The human part of any large intelligent system is by far the most intelligent part. As long as this remains true, the biggest system advancements will come from aids that fill big holes in human abilities, rather than from artifacts that stretch engineers' abilities. Consider Post-it Notes or, better yet, plain paper notepads. These probably seemed like trivial ideas, but they turned out to be terribly useful.Read more at location 1098
Consider, for example, a clearly important policy question such as, How would crime rates change if more citizens could legally carry hidden guns?Read more at location 1104
I suspect that the existence of such divergent opinions reflects the fact that we suffer from a serious failure to share information.Read more at location 1105
The real problem is not finding more words, but judging who really knows about the topic and whether these experts are saying what they know. We are in many ways bit-full, yet information-poor. Read more at location 1108
I suggest that speculative markets are a neglected way to help us find out what people know. Such markets pool the information that is knownRead more at location 1110
Speculative markets are decentralized and relatively egalitarian, and they can offer direct, concise, timely, and precise estimates in answer to questions we pose. These estimates are self-consistent across a wide range of issues and respond quickly to new information. They also seem to be cheap and relatively accurate.Read more at location 1112
Imagine that we created markets where people could bet on future crime rates, conditional on allowing or not allowing more hidden guns. That is, if the market prices predicted that murder rates would be 10 percent higher should a certain hidden-gun bill pass, then anyone who thought this estimate too high could easily identify a particular profitable trade.Read more at location 1114
if market prices said that crime rates would be 10 percent higher given more hidden guns, most nonexperts would accept this estimate as our "best answer" or as a neutral "consensus."Read more at location 1117
Speculators, in turn, would have a clear incentive to be careful and honest in contributing what they know and in judging what advocates know.Read more at location 1120
First, you must state your claim clearly.Read more at location 1122
Next, you must choose some particular trusted third party who will finally declare a murder rate M within [0,1] and determine whether bill B passed.Read more at location 1126
Finally, you have to decide how much to subsidize this market. If interest in your topic is strong enough, simply creating these markets might induce people to trade in them. Failing that, sufficient interest might be induced if someone committed to make a policy choice based on the market estimate.Read more at location 1136
You can also safely and directly subsidize a market to induce more participation.Read more at location 1139
Murder rates-with or without capital punishment? • Average mortality rates-with or without national health insurance? • Health-care spending-with expanded or curtailed use of health maintenance organizations? • Employment change-raise minimum wage or rescind NAFTA? • Global sea-level and temperature changes-impose or not impose a carbon dioxide tax? • Military casualties-with a Republican or a Democratic president? • Stock prices-with a Republican- or Democrat-controlled U.S. Congress? • World per capita food consumption-raise or lower average tariffs? • Student test scores-with or without school choice or voucher reform? • Future national economic growth-raise or lower interest rates, or with or without an education subsidy? Read more at location 1142
But how clear, cheap, and accurate are such market estimates? Read more at location 1148
decades of research on the efficiency of financial markets have found little price-relevant information that is not reflected in market prices.Read more at location 1149
Any inefficiencies seem to be weak and to go away with publicity, because they represent a profit opportunity. If you think the current price is too low, you expect to profit by buying now and selling later, and buying now will raise the price,Read more at location 1150
For example, orange juice futures prices have been shown to improve on government weather forecastsRead more at location 1152
Also, markets where traders can bet on election results predict vote totals better than opinion pollsRead more at location 1152
while most traders tended to suffer from cognitive biases such as expecting others to agree with them, the most active traders were not biased this way-and active traders set the prices. Speculative markets thus seem to induce the real experts to self-select and participate more.Read more at location 1154
Older economics writings sometimes give the impression that speculative markets will not function unless you have thousands of traders frequently trading millions of dollars worth of goods. Recent Web markets, however, clearly show that markets can be much smaller and slower than this.Read more at location 1157
Until the last few centuries, the cost of simply handling trades was enough to sharply limit the number of speculative markets that could be made widely available. Yet today, ebay.com routinely sells $10 items by having a handful of people bid a few times each over a period of a week.Read more at location 1163
More important, most speculative markets are now illegal. The short history of financial market regulation is that everything was once illegal until limited exemptions were granted for specific purposes.Read more at location 1166
Gradually, exceptions were granted for what came to be seen as worthy purposes, such as teaching people about horses (horseracing) or raising state revenue (lotteries).Read more at location 1168
Stocks were allowed for the purpose of capitalizing firms,Read more at location 1169
insurance was allowed to let individuals hedge risks.Read more at location 1169
commodity futures and financial derivatives were allowed to let firms hedge more risks.Read more at location 1170
how can we test prototypes if IA markets are generally illegal? Well, there is one plausible loophole (besides offshore gambling), which I have saved for those of you who are still reading this far: internal corporate markets.Read more at location 1183
several companies, including Hewlett-Packard and Siemens, have begun experimenting with real-money internal speculative markets for estimating things such as future sales. Read more at location 1185
