Chris Masse taunted, “If he had balls, Robin Hanson would debate Paul Hewitt, instead” of Mencius Moldbug. Monday Paul posted a 7000+ word critique of futarchy. I commented, “Care to indicate the top three claims you’d most prefer I respond to?” Paul listed three, and Eric Crampton
I agree with most of your comments, Robin, particularly as they relate to financial markets. However, the types of markets contemplated under futarchy differ from financial markets in terms of their informational efficiency (at least that's my opinion).
I'm not saying that the information accuracy drops to zero, but I am saying that it drops to a very low, or at least an unreliable level. Consequently, for the long-term markets, the market aggregates a lot of guesses, as opposed to reasoned opinions.
Perhaps we differ in our beliefs about market efficiency of decision markets.
In terms of distinguishing between innovative ideas worth trying and others, I draw the line with a reasonable cost-benefit analysis. Rather than have faith that a market will "work", even when logic tells you it won't (a la Miracle on 34th Street), I need to know there is a logical reason why it should (or at least could) work. Then, if the potential benefits are likely to exceed the cost of trying, give it a try.
Maybe, we need to take a closer look at prediction market efficiency.
Hal, on reflection the minimal change and recursive elements of futarchy already deal with this problem of what to do when markets are silent. Presumably the new futarchy regime would start out with all the old rules, plus the one new rule that markets can set all policy. Legislatures would thus continue to be able to pass bills that change policy until markets approved a specific futarchy proposal to take this power away from legislatures. If such a proposal passed, it would be because speculators expected that the harm from continued legislature policy changes would outweigh its benefits.
If the legislation took things too far then a futarchy proposal to reverse their recent moves would rise above the noise and win. But then maybe you'd have to have some extra rule to prevent this back and forth pattern wastefully repeating. It gets pretty complicated, and we don't know if the flat distribution would be real or not.
Maybe it would be interesting to consider a hybrid of futarchy and conventional legislatures, to deal with Paul's "flat distribution" problem. As I understand it, the issue is that markets in practice may be unable to penetrate the fog of uncertainty regarding the semi distant future, and therefore cannot effectively differentiate the expected long-term effects of various policies. This leads to market prices that are equal for various proposals, to within some noise term, preventing effective policy action.
Imagine that we had the usual futarchy rules that clearly superior policies are implemented automatically (ie policies where the expected improvement exceeds some noise threshold). But, in addition a legislature would be permitted to enact policies which made things no worse, again to within a noise delta. If it does turn out that in some policy areas, the market ends up scratching its collective head when it tries to predict the future, the legislature would then be able to take action.
"...there is...no understanding as to why" ... is this the narrative fallacy at work here? I think there are plenty of explanations for a failure but agreement is limited.
Isn't the point that a robust prediction market would incorporate "alternative forecasting methods"? To me, the point of a market price is that it incorporates "everything". Prediction markets share/uncover information quite well, don't they?
If you think company XYZ is worth $20/share and the market value is $10 or $30, doesn't that give you pause to think maybe you've missed something? If nothing else, is this not a major benefit of any type of market...you are forced to view a reality you may not see otherwise given your biases?
Isn't the hedging benefit of markets worth something too? Unless hedging is not important to you at all. If it is, how could it be done easily outside of a market?
No, there is no way of knowing in advance. This places added importance on being "right" most often. In Enterprise Prediction Markets, we can obtain some information to make this assessment.
If it turns out that the distribution of forecasts is too flat, it may be that it is not possible to forecast that particular metric (perhaps by any known method). Maybe the only alternative is to abandon that metric and choose another (or others) that can be measured and forecast to some reasonable level of accuracy.
Related to the issue of accuracy, how does futarchy handle the case where the decision markets "clearly" indicate a positive policy effect, but the prediction market distributions are very flat?
The amount I would be willing to bet would depend on the assumptions you would impose on these hypothetical markets. If you decide to make the manipulators wear signs indicating the direction and strength of their manipulation, I wouldn't bet very much at all.
If the manipulators look like you and me (and all of the other traders), I'll bet the farm they'll be able to get away with it. Traders in these markets will have a tough enough time trying to forecast a very complex number. On top of that, you think they will have the uncanny abilities to identify manipulators, figure out approximately how manipulative they are, and calculate the corrective bets? Oh yeah, and do so confidently. I would prefer to confidently bet against such abilities.
Do you have access to some forecasting method whereby one can see ahead of time the difference between correct and incorrect forecasts?! If no such method is available, how can it be crazy not to use one?
