#so many funny moments you wouls thought this was the case... but no... its like they were smelling all this

[arcticdementor]

I recently had Robin Hanson on the CSPI podcast to talk about futarchy. It’s one thing to spread knowledge on a particular issue, it’s another to invent a new technology to create more knowledge in the world, and help apply it where needed. That’s what I see Robin doing. He convinced me that although it may take a very long time, one day humanity will give less of a role to systems like peer review and unaccountable bureaucracy in determining how we understand the world, and more of a role to prediction markets. The logic is just too compelling. But sooner is better than later, and if you want to be involved, please reach out.

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The first step towards this glorious future is convincing people that a world where more decisions are made based on prediction markets is desirable and achievable. In that spirit, below is a transcript of our conversation, lightly edited for clarity. To read more about futarchy, see here.

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Robin: Right. This conditional market mechanism hasn't actually been tested out in the world outside of the laboratory tests in that we haven't been able to get people interested enough to try it. We've had a lot of tests of speculative markets that aren't conditional in the sense that we've had markets on deadlines, whether you make a deadline in sales and things like that.

We've probably had 100 different trials like that over the last few decades. Typically what happens is that if there's enough support for the market in order to induce an affectivity then again the price is about as accurate or more accurate than the status quo and most users are satisfied. The costs are modest. That's been the history for many decades.

However a key problem is usually the market gets killed in the sense that an organization says to stop and doesn't continue it. The main reason is that it's relatively disruptive. These markets are politically disruptive. The way they are disruptive is analogous to, imagine you put a very knowledgeable autist in the C suite, that is somebody in the C suite that knows a lot about the company and they go to the meetings. They just blurt out when they know things that it's relevant to the conversation but they have no political savvy.

They have no sense of, what does anybody want to hear, or who will be bothered by anything they say. That sort of an autist would not last long in the C-suite. They would be shunted aside and become an advisor to someone perhaps, trusted advisor to their side but they wouldn't be allowed to speak in the boardroom. But that's what a prediction market is. It has no idea who wants to hear what it has to say.

It will often say things that people do not want to hear, and that embarrass them, and that contradict what they've said. Then all the worse of course it will be proven right.

Richard: Yeah. But what's stopping the autist, or I guess what's stopping them is nobody has just done this yet? But theoretically you could imagine the autist setting up the rules for the corporation, right?

Robin: You might if they were in charge at the beginning sure.

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Robin: Now we move to the question of like, what fraction of companies out there are actually maximizing profits?

Richard: Yeah.

Robin: It’s a very basic question in economics and in our world. We economists tend to assume as a simple initial working model that organizations that are for profit actually do maximize profits. That's the thing they usually do. If you give them a choice of A or B, and B is higher profit they'll choose B.

Here if you apply that model you say, “Well, this looks like it would give them key information to make key decisions like, ‘Will we make the deadline,’ and it will be valuable. The cost is relatively low so of course they would do it.” That's what you would say if you were applying that theory. Then here we have a case where it looks like, well it hasn't happened yet.

You might think, “Okay, innovation is slow. It takes a while,” but we’ve been waiting several decades. Honestly if I look across a wide range of other areas of corporate behavior I can't fully support this profit maximizing theory. I think I can find a lot of other places where what they do does not maximize profits.

I could give you a long list of examples. We could go through some of those but then the question is, “Well, how do I come to terms with it? What theory do I have affirms in the absence of profit maximizing to explain the behavior?”

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Robin: I mean I think in fact the correct response is to say the free market version is probably the best. You just have no idea how much worse things can be. People often look at the status quo of a business world say that is relatively free market. They look at this up close and they go, “This looks terrible how could you possibly be defending this?”

The argument has to be, “Well, it would just be so much worse without this.” And in fact often if you look to large stable organizations like universities and government agencies, or churches that have been around for a long time it is in fact worse. I think that's roughly right. Another story might be we've hobbled some of the competition between firms that might solve some of these problems.

I honestly think one of the biggest wins we could do is to just allow stronger hostile takeovers. The laws at the moment make it harder to do hostile takeovers. They require a substantial tax on them in essence. If you see a badly run company and you have an idea how it could be run better the problem is how are you going to profit on that? But if you could just buy up the company, change its management and then sell it again after it was better that would be a big, powerful engine for making it better.

There have been times when that mechanism has been allowed to do more and it has made huge changes. That's what inspired people to lock it down and prevent those changes because they were scared it was coming for them.

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Richard: I've seen stuff like who will win the tip off in basketball, and who's going to win the coin toss in a football game? Who's going to win first quarter?

