Subject: idea futures markets (was Re: Tom W. Bell paper)
From: <stephen@xemacs.org>
Date: Wed, 6 Sep 2006 17:08:30 +0900

Kragen Javier Sitaker writes:

 > Here are some possible reasons:
 > 1. You want a way to fund free-software development, and it's an
 >    alternative to bug-bounty systems, dominant assurance contracts,
 >    and the street performer protocol.

SPexes as described in Bell's paper are zero-sum, and cannot fund
development per se, except if they redistribute profits from people
less interested in investing in R&D to those more interested in
investing in R&D.  If this consistently happens on average, the former
will leave the market.  Uh-oh.

 > I don't think it's supposed to work like [Stephen Turnbull
 > described], although I haven't read the paper, the excerpt Don
 > quoted makes it sound like a standard prediction market, which
 > doesn't have these problems.  You have web 3.0 in development, but
 > just like the patent system, the system doesn't award any money for
 > things that are in development.  You use some of your VC money to
 > bet heavily

I'm talking about the same markets everybody else is.  What's
different is that I'm talking about arranging that the market provide
funds to the developers *while they're developing*, while everybody
else is talking about the developers *injecting funds into the
market*, until there's no development to be done any more.

Think about it.  Why would any VC give you money to bet on the market?
"*You* are a developer, go develop, dammit!  *I* am the VC, and *I* do
the betting and get the returns to supplying capital and taking
risks."

 > > Second, even with the legal changes, these markets may suffer from
 > > a severe "market for lemons" problem, which will result in
 > > underfunding of desirable projects.

 > In the scenario Don's proposing, the "market for lemons" problem
 > doesn't seem particularly severe.

The market for lemons problem == insider trading.  The only argument
anybody has made that SPexes can fund R&D in the short run depends on
the proceeds of insider trading, but that's going to chase out the
people regularly making losses.

 > > we want to be able to extract funding for R&D, but there's no net
 > > surplus to be extracted,

 > There is a net surplus to be extracted from risk arbitrage.  See
 > below.

I don't deny that.  I do deny that it has any particular connection to
R&D funding; the world gets richer, it will spend some amount of that
on R&D, but that's the only connection I can see.

Your Transmeta scenario has a small boo-boo, and a big conceptual
problem.  The boo-boo is that the perfect hedge requires buying $1 of
stay-hot claims per $1 of hot-CPU expense, not 1 per 2.

The conceptual problem is that firms are *much* less risk-averse than
people are.  The reason is simple: they can pass most risk on to their
customers.  Not all of it, true, but enough that "risk-neutral" is
quite a good approximation to firm behavior.  Fact is, the only very-
risk-averse agents you're likely to be able to find in these markets
are the free software developers. ;-)

 > I think the reason [an innovation prediction] is different is that
 > innovations are public goods, unlike gold.

But that's just plain irrelevant.  A claim in a prediction market is a
pure private good.  One person has it, nobody else does.

The only thing that matters is whether these markets will tend to
reallocate wealth from those who are less likely to invest in R&D to
those who are more likely to do so.  The insider trading story is the
only one I see that makes sense, but I don't like it very much after
looking at the likely equilibrium prices and volume of trade in such a
market.

Steve