Why don’t more businesses use prediction markets?
Last week in The New York Times (TimesSelect), Joseph Nocera quoted Robin Hanson as saying private businesses had not made a breakthrough with the use of idea futures. It seems natural to let your employees bet on future business conditions, the success of product lines, or broader questions of corporate strategy. Microsoft and Google and a few other companies have played with the idea, but it does not (yet?) seem to be taking off. Why not?
1. Prediction markets threaten the hierarchical control of top managers. It would become too obvious that most managers are idiots, unable to predict the future.
2. Prediction markets make a big chunk of the bettors into "losers." Yet within a company morale is all-important. Businesses proceed by soliciting feedback, and by reshaping their plans to pretend that everyone is on board and has an ego stake in the final outcome. Prediction markets make this coordination more difficult. Once people make bets, they start rooting for their bet to win and for the other bet to lose. They move away from maximizing the value of the firm and develop an oppositional mentality vis-a-vis other employees. Furthermore it is disruptive to have a running tally on who are the winners and losers each day.
3. No matter what they pretend, businesses are not much interested in forecasting many future variables. Successful businesses find product markets they can control for long periods of time. They do a few things really well, and let a surprisingly large number of tasks slide.
4. We already have implicit betting markets in the form of resource prices. When the information contained in those prices is sufficiently important, institutions will be organized in terms of "markets," rather than "firms." Or firms can look at resource prices in outside markets for the information they need.
5. Most employees have no rational basis on which to bet. If someone knows the truth, but is otherwise locked out from credibly signaling that knowledge to management, something is wrong with the organization of the company. The small prizes from corporate prediction markets won’t be enough to elicit that knowledge from him in any case.
6. The corporate beast is far more constrained than most outsiders imagine. Interest groups must be courted, coordinated, and sometimes fought every step of the way. When it comes to choice, there are fewer degrees of freedom than one might think. The real question is not what to do, but rather having the will and effectiveness to do it. A bit like international free trade, no? Prediction markets don’t help much in this regard.
7. When reward systems are created, employees view them as a means to distribute further privileges to insiders and favorites. Prediction markets would be viewed the same way and in fact this might be true. Who else is going to win all those bets? Do corporations really need more insider favoritism?
Your thoughts? Here are five open questions about prediction markets.
My favorite things Virginia
It feels like an eon since I have traveled, plus I have been at home with the sniffles and a nasty cough. So here goes:
1. Music: Right off the bat we are in trouble. Ella Fitzgerald was born in Newport News but she is overrated (overly mannered and too self-consciously pandering to the crowd). We do have Patsy Cline and Maybelle Carter, the latter was an awesome guitar player and a precursor of John Fahey, not to mention the mother of June Carter.
2. Writer: There is Willa Cather, William Styron, and the new Thomas Wolfe. Cather moved at age ten to Nebraska. Some of you might sneak Poe into the Virginia category, but in my mind he is too closely linked to Baltimore. If you count non-fiction, add Booker T. Washington to the list.
3. Deaf, Dumb, and Blind Person: I have to go with Helen Keller. If you choose her for "20 Questions," no one will hit upon her category.
4. Movie, set in. The first part of Silence of the Lambs is set in Quantico, Virginia. No Way Out, starring Gene Hackman and Kevin Costner, is set in DC and around the Pentagon.
5. Artist: Help! Can you do better than Sam Snead? George Caleb Bingham was born here, but I identify him with Missouri.
6. The Presidents. I’ll pick Washington as the best, simply because he had a successor, and Madison as the best political theorist. Jefferson’s writings bore me and Woodrow Wilson was one of the worst Presidents we have had.
The bottom line: Maybe you are impressed by the Presidents, but for a state so old, it makes a pretty thin showing. It has lacked a strong blues tradition, a major city, and has remained caught up in ideals of nobility and Confederacy.
Economic costs and benefits of the Iraq War
I’ve read through the new Davis, Murphy, and Topel paper on the Iraq War. They conclude that if you account for the future dangers of a Saddam-led Iraq, the war might make sense in cost-benefit terms, and yes that does count dead Iraqis. Most of all, this paper takes seriously the costs of future containment efforts that might have been needed against Saddam.
This is serious work and it deserves more attention than it will likely receive at this point. On one side, I very much doubt their assumption that a Saddam-led Iraq "raises the probability of a major terrorist attack by 4 percentage points in any given year…" On the other side, perhaps the current civil war might have occurred, sooner or later, if we had stayed out. It is also hard to estimate the costs from skepticism about U.S. WMD intelligence the next time around. As you might expect, the most important variables are the most difficult to quantify. File this one under The Policy Will be Judged by its Absolute, Not Relative, Consequences.
Why does underdevelopment persist?
