OK first of all, I think they picked the wrong example with doctors, because that one comes with a lot more ethical and emotional baggage than the others referenced.
For something like consulting, the author's proposal sounds like an overcomplicated "pay for performance" model.
For example: Advertising agencies get paid based on the conversions they drive, law firms get a cut of winnings, whistleblowers get a percentage of fine, recruiters get a fee based on placement, etc...
Pay for performance is a perfectly valid way to solve these problem if the outcomes are clearly attributable for the service provided, but consider cases like strategy consulting where the outcome of hiring a strategy consultant is hard to attribute.
One of the things I was interested about is problems where there is possible deniability and attribution ambiguity, in these cases my thinking was it is better to scope and anchor to a larger issue that might occur and align incentive towards a more holistic outcome rather than specific service. The futures approach was a general way of doing it which is agnostic of the problem in hand (though the specific implementation of it would inevitably be tied to the outcome you want in the end).
The doctor example is a common example I keep using since it is very simple to explain, it is purely for exploratory purposes and I did note that it is quite possible not all doctors and consultants might do this. My point was not to deride anyone but rather to just explore an idea.
> Create futures of earth not warming more than 2°C in the next 3 decades, let all the climate skeptics put money where their mouth is and buy these futures.
I'm assuming you're question is why would they buy the futures?
If they really believe that climate change is not real, then they would benefit from owning the futures which pay off when if the climate really doesn't warm more than 2°C in the next 3 decades.
Indeed, after thinking about this, prediction markets was one of the things that came to my mind, this is something I hopefully will research a bit more on. I was primarily interested in the general pattern of using the negative outcomes to align incentives and also potentially use it actually solve the problem. Prediction markets are possibly a pretty good place to experiment this.
>"All the people who are working on solving climate change can short these futures and have an incentive to work on these problems."
But I think they either misunderstand or misstate how the futures would be created. Someone needs to actually issue the futures, and I'm not sure who would do it; these 'futures' contracts seem more like straight bets than actual futures.
In any case, you'd need some credible issuer to create them, either an intermediary or the climate 'workers'. The problem is that you'd need the holder of the long position to be able to pay out in case they lost; so they need to either insure against the possibility of loss (which would be prohibitively expensive), or have some other source of money to pay off a loss. Given these conditions, it seems like the only 'people' who could actually benefit from being long on this instrument would be large corporations, who have easier ways of generating the capital.
The simplest way to generate the funding the author wants to convey to 'workers' is to create a joint-stock corporation and issue shares on the open market... But that's already possible and not novel (though regulation has made this very very expensive).
> Someone needs to actually issue the futures, and I'm not sure who would do it; these 'futures' contracts seem more like straight bets than actual futures.
You're right I didn't mention specifics of on who would create these. A naive answer would have been "why not anyone?", but you bring up an interesting point on who would actually hold the bet for a long duration of time and be guaranteed for pay-offs.
I disagree with the problem of enforceability of the paying out in case someone looses a long position, since it's also a current problem with the standard futures for stocks/commodities, where the brokerage firm would be liable for paying up in case of defaulting on a margin call, so similar structure might be imagined for these cases.
With regards who might create these futures, the government seems like a good candidate, but really if we do have a solid clearinghouse with similar structure for handling margin calls etc. I don't see why not anyone can create these.
The regulatory concerns for implementing these is very valid, but I was primarily just interested in exploring the idea.
The climate change example has a hole in the form of people who neither believe nor disbelieve that the temperature will rise or fall, or that it's caused by man or that it's adressable by man, but simply don't agree it's necessarily a problem either way.
They aren't necessarily saying the temp won't rise or that the climate and landscape and bioscape won't change. It's possible to simply not have a problem with any of that.
Climate change debate is more about agreeing on a goal than agreeing on a fact or an outcome.
A whole bunch of people would not bother betting on either outcome, and so the bets have no influence on their actions.
The regulatory stopgap seems inelegant too. Like the whole point of the article is to try to get a system to self regulate through correct alignment of incentives. Well that part indicates an imcomplete system then, since that's not an incentive, nor even an elegant equilibrium-based governor mechanism, it's a plain manual control.
Well since they didn't say what the regulatory measure would be I suppose that could be something elegant, but I think it's too central to the whole idea to leave as a handwave. That's like the step 2 ??? between socks and profit.
> but I think it's too central to the whole idea to leave as a handwave
haha yeah, you're right I could have been more clear on why I thought there was a need for it.
One way to look at it (though might not be a strong argument) is even with the current regulatory framework, the incentives are not aligned. So I don't think regulation is a way to align incentives rather it acts as a floor of what should be acceptable behavior.
The reason why I think a regulatory stop gap is needed is, when a problem doesn't have enough momentum towards it, it's much easier to make a problem worse than to make it better and regulation acts as a valve by indicating the directional progress we want to make and prevent making it worse at least until there is sufficient momentum that progress from the problem is clearly much better than the alternative.
That said, I think for the problems I used as examples in the article the current mechanisms and the current framework we have are sufficient, and possibly no new regulation needs to be taken. (i.e, for the case of doctors, we already have pretty good mechanisms to prevent doctors from creating actual harm, for climate change we already have limits on carbon emissions, etc.)
