At the closing of the last decade, I reviewed the intellectual progress I had in 2010s. Then I reflected upon the year 2020 by writing 20 lessons I learned in that year. Such reflections haven’t been part of any process – I’ve simply enjoyed taking a pause and doing stock of where my time went. Since time is the only limited resource we have, as I’m aging, I’m realizing that being conscious of how it’s getting spent is extremely important. In fact, such reflections are a fantastic way to nudge your future into a direction that you intentionally choose (v/s reacting to circumstances and drifting from year to year). ...
When you consider democracy, think about a group of people with different educational backgrounds, different interest levels and, most importantly, different preferences (some like guns and some don’t). Now, all members of this disparate group decide equal votes is a good idea and what they get is an average opinion that nobody likes. That’s democracy in a nutshell.
Markets: make it profitable for someone to make your life better
Markets are a wonderful mechanism. The profit motive creates incentives for entrepreneurs to make your life better, and competition drives down the cost you have to pay for an improved life. Airplanes, TV, air conditioners, refrigerators, wine, video games, paracetamol – these endless varieties of conveniences were once luxuries or fantasies. If economic markets make it profitable for entrepreneurs to put an effort into making your life better, why not design a political market that makes it profitable for politicians to do the same?
“I do not believe that the solution to our problem is simply to elect the right people. The important thing is to establish a political climate of opinion which will make it politically profitable for the wrong people to do the right thing. Unless it is politically profitable for the wrong people to do the right thing, the right people will not do the right thing either, or it they try, they will shortly be out of office.”
Nobody has a straight answer yet on how to make it “politically profitable for the wrong people to do the right thing” but a starting point could be prediction markets. This is because the question we should ask about governance isn’t who should rule, but what mechanism can help us discover and implement better policies over time. An ideal system will make specific people (politicians) immaterial when it comes to society’s progress.
What is a prediction market?
A prediction market, as the name suggests, is a market where people come together to trade in order to make a profit from their beliefs about future events. Imagine there’s a future event: ‘BJP will come to power in India’s 2019 general elections’ with two options ‘Yes’ and ‘No’. Anybody can create a contract on the prediction market for this event that will pay the owner of the contract $1 if in future the real result turns out to be ‘Yes’ (and pays nothing otherwise).
When an event is listed, its price starts at 50 cents. Anybody can trade on the market and if their expectation of a ‘Yes’ outcome is 90%, their expected value of this contract is 90 cents. Seeing the contract being sold at 50 cents on the market, a trader (who can be anyone) smells a profit-making opportunity and purchases it. In this process, s/he pushes the price upwards and the contract starts selling at a higher price (say 60 cents).
Now, if another trader comes along whose expectation of a ‘Yes’ outcome is 10%, s/he will short-sell (borrow and sell shares at the current price of 60 cents and buy back at a lower price of say 10 cents, netting 50 cents of profit). Doing this short-selling drives down the price. In this manner, buying and selling on a prediction market changes the price of the contract.
Properties of prediction markets
Here are all the reasons why prediction markets are so wonderful:
- They incentivize people to seek information. Most people are apathetic to future. What if you could make finding evidence on whether Mumbai’s sea level will rise in next 2 years or not a profitable endeavor?
- They force people to be precise with their claims. Many disagreements happen because of different interpretations. Is global warming real or not? It depends on what you mean by ‘real’ and how you define ‘global warming’. But if you create an event on a prediction market, you have no choice but to make a precise, measurable statement such as ‘2020 will be the warmest year in terms of global average temperature as measured by NASA pathfinder‘
- They efficiently aggregate disparate sources of information. Since prediction markets incentivize people to seek information and then trade based on that information, the price of the contract aggregates all information available (to traders). In fact, empirically, the price of a contract (say 65 cents for whether BJP will win 2019 India’s general elections) is the collective estimate of the (65%) probability of the respective event being true. This benefits public because they get aggregated info at one place rather than seeking and aggregating information themselves.
- They scale well with number of people and opinions. Traditional knowledge aggregation and dissemination mechanisms (news channels and polls), become confusing with more number of information sources. Markets become better with number of people engaged in them (as people have the incentive to make profitable trades if they have info that others lack
Reading resources on Prediction Markets
1/ Start by reading this short paper by Paul (@Truthcoin) on what makes prediction markets so compelling. He argues, and I agree, that prediction markets are a threat to gatekeepers and that’s why they keep them illegal.
2/ The scientific journal @Nature has a feature on prediction markets that I highly recommend for a detailed introduction. It also cites research papers on the subject (in case you want to go into details).
