for us) in the future (no rice, potatoes needed). You end up in a situation where the WSJ interviews a guy in Iran who sounds like he'll raise all sorts of hell if he gets elected and a few people read it. This generates interest in the Iran election future which effects prices and gets everyone else looking at it because it's on the "movers" list that week. Joe trader decides this valuation is a bit of a strech so he shorts it hoping he'll be able to turn some quick cash. Jim sees that happening, he picks up some options on it so he can grab some cash if it recovers and rub Jim's nose in it. All this goes on regardless of the actual election. It was about the election at first but it became about the market quickly.

The only thing that markets can teach us it that value and worth have a very weak relationship in this system.

then the election happens (5.00 / 1) (#63)
by khallow on Fri Aug 15, 2003 at 10:50:16 AM EST

One of the things about stock markets, is that market reaction to certain types of good and bad news can be delayed indefinitely. Value and worth can get quite out of joint. However, in the PAM market and other idea futures markets, the claims are ultimately about whether events occur or not and these almost always have a deadline.

So in the short term, I can trade based on dimly recalled news, irrational feelings and urges, or on the sayso of my astrologer. Eventually, the election will occur or that deadline will occur, then it gets settled according to what actually happened. Reality got postponed only so long. That's why I think this market will work. Sure you'll get flaky investment every so often, but it won't change the market forever. Judgement day happens.

Further, you have some confusion about value and worth. For some goods, those are exactly identical (eg, electricity, a meal) since the good decays in worth so rapidly, while others like real estate may only have a loose link relationship between the two. We both agree that there are elements of the market that are only interested in what they can sell the good for, the value of the item. For those traders, the market works perfectly: the value is the worth. Not everyone can afford to completely evaluate the complexities of an investment and determine what its true worth is. That's the nature of having only limited information.

However, even in the stock market, worth and value are linked. The Bubble did collapse. These worthless dotcoms became valueless as well. No deadlines, no definitive events, yet reality got in anyway.

Stating the obvious since 1969.
[ Parent ]

Check the ideosphere (none / 0) (#102)
by paranoid on Sun Aug 24, 2003 at 07:45:28 AM EST

There are some interesting claims at the IdeoSphere that show the problem with taking reality into account. Some claims have their value evenly climbing from, say 0.5 to 1. Yes, when the day comes and the event happens, the value IS 1. But at any point in time prior to the "judgement day", the market value of the claim was giving confusing information.

You are right that the closer we come to the election date, the better the price of the futures will reflect the consensus, but this information will itself become less important and less valuable. This is not a problem for elections, when you bet on Arnold and you know that the answer will be here in a few months. This IS a problem for long-term idea futures, because people will always try to make some quick buck, and if they can't do it using real info to correctly value the claim, they will do it by trying to game the market. The longer the term, the less accurate the markets are.

A funny thing that nobody seem to have tried at IdeoSphere, TradeSports and other futures markets is arbitrage. It was proven that if people have different expectations about outcomes and they do not sum to 100% (which they usually do not - check the rates for governor elections in CA), someone can make a number of bets to have guaranteed positive outcome. These markets usually are not efficient and nobody seems to care...

[ Parent ]

ideosphere and stuff (none / 0) (#105)
by khallow on Mon Aug 25, 2003 at 02:09:54 AM EST

There are some interesting claims at the IdeoSphere that show the problem with taking reality into account. Some claims have their value evenly climbing from, say 0.5 to 1. Yes, when the day comes and the event happens, the value IS 1. But at any point in time prior to the "judgement day", the market value of the claim was giving confusing information.

If an event is 50% likely to occur, then you would expect the price to be at 0.5, even if later it turns out to be judged at 1. I admit that there's a number of examples of claims that react apparently only in hindsight. And there's at least one spectacular mistake (ie, when Yeltsin resigned on the last day of a particular FX claim). The price swung from 0.01 (I set that price BTW) to almost 1.00 in moments.

