Subject: Re: Tom W. Bell paper
From: Don Marti <dmarti@zgp.org>
Date: Sun, 3 Sep 2006 11:32:26 -0700

begin stephen@xemacs.org quotation of Sat, Sep 02, 2006 at 04:24:37PM +0900:

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

I see this point, but if the outsider is using the
market purely for hedging, and is indifferent to the
result,  he'll play whether or not there are insiders
in the market.

We see this today in the oil market.  Terrorists who
attack oil facilities can participate, but that
doesn't keep hedgers out.

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

I think we can non-coercively organize human effort
in three ways: politics, markets, and peer production.
During the 20th century, we turned the "politics" way
up, so we could use some wackos to talk about extreme
ways to shift the balance more toward the other two.

(The market extremists need their own version of
Burning Man -- instead of a temporary market-free
zone, a temporary all-market zone where you can
let your inner Homo Economicus get out and play for
a week.)

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

Yes, but consider Paul Graham's writings about lower
transaction costs for startups.  Many SPEX markets
will be easier to "manipulate" by funding inventions
than to "play fair".

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

But determining whether or not a patent is bogus
is more work than the SPEX.  And investing in
startups is pretty much useless as a hedge against
your exposure to lack of innovation.  For example,
trucking companies might invest in diesel efficiency
futures as a hedge against fuel price increases, but
the results for investors in the firm that sells a
technology don't map well to the costs for the firms
using the technology.  (Compare telco and Cisco stocks
to bandwidth prices.)

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

But with a SPEX and suitable insider trading reform,
every researcher is a potential analyst.

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

Why am I selling claims here?  3M and Cisco decide
that they would sell more fiber and routers if Web
3.0 were deployed, so they're taking the "no" side
of this contract.  (Less transaction costs for them
than the "Intel Capital" strategy of investing in
CPU-hog startups.)

An investor looks at my qualifications and proposed
Web 3.0 research, and funds my lab and takes the "yes"
side of the contract.  You invent Web 3.0 ahead of me,
and my investor still wins.

Which means that I have an incentive not just to
do research, but to publish my work in progress
and run my big mouth in the hotel bar at the Web
2.9 conference.

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