I think it's good to see some novel ideas in this space. I'm having trouble imagining it actually working out with things like healthcare, though, because of difficulty in defining the futures, or because some things are more likely to progress or get worse on their own, or independent of the provider.
I think it's a real and interesting problem, and find this idea intriguing but my intuition is that it wouldn't work in practice.
Also, wouldn't this lead to weird incentives for the market participants? Like in an extreme case, murder?
I've met good (often), average (mostly) and bad (sometimes) doctors, but I never encountered doctors that kept you sick for their interest. They exist but they are rare.
Analysing everything with the "economic rationality" goggle just makes you blind to the world
15 comments
[ 2.9 ms ] story [ 48.7 ms ] threadFor something like consulting, the author's proposal sounds like an overcomplicated "pay for performance" model.
For example: Advertising agencies get paid based on the conversions they drive, law firms get a cut of winnings, whistleblowers get a percentage of fine, recruiters get a fee based on placement, etc...
One of the things I was interested about is problems where there is possible deniability and attribution ambiguity, in these cases my thinking was it is better to scope and anchor to a larger issue that might occur and align incentive towards a more holistic outcome rather than specific service. The futures approach was a general way of doing it which is agnostic of the problem in hand (though the specific implementation of it would inevitably be tied to the outcome you want in the end).
The doctor example is a common example I keep using since it is very simple to explain, it is purely for exploratory purposes and I did note that it is quite possible not all doctors and consultants might do this. My point was not to deride anyone but rather to just explore an idea.
What's the motivation for them to do so?
If they really believe that climate change is not real, then they would benefit from owning the futures which pay off when if the climate really doesn't warm more than 2°C in the next 3 decades.
>"All the people who are working on solving climate change can short these futures and have an incentive to work on these problems."
But I think they either misunderstand or misstate how the futures would be created. Someone needs to actually issue the futures, and I'm not sure who would do it; these 'futures' contracts seem more like straight bets than actual futures.
In any case, you'd need some credible issuer to create them, either an intermediary or the climate 'workers'. The problem is that you'd need the holder of the long position to be able to pay out in case they lost; so they need to either insure against the possibility of loss (which would be prohibitively expensive), or have some other source of money to pay off a loss. Given these conditions, it seems like the only 'people' who could actually benefit from being long on this instrument would be large corporations, who have easier ways of generating the capital.
The simplest way to generate the funding the author wants to convey to 'workers' is to create a joint-stock corporation and issue shares on the open market... But that's already possible and not novel (though regulation has made this very very expensive).
You're right I didn't mention specifics of on who would create these. A naive answer would have been "why not anyone?", but you bring up an interesting point on who would actually hold the bet for a long duration of time and be guaranteed for pay-offs.
I disagree with the problem of enforceability of the paying out in case someone looses a long position, since it's also a current problem with the standard futures for stocks/commodities, where the brokerage firm would be liable for paying up in case of defaulting on a margin call, so similar structure might be imagined for these cases.
With regards who might create these futures, the government seems like a good candidate, but really if we do have a solid clearinghouse with similar structure for handling margin calls etc. I don't see why not anyone can create these.
The regulatory concerns for implementing these is very valid, but I was primarily just interested in exploring the idea.
They aren't necessarily saying the temp won't rise or that the climate and landscape and bioscape won't change. It's possible to simply not have a problem with any of that.
Climate change debate is more about agreeing on a goal than agreeing on a fact or an outcome.
A whole bunch of people would not bother betting on either outcome, and so the bets have no influence on their actions.
The regulatory stopgap seems inelegant too. Like the whole point of the article is to try to get a system to self regulate through correct alignment of incentives. Well that part indicates an imcomplete system then, since that's not an incentive, nor even an elegant equilibrium-based governor mechanism, it's a plain manual control.
Well since they didn't say what the regulatory measure would be I suppose that could be something elegant, but I think it's too central to the whole idea to leave as a handwave. That's like the step 2 ??? between socks and profit.
haha yeah, you're right I could have been more clear on why I thought there was a need for it.
One way to look at it (though might not be a strong argument) is even with the current regulatory framework, the incentives are not aligned. So I don't think regulation is a way to align incentives rather it acts as a floor of what should be acceptable behavior.
The reason why I think a regulatory stop gap is needed is, when a problem doesn't have enough momentum towards it, it's much easier to make a problem worse than to make it better and regulation acts as a valve by indicating the directional progress we want to make and prevent making it worse at least until there is sufficient momentum that progress from the problem is clearly much better than the alternative.
That said, I think for the problems I used as examples in the article the current mechanisms and the current framework we have are sufficient, and possibly no new regulation needs to be taken. (i.e, for the case of doctors, we already have pretty good mechanisms to prevent doctors from creating actual harm, for climate change we already have limits on carbon emissions, etc.)
I think it's a real and interesting problem, and find this idea intriguing but my intuition is that it wouldn't work in practice.
Also, wouldn't this lead to weird incentives for the market participants? Like in an extreme case, murder?
Yep, this is the reason why I think we should continue to have a regulatory stopgap to provide a floor for acceptable behavior
Analysing everything with the "economic rationality" goggle just makes you blind to the world