You are right that the closer we come to the election date, the better the price of the futures will reflect the consensus, but this information will itself become less important and less valuable. This is not a problem for elections, when you bet on Arnold and you know that the answer will be here in a few months. This IS a problem for long-term idea futures, because people will always try to make some quick buck, and if they can't do it using real info to correctly value the claim, they will do it by trying to game the market. The longer the term, the less accurate the markets are.

The big problem with long term predictions aside from the huge uncertainty, is that a correction of a long term claim is pretty worthless. I've seen corrections worth on the order of a fraction of a percent per year. Especially given that at times in the past, I've been able to exploit price differences as high as 20% per year (that was in 1996-2000). Ie, when I have return on investment expectations as high as 20% per year, why should I invest in a sure thing claim that pays more than twenty times less than that?

A funny thing that nobody seem to have tried at IdeoSphere, TradeSports and other futures markets is arbitrage. It was proven that if people have different expectations about outcomes and they do not sum to 100% (which they usually do not - check the rates for governor elections in CA), someone can make a number of bets to have guaranteed positive outcome. These markets usually are not efficient and nobody seems to care...

I have monitored the prices in those governor election contracts (as well as other contracts there) on TradeSports and let me tell you, real arbitrage in market doesn't last that long. Sometimes you'll see a small arbitrage that's dwarfed by the transaction fees required to trade on several different contracts. Also, arbitrage requires a lot of money to do since the return on arbitrage is usually a small percent.

Arbitrage with other markets is more likely, but people are getting very good at spotting those opportunities. I talked to a couple of people who were doing exactly that in short term sports-related and financial contracts.

Stating the obvious since 1969.
[ Parent ]

ideosphere claims (none / 0) (#106)
by paranoid on Mon Aug 25, 2003 at 06:09:08 PM EST

If an event is 50% likely to occur, then you would expect the price to be at 0.5, even if later it turns out to be judged at 1.

Me too, but I would expect it to jump from 0.5 to say 0.8 (when new info appears) and later to 1.0 when the event happens. I do not expect it to smoothly and gradually climb from 0.5 to 1.0 over a long period, since it's unlikely that new information will be coming in very small portions over the life of the claim and will be uniformly positive. Of course, one reason for that behaviour can be the required rate of return at the ideosphere (the same you are talking about), but I don't think it's necessarily the case, since it apparently doesn't happen with all claims. I don't know well enough the psychology of the players at ideosphere, so I don't really know what motivates their decisions regarding long-term claims with insufficient information about them, but I don't think it's some amazing insights about the issue.

It seems that we both agree that idea futures markets (at least in their current form) are not very well suited for long-term forecasts. Of course, some problems can be fixed. For example, if idea futures did not require any investments today (just bets with the payback after settling the claim), the return on corrections would be irrelevant, since you do not lock any resources in the claims you hold.

I have monitored the prices in those governor election contracts (as well as other contracts there) on TradeSports and let me tell you, real arbitrage in market doesn't last that long.

I just realised that I actually saw the bets at bodog.com (currently offline) and not at TradeSports. Anyway, since you have more experience in this area, it might very well be that these markets do in fact work efficiently enough to eliminate arbitrage opportunities. Thanks, I stand corrected

[ Parent ]

What a load of refried cow chips! (3.00 / 3) (#71)
by spcmanspiff on Fri Aug 15, 2003 at 02:42:41 PM EST

Aaah, markets, the mystical solvers of all humanity's problems!

Nobody knows how they work, but everybody pretends to.

Experts might be able to explain how a market might behave in a very detailed theoretical situation -- so removed from reality that it's mostly useless, but that doesn't mean their conclusions aren't taken as gospel from on high.

This project was a total waste of money and rightfully killed. WTF are we thinking playing the stupid-ass games to predict the future through the magic of makets -- that's right kids, MAGIC!!! -- when there are a gajillion other places where some actual insight might be obtained. Like, say, research? or on-the-ground intelligence?

