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Status Update: Game Theory Ahoy!

Posted on December 2, 2013

(For my last two (one, two) blog posts, I’ve been talking about prediction markets and their application to funding libre engineering and science.)

If we expect people to participate in prediction markets, fulfilling predictions to their personal financial benefit and society’s overall benefit, we have to give them some assurance that they’ll actually make money. I can’t tell people what strategy to use when buying contracts, what price to pay, when to sell, when or even how much to invest in progress on the goal itself. I could build a prediction market relatively easily, but there is little point if all I achieve is a fancy casino.

I intend to prove (or disprove, and find a new obsession) that given enough initial potential benefit distributed amongst a group of individuals, adding the ability to trade that potential benefit causes the net end-state benefit of the group to increase. If I can figure out the optimal strategy, I can answer the questions of when to buy or sell for how much and when to contribute. If outcomes are improved when players mostly use optimal strategies, I can prove prediction markets a useful mechanism.

Let’s describe the game formally:

I think that’s enough. If I’m successful I’ll move to progressively more realistic models.

Trivially, we can see that if Call < P, no rearrangement of the contracts will make it rational for anyone to complete the project. If we consider only one player, it reduces to the question of whether to invest in a private good. Once we have more than one players with some contracts, things become more difficult.

I’m going to leave the analysis there for now. I’ve got a nice big book on game theory to attack. When I come back, hopefully I’ll feel better equipped to handle the task I’ve set for myself.

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Recipe for an Open Source Economy

Posted on October 8, 2013

Last time, I said “our society should reward contributions to the common pool of knowledge in proportion to their value to society.” That sounds pretty sketchy, right? Don’t worry, I’m no communist. I’m looking for an answer that works when individuals act on their own initiative. Let’s talk concretely.

Imagine a system that tracks all the groceries in your house, suggests meals to cook and helps make shopping lists. Cool, right? The sort of technological advance that I’d like to incentivize. Let’s imagine Alan thinks it’d be cool too, and he values such a development at $300. Note we’re talking only about the information - the ideas, the designs and software of the system. Alan will still have to buy the physical components to actually use it. Here’s a proposition: what if he sells off his anticipated benefit?

The central idea here is that of a prediction contract - a financial instrument entitling the holder to money if a certain prediction comes true. The prediction we’re interested in here is something like “there will be developed a grocery-tracking computer system with features x, y and z”. Alan has decided such a system would make his life $300 easier, so he’s happy being up to $300 poorer in trade. For simplicity’s sake I’ll say prediction contracts always pay out at $1. So Alan sells 300 contracts for, say, $0.20 each. Up a total of $60. If nobody figures out the grocery-tracking problem, he keeps it. If the prediction comes true - if someone or some group successfully designs a system meeting the spec - Alan has to pay out the $300 to the contract holders. His net monetary loss is $240, but since the system is worth $300 to him, he gains $60 in net utility. The effect is that Alan doesn’t care whether the prediction comes true anymore.

Wikipedia has a decent article on prediction markets. The idea of prediction markets isn’t mine, but the concept of anticipated benefit transfer and it’s application to incentivizing the production of public goods is an original contribution. Conventionally, prediction markets are used for betting on world events; prices on these markets reflect the market’s believed probability of a given event happening.

At this point, you can rightly ask why Alan should make the sale in the first place. All it accomplishes for him is trading a potential windfall - new invention - for a smaller guaranteed return. If the price he and his buyer agree on accurately reflects the probability of the project’s successful completion - $0.50 per contract for a 50% probability and so on - the law of large numbers says he’d get the same result without any of the tedium of selecting predictions, deciding on their value and selling the contracts.

That line of argument holds water, though I have an inkling there may be more going on here than meets the eye - more on that later. Setting aside whether it’s rational to sell off anticipated benefit, Alan can use the prediction market as a means of cheaper and more efficient charity. Alan’s sale of prediction contracts, combined with others’ like him, may create sufficient financial incentive to get the goal completed. If not, he is much better off financially than if he had donated the money to the Stuff To Make Household Chores Easier Foundation. Furthermore, he doesn’t have to figure out if the foundation is capable of completing the project, or if the project is possible at all. Price competition from multiple bidders should mean he ends up paying a price determined by the complexity of the project and the amount of contributions in contracts from others, rather than a donation amount clouded by uninformed perceptions.

At this point I’ll acknowledge the work these ideas are based upon. I was first introduced to these ideas in a paper published in the online journal First Monday, “The Wall Street Performer Protocol: Using Software Completion Bonds to Fund Open Source Software Development” by Chris Rasch. Rasch’s work is in turn based on the concept of social policy bonds, invented by Ronnie Horesh. Horesh and Rasch both talk about the concept in terms of “bonds”, I prefer the prediction market terminology. Note that Horesh and Rasch’s bonds have no expiry date, while prediction contracts always do. There would be no way to profit by betting no if a seller was always liable to pay the face value of a contract.

Let’s look at this from the perspective of the person buying these prediction contracts. Brenda has the technical and business skills necessary to build a system meeting the prediction’s specifications. She buys up some contracts and begins work. Carl and Dani also buy some. Since they get paid if the project is completed satisfactorily regardless of who turns it in, all three of them work together in whatever way they think is most likely to get the system built. As the project gets closer and closer to completion, the market value of the contracts rises. Dani gets a job offer and has to stop working on the project. She sells her contracts to Carl, making a profit based on the progress to date. When the project is completed, Carl and Brenda get paid, repay their investors and move on to the next thing.

So there’s the rosy eyed promise of the idea - prediction markets can be used to efficiently pay for libre engineering in a way that incentivizes open collaboration between any number of participants and rewards partial progress. If people sold prediction contracts in a way that reflected their desires, we could make much faster progress as a society in the scientific, technological and humanitarian arenas.

That’s enough for now, I think. Next time is the “Halp! I’m stuck!” post, where we delve into the not-so-rosy questions like “Does it make sense for anyone to sell prediction contracts in this manner?” and “How do you decide the value of a prediction contract?”

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Making it the Future Sooner

Posted on August 13, 2013

I want a space elevator. I want to bind mortality. I want to understand the fundamental physics of the universe. I want to be able to speak to anyone, in any language. I short, I want the future, now. I want science and technology to advance quickly enough that I can live to experience the achievements I can’t even dream of today. I think I can hack society to get there faster.

It is my goal to create an open source future - a society where innovations and knowledge are shared, where collaboration is the norm and progress is made by anyone with the skills and inclination. The system of the present day involves tragic waste of effort and talent. We spend millions of person-hours duplicating engineering effort; we take the best thing about information in the modern era - that it can be shared with anyone anywhere for free - and make it illegal; and we empower large corporations to control the future of technologies through patents.

To get from here to there we need a mechanism for funding libre technological and scientific development. GlaxoSmithKline will not continue paying for drug discovery efforts if it cannot expect to profit from the resulting patents. Nor is Intel likely to give up the patents and proprietary designs that allow it to dominate the x86 processor market.

Incentivization is the key - our society should reward contributions to the common pool of knowledge in proportion to their value to society. There is value in technology, and that value can be gauged in monetary terms, but effecting the movement of money from beneficiaries to creators in a way that incentivizes open collaboration is tricky. Nevertheless, I believe it is a solvable problem. I do not yet have the whole solution, but I have some exciting ideas to share and I hope you readers can help develop things further.

Next time: less why, more how

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First

Posted on July 30, 2013

’Ello, world!

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