Robin: I once looked onto doing this for war college war games. As you may know many war colleges have war games where they put teams on different sides and give them various equipment in a simulated war. They have them go to war. You could imagine, well letting everybody else who’s watching the war game give advice about particular strategies in the war game. That seemed plausible to me but then when I talked to people at war colleges I found that most of these war games are kind of fake.

Richard: Yeah.

Robin: They have a predetermined outcome that’s some lesson they want to tell, and so they aren't really letting it be open to winning one side or the other.

Richard: No, that's funny because you'll see headlines every now and then that'll say, “Oh, my God. The US loses to China in a war game,” and yeah I always thought that that’s…

Robin: I’m sure there probably are real war games somewhere. They just aren't at the war colleges. That's where I was thinking I could convince somebody to try this sort of thing.

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Richard: What is the advantage of the blockchain? What is the difference between a blockchain say market versus just something like PredictIt?

Robin: Well, that's an excellent question. Initially the story was that blockchain was out of control, that it couldn't be regulated so you could set up a system on a blockchain. If the regulators didn't like it they didn't have anybody to go to stop it. The blockchain just kept going regardless of who didn't like it.

That was a big selling point. People said, “Well, look at all this financial innovation we can do because we are free from existing regulations on the blockchain.” That's what they said, and then a lot of companies formed on this basis.

But these companies didn't take personal strategies to match that rhetoric. You would think if your plan was to put a product on the blockchain and that you were going to say nanny nanny to the regulators because, “You can’t get me,” you wouldn’t have a big public presence with the headquarters, and your picture in the magazines, and show up in person at conferences right? Because…

Richard: Yeah. Sure.

Robin: ...well, that makes you more obviously a target right? That's what they did though, and then they sort of back pedaled and said later, “Oh, we're following all the regulations.” But you know people don’t really believe that. It's been this big question, to what extent will governments crack down on these blockchain things that at least from the government regulators point of view are not following their rules?

Richard: Yeah. Do you have in mind the Coinbase news that had come out the last few days, or was it today or yesterday that-

Robin: This is just a continuing issue. I don't have any particular recent event in mind but there are lots of stories about regulators thinking of doing a lot more regulating and cracking down more. This is a big question about blockchain is how far will they crack down, and what will be the consequences? Of course people say, “Well, in principle Bitcoin can keep chugging along even if they do crack down,” and no doubt that's true to some degree.

But the question of how much activity there'll be is still somewhat open. You could have it chugging along with a far lower activity because a lot of people have been discouraged.

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Robin: Let me at this point admit what I would say is the biggest problem with futarchy and with some of these other decision markets, which is that they make hypocrisy harder, which is actually a problem. You might think, “Well, hypocrisy is a bad thing. Making it harder is good right?” Well, let’s walk through that.

At the moment, say ordinary people can claim to love trees and they just care a lot about trees. Trees real estate wonderful and they certainly wouldn’t want to have fewer trees. But then they elect politicians who have to make choices about trees versus other things. Those politicians can probably read the public and say, “Well, they say they like trees but they don’t really like trees that much, so I’m not actually going to go save some trees by interfering with something else.”

Then if the public ever finds out that somehow not everything was being done to save trees, the public can complain and say, “That damn politician! They’re corrupt! They were bought out and I sure hate them. Let’s throw them out of office,”right? Because the politician is allowing the public to be hypocritical, to pretend they care more about trees than they do.

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Robin: The pandemic was not a big enough crisis that we fired people who did badly on it. Neither was Afghanistan. We’re in a world where we have these big things we do wrong but they somehow just aren’t bad enough to really scare us into trying different things. The question is where will we ever see some nation or big organization that’s scared enough about losing to be willing to roll the dice and try some big changes?

Richard: When you look at the American Military established under World War II I mean the military establishment was a new thing. You were building basically something from scratch. Now you have all these vested interests. You know it’s funny. The places, the countries with the most US Military… the most military personnel in the world are actually Italy, Germany, Japan, and South Korea right?

Robin: Those are risky, dangerous spots. You’d want troops there wouldn’t you?

Richard: Yeah. Well, maybe but if you notice they have something in common. Those are the Axis powers and the Korean War right?

Robin: Right.

Richard: Basically they’re the exact same place they were in 1945 to 1950 and so-

Robin: Hysteresis right? Enormous path dependence?

Richard: Yeah, exactly. Enormous dependence. Yeah, Italy. Is that obvious? The most dangerous place in the world. Maybe, maybe not.

Robin: No, and it’s not remotely obviously the most dangerous place in the world.

Richard: Yeah. Do you look around the world, and right now do you see variation in the extent to which countries are willing to not only take risks but take risks specifically along the path that you suggest?