Markets suck at predictions. I'll take the dot-com bust as an example, as you suggest. Everybody who wasn't an idiot knew that these companies were shit, and that their time on Earth would be limited to their ability to keep the hype up. If you look around, you'll see that many academics, and industry individuals, were predicting an implosion long before it happened; everyone else you listed had a vested interest in perpetuating the scam.

And that's what it was -- it's because The Magical Market wasn't, and isn't, about accurate predictions. It's about who can extract the most value from others, and if that involves participating in a bit of mass delusion to keep Ma and Pa buying tech stocks at inflated prices, well hey, no big deal!

 

play with fire, get burned (5.00 / 1) (#73)
by khallow on Fri Aug 15, 2003 at 03:48:50 PM EST

This project was a total waste of money and rightfully killed. WTF are we thinking playing the stupid-ass games to predict the future through the magic of makets -- that's right kids, MAGIC!!! -- when there are a gajillion other places where some actual insight might be obtained. Like, say, research? or on-the-ground intelligence?

"Actual insight" can be incorporated into a market, but not necessarily into rival concensus building processes.

Markets suck at predictions. I'll take the dot-com bust as an example, as you suggest. Everybody who wasn't an idiot knew that these companies were shit, and that their time on Earth would be limited to their ability to keep the hype up. If you look around, you'll see that many academics, and industry individuals, were predicting an implosion long before it happened; everyone else you listed had a vested interest in perpetuating the scam.

Unfortunately, non-idiots were hard to come by back then. And even worse, they weren't listened to. But you with your intelligence made money by trading on your superior understanding of what was to come, correct? Those industry individuals most certainly profited from their knowledge.

Further, those that predicted gloom and doom had no credibility except as validated by the market. Ie, they predicted it early on, but people only realized that they were telling the truth when the dot com markets started to collapse.

And that's what it was -- it's because The Magical Market wasn't, and isn't, about accurate predictions. It's about who can extract the most value from others, and if that involves participating in a bit of mass delusion to keep Ma and Pa buying tech stocks at inflated prices, well hey, no big deal!

What you're really saying is that a bunch of people in control of the media and financial resources lured a huge number of mostly ignorant people into the market where the victims proceeded to get fleeced. Now that Ma and Pa learned their painful lesson, do you think this will work a second time?

More relevant to the current discussion is that if the markets are so poor at prediction then why did the bubble finally correct itself? The answer is that even in the stock market, you can't deviate from reality forever. A lot of other processes have this property as well, but which ones directly punished the people who made the incorrect decisions? Ultimately, a lot of people made poor investment decisions and suffered for that with a loss of most of that investment.

Stating the obvious since 1969.
[ Parent ]

Repeat stupid platitudes, look stupid. (none / 0) (#74)
by spcmanspiff on Fri Aug 15, 2003 at 04:40:06 PM EST

"Actual insight" can be incorporated into a market, but not necessarily into rival concensus building processes.

How are you defining "actual insight?" It seems to me that you'd be just as well off looking at storm-cloud patterns off the coast of Bali to gain some "insight" into the future.

I realize you're a True Believer and all, but how the hell does a market provide more insight than a thoroughly researched article in a peer-reviewed journal, or a good piece of investigative journalism?

I would very much prefer an actual solid example instead of some econo-mysticism, but that's probably wishful thinking.

Now that Ma and Pa learned their painful lesson, do you think this will work a second time?

Yes.

Besides, as long as the stock was going up, Ma and Pa were plenty happy to optimistically overlook any bad news and tell their neigbors about the glorious future of the coming .com age.

As long as you're making money from a lie, it doesn't matter whether it's true or false -- all that matters is who believes it. That's markets.

A lot of other processes have this property as well, but which ones directly punished the people who made the incorrect decisions? Ultimately, a lot of people made poor investment decisions and suffered for that with a loss of most of that investment.

Actually, those who made incorrect predictions made bundles, and then some. The people who believed them are the ones who lost their pants.

 

[ Parent ]

markets aggregate information, they don't make it (none / 0) (#78)
by khallow on Fri Aug 15, 2003 at 11:53:03 PM EST

How are you defining "actual insight?" It seems to me that you'd be just as well off looking at storm-cloud patterns off the coast of Bali to gain some "insight" into the future.

