AND THE UTILITY OF PREDICTION MARKETS

FIRST, A TESTING OPPORTUNITY : 2008 ELECTION ODDS
http://www.fivethirtyeight.com/
http://www.intrade.com/jsp/intrade/trading/t_index.jsp
http://iemweb.biz.uiowa.edu/quotes/Pres08_quotes.html
http://politics.betfair.com/

OBAMA 90+% LIKELY TO WIN
http://www.businessweek.com/investing/insights/blog/archives/2008/11/election_predic.html
Election Prediction Markets Bet on Obama
BY Ben Steverman / November 03 2008

Here’s one rare investment that, at least so far, has paid off
handsomely in 2008: Barack Obama. Various election futures markets
allow traders to make bets on politics. On Nov. 1, 2007, on the Iowa
Electronic Markets, the Illinois senator was given about a 14% chance
to merely win the Democratic presidential nomination. Today, traders
are betting Obama has a 90% chance of winning it all by being elected
president.

Of course, the Republican nominee, Arizona Senator John McCain, could
make a lot of money for certain investors by pulling off an upset on
Nov. 4. As of midday on Nov. 3, the Iowa Electronics Market gives the
Republican a roughly 8.8% chance of winning the presidency. Thus, if
you bet on McCain for a “share price” of $8.80, you get a payoff of
$100 if he wins. That’s a return of more than 1,000% if you’re right.
Intrade also runs a presidential prediction market: It gives Obama a
92% chance and McCain a 9.5% chance of victory. Another site (not open
to U.S. bettors) is Betfair.com, which gives Obama odds of almost 93%
and McCain probability of about 8%.

How accurate are these markets? Many, including the founders of the
Iowa Electronic Markets (see video below for more on IEM), say the
collective wisdom of traders often beat the accuracy of polls in past
elections. Ben Kunz makes the argument for prediction markets — both
in politics and other fields like public health — in this BusinessWeek
piece.

On the IEM, you can bet on each candidate’s percentage of the popular
vote. Right now, that gives Obama about 53.4% and McCain 46.8% of
the vote. A key test of these markets will be how close this is to actual
results. There are plenty of legitimate questions about how well these
markets work. This fall, observers alleged that Intrade’s presidential
futures market was being manipulated, creating odds that were
inconsistent with (and more favorable to McCain than) other markets.
Intrade’s CEO John Delaney investigated and said one institutional
Intrade member had been making big buys that skewed the market.
Delaney said the trader was trying to “manage certain risks.”

Alex Tabarrok at Marginal Revolution didn’t think this called into
question the concept of prediction markets: “This supports Robin
Hanson’s and Ryan Oprea’s finding that manipulation can improve (!)
prediction markets – the reason is that manipulation offers informed
investors a free lunch. In a stock market, for example, when you buy
(thinking the price will rise) someone else is selling (presumably
thinking the price will fall) so if you do not have inside information
you should not expect an above normal profit from your trade. But a
manipulator sells and buys based on reasons other than expectations
and so offers other investors a greater than normal return. The more
manipulation, therefore, the greater the expected profit from betting
according to rational expectations.”

Even if markets get the liquidity they need to work efficiently, they
have yet to prove they’re much more than an entertaining parlor game.
These markets might be able to predict the obvious, but do they really
tell us more than a statistically adept poll-watcher like Nate Silver
or Chuck Todd? If working properly, the markets end up reflecting
conventional wisdom. But they don’t really predict the future. A year
ago, while Obama was given 14% of winning the Democratic nomination,
McCain was given a 7.5% chance of winning the Republican nomination.
Both “predictions” weren’t just wrong, but wildly so.

Furthermore, the usefulness of election prediction markets for
investors as a so-called “risk manager” is questionable. First, the
risks and benefits of an Obama victory should already be reflected in
other markets. For example, health care stocks already have been hurt
by the prospects for a successful Democratic effort to reform health
care. Second, unless you expect to get a job in a McCain or Obama
administration, the direct economic effect of a political outcome is
not easy to determine. The impact of, say, the Indiana gubernatorial
race (which you can also bet on at Intrade) is even harder to detect.

If you’re betting for McCain or Obama, in other words, it’s unlikely
you’re trying to hedge against other losses if you lose. Rather,
you’re probably just a political junkie having fun and trying to make
a little money. More than 100 million people will vote for president,
and each vote will have been determined by a multiplicity of factors.
The complexity of it all is mind-boggling. The only thing that comes
close to complexity of the factors that influence election vote totals
is the many inputs that determine the price movements of a stock or
other investment. And, as the past year has shown in both the
presidential campaign and the stock market, life can be very
unpredictable.

ROGUE TRADER / PROPAGANDIST TRIES TO BULLSHIT MARKET
http://www.whistle-safe.org/article.pl?sid=32/07/20/0833218
http://www.cqpolitics.com/wmspage.cfm?docID=news-000002976265&referrer=js
Trader Drove Up Price of McCain ‘Stock’ in Online Market
BY Josh Rogin / Oct. 21, 2008

An internal investigation by the popular online market Intrade has
revealed that an investor’s purchases prompted “unusual” price swings
that boosted the prediction that Sen. John McCain will become
president. Over the past several weeks, the investor has pushed
hundreds of thousands of dollars into one of Intrade’s predictive
markets for the presidential election, the company said. “The trading
that caused the unusual price movements and discrepancies was
principally due to a single ‘institutional’ member on Intrade,” said
the company’s chief executive, John Delaney, in a statement released
Thursday. “We have been in contact with the firm on a number of
occasions. I have spoken to those involved personally.” After the
internal investigation into the trading patterns, Intrade found no
wrongdoing or violation of its exchange rules, according to the
company. Citing privacy policies, Delaney would not disclose the
investor’s identity or whether the investor was affiliated with any
political campaign. According to Delaney the investor was using
“increased depth” in the Intrade market “to manage certain risks.” The
action boosted the McCain prediction over its previous market value
and above the levels of competing predictive-market Web sites. Pundits
and politicians have used Intrade to track the fortunes of the two
presidential candidates. Through the site, begun in 1999 and
incorporated in Ireland, traders buy and sell “contracts” that
function as stocks, allowing investors to gamble on the outcome of
political, cultural, or even geological events such as the weather.
The company asserts and experts have found that the Intrade market is
generally more accurate in predicting the outcome of major events than
other leading indicators, including public opinion polls. But the
relatively small scale of the market and its lack of outside
regulation could leave the system vulnerable to unscrupulous
investors, scholars of predictive markets say. Justin Wolfers, an
associate professor at the University of Pennsylvania’s Wharton School
of Business, said the trades in question do not follow any logical
investment strategy. “Who knows who’s doing it, it’s obviously someone
who wants good news for McCain,” said Wolfers, who has been following
the situation closely. McCain campaign spokesman Michael Goldfarb
said: “It’s always a good time to buy McCain.”

Ripple Effects
Intrade users first noticed something amiss when a series of large
purchases running counter to market predictions sparked volatility in
the prices of John McCain and Barack Obama contracts. The investor
under scrutiny purchased large blocks of McCain futures at once,
boosting their price and increasing the prediction that McCain had a
greater chance of winning the presidential election. At other times,
according to Intrade’s online records, blocks of Obama futures were
sold — lowering the market’s prediction about Obama’s standing in the
race. According to Intrade bulletin boards and market histories,
smaller investors swept in to take advantage of what they saw as price
discrepancies caused by the market shifts — quickly returning the
Obama and McCain futures prices to their previous value. This resulted
in losses for the investor and profits for the small investors who
followed the patterns to take maximum advantage. The activities of the
trader, dubbed the “rogue trader” on Intrade’s message boards, raised
several questions. For example, the trader purchased large contracts
named specifically after McCain and Obama. There were no similar-sized
investments, however, in separate instruments that predict a generic
Republican or Democratic presidential win — even though both sets of
contracts apply to the same event, prices show. Some political news
sites, such as realclearpolitics.org, prominently display Intrade’s
McCain contract value but do not display the corresponding value for a
Republican presidential win. Similar trading patterns were not found
in competing predictive market Web sites betting on John McCain , such
as the Iowa Electronic Markets or Betfair. This means the trader was
paying thousands of dollars more than necessary to purchase McCain
contracts on Intrade, where the price of betting on McCain was much
higher. On Sept. 24, for example, Obama contracts were trading on
Intrade at a price that predicts a 52 percent chance of an Obama
victory. At the same time, Betfair and IEM contracts equated to about
a 62 percent chance of an Obama victory, according to the political
site fivethirtyeight.com. Intrade records show the trader often
purchased tens or hundreds of thousands of dollars of contracts in the
middle of the night, when activity was at its lowest, and in large
bursts. In a three-day period from Sept. 30 through Oct. 2, four
separate flurries of buying drove the price of the McCain contracts up
by 3 to 5 points each. Those numbers eventually settled when the
market compensated. “These movements over McCain largely occurred at
time when there was no way that any useful information came out that
was pro-McCain,” Wolfers said. “A profit-motivated guy wants to buy
his stock in a way that would minimize his impact on the price, a
manipulator wants to maximize it.”

Rogue Tactics
According to Intrade, the company contacted the investor and used
public and private data held by the company as part of its
investigation. That included an analysis of the trades made by the
investor, tracking of Internet addresses, checking physical addresses
and other information. Intrade released details about its
investigation in a statement on its Web site. Some Intrade users
commented on the company’s message board that the trader may believe
in McCain’s chances for victory, despite trends in recent public
opinion polls. Indeed, bucking conventional wisdom can be a profit-
making strategy. For example, David Rothschild, a researcher and Ph.D.
candidate at the Wharton School, said that during the first two
presidential debates, the trader bet thousands of dollars on a McCain
electoral victory at the same moment that instant polls were
suggesting that Obama would win. “That’s equivalent to buying a
company’s stock just as negative earning reports come out,” Rothschild
said. “It is a bad investment, but may make some observers think that
Mr. McCain won the debate, which, again would be the goal of market
manipulation.” Also, the trader paid a premium of 10 percent to 20
percent on every dollar traded by not placing similar bets on other
Web sites, according to Rothschild’s calculations. Overall, if the
trader’s motive was to influence the Intrade market, he was remarkably
successful, Rothschild said. The trader’s actions help keep the
probability of Obama winning the election on Intrade about 10 percent
lower than Betfair and IEM for more than a month. “If the investor did
this as investment, not to manipulate Intrade, he is one of the most
foolish investors in the world,” Rothschild said.

MARKET MANIPULATION RESEARCH
http://hanson.gmu.edu/biashelp.pdf
http://www.unc.edu/~cigar/papers/ManipIHT_June2008(KS).pdf
http://bpp.wharton.upenn.edu/jwolfers/Press/WSJcolumn/16-Market%20Manipulation%20Muddies%20Election%20Outlook.pdf

PROOF OF CONCEPT?
http://www.fivethirtyeight.com/2008/09/intrade-betting-is-suspcious.html
http://freakonomics.blogs.nytimes.com/2008/10/02/manipulation-in-political-prediction-markets/#more-3145
http://www.marginalrevolution.com/marginalrevolution/2008/01/prediction-mark.html
http://www.marginalrevolution.com/marginalrevolution/2008/10/manipulation-of.html
“This is big news but not for the reasons that most people think.
Although some manipulation is clearly possible in the short run, the
manipulation was already suspected due to differences between Intrade
and other prediction markets. As a result: “According to Intrade
bulletin boards and market histories, smaller investors swept in to
take advantage of what they saw as price discrepancies caused by the
market shifts — quickly returning the Obama and McCain futures prices
to their previous value. This resulted in losses for the investor and
profits for the small investors who followed the patterns to take
maximum advantage.”