Who better to ask than Rajan and Zingales:
Why is underdevelopment so persistent? One explanation is that poor countries do not have institutions that can support growth. Because institutions (both good and bad) are persistent, underdevelopment is persistent. An alternative view is that underdevelopment comes from poor education. Neither explanation is fully satisfactory, the first because it does not explain why poor economic institutions persist even in fairly democratic but poor societies, and the second because it does not explain why poor education is so persistent. This paper tries to reconcile these two views by arguing that the underlying cause of underdevelopment is the initial distribution of factor endowments. Under certain circumstances, this leads to self-interested constituencies that, in equilibrium, perpetuate the status quo. In other words, poor education policy might well be the proximate cause of underdevelopment, but the deeper (and more long lasting cause) are the initial conditions (like the initial distribution of education) that determine political constituencies, their power, and their incentives. Though the initial conditions may well be a legacy of the colonial past, and may well create a perverse political equilibrium of stagnation, persistence does not require the presence of coercive political institutions. We present some suggestive empirical evidence. On the one hand, such an analysis offers hope that the destiny of societies is not preordained by the institutions they inherited through historical accident. On the other hand, it suggests we need to understand better how to alter factor endowments when societies may not have the internal will to do so.
In other words, for a long time the Mexican government didn’t want to educate rural campesinos for fear they would capture a greater share of the rents. Low human capital, initial monopolies, and overly strong interest groups create an intersecting triple whammy to oppose the sacrifices necessary for development. There is much of interest in the theory, including a discussion of when democracy is superior to dictatorship. Here is the paper.
How happy should I be?
Sometimes I will pull up to a red light and be, in the middle of the day, the first car in line waiting for the green. (Northern Virginia, of course, has its fair share of traffic, so this is unusual but it does happen.) I often wonder: should I be happy?
Under one view, I should be unhappy. The absence of other cars means the light hasn’t been red for very long. That suggests I have a relatively long time to wait for a green.
Under another view, I should be happy. It is a brute fact, carved into "the furniture of the universe," when the light will turn green. How many cars I see won’t change that. I should be happy that no cars will impede my forward progress.
Much rests on this question. I am very happy to have the friends I do. But exactly how happy should I be?
Should I be happy if I know the answer to this question? Or would knowing be like seeing no other cars around?
Tyrone takes on free will
Just last week Tyrone told me the following:
The traditional debate pits determinists against voluntarists. The determinists believe that man is caught up in the grand causal nexus. The voluntarists believe you somehow break free of cause and effect. You are able to spew forth "uncaused events" more or less at will. You are a truly special being, rather than just another toad.
As for the compatibilists, I say ugh. I am sorry, but you can’t believe A and non-A at the same time.
The voluntarists just don’t cut it. What strange theory of physics do they hold? At what moment in the evolution of man (or monkeys) did cause and effect cease to apply to brains? Plus neuroscience shows that subconscious brain activity, in the relevant parts of the brain, precedes the moment of conscious decision.
Furthermore I doubt if the voluntarist vision of free will is so fun. How sad to have to stand apart from the causal nexus. How alienating. How totally gauche. Isn’t the causal nexus what makes sex so fun?
My vision of free will starts with the problems in defining the self. You know: Parfit, Hume, time-slices, and the fact that I cannot remember what I did last night (fyi, I don’t remember what my wife and I discussed on our first date but I do remember what she ordered).
If you are nothing but a time-slice, the free will "problem" goes away. There is no "you" freely choosing, but there is also no "you" caught up as a prisoner of the causal chain. Instead you are your choice. At least "that you" was your choice at the time. No more and no less.
You are identical to your choice. What more dignity or freedom could you possibly expect? Surely that is better than the voluntarist notion of exogenously originating autonomous control.
This view allows us to maintain that human beings are ruled by the same natural laws which govern the behavior of stones. Physics remains monistic. At the same time, you are not reduced to a mere puppet. Ha! There’s not even a "you" to be subject to reduction!
To up the ante just a bit, dare I mention multiple worlds quantum mechanics, David Lewis’s modal realism, and inflationary cosmology? These views are distinct but all lead us to the conclusion that many possible universes, perhaps all possible universes, exist in some fashion. They will give you lots of time-slices and lots of bits of you walking around. Who cares in what order the deck is shuffled, or where the different cards lie spatially? The time-slice you, temporary as he or she may be, is connected to an infinite or very large number of other time-slices. A very large number of those time slices will be very close to the "you" that constituted your choice. Furthermore some other time-slice will get to experience some almost identical version of your choice, sooner or later. Being a solitary fellow, I like that better than voluntarism.
In some versions of these views, literally everything is removed from the causal nexus. In fact there is no causal nexus in the first place. Surely that should make you feel better and restore your underlying pantheism. No self. No reduction. No causal nexus. Just lots of you, you, you. Better than having your own TV show.
Tyler, of course, is a determinist. He thinks I had to write this post. More to the point, this post is who Tyrone really is.