Did you mean the efficiency of financial speculative markets? If so, I'll take the heat.
Your statement "Prediction markets ... will perform better..." is without support. Also, when they do "fail spectacularly", there is, presently, no understanding as to why. Inaccurate markets look identical to accurate ones.
To blindly make decisions based on markets that will sometimes be right, sometimes wrong (and we have no way of knowing when), is just plain crazy. You might have an argument, if prediction markets (for long-term forecasts) are proven to be more accurate than alternative forecasting methods. Unfortunately, there is no such evidence, yet.
"Rather than reinventing an entirely new institution, why not reform the existing one to make better, proactive, use of experts, directly? "
Because it is clear that short term social status related benefits have a very real chance of skewing our perspective or altering our behaviors as regards the future. Prediction markets (just like financial spec markets) will perform better on the average but would also fail spectacularly on occasion. Prediction markets also be be inefficient in small numbers just like bulletin board stock markets.
Paul's ideas are tantamount to questioning the efficacy of financial speculation markets.
"It is naive to think that manipulators will lose all their money and stop trying to manipulate the markets. Instead, they will find new and more effective ways to purchase policy."
And you're willing to bet that prediction markets wouldn't be able to predict those manipulations -- and assess countermeasure policies -- faster than the would-be manipulators could come up with them? OK, how much are willing to risk?
Size is relative, though. If the proposal evaluators are themselves living on $2/day, $50 to get a quorum of them to consider your idea woukd actually be a lot of money from their point of view. And you shouldn't worry about micro-lending making a profit overall, because that's not really the point of micro-lending anyway. Whether you're lending to a village business or a village government, the point of a "micro-futarchy" scheme would be to have a mechanism that helps people determine what's likely to work.
If you are saying that there will be no restrictions limiting future changes, then the futarchy proposal will never have any lasting effects on policy.
I don't understand why this would be, except to say that policies will be continually refined in order to better-maximize GDP, which would generally be considered a good thing.
Quoting directly from your paper (p13), "When an approved betting market clearly estimates that a proposed policy would increase expected GDP+ (E[W|N] > E[W|Q]), that proposal immediately becomes law." The "without amendment" is implied, and I only made it explicit.
If you are saying that there will be no restrictions limiting future changes, then the futarchy proposal will never have any lasting effects on policy.
In response to your comment on my blog...
I agree with most of your comments, Robin, particularly as they relate to financial markets. However, the types of markets contemplated under futarchy differ from financial markets in terms of their informational efficiency (at least that's my opinion).
I'm not saying that the information accuracy drops to zero, but I am saying that it drops to a very low, or at least an unreliable level. Consequently, for the long-term markets, the market aggregates a lot of guesses, as opposed to reasoned opinions.
Perhaps we differ in our beliefs about market efficiency of decision markets.
In terms of distinguishing between innovative ideas worth trying and others, I draw the line with a reasonable cost-benefit analysis. Rather than have faith that a market will "work", even when logic tells you it won't (a la Miracle on 34th Street), I need to know there is a logical reason why it should (or at least could) work. Then, if the potential benefits are likely to exceed the cost of trying, give it a try.
Maybe, we need to take a closer look at prediction market efficiency.
I have posted a concluding comment on my blog, here:
http://torontopm.wordpress....
Robin, thank you for continuing the discussion. Good luck in The Debate!
Hal, on reflection the minimal change and recursive elements of futarchy already deal with this problem of what to do when markets are silent. Presumably the new futarchy regime would start out with all the old rules, plus the one new rule that markets can set all policy. Legislatures would thus continue to be able to pass bills that change policy until markets approved a specific futarchy proposal to take this power away from legislatures. If such a proposal passed, it would be because speculators expected that the harm from continued legislature policy changes would outweigh its benefits.
If the legislation took things too far then a futarchy proposal to reverse their recent moves would rise above the noise and win. But then maybe you'd have to have some extra rule to prevent this back and forth pattern wastefully repeating. It gets pretty complicated, and we don't know if the flat distribution would be real or not.
Hal, I fear that would allow the legislature to do pretty much anything they wanted, as long as they did it in small enough steps.
Maybe it would be interesting to consider a hybrid of futarchy and conventional legislatures, to deal with Paul's "flat distribution" problem. As I understand it, the issue is that markets in practice may be unable to penetrate the fog of uncertainty regarding the semi distant future, and therefore cannot effectively differentiate the expected long-term effects of various policies. This leads to market prices that are equal for various proposals, to within some noise term, preventing effective policy action.