This supports Robin Hanson’s and Ryan Oprea’s finding that
manipulation can improve (!) prediction markets – the reason is that
manipulation offers informed investors a free lunch. In a stock
market, for example, when you buy (thinking the price will rise)
someone else is selling (presumably thinking the price will fall) so
if you do not have inside information you should not expect an above
normal profit from your trade. But a manipulator sells and buys based
on reasons other than expectations and so offers other investors a
greater than normal return. The more manipulation, therefore, the
greater the expected profit from betting according to rational
expectations.

An even more important lesson is that prediction markets have truly
arrived when people think they are worth manipulating. Notice that
the manipulator probably doesn’t care about changing the market
prediction per se. Instead, a manipulator willing to bet hundreds of
thousands to change the prediction of a McCain win must think that the
prediction will actually affect the outcome. And if people think
prediction markets are this important then can decision markets be far
behind?”

COLLECTIVE INTELLIGENCE
http://www.prokons.com/prediction-markets/faq
http://flipflopmoney.com/2008/05/11/intrade-making-money-online-not-the-usual-way/
http://www.intrade.com/
http://us.newsfutures.com/
http://www.biz.uiowa.edu/iem/
http://www.fivethirtyeight.com/
http://www.realclearpolitics.com/
http://www.hsx.com/

http://en.wikipedia.org/wiki/Prediction_market
http://en.wikipedia.org/wiki/Election_Stock_Market
http://en.wikipedia.org/wiki/Policy_Analysis_Market
http://en.wikipedia.org/wiki/Futures_market
http://en.wikipedia.org/wiki/Efficient_market_hypothesis

http://www.forecastingprinciples.com/PM/
http://www.midasoracle.org/
http://www.chrisfmasse.com/
http://www.predictionmarketjournal.com/
http://www.pmindustry.org/
http://betting.betfair.com/specials/politics-betting/prediction-markets/
http://www.dmreview.com/bissues/20070301/2600311-1.html?bir=1
http://www.ideosphere.com/
http://www.consensuspoint.com/blog/?m=200809

‘HERD INSTINCT’ AS ECONOMIC MODEL
http://www.forbes.com/2008/10/21/why-bubbles-economy-markets-bubbles08-cx_th_1021harford.html
Why Do Markets Create Bubbles?
BY Tim Harford / 10.21.08

Bubbles are like pornography: Everyone has his or her own opinion as
to what qualifies, but it is impossible to pen a precise definition.
If you wish to push the metaphor further, both are also fun for a
while, if you like that sort of thing, but apt to end up making you
feel deflated and embarrassed. Bubbles are also embarrassing for the
economics profession. It’s not that we have no idea what causes
bubbles to form, it’s that we have too many ideas for comfort. Some
explanations are psychological. Some point out that many bubbles have
been stoked not by markets but by governments. There is even a school
of thought that some famous bubbles weren’t bubbles at all.

The psychological explanation is the easiest to explain: People get
carried away. They hear stories of their neighbors getting rich and
they want a piece of the action. They figure, somehow, that the price
of stocks (1929) or dot-com start-ups (1999) or real estate (2006) can
only go up. A symptom of this crowd psychology is that the typical
investor displays exquisitely bad timing. The economist Ilia Dichev of
the University of Michigan has recently calculated “dollar-weighted”
returns for major stock indexes; this is a way of adjusting for
investors rushing into the market at certain times. It turns out that
“dollar-weighted” returns are substantially lower than “buy and hold”
returns. In other words, investors flood in when the market is near
its peak, tending to buy high and sell low. The herd instinct seems to
cost us money. That is awkward for economists, because mainstream
economic models do not really encompass “herd instinct” as a variable.
Still, some economists are teaming up with psychologists and even
neurophysiologists in the search for an answer.

Cambridge economist John Coates is one of them. He used to manage a
Wall Street trading desk and was struck by the way the (male) traders
changed as the dot-com bubble inflated. They would pump their arms,
yell, leave pornography around the office and in general behave as
though they were high on something. It turns out that they were: It
was testosterone. Many male animals–bulls, hares, rutting stags and
the like–fight with sexual rivals. The winner experiences a surge of
testosterone, which makes him more aggressive and more likely to take
risks. In the short run that tends to mean that winners keep winning;
in the long run, they take too many risks. Dr. Coates wondered if
profitable traders were also running on testosterone, and a few saliva
samples later it appears that he is right. Profitable trading days
boost testosterone levels and tend to encourage more risk-taking, more
wins and more testosterone. When the risks didn’t pay off, the
testosterone ebbed away to be replaced by a stress hormone, cortisol.
The whole process seems likely to exaggerate peaks and troughs. These
psychological explanations are likely to help us understand what goes
on as bubbles form and how they might be prevented. Yet they make me
nervous: It is too easy to blame a bubble on the mob psychology of the
market when a closer look at most bubbles reveals that there is much
more to the story than that.

For example, one famous early “mania” was the Mississippi bubble, in
which countless investors poured their money into the Compagnie des
Indes in France in 1720, and lost it. Yet there was more going on than
a free-market frenzy: The government could hardly have been more
closely involved. The Compagnie des Indes had effectively taken over
the French Treasury and legal monopolies on French trade with much of
the rest of the world (including Louisiana–hence “Mississippi
bubble”). Investors were hardly insane to think that such a political
machine might be profitable, especially since the king of France
personally held many of the shares. But the king sold out near the top
in 1720; within two years, the Compagnie was bankrupt and its
political power dismantled.

The government played its own part in the current credit crunch, too.
For all the scapegoating of deregulation, thoughtful commentators also
point to the Federal Reserve’s policy of cheap money, and Fannie and
Freddie’s enormous appetite for junk mortgages–urged all the way by
politicians trying to make credit available to poor and risky
borrowers. Market psychology was part of the story, but not the whole
story. The idea that ordinary people have a tendency to be caught up
in investment manias is a powerful one, thanks in part to Charles
Mackay, author in 1841 of the evergreen book Extraordinary Popular
Delusions and the Madness of Crowds. Mackay’s most memorable
example was the notorious Dutch tulip bubble of 1637, in which
–absurdity!–tulip bulbs changed hands for the price of a house.

It is the quintessential case study of financial hysteria, but it’s
not clear that there was ever an important tulip bubble. Rare tulip
flowers–we now know that their intricate patterning is caused by a
virus–were worth huge sums to wealthy Parisian gentlemen trying to
impress the ladies. Bulbs were the assets that produced these floral
gems, like geese that laid golden eggs. Their value was no fantasy.
Peter Garber, a historian of economic bubbles, points out that a
single bulb could, over time, be used to produce many more bulbs. The
price of the bulbs would, of course, fall as more were cultivated. A
modern analogy would the first copy of a Hollywood film: the final
copies may circulate for a few dollars, but the original is worth tens
of millions. Garber points out that rare flower breeds still change
hands for hundreds of thousands of dollars. Perhaps we shouldn’t be
quite so sure that the tulipmania really was a mania. Economists are
going to have to get better at understanding why bubbles form from a
heady mix of fraud, greed, perverse incentives, mob psychology and
government incompetence. What we should never forget is that
underneath the apparent hysteria, there is often a cold rationality to
it all.

THE FOUR CONDITIONS OF CROWD-MIND HEALTH
http://kottke.org/04/07/wisdom-of-crowds
The wisdom of crowds you say? As Surowiecki explains, yes, but only
under the right conditions. In order for a crowd to be smart, he says
it needs to satisfy four conditions:
1. Diversity. A group with many different points of view will make
better decisions than one where everyone knows the same information.
Think multi-disciplinary teams building Web sites…programmers,
designers, biz dev, QA folks, end users, and copywriters all
contributing to the process, each has a unique view of what the final
product should be. Contrast that with, say, the President of the US
and his Cabinet.
2. Independence. “People’s opinions are not determined by those around
them.” AKA, avoiding the circular mill problem.
3. Decentralization. “Power does not fully reside in one central
location, and many of the important decisions are made by individuals
based on their own local and specific knowledge rather than by an
omniscient or farseeing planner.” The open source software development
process is an example of effect decentralization in action.
4. Aggregation. You need some way of determining the group’s answer
from the individual responses of its members. The evils of design by
committee are due in part to the lack of correct aggregation of
information. A better way to harness a group for the purpose of
designing something would be for the group’s opinion to be aggregated
by an individual who is skilled at incorporating differing viewpoints
into a single shared vision and for everyone in the group to be aware
of that process (good managers do this). Aggregation seems to be the
most tricky of the four conditions to satisfy because there are so
many different ways to aggregate opinion, not all of which are right
for a given situation.

Satisfy those four conditions and you’ve hopefully cancelled out some
of the error involved in all decision making: “If you ask a large
enough group of diverse, independent people to make a prediciton or
estimate a probability, and then everage those estimates, the errors
of each of them makes in coming up with an answer will cancel
themselves out. Each person’s guess, you might say, has two
components: information and error. Subtract the error, and you’re left
with the information.”

CONTACT
James Surowiecki
http://www.newyorker.com/online/blogs/jamessurowiecki/
email : jamessuro [at] aol [dot] com

HOW CROWDS GET SMARTER
http://www.randomhouse.com/features/wisdomofcrowds/Q&A.html
Q & A with James Surowiecki

Q: How did you discover the wisdom of crowds?
A: The idea really came out of my writing on how markets work. Markets
are made up of diverse people with different levels of information and
intelligence, and yet when you put all those people together and they
start buying and selling, they come up with generally intelligent
decisions. Sometimes, though, they come up with remarkably stupid
decisions—as they did during the stock-market bubble in the late
1990s. I was interested in what explained the successes and the
failures of markets, and as I got further into it I realized that it
wasn’t just markets that were smart. In fact, crowds of all sorts were
often remarkably wise.

Q: Could you define “the crowd?”
A: A “crowd,” in the sense that I use the word in the book, is really
any group of people who can act collectively to make decisions and
solve problems. So, on the one hand, big organizations—like a company
or a government agency—count as crowds. And so do small groups, like a
team of scientists working on a problem. But just as interested—maybe
even more interested—in groups that aren’t really aware themselves as
groups, like bettors on a horse race or investors in the stock market.
They make up crowds, too, because they’re collectively producing a
solution to a complicated problem: the bets of people betting on a
horse race determine what the odds on the race will be, and the
choices of investors determine stock prices.

Q: Under what circumstances is the crowd smarter?
A: There are four key qualities that make a crowd smart. It needs to
be diverse, so that people are bringing different pieces of
information to the table. It needs to be decentralized, so that no one
at the top is dictating the crowd’s answer. It needs a way of
summarizing people’s opinions into one collective verdict. And the
people in the crowd need to be independent, so that they pay attention
mostly to their own information, and not worrying about what everyone
around them thinks.

Q: And what circumstances can lead the crowd to make less-than-stellar
decisions?
A: Essentially, any time most of the people in a group are biased in
the same direction, it’s probably not going to make good decisions. So
when diverse opinions are either frozen out or squelched when they’re
voiced, groups tend to be dumb. And when people start paying too much
attention to what others in the group think, that usually spells
disaster, too. For instance, that’s how we get stock-market bubbles,
which are a classic example of group stupidity: instead of worrying
about how much a company is really worth, investors start worrying
about how much other people will think the company is worth. The
paradox of the wisdom of crowds is that the best group decisions come
from lots of independent individual decisions.