The key is that you make testable hypotheses about the future, and then those hypotheses are proven or disproven over time. Each claim on an idea futures market is a testable hypothesis. In that sense, "actual insight" becomes information that allows you to estimate more accurately what the outcomes of these claims will be.

I realize you're a True Believer and all, but how the hell does a market provide more insight than a thoroughly researched article in a peer-reviewed journal, or a good piece of investigative journalism?

There are several reasons this is true. First, the thoroughly researched article or the good piece of journalism can be evaluated by the market rapidly and the information contained therein reflected promptly in the prices of the relevant claims on the market. The problem is that good research or good journalism can be supressed or refuted strongly by propaganda. How do we evaluate the relative strengths of the original data versus the counterargument? Especially if the original data never reaches a large audience?

Further, a market can be a larger pool than the reviewers and associates who evaluate the original research or the editor and fellow reporters who evaluate that journalism. Hence, it becomes much easier to both validate the new data and to connect that data with existing data that may not be accessible to the original circle of people who reviewed the article.

In the case of the Middle East claims on PAM, suppose a researcher comes out with strong evidence that the droughts in Saharan Africa are going to get worse. Someone in the CIA or in an oil exploration company might know that the political situation is so tricky in most of the Middle East, that that drought would be enough to cause massive regime change throughout the Middle East even remote areas that wouldn't be affected by the drought (say a variant of the domino theory).

Hence, the original scientists may not know how sensitive the Middle East situation could be. Indeed, the researchers may reside in places where that information is ruthlessly suppressed (say Libya).

That's my point. A lot of people can collaborate quickly and effectively with markets. It is a simple form of communication that elimates a lot of the deception. It processes new information pretty well yielding better predictions than the old methods could on their own.

Actually, those who made incorrect predictions made bundles, and then some. The people who believed them are the ones who lost their pants.

As I see it, the one's making the incorrect predictions weren't the ones making the incorrect decisions. You seem to agree with me on that. But how does this differ from any other situation where a party that controls media and issues deceptive information to the public? At least with the stock market, you know the deception will eventually be revealed. This is why I think markets will become one of the prime means of communication for the human race. Deception is still possible and is frankly expected, but the nature of the market helps to eventually pierce deception. That's because ultimately it will profit someone, perhaps even the conmen themselves, to reveal the truth.

Stating the obvious since 1969.
[ Parent ]

It's just a friggin' poll, people! (4.00 / 1) (#86)
by ixian on Sat Aug 16, 2003 at 03:53:31 AM EST

There really isn't that much more to it. This system is a simple poll, with a slight twist. The twist is that it costs the participants money to express their opinion, and an opinion that turns out to be true will earn money. Therefore, the participants are less likely to bullshit their way through the poll.

And indeed, in a vast majority of cases, these will be opinions. Not predictions, not thoroughly-researched theories. not educated guesses. Simply opinions. Look back to the dot-COM bubble. When "Ma's and Pa's" were buying tech stocks, how many of them have actually done some research about it. What do those companies sell? Is it a good or a service? Who needs this good or service? Do they have any competitors? What is the technology that their product is based on? Competing technologies? And so on and on...

Markets aggregate public opinion. They aggregate public confidence in the subject of the trade.

[ Parent ]

Bogus Trades (5.00 / 2) (#77)
by CoolName on Fri Aug 15, 2003 at 09:25:42 PM EST

Osama et al. already send out chatter designed to confuse the issue. With dollar limits so low many bogus trades could be made to decoy U.S. forces away from real targets. Also one might spend a million dollars on bogus trades making it look like Indonesia was going to fall tommorrow but more than recoup this sum in the currency markets when the Indonesian currency free falls. Also for small change are Mideastern policy makers going to essentially help the U.S.? No. An in-house market where CIA and defense department analysts trade anonymously might be helpful. Such a market would be a check on politically spinning intelligience questions.