4/ A variant of prediction markets is decision markets where taking decisions are taken automatically based on predictions. @RobinHanson, the godfather of prediction markets, recently released a call to adventure encouraging younger folks to carry the baton for making collective decision-making better via prediction markets.
5/ I HIGHLY RECOMMEND watching this one hour video where @Truthcoin (Paul) talks about why self-governance is necessary but inherently contradictory and how prediction markets are a step forward in designing better governance systems.
6/ Can prediction markets be used beyond governance? Absolutely yes. This paper by @Truthcoin is a treasure trove. It lists applications of PMs in a) ending debates; b) detecting lies; c) whistleblowing; d) insurance; e) funding public goods.
7/ What caught my eye was the application of PMs in funding public goods. Essentially, you bet AGAINST getting a public good. If you want a park near your house, you bet that it won’t be built. If enough people bet along with you, a contractor can short that bet and claim the profit to build a road. No government required!
8/ If you want to go deep into *designing* prediction markets, I found this lecture by Prof. Yiling Chen of @hseas really good.
9/ Another way to learn more about designing prediction markets is to read whitepapers of new and upcoming crypto-currency based prediction markets. There’s @Augur, @Gnosis and BitcoinHivemind (project by @Truthcoin).
10/ THE most difficult part of prediction markets is designing neutral parties that can be trusted with providing data that resolves a prediction. For example, who should resolve whether the prediction ‘BJP will win 2019 election’, came out to be a ‘yes’ or a ‘no’ in reality? People will only participate in a prediction market if they trust that your data sources are unbiased.
11/ If prediction markets are so wonderful, why aren’t they popular? Short answer: it’s because they’re illegal in most countries (except Ireland/UK). @lawscholar says that a US agency (CTFC) made it illegal because of lobbying by movie industry (they were worried that a prediction that a movie will bomb will make it bomb!)
12/ Most economists believe that making prediction markets illegal is unfortunate. Thankfully, there are some non-money prediction markets that you can participate. A popular one is: @Metaculus where you can find predictions on ‘
Will the first crewed SpaceX flight lead to the death of a crew member? ... Read the entire post →
Any scientist can tell you that just because you had snow in your area, it doesn’t mean global warming is false. Most people care only about immediate and local issues, and good policies usually require second or third order analysis that’s hard to do and even harder to explain.
Democracy feels like an awkward compromise. But, we’re so used to majority vote schemes that it’s hard to see whether there could be any system that improves upon democracy. So this week, I spent a majority of my time reading about flaws of democracy and proposals for improving it. Here are my recommendations of good resources on this topic.
Issues with democracy
1/ Start by reading about this funny story. UK’s Natural Environment Research Council’s asked the Internet to propose and vote on names for their new boat. A BBC commentator joked about the boat being called “Boaty McBoatface” and the name caught on and won the contest.
In UK parliament, there was a big debate on whether to go with a majority vote (33% voted for Boaty McBoatface) or go with a name that has historical significance (3% voted it to be named after Sir David Attenborough, the presenter of BBC series Life). Of course, in this context, the situation is hilarious. But remember that the same process elected Donald Trump in US and booted UK out of European Union.
2/ The biggest issue with democracy is tyranny of the majority where the majority group squeezes minorities. This sucks if you’re a part of a minority and you have to fight for your fundamental rights. It’s absurd how the LGBT community has to get an agreement from heterosexuals to marry amongst themselves.
3/ Even if we assume that all citizens are well informed and are ethical, there’s still one unavoidable flaw in voting systems. It’s called Arrow’s impossibility theorem and it states that all majority ranking voting systems (where you have to choose or rank between alternatives such as your favorite candidates) have a logical flaw wherein people could end up voting that they like A over B, B over C, and C over A. If this is the case, can you trust the majority vote?
Yes, it’s a really weird concept. So, I recommend watching this video by @pbsinfinite.
4/ There are incremental improvements on democracy such as delegative democracy where you delegate your vote to someone else. Then there’s direct democracy where instead of electing representatives, you cast votes on policies directly. Of course, we can’t forget democracy where only one person’s vote counts: dictatorship!
5/ I was surprised to learn that the citizens of the world’s largest democracy (India) prefer a dictatorship. More than half of those surveyed by @PewResearch said autocracy or military rule will be very good for the nation.
So is democracy really what Churchchill described it as:
Democracy is the worst form of government, except for all the others?
Let’s find out!