Q: What kind of problems are crowds good at solving and what kind are
they not good at solving?
A: Crowds are best when there’s a right answer to a problem or a
question. (I call these “cognition” problems.) If you have, for
instance, a factual question, the best way to get a consistently good
answer is to ask a group. They’re also surprisingly good, though, at
solving other kinds of problems. For instance, in smart crowds, people
cooperate and work together even when it’s more rational for them to
let others do the work. And in smart crowds, people are also able to
coordinate their behavior—for instance, buyers and sellers are able to
find each other and trade at a reasonable price—without anyone being
in charge. Groups aren’t good at what you might call problems of skill—
for instance, don’t ask a group to perform surgery or fly a plane.

Q: Why are we not better off finding an expert to make all the hard
decisions?
A: Experts, no matter how smart, only have limited amounts of
information. They also, like all of us, have biases. It’s very rare
that one person can know more than a large group of people, and almost
never does that same person know more about a whole series of
questions. The other problem in finding an expert is that it’s
actually hard to identify true experts. In fact, if a group is smart
enough to find a real expert, it’s more than smart enough not to need
one.

Q: Can you explain how a betting pool can help predict the future?
A: Well, predicting the future is what bettors try to do every day,
when they try to figure out what horse will win a race or what
football team will win on Sunday. What horse-racing odds or a point
spread represent, then, is the group’s collective judgment about the
future. And what we know from many studies is that that collective
judgment is often remarkably accurate. Now, we have to be careful
here. In the case of a horse race, for instance, what the group is
good at predicting is the likelihood of each horse winning. The
potential benefits of this are pretty obvious. If you’re a company,
say, that’s trying to decide which product you should put out, what
you want to know is the likelihood of success of your different
options. A betting pool—or a market, or some other way of tapping into
the wisdom of crowds—is the best way for you to get that information.

Q: Can you give an example of a current company that is tapping into
the “wisdom of crowds?”
A: There’s a division of Eli Lilly called e.Lilly, which has been
experimenting with using internal stock markets and hypothetical drug
candidates to predict whether new drugs will gain FDA approval. That’s
an essential thing for drug companies to know, because their whole
business depends on them not only picking winners—that is, good, safe
drugs—but also killing losers before they’ve invested too much money
in them.

Q: You’ve explained how tapping into the crowd’s collective wisdom can
help a corporation, but how can it help other entities, like a
government, or perhaps more importantly, an individual?
A: Well, the same principles that make collective wisdom useful to a
company make it just as useful to the government. For instance, in the
book I talk about the Columbia disaster, showing how NASA’s failure to
deal with the shuttle’s problems stemmed, in part, from a failure to
tap into knowledge and information that the people in the organization
actually had. And in a broader sense, I think the book suggests that
the more diverse and free the flow of information in a society is, the
better the decisions that society will reach. As far as individuals
go, I think there are two consequences. First, we can look to
collective decisions—as long as the groups are diverse, etc.—to give
us good predictions. But the collective decisions will only be smart
if each of us tries to be as independent as possible. So instead of
just taking the advice of your smart friend, you should try to make
your own choice. In doing so, you’ll make the group smarter.

Q: When you talk about using the crowd to make a decision, are you
talking about consensus?
A: No, and this is one of the most important points in the book. The
wisdom of crowds isn’t about consensus. It really emerges from
disagreement and even conflict. It’s what you might call the average
opinion of the group, but it’s not an opinion that every one in the
group can agree on. So that means you can’t find collective wisdom via
compromise.

Q: What would Charles MacKay—the author of Extraordinary Popular
Delusions and the Madness of Crowds—think of your book?
A: He would probably think I’m deluded. Mackay thought crowds were
doomed to excess and foolishness, and that only individuals could
produce intelligent decisions. On the other hand, a good chunk of my
book is about how crowds can, as it were, go mad, and what allows them
to succumb to delusions. Mackay would like those chapters.

Q: What do you most hope people will learn from reading your book?
A: I think the most important lesson is not to rely on the wisdom of
one or two experts or leaders when making difficult decisions. That
doesn’t mean that expertise is irrelevant, or that we don’t need smart
people. It just means that together all of us know more than any one
of us does.

EARLY CROWD EXPERIMENTS
http://www.randomhouse.com/features/wisdomofcrowds/audio.html
http://www.randomhouse.com/features/wisdomofcrowds/excerpt.html
BY James Surowiecki

As it happens, the possibilities of group intelligence, at least when
it came to judging questions of fact, were demonstrated by a host of
experiments conducted by American sociologists and psychologists
between 1920 and the mid-1950s, the heyday of research into group
dynamics. Although in general, as we’ll see, the bigger the crowd the
better, the groups in most of these early experiments—which for some
reason remained relatively unknown outside of academia—were relatively
small. Yet they nonetheless performed very well. The Columbia
sociologist Hazel Knight kicked things off with a series of studies in
the early 1920s, the first of which had the virtue of simplicity. In
that study Knight asked the students in her class to estimate the
room’s temperature, and then took a simple average of the estimates.
The group guessed 72.4 degrees, while the actual temperature was 72
degrees. This was not, to be sure, the most auspicious beginning,
since classroom temperatures are so stable that it’s hard to imagine a
class’s estimate being too far off base. But in the years that
followed, far more convincing evidence emerged, as students and
soldiers across America were subjected to a barrage of puzzles,
intelligence tests, and word games. The sociologist Kate H. Gordon
asked two hundred students to rank items by weight, and found that the
group’s “estimate” was 94 percent accurate, which was better than all
but five of the individual guesses. In another experiment students
were asked to look at ten piles of buckshot—each a slightly different
size than the rest—that had been glued to a piece of white cardboard,
and rank them by size. This time, the group’s guess was 94.5 percent
accurate. A classic demonstration of group intelligence is the jelly-
beans-in-the-jar experiment, in which invariably the group’s estimate
is superior to the vast majority of the individual guesses. When
finance professor Jack Treynor ran the experiment in his class with a
jar that held 850 beans, the group estimate was 871. Only one of the
fifty-six people in the class made a better guess.

There are two lessons to draw from these experiments. First, in most
of them the members of the group were not talking to each other or
working on a problem together. They were making individual guesses,
which were aggregated and then averaged. This is exactly what Francis
Galton did, and it is likely to produce excellent results. (In a later
chapter, we’ll see how having members interact changes things,
sometimes for the better, sometimes for the worse.) Second, the
group’s guess will not be better than that of every single person in
the group each time. In many (perhaps most) cases, there will be a few
people who do better than the group. This is, in some sense, a good
thing, since especially in situations where there is an incentive for
doing well (like, say, the stock market) it gives people reason to
keep participating. But there is no evidence in these studies that
certain people consistently outperform the group. In other words, if
you run ten different jelly-bean-counting experiments, it’s likely
that each time one or two students will outperform the group. But they
will not be the same students each time. Over the ten experiments, the
group’s performance will almost certainly be the best possible. The
simplest way to get reliably good answers is just to ask the group
each time.

A similarly blunt approach also seems to work when wrestling with
other kinds of problems. The theoretical physicist Norman L. Johnson
has demonstrated this using computer simulations of individual
“agents” making their way through a maze. Johnson, who does his work
at the Los Alamos National Laboratory, was interested in understanding
how groups might be able to solve problems that individuals on their
own found difficult. So he built a maze—one that could be navigated
via many different paths, some shorter, and some longer—and sent a
group of agents into the maze one by one. The first time through, they
just wandered around, the way you would if you were looking for a
particular café in a city where you’d never been before. Whenever they
came to a turning point—what Johnson called a “node”—they would
randomly choose to go right or left. Therefore some people found their
way, by chance, to the exit quickly, others more slowly. Then Johnson
sent the agents back into the maze, but this time he allowed them to
use the information they’d learned on their first trip, as if they’d
dropped bread crumbs behind them the first time around. Johnson
wanted to know how well his agents would use their new
information.Predictably enough, they used it well, and were much
smarter the second time through. The average agent took 34.3
steps to find the exit the first time, and just 12.8 steps to find it
the second.

The key to the experiment, though, was this: Johnson took the results
of all the trips through the maze and used them to calculate what he
called the group’s “collective solution.” He figured out what a
majority of the group did at each node of the maze, and then plotted a
path through the maze based on the majority’s decisions. (If more
people turned left than right at a given node, that was the direction
he assumed the group took. Tie votes were broken randomly.) The
group’s path was just nine steps long, which was not only shorter than
the path of the average individual (12.8 steps), but as short as the
path that even the smartest individual had been able to come up with.
It was also as good an answer as you could find. There was no way to
get through the maze in fewer than nine steps, so the group had
discovered the optimal solution. The obvious question that follows,
though, is: The judgment of crowds may be good in laboratory settings
and classrooms, but what happens in the real world?

FINANCIAL LITERACY
http://annalusardi.blogspot.com/
http://www.dartmouth.edu/~alusardi/media.html

GAIN CONFIDENCE
http://www.gametheory.net/dictionary/
http://www.gametheory.net/tests/
http://www.gametheory.net/games/
http://www.gametheory.net/applets/
http://www.gametheory.net/links/academic-journals.html
http://www.gametheory.net/lectures/
http://www.gametheory.net/books/
http://gambit.sourceforge.net/
http://www.strategy-business.com/library/enews
http://www.ics.uci.edu/~eppstein/cgt/
http://kuznets.fas.harvard.edu/~aroth/alroth.html
http://www.perfecteconomy.com/pg-glossary-of-terms.html
http://www-sop.inria.fr/coprin/ISDG/
http://meganmcardle.theatlantic.com/archives/2008/10/recommended_reading.php
http://www.econlib.org/

POSITIVE ECONOMICS
http://en.wikipedia.org/wiki/Positive_economics
http://en.wikipedia.org/wiki/Essays_in_Positive_Economics#The_Methodology_of_Positive_Economics
http://academic2.american.edu/~dfagel/Class%20Readings/Friedman/Methodology.pdf

FRENCH TV DEBATE ON CHARGING ALAN GREENSPAN WITH CRIMES
AGAINST HUMANITY AT THE HAGUE VS. STRINGING HIM UP
http://blip.tv/file/1275755
THIS GUY (PARIS)
http://www.cepii.fr/anglaisgraph/pagepers/stoffaes.htm
vs. THIS GUY (USA)
http://www.karmabanque.com/
http://www.karmabanque.com/modules.php?op=modload&name=FAQ&file=index
http://www.webbyawards.com/webbys/current_honorees.php?season=9
email : max [at] maxkeiser [dot] com

THE DEFENSE

http://www.youtube.com/watch?v=55-A1-D3MR0

AND WHY NOTHING WILL LIKELY HAPPEN
http://www.economist.com/finance/displayStory.cfm?source=hptextfeature&story_id=12480871
Hunting for scalps / Oct 23rd 2008
The pressure for convictions is great but prosecutors have their work
cut out

Americans are turning creative as they strive to make sense of the
crisis. On October 29th a group of artists will stage a “literal
meltdown” by placing a 1,500lb (680kg) ice sculpture of the word
“economy” in Manhattan’s Foley Square. The installation will,
according to one collaborator, “metaphorically capture the results of
unregulated markets.” For many, though, catharsis will come only
through another capture: the arrest and courtroom humiliation of the
erstwhile Wall Street titans the public holds responsible for the
mess. In today’s political climate, the government will feel immense
pressure to put a few moneymen in the dock. The FBI alone is probing
more than two dozen firms. Market regulators, state attorneys-general
and the Department of Justice are also jostling to unearth wrongdoing,
sifting through e-mails and seeking whistle-blowers at firms such as
Fannie Mae, American International Group and Lehman Brothers, the only
Wall Street firm allowed to go bust. At least 17 former Lehman
executives, including Dick Fuld, once its boss, are expected to
receive grand-jury subpoenas.