Tyrone is really quite a sad fellow. Many of you believe in free will, but I know determinism applies to me and to my choices. I feel the pull of those causal chains, day in and day out.
At the Sorbonne
French riot police stormed the Sorbonne on the weekend, ousting students who had barricaded themselves in the first occupation since the events of 1968. I am in Paris (did you guess?) and the police presence at the Sorbonne is impressive, but student protests continue in the streets.
The students are protesting a new labor law which would make it easier to fire workers under the age of 26. Of course, this would also make it easier to hire young workers who currently have an unemployment rate of 23 percent. You cannot have it both ways; raise the cost of firing and you raise the cost of hiring. In my opinion, the Sorbonne students need a little less Foucault and a little more Bastiat.
Or perhaps the students know more economics than I credit them with. Under the current law it is costly to fire anyone but the effect on hiring is not symmetric. The workers least likely to be hired are those who are perceived, rightly or wrongly, as a risk. The fear of hiring effect falls not on the privileged students at the Sorbonne (trust me today’s protesters were tres chic), but on young French North Africans whose unemployment rate exceeds 30 percent.
Thus, paradoxical as it may seem, today’s protests by the Sorbonne elite are a cause of the riots of late last year.
Assorted links
1. New Freakonomics study guide, explained and downloadable here. Elsewhere on the Steve Levitt front, he argues with Roland Fryer that black and white kids have roughly the same mental abilities when measured at age one.
2. Google map of Mars, hat tip to Yana.
3. Here is a new cost-benefit study of the war in Iraq, from a hawk-friendly point of view. The authors are Steve Davis, Kevin Murphy, and Bob Topel; I’ll let you know more once I’ve read it.
Do you want to be inspired?
Adam Phillips remains one of our most underrated thinkers:
However much we want inspiration, if it disturbs our normal sense of ourselves then we are going to resist it. Most people are not seeking self-knowledge; they believe – they live as if – they already know who they are. So self-knowledge in this sense is the enemy of inspiration, our best defence against this alien invasion. As in sex, we may long to lose our composure and self-control but there is one thing we desire even more, and that is not to. Self-knowledge protects us from inspiration; inspiration, like sexual desire, undoes us. For non-believers, inspiration is more like sexual desire than anything else; a fascination, a fear, and something we think of as having a secret solitary pleasure attached to it.
Read the whole thing. If you want to try one of his books, On Kissing, Tickling, and Being Bored is the best place to start.
China fact of the day
84 percent of new car sales in China are to first-time buyers. In the U.S., just 1 percent are.
That is from 20 March Business Week.
The bottom line on the new Judith Harris book
If you think my theory is unnecessarily complex, just wait till you see what the theories will be like fifty years from now.
An excellent line but also a sign of trouble. The final sentence is:
Making a virtue of necessity, I will leave it to other people to test my theory [TC: in fairness to Harris, she may be referring to her medical problems].
Nonetheless I like virtually everything she says. The key point is that when it comes to environmental influences on our behavior, we are highly malleable avatars. Tests which don’t recognize this will be misleading. For instance if you are testing "birth rank" theories, submission within the family does not imply submissive behavior toward the outside world. Of course the theory immediately gains an additional degree of freedom, both its blessing and curse.
The book is full of fascinating facts and interludes:
…people who are married to one of a pair of twins feel, on average, only so-so about the other twin; only 13 percent of the men and 7 percent of the women feel they could have fallen for their spouse’s twin.
Dead Ringers anyone? Here is my previous post on the book.
The bottom line: All those young, anti-theocratic, and sometimes pro-democratic Iranian hotheads, for all their rebellious behavior against their parents, when push comes to shove will embrace nuclear weapons and a maximal sphere of regional influence.
Road to Serfdom ala Ken Burns
Jared Rhoads has taken the Road to Serfdom cartoons and made them into a really elegant movie with music, ala Ken Burns. Check it out!
Addendum: Jared also writes regularly the Lucidicus Project.
M1 and Me
Michael Kinsley helps Alan Greenspan with his memoirs.
Although developments in human biology are always–and, in the view
of many experts, perhaps not un-including myself, quite
properly–subject to a variety of interpretations, the evidence does
tend to suggest, with only a limited amount of ambiguity, that I was
born…
New Thomas Schelling book
Strategies of Commitment, by Thomas Schelling, essays and speeches. Here is my previous post on Thomas Schelling, 2005 Nobel Laureate. Here is the home page for the book.
Cultural recovery bleg
I am looking for cases when a culturally flourishing city met a great tragedy, saw some population dispersion, and then recovered its creative energies. Vienna is an example where this is not true. Paris has wonderful museums and concerts but it is no longer a global cultural leader as it was before World War II. I am not aware that Atlanta was culturally important after the wreckage of the Civil War. Rome faded after (before?) the barbarian invasions. So are there any good examples? Comments are open…