"What does your conscience say? -- 'You shall become the person you are.'" Friedrich Nietzsche


Are You Completely Insane? (2.50 / 2) (#80)
by greenrd on Sat Aug 16, 2003 at 12:26:06 AM EST

Finally, we have the opportunity to settle in a rational way debates on the relative harm of various global policies.

This idea is so completely off the wall it does not deserve a serious rebuttal. It rebuts itself.


"Capitalism is the absurd belief that the worst of men, for the worst of reasons, will somehow work for the benefit of us all." -- John Maynard Keynes

I feel the same way (3.00 / 2) (#92)
by jjayson on Sat Aug 16, 2003 at 03:37:58 PM EST

... about transhumanism.
--
This space for rent.
[ Parent ]
An interesting but flawed idea (4.00 / 1) (#83)
by Battra on Sat Aug 16, 2003 at 03:13:38 AM EST

Disclaimer: I have a federal general securities license and work for a licensed broker/dealer. That doesn't necessarily mean I know what I'm talking about.

Although I think that PAM was ultimately flawed, I think DARPA deserves credit for floating an interesting trial balloon. Their mandate is to support high risk, high reward research. It's a given that many DARPA experiments will never reach their original goals. That does not mean that the projects were without value.

That said, here's what I think was wrong with PAM:

  • Encumbered Participants The participants with the best information would not be allowed involvement in the market. I really don't think that the CIA, NSA, or DIA would look very kindly on their intelligence analysts making bets based on their access to classified intelligence. I don't see a way these analysts could participate in a market like this at all without risking some incredibly serious federal felonies.
  • "Insider" Information In the securities industry, the test for insider trading is when an individual executes trades based on "material non-public information". Meaningful intelligence is by definition material and, to have any real value, must generaly be non-public. Since the serious participants in this market would all have extensive material non-public information, PAM would not meet the definition of a free trading market as it is commonly understood today.
  • Prior Art PAM, in many ways, is not as novel as it might seem. Espionage is, in many ways, just paid intelligence gathering. Every intelligence service on the planet has a network of paid informers, but here the model is different. Sources are paid based on their reputation for previous accurate information. This places the incentive on the informant to divulge information, unlike a futures market which practically begs for exploitation with material non-public information.Unfortunately, many members of the intelligence agencies around the world have participated in this already existing market, often with disasterous effects for themselves (tried for espionage or treason) and their countries.
  • Why should the government set up a market? Want to trade futures contracts on the US terrorist alert level for December 31, 2003? Or, would you rather trade on the liklihood of the death or capture of Usama bin Laden in the same period? Guess what, the marketplace didn't wait around for the military to come up with this. You can trade all these and more today at TradeSports
  • Is it really anonymous? Think about the way the US is viewed by much of the rest of the world right now, particularly in the Middle East. Do you really think professors in Amman, cabbies in Cairo, or observers in Isfahan are going to sign up for an account on a Pentagon web server to share their special information? What about Joe Schmoe in Ohio who happens to be a lucky guesser and does well in the market. In the Age of Ashcroft, don't you think there would be overwhelming pressure to investigate him to find out exactly why things seem to go his way?

Finally, an unrelated comment that I have been thinking about for some time. I read years ago that most cases of US government employees selling secrets to foreign governments were economically and not ideologically motivated. If you look at the payouts to famous moles, they are generally pitifully small. Given the enormous cost of investigating and cleaning up these holes when they are found, I suspect it would be cheaper in the long run to give everyone with access to classified material a 50 - 100% pay increase to remove the motivation. Who knows, the increase in pay might also help these agencies attract and retain highly skilled employees.



a science example (none / 0) (#84)
by khallow on Sat Aug 16, 2003 at 03:24:40 AM EST

Ok, suppose I head a science agency that funds the building and launching of space probes to accomplish scientific tasks and I want to use markets to help advise me on what decision to make.