Investigators are likely to focus mainly on disclosure and valuation.
Ken Lay, boss of Enron, the failed energy giant, was convicted in part
because of upbeat public statements he made even as he knew the firm
was in trouble. Some may try to draw a parallel with Lehman, which
said its capital position was “strong” just days before it filed for
bankruptcy. But to constitute fraud there must be intent to deceive.
Proving that beyond reasonable doubt may not be easy, even to a jury
disinclined to give fat cats the benefit of the doubt. Likewise,
sloppy risk management, though lamentable, is not illegal.
Paradoxically, the severity of the financial storm could help
defendants. “As the crisis has grown, it has become harder for
prosecutors to charge that any single firm has committed fraud,”
argues Robert Giuffra of Sullivan & Cromwell, a law firm. Moreover,
showing that executives deliberately overvalued complex mortgage
securities could be hard. Those accused of masking losses can point to
the continuing debate over mark-to-market rules, which regulators
recently relaxed—though any e-mails that reflect internal doubts about
marks could “create smoke”, says Mary Jo White of Debevoise &
Plimpton, another law firm.

The legal climate has shifted in favour of corporate defendants, too.
Some aggressive tactics used by prosecutors after the bursting of the
dotcom bubble have been curbed: for instance, firms can again cling to
attorney-client privilege—the right to keep their communications
confidential—without it being viewed as unco-operative by the
authorities. New sentencing guidelines means 25-year jail terms are
less likely. In civil cases three Supreme-Court rulings have made
fraud harder to prove. Investigators are yet to turn up clear evidence
of unethical behaviour, let alone anything that warrants a long
stretch in jail. They have a lot more digging to do—witness the
subpoenas just handed to analysts who covered Lehman, requesting
information that might suggest they were misled. They may find dirt—
but it will be harder to make it stick.

SO WHO’S MAX KEISER? (WIKI WON’T SAY)
http://www.maxkeiser.com/
http://www.maxkeiser.net/
http://maxkeiser.net/oracle-pressrelease.html
http://maxkeiser.net/opinion1.html
http://maxkeiser.net/writing.html
http://www.youtube.com/maxkeisertv

SIMPLE SOLUTION TO WIKI ‘NOTABILITY’ PROBLEM:
EVERYONE MENTION MAX KEISER (NOW HE’S FAMOUS)
http://www.midasoracle.org/2007/06/22/the-hollywood-stock-exchange-max-keiser-and-their-wikipedia-entries/
http://en.wikipedia.org/wiki/Max_Keiser
http://en.wikipedia.org/wiki/Wikipedia:BIO
http://en.wikipedia.org/wiki/Wikipedia:Articles_for_deletion/Max_Keiser
a vote to keep: “I added some, not all, of the material on the Max
Keiser entry and there was at one point an explanation of the
significance of the underlying patent on HSX. It was however deleted.
The three underlying patents which are still linked to in the article,
I believe, are the only patents for prediction markets and virtual
currencies. The virtual specialist technology he invented is a
mechanism for creating a price for previously unpriceable things like
fame, popularity, ideas, time spent online, etc. Prediction markets
were called the biggest financial and market trend for the future by
the Economist Magazine (December 2005). So, his virtual specialist
technology is notable to economics and finance even if the average
person doesn’t understand the notability. The debate held between
Keiser and the Hollywood studios in the public during 1999 when Keiser
said studios were going to have to compete with a ‘price point called
free’ was revolutionary at the time. From the Hollywood industry trade
magazines linked to in the article, it is clear to see that no other
person had suggested this publicly at that time and it was considered
heretical as the articles make clear. In terms of Karmabanque not
being relevant, Cheuvreux, a major European bank, only just came out
with a report this month, June 2007, called “Consumer Power: Pricing
Power versus Consumer Power” and the report specifically cites Max
Keiser alone as having innovated a powerful market solution to the
demand side of the consumer / corporation equation with Karmabanque.
And Newsweek Japan is profiling Max Keiser and Karmabanque for the
final issue of June 2007. The Karmabanque Hedge fund concept is the
first ever mechanism for monetizing dissent in a day and age of anti-
globalisation protests where hundreds of thousands protest G8 like
events. Karmabanque has been profiled in the Washington Post, Dow
Jones Marketwatch, Atlanta Journal Constitution and dozens of other
important financial trade magazine and has been included in the
curriculum at universities (Robert W. Benson, Loyola Law School) as
well as legal opinions issued by the Washington Legal Foundation. So,
while it may not be easy for the the average person to understand the
significance at this moment in time, it is notable in financial,
market, banking and academic sectors – all of which also use
Wikipedia. And, finally, Max Keiser is an American presenter for
Aljazeera English. He has made six films for them and most of the
films are linked to in the article. Aljazeera English is a notable
international broadcaster with significance at this moment in
history.”

LIKE THIS:
THE COLLECTED LETTERS (TO EDITOR) OF MAX KEISER

MANIPULATION RUINS (PREDICTION) MARKETS
http://www.ft.com/cms/s/0/49a0ab3e-338d-11dd-ba8a-0000779fd2ac.html
Prediction markets are doomed to fail / June 6 2008

From Mr Max Keiser.
Sir, I predict that if John Authers keeps quoting prediction markets
in his columns (“Recession fears”, The Short View, June 3), their
ability to generate reliable price signals will diminish as those in a
position of power will try to subvert these markets with “spin” and
PR, as they do now on various other markets. I had this experience
when I was running the Hollywood Stock Exchange, the first and most
influential of all prediction markets. When I predicted box office
success, the networks (which also own film studios) would broadcast
that information. When I predicted box office losers, they chose to
ignore it. Naturally, we tended to talk up MovieStocks that looked as
if they were going to be winners, and this ended up defeating the
whole purpose of having a prediction market.

Max Keiser,
75005 Paris, France
Former Chief Executive and Co-Founder, HSX Holdings/ Hollywood Stock
Exchange

STOCK PRICE VACUUMS
http://www.ft.com/cms/s/0/93387884-43e7-11dd-842e-0000779fd2ac.html
June 27 2008

From Mr Max Keiser.
Sir, The opposite of a stock price bubble is a stock price vacuum.
Just as stock prices are inflated to a point where the tiniest prick
of reality can pop the bubble and cause a wave of selling, stock
prices that are driven lower by rampant, unfounded short-selling can
snap back with a rally as soon as the oxygen of buyers emerges to
eliminate the price vacuum.

Max Keiser,
75005 Paris, France

MARKET OPAQUENESS — “OFF BALANCE SHEET”
Transparency is the essence of market economy
By Max Keiser / June 29 2007

From Mr Max Keiser.
Sir, Martin Wolf makes a good case for reforming capitalism (“Risks
and rewards of today’s unshackled global finance”, June 27) but fails
to address the key problem underlying the various inequalities and
distortions he describes. Transparency used to be the hallmark of
market economics. Buyers and sellers had confidence in the “invisible
hand” of multiple self-interested parties seeking maximum utility for
themselves – and, in so doing, inadvertently contributing to fair
prices. Today the business of market-making, the so-called price
discovery mechanism at the heart of every exchange in the world, is
dominated by “black box” algorithmic proprietary trading models of
unregulated hedge funds and private equity that thrive on market
opaqueness. These private funds argue that to become transparent would
mean giving away trade secrets. In other words, the very essence of
free market capitalism, transparency and fair play, has gone “off
balance sheet” as surely as those hundreds of billions of dollars
worth of misplaced synthetic derivatives we keep reading about. Until
these fund managers are forced to disclose the actual risk they carry,
we cannot expect the situation to rectify itself before being forced
to do so with an inevitable “exogenous” repricing event like the one
we saw in October of 1987.

Max Keiser,
Founder and chairman,
Karma Banque,
Paris 75005, France

PONZI SCHEME
http://en.wikipedia.org/wiki/Ponzi_scheme
http://www.ft.com/cms/s/0/c1f8b420-9d54-11dc-af03-0000779fd2ac.html
Problem with banks was insolvency / November 28 2007

From Mr Max Keiser.
Sir, Lawrence Summers needs to wake up and smell the inadequacies of
his analysis (“Wake up to the dangers of a deepening crisis”, November
26). Two months ago (“Beware the moral hazard fundamentalists”,
September 24) he was trying to convince us that the problem with banks
was not insolvency but rather illiquidity. Insightful observers of the
credit markets knew then, as they know now, that the primary source of
revenues for much of the banking industry for the past decade has been
their foolhardy participation in a global Ponzi scheme backed by what
we now know to be largely counterfeit mortgage paper. Therefore it is
insolvency along with its corollaries – opacity, misleading
statements, dishonesty and larceny – that constitute the problem and
illiquidity that is its symptom.

Max Keiser,
Founder and Chairman,
Karma Banque,
Paris 75005, France

MARKET ACTIVISM
http://search.ft.com/ftArticle?queryText=max+keiser&y=5&aje=true&x=8&id=040102000675&ct=0
‘Integrity’ blinding environmentalists
By Max Keiser, Financial Times / Jan 02, 2004

From Mr Max Keiser.
Sir, Allow me to comment on your editorial “Not so great
revolt” (December 30). I started a website 18 months ago that
recommends to all activists, not just shareholder activists, how to
take positions against corporations based on a company’s highest point
of vulnerability, its stock price. To this end, we offer an index that
lists which companies’ stock prices are the most vulnerable to a
boycott, the low-cost weapon of choice for most activists. What I have
discovered during this time sadly confirms what I construe to be the
FT’s findings, that activists are blind when it comes to recognising
the potential of targeting a company’s stock price in their campaigns.
In the case of the environmentalists I have talked to, I can report
that the reason they refuse to look at the world in this way is
because they consider talking about markets and money as the basis for
a campaign to be beneath their integrity as moral guardians of the
ecosphere. They would rather be hauling buckets of sludge and tar off
a beach in Spain or Alaska than working to clean up the environment of
finance, even though companies have proved many times over they do not
care as much about oil-drenched rare birds as they do about their
stock price. Hedge funds, interestingly enough, send me e-mails every
day asking when activists will launch a stock-price targeted campaign
so that they can start shorting shares in these companies – this
implies that activists have an incredible leverage in this economy to
effect change, leverage they are not making use of, simply because
their high-minded definition of the environment refuses to include the
environment of money and markets.