Imagine that we had the usual futarchy rules that clearly superior policies are implemented automatically (ie policies where the expected improvement exceeds some noise threshold). But, in addition a legislature would be permitted to enact policies which made things no worse, again to within a noise delta. If it does turn out that in some policy areas, the market ends up scratching its collective head when it tries to predict the future, the legislature would then be able to take action.
"...there is...no understanding as to why" ... is this the narrative fallacy at work here? I think there are plenty of explanations for a failure but agreement is limited.
Isn't the point that a robust prediction market would incorporate "alternative forecasting methods"? To me, the point of a market price is that it incorporates "everything". Prediction markets share/uncover information quite well, don't they?
If you think company XYZ is worth $20/share and the market value is $10 or $30, doesn't that give you pause to think maybe you've missed something? If nothing else, is this not a major benefit of any type of market...you are forced to view a reality you may not see otherwise given your biases?
Isn't the hedging benefit of markets worth something too? Unless hedging is not important to you at all. If it is, how could it be done easily outside of a market?
No, there is no way of knowing in advance. This places added importance on being "right" most often. In Enterprise Prediction Markets, we can obtain some information to make this assessment.
If it turns out that the distribution of forecasts is too flat, it may be that it is not possible to forecast that particular metric (perhaps by any known method). Maybe the only alternative is to abandon that metric and choose another (or others) that can be measured and forecast to some reasonable level of accuracy.
Related to the issue of accuracy, how does futarchy handle the case where the decision markets "clearly" indicate a positive policy effect, but the prediction market distributions are very flat?
The amount I would be willing to bet would depend on the assumptions you would impose on these hypothetical markets. If you decide to make the manipulators wear signs indicating the direction and strength of their manipulation, I wouldn't bet very much at all.
If the manipulators look like you and me (and all of the other traders), I'll bet the farm they'll be able to get away with it. Traders in these markets will have a tough enough time trying to forecast a very complex number. On top of that, you think they will have the uncanny abilities to identify manipulators, figure out approximately how manipulative they are, and calculate the corrective bets? Oh yeah, and do so confidently. I would prefer to confidently bet against such abilities.
Do you have access to some forecasting method whereby one can see ahead of time the difference between correct and incorrect forecasts?! If no such method is available, how can it be crazy not to use one?
Did you mean the efficiency of financial speculative markets? If so, I'll take the heat.
Your statement "Prediction markets ... will perform better..." is without support. Also, when they do "fail spectacularly", there is, presently, no understanding as to why. Inaccurate markets look identical to accurate ones.
To blindly make decisions based on markets that will sometimes be right, sometimes wrong (and we have no way of knowing when), is just plain crazy. You might have an argument, if prediction markets (for long-term forecasts) are proven to be more accurate than alternative forecasting methods. Unfortunately, there is no such evidence, yet.
"Rather than reinventing an entirely new institution, why not reform the existing one to make better, proactive, use of experts, directly? "
Because it is clear that short term social status related benefits have a very real chance of skewing our perspective or altering our behaviors as regards the future. Prediction markets (just like financial spec markets) will perform better on the average but would also fail spectacularly on occasion. Prediction markets also be be inefficient in small numbers just like bulletin board stock markets.
Paul's ideas are tantamount to questioning the efficacy of financial speculation markets.
"It is naive to think that manipulators will lose all their money and stop trying to manipulate the markets. Instead, they will find new and more effective ways to purchase policy."
And you're willing to bet that prediction markets wouldn't be able to predict those manipulations -- and assess countermeasure policies -- faster than the would-be manipulators could come up with them? OK, how much are willing to risk?
Size is relative, though. If the proposal evaluators are themselves living on $2/day, $50 to get a quorum of them to consider your idea woukd actually be a lot of money from their point of view. And you shouldn't worry about micro-lending making a profit overall, because that's not really the point of micro-lending anyway. Whether you're lending to a village business or a village government, the point of a "micro-futarchy" scheme would be to have a mechanism that helps people determine what's likely to work.
If you are saying that there will be no restrictions limiting future changes, then the futarchy proposal will never have any lasting effects on policy.
I don't understand why this would be, except to say that policies will be continually refined in order to better-maximize GDP, which would generally be considered a good thing.
Quoting directly from your paper (p13), "When an approved betting market clearly estimates that a proposed policy would increase expected GDP+ (E[W|N] > E[W|Q]), that proposal immediately becomes law." The "without amendment" is implied, and I only made it explicit.
If you are saying that there will be no restrictions limiting future changes, then the futarchy proposal will never have any lasting effects on policy.