The problem: I have three space probes (say "A", "B", and "C"). Each has a chance of success and my organization must weigh the scientific advantages and disadvantages of each probe. I currently have money to launch one of the three missions and that is the current intent of the agency. However, at a future point it may turn out that either none of them launch or more than one is launched. Which one do I decide to launch now?

Here's how I could use that market. Create three claims for each probe. For example, the three for Probe "A":

Claim: Space probe "A" is launched by the end of the 2007-2008 financial year.

Claim: Space probe "A" is launched and it deploys correctly [by this, I mean that it reaches its destination and begins its science mission].

Claim: Space probe "A" is lauched, deployed correctly, and it completes its specified science mission [with the science mission parameters specified in the claim contract].

This is all important information to me. Preferably, I'd like to launch the probe that has the best science mission subject to its ability to start and to complete that science mission. Traders not only must figure out the conditional likelihood of deploying the probe and of it completing its science mission, but they also must determine other factors like what the priorities and agenda are of my agency, what the likelihood is that my agency will alter the science mission to become either easily achievable or impossible, and so on.

OTOH, the people making these trades would be agency personel, the makers of the three probes, and a host of interested parties that are knowledgeable in space science, risks of satellite/space probe deployments, or in the ways of government bureaucracy.

I could of course ignore the results of the market. But if I select a probe that has very little likelihood of being deployed if launched, then I should study why the market is trading that way. It could be noise, private agendas, or it could be an accurate assessment of the probe's chances. The existence of the market doesn't excuse the agency and me from due diligence. My agency still needs to inspect each of these probes and chose. But what is important here is that if a part of the agency determines values that are at odds with the market data, then that could indicate that the group is acting on incomplete data. It's a good warning sign.

The key here, is that this market information aids my agency in deciding how to allocate the agency's scarce resources to aid one or more scientific projects.

Stating the obvious since 1969.

a policy example (none / 0) (#85)
by khallow on Sat Aug 16, 2003 at 03:51:11 AM EST

There's a broad group of conservatives that claim that a decrease in taxes on the wealthy will result in an overall increase in revenue due to "trickle down" economics. So imagine if people could trade on stuff like this.

examples of basic stuff (all for the year 2010 relative to the year 2003):

The fractional tax load of those with salaries in the top 10% decreases by more than 10%. [that is the tax load in 2010 is 10% or more less than the tax load in 2003]

The inflation adjusted taxes paid by the wealthiest 10% doubles.

The total inflation adjusted tax revenue increases by more than 10%.

Then have conditional claims (something PAM could do automatically):

If the tax load on the wealthiest 10% decreases by more than 10% then the total tax revenue increases by 50%.

If the tax load on the wealthiest 10% decreases by more than 10%, then the tax load on the 25% to 75% salary bracket will increase by more than 25%.

Finally, do claims on other aspects of society:

If the tax load of the wealthiest 10% decreases by more than 10%, then no on budget Federal government surplus will occur in the financial years 2005 through 2015.

If the tax load on the 25% to 75% increases by 10%, then personal bankrupcies increase by 25%.

The variety of conditional claims allow markets to evaluate the likelihood of claims like "X causes Y". This is a key thing missing from current policy debate. Namely, everyone has an opinion on the matter, and usually can find experts to base their opinion, but aside from just letting the policy run its course, a lot of the negative effects of policy can't be proven beforehand. Markets here give a way to evaluate those costs and risks before the policy is undertaken.

Stating the obvious since 1969.

Blackout Trading (none / 0) (#88)
by Baldrson on Sat Aug 16, 2003 at 11:40:23 AM EST

Looks like there may have been insider trading regarding the recent blackout.

The relevance of this is that if people want to make money on sabatage they can do so already. What is absent is specific market information.

-------- Empty the Cities --------


PAM: Why it was a bad idea (3.50 / 2) (#96)
by subversion on Mon Aug 18, 2003 at 08:13:26 PM EST

Point #1: Gaming the market.  With a limited set of players, a limited amount of cash in the economy, and a limited set of bets, what do you want to bet that a small collaborative group could have completely invalidated the results?