Max Keiser, Chairman and Founder, Karmabanque, Villefranche Sur Mer
06230, France

DECAPITALISED
http://search.ft.com/ftArticle?queryText=max+keiser&y=5&aje=true&x=8&id=030226000849&ct=0
Anti-Americanism: the ‘third way’
By Max Keiser / Financial Times / Feb 26, 2003

From Mr Max Keiser.
Sir, Moisés Naím’s commentary (“Anti-Americanism’s nasty taste”,
February 24) describes two types of pernicious anti-Americanism:
murderous fanatics who want to destroy America; and those who just
want to rant, a group he calls anti-Americanism “light”. Both groups,
he says, create an unacceptable cost of fanning the flames of
animosity towards the US and therefore should be avoided. I
wholeheartedly disagree and offer a third version of anti-Americanism,
one that I feel is necessary now that the US has wilfully abdicated
its leadership role in matters of universal global seriousness, such
as protection of the environment. In my opinion, the US no longer
qualifies for the type of critical exemption suggested by Mr Naím. The
US voluntarily stepped down from the pedestal of moral accountability
when Bush took office and walked away from various international
treaties and organisations. Therefore, it stands to reason that the US
must now deal with the consequences of living in a world that views
its franchise not as a perennial force for good but as just another
economic entity either to buy or to sell. As an American, I am
expressing my anti-Americanism by selling short the Standard & Poor’s
500 and I will continue to do so for as long as America’s rhetoric
about maintaining social contracts such as freedom and democracy races
ahead of its actions in places such as the Gulf. I will gladly cover
my shorts when the US starts to act like a country that believes in
democracy instead of one that just talks about it. If every hedge fund
manager in the world focused his collective market power in this way I
believe the US would be forced to change its behaviour or risk getting
“decapitalised” in a non-violent, non-fanatical way, a third way not
mentioned by Mr Naím in his commentary.

Max Keiser, Co-founder, Chairman, Karma Banque, Villefranche-sur-Mer,
France

MAXIMUM PROFIT
http://search.ft.com/ftArticle?queryText=max+keiser&y=5&aje=true&x=8&id=040526001241&ct=0
NGOs would do well to become more transparent
By Max Keiser / Financial Times / May 26, 2004

From Mr Max Keiser.
Sir, Rational cost accounting, economies of scale and cost-benefit
analysis, as Bjorn Lomborg suggests (“The Copenhagen Consensus will
help save lives”, May 24) comprise a long-overdue development in the
field of activism. Until morality starts trading on one of the main
exchanges it is impractical to think that the moral argument used by
virtually all non-governmental organisations will sway the behaviour
of those who run socially irresponsible companies. Activists arguing
against Mr Lomborg’s ideas seem to think that putting a dollar value
on their activities is tantamount to cheapening the importance of what
they are trying to accomplish. Is this not the inverse of the same
argument corporations use to legitimise their irresponsible behaviour;
that trying to put a dollar amount on morality reduces their ability
to serve shareholders by pursuing, as Milton Friedman might say,
maximum profit? Perhaps activists are being disingenuous. They seem to
be putting up a smoke screen when more transparency is in order. In
other words, is it possible that cost-efficiency, if embraced by the
thousands of NGOs that are now operating without basic economic
principles, might lead to the realisation that the structure of NGOs
themselves is as inefficiently bloated as the corporations they
criticise. NGOs seem to be saying they are against Mr Lomborg’s
methods, but I think what they are really saying is they are against
losing their jobs.

Max Keiser, Chairman and founder, Karmabanque, Villefranche-sur-Mer,
France 06230

HEDGING PROGRESS
http://www.washingtonpost.com/wp-dyn/articles/A25215-2004Dec24.html
Hedge Funds Banking on Social and Moral Issues
BY Thomas M. Kostigen / December 25, 2004

Wealthy British scion Zak Goldsmith and investment activist Max Keiser
want to take down Coca-Cola Co., and they have added a new twist to
the age-old tactic of boycotting: They have opened a hedge fund
designed to profit from any decline in the soft drink conglomerate’s
stock price. “We’re simply picking up on a trend and giving people the
tools to use,” Keiser said. “The Internet allows people, activists,
from all over the world to gather, or swarm, and hit a company where
it hurts most — in their stock price.” Hedge funds are a popular
investment option for the wealthy. But creating a hedge fund with a
specific social agenda, like the one promoted by Goldsmith and Keiser,
is a recent development, according to Doug Wheat, director of business
development at SRI World Group, a financial news and data monitoring
service in Vermont. “There are only five or six hedge funds like
that,” Wheat said. “Meanwhile, there are like 8,000 hedge funds.” A
hedge fund is a type of private investment vehicle for wealthy
investors who choose to pool their money and invest in securities.
Many hedge funds invest in unusual securities in unusual ways. They
sometimes assume substantial risks on speculative strategies. This
sometimes includes “hedging,” or leveraging investments to get the
most gain. Hedge funds are subject to few regulations. The Securities
and Exchange Commission requires only that the investors be
accredited, meaning that they must earn more than $200,000 per year or
have a net worth of more than $1 million. Hedge fund managers are not
currently required to register with the SEC. “We don’t get into who’s
investing,” said SEC spokesman John Heine. But that hands-off approach
may change. Regulators started eyeing hedge funds after the 1998 near-
collapse of Long-Term Capital Management LP, which lost billions in
derivatives trading and created a financial market disaster,
necessitating a private-sector bailout organized by the Federal
Reserve Bank of New York. In October, the SEC voted 3 to 2 to increase
hedge fund oversight by mandating that hedge fund managers register by
February 2006. But on Monday, the head of a New York-based hedge
fund, Opportunity Partners LP, sued the SEC in an effort to block the
registration requirement. In public comments dissenting from the
adoption of the proposed registration rule, the two Republican
commissioners, Cynthia A. Glassman and Paul S. Atkins, questioned
whether the registration requirement would be too rigorous on certain
issues and too lax on others. Heine said that requiring hedge funds to
register with the commission “will not have any effect on the
suitability requirement for hedge fund investors.” Even within the
context of traditional stock and bond investing, hedge funds sometimes
seek out esoteric niches, such as interest rate swaps and
collateralized mortgage obligations, according to Todd Goldman,
managing principal at Walnut Creek, Calif., accounting firm Rothstein
Kass, which serves hedge funds. “The whole point of hedge fund
investing is the ability to specialize,” Goldman said, pointing out
that there are hedge funds producing steady returns that strictly
invest in credit card debt and funds that invest in tax liens. To
date, specialization among hedge funds has meant inventing new
investment strategies within a core group of publicly traded
securities — stocks, bonds, currencies, futures and options. But some
investors are expanding beyond what most people would even consider
investments. Billionaire Mark Cuban, owner of the NBA’s Dallas
Mavericks, for example, said in November that he is preparing to
launch a hedge fund focused on gambling. “This hedge fund won’t invest
in stocks or bonds, or any type of business. It’s going to be a fund
that only places bets,” Cuban said in a posting on his Web log,
MarkCuban.com. He promised in his posting to hire top professional
gamblers to figure out what bets to place or what games to play. Their
performance of gambling wins and losses, of course, will generate the
return for investors, Cuban said. He declined to comment further on
his hedge fund plans in response to an e-mail message from The
Washington Post on the subject. Some funds already invest in the
gaming sector, albeit through trading shares of companies operating in
that industry. The Vice Fund, based out of Texas, for example, is a
mutual fund that invests only in companies with ties to weaponry,
smoking, drinking and gambling. Other funds take great pains to avoid
so-called “sin” stocks. Shariah Funds, managed by Meyer Capital
Partners of New Canaan, Conn., invests according to Islamic law,
avoiding companies associated with gambling, alcohol, tobacco and food
processing (because of dietary restrictions). “We look at a company’s
primary business first, and then we look at their financials,” said
Sheikh Yusuf Talal DeLorenzo, an Islamic scholar and adviser to the
fund. DeLorenzo noted that although Islamic law prevents the taking of
interest and allows investments only in tangible assets, he has
configured a way to hedge using futures and options. The money behind
Shariah Funds comes from wealthy investors in the Middle East and
Asia, DeLorenzo said. Other groups with religious affiliations have
also launched hedge funds. Last year, Catholic Institutional
Investors, a coalition of five Catholic health care organizations,
launched the Good Steward Fund. And the Church of Jesus Christ of
Latter-day Saints has a private investment fund — Ensign Peak
Advisors — to serve its Mormon constituents. Mission-oriented hedge
funds fall into a category known as “socially responsible” investments
that permit investors to grow financially while still adhering to
their own individual social or moral preferences. Investment managers
typically screen potential investments so that they match a client’s
beliefs. Socially responsible investing is one of the fastest-growing
sectors in the financial services industry, with more than $2 trillion
of assets being managed in such fashion, according to the Social
Investment Forum, a District-based nonprofit organization providing
research and education. The anti-Coke campaign has been called by its
founders a “smart boycott.” Goldsmith said he believes he can push
Coca-Cola shares to as low as $22. They closed at $41.51 in Thursday
trading on the New York Stock Exchange. U.S. financial markets were
closed yesterday. “Coke represents the cutting edge of a global
monoculture that is undermining real human diversity,” said Goldsmith,
29, who is the son of a famed British corporate raider, the late Sir
James Goldsmith. With a reported inheritance of about $700 million,
Goldsmith could wage a formidable battle against Coca-Cola via his
family’s magazine, the Ecologist, where he is founding editor. Coca-
Cola has issued numerous statements clarifying its positions on the
corporate issues at which Goldsmith and Keiser are taking aim. “This
so-called campaign is based on blatant falsehoods,” said Ben Deutsch,
a Coca-Cola spokesman. “It’s unfortunate that anyone would attempt to
hurt Coke shareholders . . . without the facts.” Investors in the
unnamed anti-Coca-Cola fund will get a stated annual return akin to a
long-term Treasury bond. But, after a 2 percent management fee, the
rest of profits will go to aid disaffected farmers in India, AIDS
organizations in Africa and human rights monitoring groups in Central
and South America. “We’re now focused on closing a $100 million fund
by the end of 2005,” said Keiser, who founded Karmabanque.com, the
Web site through which the anti-Coca-Cola campaign is being managed.

MAKING A MARKET
http://www.dmreview.com/bissues/20070301/2600311-1.html?bir=1
An Internal Futures Market
BY Robert Charette / March 2007

“The economic problem of society is thus not merely a problem of how
to allocate “given” resources … it is a problem of the utilization
of knowledge which is not given to anyone in its totality.” Friedrich
Hayek, the 1974 Nobel Prize winner in economics, wrote these words in
his 1945 classic essay, The Use of Knowledge in Society, in which he
argued that centrally-planned economies are unable to efficiently
allocate societal resources because their planners, no matter how
smart they were, would never have all the information required to make
the correct decisions. Hayek, on the other hand, asserted that pricing
systems, (e.g. stock markets), which reflect the collective knowledge
of a myriad of individuals is a much better approach for performing
resource allocation decisions. Market systems which signal the value
of a resource through a numerical index (i.e. price), he said, are “a
mechanism for communicating information”, with the “most significant
fact about this system [being] the economy of knowledge with which it
operates, or how little the individual participants need to know in
order to be able to take the right action.”

The problems that Hayek said governments face in best allocating
resources are nearly identical to what most organizations face. How
can the corporate planners have access to all of the information they
need to best allocate scarce corporate resources to increase
shareholder value? And, as Dominic Dodd and Ken Favaro, in their book,
“The Three Tensions,” point out, is the best way to increase
shareholder value to increase corporate profitability or growth?
Allocate resources for results today or tomorrow? Allocate resources
to increase the performance of the corporation as a whole or
performance of standalone business units? Could it be some combination
of all six?

The Future Value of Decisions
The growth of business intelligence over the past decade reflects the
idea that corporate planners – be they on the corporate executive
staff, business managers or line managers – need better information to
make their allocation decisions, and properly structured BI can often
help fulfill this need. However, the focus of BI in many instances
seems to be more on answering questions about “what was” or possibly
on “what is,” data that reflects the past or recent past – rather than
on what will be. The current focus on BI corporate dashboards is an
example. What planners truly need is information about “what might
be.” – i.e., what is the future value of present decisions?