Quadratic voting: Allow people to buy votes
6/ Quadratic voting is a very intriguing idea: people can cast as many votes as they want but they have to pay money equal to square of votes they cast. After voting, the collected money is redistributed equally to everyone who voted. The original paper was written by Stephen Lalley and Glen Weyl.
7/ The argument of allowing people to buy votes sounds horrible in the gut but if you inspect it closely, it makes sense. For a typical issue, most people have no preference yet their vote is given the same weight as someone for whom that issue is a life-or-death matter. Why give equal votes to both?
8/ In quadratic voting, people cannot “cheat” because economic analysis of this scheme shows that marginal benefit of extra votes is equal to marginal cost. So people will buy votes to express their true preference and nobody can simply get more benefit than the benefit they’ll get by getting a favorable policy passed. Plus, even losers get compensated by with money.
9/ The original paper on quadratic voting is short on details, so I highly recommend reading this follow up this paper by Eric Posner and Glen Weyl (@glenweyl).
Overall, quadratic voting is a really intriguing idea.
Futarchy: allow people to bet and profit from good policies
11/ Futarchy is a form of governance system where citizens participate in prediction markets, betting on whether a proposed policy will improve (previously agreed) well being or not. It was proposed by @RobinHanson. Start by reading his own introductory essay on the topic.
12/ @RobinHason argues that people will usually agree on what metrics constitute progress (GDP growth, happiness, well being) but they don’t agree on how to achieve pursue it (should we build more factories or plant more trees?). In Futarchy, very much like stock markets, people buy or sell policies on prediction markets. This incentivizes them to seek out information that others don’t have, so they can profit from information difference. This extra information is incorporated into the price which is visible to everyone, so the entire community benefits.
13/ How prediction markets aggregate information is very interesting. I found a really good explanation of it in a crypto project called @Truthcoin. I HIGHLY recommend reading this essay by Paul (the founder of @Truthcoin) where he explains how (and why) prediction markets work.
14/ Once you have a good grip on the power of prediction markets, I encourage you to read the original paper by @RobinHanson titled ‘Shall We Vote on Values, But Bet on Beliefs?‘ (it’s a really well-written paper!)
15/ Futarchy is perhaps the favorite form of governance for crypto projects (especially for Distributed Autonomous Organizations – entities that have no leader!). Here’s an
introduction to Futarchy ... Read the entire post →
The inaugural weekly recap (this one!) is mostly going to be about blockchains and bitcoins. What I find fascinating about the cryptocurrency mania is that perhaps the biggest current phenomenon that’s begging to be analyzed. Previously I covered how fidget spinners became all rage, how Facebook beat Friendster and how Singapore rose into dominance. All those were historical phenomena but bitcoins is what’s happening right now.
If you are, like me, late to the party of bitcoins and blockchains, don’t worry. This week’s recap will bring you up to speed on the basics of bitcoin and blockchains.
1/ Start with The Bitcoin Boom: Asset, Currency, Commodity or Collectible? Aswath Damodaran, professor of finance at NYU, differentiates between assets (something that generates cash over time in future, e.g. stocks or debt), commodities (something that goes into supply chain as raw material, e.g. copper or energy or wheat), currency (something that is used as a medium of exchange and has no inherent value, say USD) and collectible (something that has aesthetic value for the holder, e.g. baseball cards). He argues that bitcoin is not an asset (it doesn’t generate cash), nor a commodity (it isn’t useful as a raw material), so the big question is whether it’s a currency or a collectible. Nobody knows that yet, so it can be profitable to make your own opinions there.
2/ If you do think bitcoin is more likely to be a currency than a collectible, I recommend reading this analysis on Cryptoasset Valuations. The key idea is that price of one bitcoin is equivalent to the worth of all goods and services traded via it divided by the number of times bitcoins exchanged hands. P = Total-worth-of-transactions-via-bitcoins / Number-of-bitcoin- exchanging-hands. The insight I got was that if people hold on to a currency, it ceases to be a currency. For a currency to be useful, it needs to exchange hands. The concept is called the velocity of money and you can watch a short Youtube video on it.
3/ New York Times magazine had a very long but super interesting article on bitcoins that explains what it is simply, compares its evolution with the early days of the Internet and then explores the potential of the technology behind bitcoin: blockchain. I recommend reading it: Beyond the bitcoin bubble.
4/ Before we move to blockchains, I also recommend thinking about where does the BTC/USD rate come from and what variables impact that rate. Since most of the bitcoin hype is about its price, read about the
difference between pricing and valuing ... Read the entire post →