Point #2: Markets are damn near useless as predictors of value/events.  They're pretty good indicators - generally, over the long term 'good' investments go up in value and 'bad' investments go down.  But they only stabilize after the fact - prior to the fact, they're subject to severe fluctuation based on perception, and are often wrong.

Point #3: DARPA should be doing something far more innovative than this.

Point #4: No one should ever, ever trust anything John Poindexter is involved in.

If you disagree, reply, don't moderate.

concerning your points (none / 0) (#97)
by khallow on Mon Aug 18, 2003 at 09:52:16 PM EST

point #1: Yes, you can game the market. I don't think it would "completely invalidate" the idea though. Remember that eventually these claims are judged. So gaming the market means the people who are wrong will lose money.

point #2: Markets are "damn near useless" compared to what? AS you say, they are "pretty good indicators". Sounds about right to me. As long as the event hasn't occured, then there is legitimate uncertainty which results in market fluctuations.

point #3: I frankly don't think it's possible for DARPA to be more innovative.

point #4: Yet another case where it all boils down to Poindexter. If he hadn't been involved, you'd still be doing whatever it is that you do blissfully unaware of the existence of PAM.

I got a proposal. Markets seem to do really well in the real world despite their short comings. How about we have ourselves an experient? If you're right, then that experiment will prove your points rather quickly. We ought to have the experiment cover something relevant like the Middle East events, run by an independent party not beholden to the financial powers-that-be and very interested in the outcome (say the Department of Defense), and finally, let's call it something innocuous like the "Policy Analysis Market" so the anti-market people don't get so upset. Oh, we did that already and it got shot down?

Stating the obvious since 1969.
[ Parent ]

Wow...and one additional point (none / 0) (#99)
by jpmirabeau on Wed Aug 20, 2003 at 12:20:12 AM EST

Brilliant article. I confess some envy at the author's courage to tackle an issue so clouded by confusion: the author must have the balls of a bull.

It seems to me that much of the negative reaction to the DARPA proposal flows from a basic ignorance of basic economic principles and of how markets work (and don't work). Unfortunately, even the basics of economics and finance strike fear in the hearts of most mortals.

I wanted to add one additional point which, in my opinion, strengthens the author's argument.

One aspect of the proposal often not mentioned is the ease with which the market would aggregate information into one nice proxy (the price of the asset). This proxy would be especially informative if members of the government were allowed to participate in the market. Imagine being the CIA chief trying to assimilate all the information in front of you - reports from several dozen different section chiefs, each with their own bureaucratic agenda, each with their own special sources, each with their own biases. If these chiefs were allowed to participate in the market, their information--with the biases sterilized--would aggregate into a simple proxy for the CIA chief to consider. Perhaps this proxy would have been helpful. Perhaps not. Now we'll never know.

Thanks! (none / 0) (#101)
by khallow on Wed Aug 20, 2003 at 05:45:28 AM EST

I had been looking forward to trading on the Policy Analysis Market, but I got pretty steamed when those two senators started tearing into the market, days before it was to open. Then we find that the senators were exaggerating as well. So I had to write something. It just wasn't right to let this go down in history as some victory over the forces of "evil".

As far as markets in this area go, we may see them yet. We already are seeing real money markets as I mentioned in my story, trading in contracts like this virtually all overseas. For a brief while, I even traded in a real money idea futures market on nanotech and other scientific advancements (it actually traded units of Nasdaq index). That got nixed (and all the money handed over to a non-profit) because we never could fix the legal issues.

Stating the obvious since 1969.
[ Parent ]

Capital markets are not crystal balls (none / 0) (#112)
by alexwcovington on Sat Sep 06, 2003 at 10:07:55 PM EST

You'd have to be living in a 83rd storey office with a necktie on three clicks too tight to believe that capital markets can solve all problems. This venture would have pointless and would have rewarded terrorism, and I'm glad Senator Dorgan called them on it.

The Policy Analysis Market: Why It is a Great Idea. | 112 comments (96 topical, 16 editorial, 0 hidden)
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