Markets systems fit this bill nicely since they are focused primarily
towards predicting the future. A corporation’s stock price, for
instance, reflects not only information about the corporation’s
current course and speed but also its projected course and speed as
perceived by its current investors and non-investors alike. When a
corporation releases its quarterly earnings and investors react
positively or negatively, for example, they are making a collective
judgment on the corporation’s future financial risks, not its current
state of play.

It has long been recognized that collective judgment provided by
market systems can be very useful in making accurate predictions about
future events, but it has only been in the past 30 years or so that
“maverick” economists such as Vernon Smith (who won a Nobel prize in
economics in 2002), Charles Plott, John Ledyard and Robert Forsythe
have focused on how to use the predictive power of markets for uses
other than for managing financial risk. As detailed in James
Surowieki’s recent book, “The Wisdom of Crowds,” the theoretical work
of these four economists, combined with Internet’s ability to quickly
form markets, has spawned the creation of a number of prediction/
information markets, like Forsythe’s Iowa Electronic Market, which is
used to predict elections, TradeSports in Ireland which focuses
primarily on sporting events, and the Hollywood Stock Exchange, which
focuses on the various goings-on of the film industry.

Market Systems and the Enterprise
In conjunction with using markets for “public” prediction purposes, a
number of economists have investigated the use of predictive markets
that also could be used by corporations internally. Economist Robin
Hanson (who studied under Plott), came up with the concept of the idea
or innovation future market, where specific questions of some future
event could be evaluated for its likelihood of occurrence. One
question of interest, Hansen says, might be the probability that the
greenhouse effect and other causes will have raised the average world
sea levels by 1 meter by 2030. By establishing a market focused on
that question, a rapid consensus – in the form of a probability that
is related to the going market price – can be reached about this
particular issue.

Over the past decade, a small but growing number of companies have
been creating their own internal idea, innovation or prediction
markets. For instance, France Telecom Group created an internal
predictive market called Project Destiny that examines certain
technological trends. A France Telecom employee is able to place bets
concerning different technology questions, for example, will Skype
reach “X” million of users by a given date? France Telecom believes
that by posing questions whose outcome can affect its business,
executives and managers can be better prepared to address them. Of the
18 questions posed, Project Destiny claims its internal market to have
correctly predicted 16 of them.

Similarly, Yahoo, in a joint venture with O’Reilly Media, has created
a prediction market called the Tech Buzz Game. The game is made up of
a number of sub-markets that match a small number of rival
technologies against one another, Internet browsers for instance. The
object of the game is to anticipate a technology’s “buzz” as measured
by the number of Yahoo!Search users seeking information about that
individual technology. Yahoo hopes by conducting this game it can
evaluate whether power of prediction markets can help forecast high-
technology trends.

Google has created an internal predictive market that according to
Google, aims to “forecast product launch dates, new office openings,
and many other things of strategic importance to Google.” Google says
that over 20 percent of its staff has bid in the 100-plus online
markets it has run, covering over 350 events in more than 40 different
topic areas. Google says that the online market prediction accuracy is
about 70 percent.

HP Labs created its own internal market system and supporting software
called BRAIN (Behaviorally Robust Aggregation of Information in
Networks) to help predict certain critical business issues such the
quarterly sales forecast or the price of DRAM memory chips in one,
three or six months. The importance of being right about a forecast
can have major impact. If a chip price forecast is off by just a
couple of pennies, a significant impact on HP’s hardware profit margin
can result. HP has found that its internal market predictions are
often more accurate than the company’s “official” forecasts (for
instance, six out of eight times the market was better at predicting
computer sales). HP is now working with Pfizer pharmaceutical to
create an internal prediction market using BRAIN starting in 2007.

Many other companies are experimenting with or creating different
types of internal prediction markets: Microsoft (for predicting
product ship dates); GE (for discovering new ideas); Eli Lilly (for
discovering new drug candidates); BP Amoco (for reducing carbon-
dioxide emissions); Intel (for allocating computer chip production),
and; Siemens AG (for improving the accuracy of product developments).
As these companies and others report their experiences with the
application of internal prediction markets, it is likely that others
will follow suit.

Making a Market
For internal markets (or any market for that matter) to work well, a
number of requirements must be met. First, there has to be a diversity
of opinion: the more diverse the opinion, the better the prediction.
Second, the market participants need to have independent opinions. If
these first two requirements are not met, you tend to get a “group
think” result. Third, decentralized information sources need to exist,
in other words, unique levels of knowledge should be held by the
market participants. Finally, the information from everyone needs to
be aggregated in some way. A stock’s price, as Hayek says, serves to
aggregate information. If these are not met, then the prediction value
of the market starts to decline.

While the concept of using internal predictive markets is very
seductive, their use should not be seen as end-alls or be-alls. As Max
Keiser, the inventor of the technology that runs the Hollywood Stock
Exchange, warns, “Markets (are) unable to forecast the future with any
certainty.” This can readily be seen from just a couple of the
examples cited above. They are generally better than other predictive
measures, such as polling or Delphi techniques, but they shouldn’t be
endowed with powers they don’t have.

Furthermore, while markets may be good at predicting certain events,
they don’t tell you “why” events are going to happen. For instance,
some companies have used internal markets to predict software delivery
schedules, which proved more accurate than the internal estimates.
However, “the market” couldn’t indicate why the software was going to
be delivered late – or how the development approach could be improved
so that future delivery dates could be met. It may be that by using BI
analytics with prediction markets this issue could be addressed.

As far as I am aware, no one has tried to tie BI in with the use of
prediction markets, but it would seem to be a very natural fit. For
instance, access to BI systems could allow some market participants to
increase the level of decentralized or special knowledge (think
insider trading information), which could help improve market
predictions. Or, BI’s ability to aggregate corporate information in
novel ways could be used to help create interesting questions for an
internal market to contemplate (remember, markets don’t ask questions
– someone else has to). Or, from a risk management perspective, an
internal market used with BI analytics could help increase the
understanding of how to manage the three elemental tensions –
profitability or growth, results today or tomorrow, synergistic or
stand alone performance – better or to create improved contingency
plans based as a result of a set of internal market predictions.

Internal prediction markets are only in their infancy, but I expect
them to become more common in the next decade. For those in the BI
field, now is a good time to see how BI and market information can be
tied together.

COMEDY OR TRAGEDY? MAX KEISER (cont.)

U.S. DOLLAR IS A ‘TOXIC CURRENCY’

http://www.youtube.com/watch?v=cI55epbbtU0

MIDDLE EAST GOLD-BACKED CURRENCY IN DEVELOPMENT

http://www.youtube.com/watch?v=vnfeBKa4FjE

CRASHING THE DOLLAR

http://www.youtube.com/watch?v=4ItC_nT4rS8

BETTING ON IRAN WAR, ETC

http://www.youtube.com/watch?v=J1AMs5o7l-g

CALLED IT

http://www.youtube.com/watch?v=ktBDj8VogPo

THE CARRY TRADE (ICELAND, 2007)

http://www.youtube.com/watch?v=JjglR2KYz5o


http://www.youtube.com/watch?v=MPRoQ7OxZAQ

ONLINE POLITICAL BETTING
http://www.iht.com/articles/2001/07/11/edlet_ed2__2.php
Playing Virtual Markets / July 11, 2001
Regarding the report “Just a Game? Some Virtual Traders Aren’t Playing
Around” (July 7):

It is true that virtual markets are better at predicting outcomes than
polls, but markets are horrible predictors of anything. If the markets
did not continuously defy prediction there would be no risk, and
without risk there would be no speculation, and without speculation
there would be no liquidity, and without liquidity there would be no
markets. The reason markets work as an effective means of raising
capital is precisely because they are so unpredictable, which invites
speculation, which invites liquidity. Anyone who believes that he or
she can predict an outcome by watching virtual markets like
NewsFutures and the Hollywood Stock Exchange does not understand
markets. One prediction that appears guaranteed, however, is that
people who invest in a company that bases its revenues on predicting
outcomes by predicting markets will lose their money.

Max Kieser, Villefranche-sur-Mer, France.

REPUTATION MATTERS
http://www.thing.net/~rdom/ecd/ecd.html
http://www.attac.org/

KARMABANQUE — CONSUMER STOCK BOYCOTTS
http://www.enoughfanzine.com/index.php?cID=96&view=columns_detail

Consider a May 9, 2004 article by Simon Romero in The New York Times,
“War and Abuse Do Little to Harm U.S. Brands.” Romero begins: “When
American troops moved into Iraq last year, European executives at the
Ford Motor Company braced for an adverse consumer reaction.” Niel
Golightly, a Ford spokesman in Cologne, Germany added: “Our sales and
image and market share are things we monitor extremely closely. So the
potential fallout risk from Ford being perceived as a symbol of
America’s foreign policy is something we’re always looking at.” Romero
goes on to claim that U.S. corporations have thus far remained
relatively unscathed by the rampant anti-American feelings across the
globe. “McDonald’s, one of the largest private-sector employers in
Brazil, is sometimes the target of taunts in left-wing demonstrations
on Avenida Paulista, one of Sâo Paulo’s main streets, but it is also
common to see demonstrators eating at McDonald’s after the rallies,”
he explains. “For the most part, boycotts announced against American
products last year have fizzled out.”

An example of this took place just before the U.S. invaded Iraq in
March 2003. “The Muslim Consumer Association of Malaysia called for a
boycott of Coca-Cola,” writes Romero, “and there was a flurry of news
media reports on the sudden popularity of local brands of cola.”
According to Marimuthu Nadason, secretary general of the Federation of
Malaysian Consumers Associations, that boycott was essentially
ignored. “Anyone can call for a boycott,” Nadason said, “but it won’t
work.” Not so, says Max Keiser, founder of Karmabanque (http://
http://www.karmabanque.com), where “the civil disobedience of Gandhi” is
combined with “the financial savvy of George Soros.”

“You don’t need guns or money to destroy American companies-and the
environmental catastrophes they thrive on,” Keiser declares. “All we
ask is that you focus your dissent on one company at a time and we ask
that you focus that dissent/attention on a company that is vulnerable
to the low cost weapon of choice for activists: the boycott.”

Keiser points to the recent “carbohydrate boycott”-and resulting
plummet in the stock price-of Krispy Kreme donuts. “These companies
are not able to defend against a boycott or organized dissent,” he
says. According to Karmabanque’s Boycott Vulnerability Ratio-and
contrary to unsuccessful efforts in Malaysia-Coca Cola is about as
vulnerable to boycott as a corporation can get. “This means that for
every dollar I do not spend on Coke, I am erasing 5 dollars off their
market capitalization (number of shares outstanding times the current
stock price),” says Keiser. The number, he explains, is devised by
dividing market capitalization by trailing twelve-month sales.

The “magic,” says Keiser, occurs when “word gets out to the 800
billion dollar hedge fund industry-beholden to no one-that there is a
very large boycott of Coke’s stock. A big boycott equals loss of
revenues equals lower stock price. Mr. Hedge Fund sells short stock (a
bet that the stock price will go down) in Coke. Sure enough, the stock
price is going down. More boycotters, cost free to them, join the
boycott and more hedge money goes into selling short the stock. Now,
my $1 of dissent, multiplied times 5, is multiplied again thanks to
the hedge money.

“Both hedge funds and activists benefit when a target company’s stock
price declines,” says Keiser. “The hedge funds get dollars, while the
activists get a new way to pressure companies by attacking their stock
price. At some point, the stock price gets so low that the company
cries ‘uncle’ and gives in to the pressure group is some way.”

CONTRARIAN ACTIVISM + LEARNING TO THINK IRRATIONALLY
http://www.stwr.org/global-financial-crisis/get-ready-for-a-financial-tsunami.html
http://www.stwr.org/economic-sharing-alternatives/since-the-brandt-report.html
http://www.stwr.org/climate-change-environment/george-soros-irrationality-and-contrarian-activism.html
George Soros, irrationality and contrarian activism / BY Max Keiser

The typical activist approach of trying to get rich countries and
companies to ‘share the world’s resources’ fails to take into
consideration how the individuals in these countries and companies got
rich to begin with. What activists don’t understand is that the
process of accumulating wealth is rarely a rational, direct path.
Trying to appeal to the rich to act rationally, therefore is, in most
cases, folly.

Activists need to get into the heads of the rich and understand that
in order to create above-average wealth it is necessary for the rich
to think in ways no average (read: poor) person is thinking.
Financiers and speculators call this form of antagonism-for-profit
‘contrarianism’ and it forms the basis of an entire school of finance
that attempts to figure out where the ‘crowd’ is heading, and then do
the opposite. Some quick examples of how this works; 1) the put-call
ratio in the options markets. What this number tells contrarians is
where most of the speculators are making bets in the markets, and as
most speculation ends up in losses it makes sense, according to the
contrarian doctrine, to bet the other way. 2) Another contrarian
speculating strategy is to look at where professional money managers
are placing their bets with their professionally managed funds. Again,
since most professional money managers fail to ‘beat the market,’ it
makes sense to do the opposite of whatever they’re doing.

Probably the king of contrarianism is the most successful investor in
the history of Wall Street: George Soros. He’s taken the contrarian
concept and developed it even further into what he calls his theory of
‘reflexivity’ or the ‘human uncertainty principle.’

What Soros has observed about markets is that contrarianism itself can
breed second and third generations of contrarianism that is self
referential or ‘reflexive’ that, instead of doubling back and ending
up where it started, has the power to change the underlying market
fundamentals in ways that make the contrarian assumption the de factor
market norm. When such situations develop, it’s only a matter of time
before the market realizes it’s ‘smoking its own belly button
lint’ (my expression) and we get what Soros calls, a ‘return to
equilibrium’ i.e., a crash, like we saw in stocks in 1929, 1987 and
2000. For the professional trader, identifying these inflection points
where the market suddenly realizes that its assumptions are worth
zero, great fortunes can be made betting the other way. Soros caught
the crash in the English pound back in 1992 using this technique and
pocketed over 1 billion dollars in one day.

The point I’m making here for activists is that activists’ approach to
changing the way business treats the environment relies almost
entirely on trying to get business people to act more rationally. And
yet, to get to where they got, these business leaders have relied
mostly on obeying the voices in their head that the status quo claims
are irrational. This has set up a paradox making NGO’s lives more
difficult. Whatever an NGO thinks is a good idea, is probably a
terrible way to make money in the minds of most businessmen. They’ll
listen to what an NGO has to say, but only to know what not to do if
they want to continue making money. It’s like what Milton Friedman
advises corporations to do when an NGO walks into their office with a
list of demands, and I paraphrase; ‘listen politely, then figure out
if there’s any money to be made with what’s been said, if not, use the
meeting as a PR opportunity, but that’s all.’

So does this mean NGO’s should give up? No. What it does mean,
however, is that NGO’s should consider adopting new strategies that
will tap into businessmen’s love of the irrational. For
environmentalists, I think carbon trading offers a huge opportunity to
turn the tables on business and use the power of irrationality for a
positive change.

Take a group like Greenpeace for example. They have over 100 million
dollars sitting in the bank collecting money market interest. For all
intents and purposes, this money is what Wall Street would call, ‘dead
money.’ I propose the following. Greenpeace should start organizing a
banking crusade with their money and other NGO money (NGO’s
combined operating budgets are worth 1 trillion dollars) and start
buying Carbon Credits in the open market for the current price of
approximately 8 dollars a ton. (the EU has started a program of
capping carbon emissions for corporations; but giving them the
opportunity to go over their cap by buying ‘credits’ from companies
whose carbon output is below the cap).

This would set up an irrational chain reaction, each part of which
represents a net positive for the environment. First, the price of
carbon credits will be pressured upward thanks to the speculative
buying of a new force in the market, NGO’s. Corporations who are
banking on the price of carbon credits to remain in a certain range
will be forced to recalculate their assumptions and in many cases will
be forced to buy more credits than they had planned to in the short
term to give themselves the kind of hedging protection these carbon
credits offer for their carbon abuse. This will drive the price even
higher. As demand goes up, so does the price and now we get to the
irrational part; higher carbon prices will incentivize companies
across the business spectrum to put forward various carbon-efficiency
schemes as a way to make money with their excess credits. The money a
company makes chasing carbon efficiencies could equal if not eclipse
the profits made burning carbon. The government in turn, has the
ability to lower the carbon caps greasing this contrarian cycle even
more by making carbon more expensive, thus providing more incentive to
produce greater efficiencies.

On paper, activists will look at this and balk. They don’t like the
idea of commoditizing nature. They don’t understand why a company
would engage in such a scheme. They don’t like the fact that the whole
thing seems irrational, but that’s the point. Business today runs on
irrationality and until NGO’s adapt, they’ll always be behind the
curve. You would think NGO’s would have already figured this out. They
know for example that ExxonMobil’s business model is irrational to the
bone. ExxonMobil extract irreplaceable natural resources for virtually
nothing, sell them for a fraction of their replacement costs and then
we burn them without ever having to pay the environmental costs; all
this resulting in parts of CO2 per million in the atmosphere breaching
the ‘can’t go back’ levels where the species (ours) is put on the
extinction watch list. ExxonMobil’s business model is irrational and
suicidal. NGO’s know this, so why do they insist in trying to get
Exxon to act rationally when nothing in Exxon corporate DNA suggests
they even understand what that word means.

Exxon is not rational, but they are profitable. For NGO’s to attack
their rationale is a non-starter because the company knows it’s
irrational and doesn’t care. Environmentalists, to win against this
insanity, must tear a page out of the irrational’s handbook in order
to effectively combat the current trends blighting our futures. The
carbon trading scheme mentioned above is a step in that direction. As
distasteful as it must seem for NGO’s to drink the ‘Koolaide’ that
runs business, not to do so at this point is completely irrational.

TULIPS, FOR THE GENERALIST
http://www.itulip.com/
MARKET REFORM
http://thesanitycheck.com/
ARTHUR PIGOU
http://gregmankiw.blogspot.com/2006/10/pigou-club-manifesto.html
http://en.wikipedia.org/wiki/Pigovian_tax
ANARCHO-CAPITALISM
http://en.wikipedia.org/wiki/Anarcho-capitalism
http://praxeology.net/anarcres.htm#heritage
http://www.ozarkia.net/bill/anarchism/faq.html
MURRAY ROTHBARD
http://en.wikipedia.org/wiki/Murray_Rothbard
http://www.mises.org/about/3249
http://www.mises.org/literature.aspx?action=author&Id=299

PROPOSAL: DECENTRALIZE MONETARY POLICY
http://gregmankiw.blogspot.com/2006/07/how-to-decentralize-monetary-policy.html
How to Decentralize Monetary Policy / July 21, 2006

Today’s Wall Street Journal reports: “Federal Reserve policy makers
raised interest rates last month in part because markets expected them
to do so, and they figured failure to act might hurt their credibility
as inflation fighters, minutes of the meeting suggest.”

Some people might view this response as wimpy–doing what financial
markets want rather than showing real leadership. But one can view
this approach as a step toward decentralizing monetary decision
making. Suppose the Fed has a long-term inflation target. And suppose
the Fed followed this rule: “Look at the market’s forecast of interest
rates and inflation over the next few years. If the market expects
inflation above target, set a path for interest rates a bit higher
than the market expects. If the market expects inflation below target,
set a path for interest rates a bit lower than the market expects. If
the market expects inflation to come in on target, set a path for
interest rates equal to what the market expects.”

This might seem circular: The Fed is responding to the market, and the
market is responding to the Fed. But there is nothing wrong with that.
Economists are used to simultaneity. Of course, the market will catch
on to the policy, but that’s okay. In fact, it is ideal. We end up in
a fixed-point equilibrium in which the market expects the Fed will hit
its inflation target. In this equilibrium, the market’s forecast of
interest rates will tell the Fed what it needs to do to accomplish
what it wants to accomplish.

ORGANIZING WITHOUT ORGANIZATIONS
http://cyber.law.harvard.edu/interactive/events/2008/02/shirky
http://www.herecomeseverybody.org/
http://www.shirky.com/

FIELD RECORDINGS
http://betting.betfair.com/specials/politics-betting/prediction-markets/the-betfair-prof/whats-the-connection-between-a-1906-poultry-exhibition-and-t-180908.html
What’s the connection between a 1906 poultry exhibition and the 2008 US election?
BY Leighton Vaughan Williams / 18 September 2008

Sir Francis Galton was an English explorer, anthropologist, scientist,
who was born in 1822 and died in 1911. To students of prediction
markets he is best known, however, for his visit, at the age of 85, to
the West of England Fat Stock and Poultry Exhibition, and what
happened when he came across a competition in which visitors could,
for sixpence, guess the weight of an ox.

Those who guessed closest would receive prizes. About 800 people
entered. Ever the scientist, he decided to examine the ledger of
entries to see how clever these ordinary folk actually were in
estimating the correct weight. In letters to ‘Nature’ magazine,
published in March of 1907, he explained just how ordinary those
entering the competition were. “Many non-experts competed”, he wrote,
“like those clerks and others who have no knowledge of horses, but who
bet on races, guided by newspapers, friends, and their own fancies …
The average was probably as well fitted for making a just estimate of
the dressed weight of the ox as an average voter is of judging the
merits of most political issues”.

The results surprised him. For what he found was that the crowd had
guessed (taking the mean, i.e. adding up the guesses and dividing by
the number of entrants) that the ox would weigh 1,197 pounds. In fact,
it weighed 1,198 pounds! The median estimate (listing the guesses from
the highest to the lowest and taking the mid-point) was also close
(1,207 pounds, and therefore still within 1% of the correct weight)
but not as close. Some have argued that Galton himself favoured the
use of the median rather than the mean, and so was double-surprised
when the mean beat the median. Others have argued that the point is
incidental and what this tale demonstrates about the wisdom of the
crowd is more important than such a fine statistical detail.

I think that both these points of view contain some merit. The power
of the market to aggregate information is indeed a critically
important idea. But it is also important to be able to distinguish in
different contexts which measure of the ‘average’ (the mean, the
median, or perhaps some other measure) is more suited to the purpose
at hand.

Take the stream of opinion polls which contribute to the collective
knowledge that drives the Betfair market about the identity of the
next President of the United States. If five are released, say, on a
given day, what is the most appropriate way of gauging the information
contained in them? Should we simply add up the polling numbers for
each candidate and divide by the number of polls, or should we list
them from highest polling score to lowest and take the mid-point. The
convention adopted by sites such as http://www.realclearpolitics.com is to
take the mean. But is there a better measure than the mean of
discerning the collective wisdom contained in the polls, and if so,
what is it? The jury is still deliberating.

CONTACT
Leighton Vaughan Williams
http://www.ntu.ac.uk/research/school_research/nbs/staff/61441gp.html
http://www.ntu.ac.uk/nbs/business/specialist_centres/political_forecasting.html
http://www.predictionmarketjournal.com/
email : leighton.vaughan-williams [at] ntu.ac [dot] uk

COLLECTIVE BEST GUESS CORRECT WITHIN A FURLONG
http://betting.betfair.com/specials/politics-betting/prediction-markets/the-betfair-prof/the-betfair-prof-question-how-do-you-find-a-missing-submarin-080408.html
“Question: How do you find a missing submarine? Answer: Ask the audience”
BY Leighton Vaughan Williams / 8 April 2008

During a car journey between Nottingham and Warwick the other week I
was told a story about the value of crowd wisdom in turning up buried
treasure. The story was that by asking a host of people, each with a
little knowledge of ships, sailing and the sea, where a vessel is
likely to have sunk in years gone by, it is possible with astonishing
accuracy to pinpoint the wreck and the bounty within. Individually,
each of those contributing a guess as to the location is limited to
their special knowledge, whether of winds or tides or surf or sailors,
but the idea is that together their combined wisdom (arrived at by
averaging their guesses) could pinpoint the treasure more accurately
than a range of other predictive tools. At least that’s the way it was
told to me by an economist who was in turn told the story by a
physicist friend.

To any advocate of the power of prediction markets, this certainly
sounds plausible, so I decided to investigate further. Soon I was
getting acquainted with the fascinating tale of the submarine USS
Scorpion, as related by Mark Rubinstein, Professor of Applied
Investment Analysis at the University of California at Berkeley. In a
fascinating paper titled, ‘Rational Markets? Yes or No? The
Affirmative Case’, he tells of a story related in a book called ‘Blind
Man’s Bluff: The Untold Story of American Submarine Espionage’ by
Sherry Sontag and Christopher Drew.

The book tells how on the afternoon of May 27, 1968, the submarine USS
Scorpion was declared missing with all 99 men aboard. It was known
that she must be lost at some point below the surface of the Atlantic
Ocean within a circle 20 miles wide. This information was of some
help, of course, but not enough to determine even five months later
where she could actually be found.

The Navy had all but given up hope of finding the submarine when John
Craven, who was their top deep-water scientist, came up with a plan
which pre-dated the explosion of interest in prediction markets by
decades. He simply turned to a group of submarine and salvage experts
and asked them to bet on the probabilities of what could have
happened. Taking an average of their responses, he was able to
identify the location of the missing vessel to within a furlong (220
yards) of its actual location. The sub was found.

Sontag and Drew also relate the story of how the Navy located a live
hydrogen bomb lost by the Air Force, albeit without reference in that
case to the wisdom of crowds. Perhaps, though, that tale is too secret
yet to be told!

What then, I wonder, would those scientific giants, Karl Pearson and
Lord Rayleigh, have made of it all? It was their correspondence, you
may recall, in the pages of the scientific journal, ‘Nature’, which
answered the classic query of where to find the drunk you left in a
field. “Where you left him,” was the answer. Which is all very well,
of course, if you were sober enough yourself to know exactly where
that might have been!

BIAS BUBBLES
http://en.wikipedia.org/wiki/Futarchy
http://hanson.gmu.edu/vita.html
http://hanson.gmu.edu/ideafutures.html
http://hanson.gmu.edu/policyanalysismarket.html
http://hanson.gmu.edu/futarchy.pdf
Information Successes of Speculative Markets / BY Robin D. Hanson

While democratic policy seems to suffer from information failures,
speculative markets show striking information successes. Most markets
for stocks, bonds, currency, and commodities futures are called
speculative markets because they allow people to bet on future prices
by buying or selling today in the hope of reversing such trades later
for a profit. Such opportunities to “buy low, sell high” occur when
identical durable items are frequently traded in a market with low
transaction costs. Given such opportunities, everyone is in essence
invited to be paid to correct the current market price, by pushing
that price closer to the future price. Such invitations are accepted
by those sure enough of their beliefs to “put their money where their
mouth is,” and wise enough not to have lost too much money in previous
bets. Betting markets are speculative markets that trade assets that
are specifically designed to allow people to bet on particular matters
of fact, such as which horse will win a race. The final values of such
assets are defined in terms of some official final judgment about the
fact in question. By construction, such assets are durable, identical,
and can be created in unlimited supply. Betting and other speculative
markets have been around for many centuries, and for many decades
economists have studied the ability of such markets to aggregate
information. The main finding of this research is that such markets
tend to be relatively “efficient” in the sense that it is hard to find
information that has not been incorporated into market prices (Lo,
1997; Hausch, Lo, & Ziemba, 1994). The main possible exceptions seem
to be long-term aggregate price movements, and a long-shot bias in
high-transaction-cost betting markets.

Many have suggested that asset markets have too much long-term
aggregate price variation, such as stock market “bubbles” (Shiller,
2000). Risk and delay most discourage speculators from correcting such
pricing errors, and irrational traders can actually gain superior
returns (though not utility) from irrationally-large risk-taking (De
Long, Shleifer, Summers, & Waldmann, 1990). Long-term aggregate
prices, however, are also where it is hardest to empirically
distinguish irrationality from rational information about fundamental
economic change (Barsky & De Long, 1993), and where selection effects
most pollute our data (Jorion & Goetzmann, 2000). Even if speculative
markets are distorted by irrational bubbles, it is not clear that any
of our other information institutions do better. For example, no other
information institution in our society, such as academia or news
media, consistently predicted that we were over-investing during the
“dotcom” bubble. Yes some individual academics or reporters so
predicted, but so did some individual stock investors. Over the last
few decades economists have also studied speculative markets in
laboratory experiments, where they have more control over trader
information and preferences. Such experiments find that speculative
markets aggregate information well, even with four traders trading $4
over four minutes, and even when such traders know little about their
environment or other traders (Sunder, 1995). For example, traders can
aggregate information well when they are experienced in their role and
abstractly know the payoffs of players in other roles (Forsythe &
Lundholm, 1990). If the structure of traders’ information is complex
enough relative to the number of assets available to trade, however,
information “traps” can occur where individual traders have no direct
incentive to reveal their information (Noeth, Camerer, Plott, &
Webber, 1999). Such problems are typically, though not always, reduced
by allowing trading of more kinds of related assets.

Absolute accuracy levels, however, are not the key issue. The key
policy question about any institution is how it performs relative to
alternative institutions dealing with the same situation. A few
studies have presented field data on this question, directly comparing
real world speculative markets with other real world institutions for
aggregating information. For example, racetrack market odds improve on
the prediction of racetrack experts (Figlewski, 1979). Florida orange
juice commodity futures improve on government weather forecasts (Roll,
1984), Oscar markets beat columnist forecasts (Pennock, Giles, &
Nielsen, 2001), and gas demand markets beat gas demand experts
(Spencer, 2004). Betting markets beat major national opinion polls 451
out of 596 times in predicting U.S. presidential election results
(Berg & Rietz, 2002). Finally, betting markets beat Hewlett Packard
official forecasts 6 times out of 8 at predicting Hewlett Packard
printer sales (Chen & Plott, 2002; Plott, 2000). Unfortunately, no
studies have directly compared estimates from speculative markets to
estimates from academic-style institutions We do know, however, that
those who do best at betting on horse races are smart in ways they can
not articulate, and in ways unrelated to I.Q. (Ceci & Liker, 1986).
Academic-style institutions, in contrast, seem largely limited to
aggregating articulated knowledge from those with high I.Q. Academic
institutions put a great deal of weight on the opinions of experts
relative to ordinary people. And while speculative markets may put
less weight on experts, it does not seem that they place too little;
if anything, they seem to put too much weight on experts, both public
and private (Figlewski, 1979; Metzger, 1985; Lichtenstein, Kaufmann, &
Bhagat, 1999). How can betting markets beat opinion polls when they
use the same fallible human sources?

A study of election betting markets found that traders overall
suffered from standard biases such as expecting their favored
candidate to win, and seeing that candidate as having won debates.
“Market makers,” however, were found to be on average much less
biased. These were traders who made offers that others accepted,
rather than accepting offers made by others. Compared to other
traders, market makers invested twice as much, traded more, earned
higher returns, and made one sixth as many errors. They also tended to
be more highly educated, and experienced at trading (Forsythe, Nelson,
Neumann, & Wright, 1992; Forsythe, Rietz, & Ross, 1999). Betting
markets seem to meet or beat competing institutions in part because of
the disproportionate influence such markets give to rational and
informed traders. We also know more generally that people with
stronger incentives to be accurate show fewer cognitive biases
(Kruglanski & Freund, 1983). There are costs to create and run
markets, so there is a limit to the number of markets that can be
created. However, while it was once thought that speculative markets
could only be viable if they annually traded millions of dollars, say
10,000 trades of $100 each (Carlton, 1984), it is now clear thatmuch
smallermarkets are viable. For example, laboratory experiments
consistently show the viability of very small markets. Low internet
transaction costs are also now spurring a burst of innovation
exploring a great many new market forms (Varian, 1998; Shiller, 1993;
Hanson, 2003a). Play money web markets are now available where
anyone can create new betting topics, and where a handful of traders
betting play pennies once every few weeks are typically successful at
aggregating information into prices (see, for example, hsx.com,
ideosphere.com (Kittlitz, 1999; Pennock et al., 2001)).

Gambling and securities regulations make it very difficult, however,
to create real money markets like these play money markets. This
regulatory block on financial innovation should not be surprising,
because all of our familiar financial institutions were once
prohibited by laws against gambling and usury. For example, a
thirteenth century decree by Pope Gregory IX prohibited maritime
insurance as usury. The 1570 Code of the Low Countries outlawed life
insurance as gambling (Brenner & Brenner, 1990). In response to
speculation in the South Sea Bubble, in 1720 Britain basically banned
the formation of joint-stock companies (Kindleberger, 1984). And
futures markets were banned as gambling in the late nineteenth century
U.S. (Brenner & Brenner, 1990). The history of financial regulation
can thus be roughly summarized as everything being banned as gambling
(or usury) until an exception was granted for some newly legitimized
higher purpose. For each purpose, such as capitalizing firms, insuring
idiosyncratic risk, or insuring common risk, laws and regulations were
created to ensure that generic gambling could not slip in. We may thus
reasonably hope to someday legitimate, and thereby legalize, markets
whose main function is to aggregate information on questions that
matter (Bell, 1997).

OBJECTIVITY
http://www.aynrand.org/site/PageServer?pagename=reg_ls_capitalism_without_guilt
http://www.aynrand.org/site/News2?page=NewsArticle&id=21639
Ayn Rand Saw This Coming / October 9, 2008
“Despite overwhelming evidence that government policies caused the
current financial crisis, Congress is blaming businessmen,” said Yaron
Brook, executive director of the Ayn Rand Center for Individual
Rights. “What’s worse, the capitalists who have been shackled with
unprecedented regulatory burdens are unable to defend themselves
morally. Though the events are different, this pattern of abuse and
submission is straight out of Ayn Rand’s Atlas Shrugged. “The cycle
starts with government intervening into the economy and imposing
regulations and controls on business. This distorts the free market,
leading to economic dislocations. When the problems caused by these
distortions inevitably follow, everyone blames the free market and its
greedy capitalists. The proposed solution? More government controls.
Over the years, conservative critics of creeping government have
repeatedly exposed this illogic but have always been helpless to
explain why the cycle keeps repeating, decade after decade. “The
pattern keeps recurring because businessmen are willing to take the
blame. From capitalism’s inception, its defenders have been morally
disarmed by the widespread view that self-interest is morally suspect,
and disinterested service to others is a moral ideal. So each new
spate of controls has been grudgingly accepted as a fair price to pay
for society’s toleration of the selfish pursuit of profit. “Atlas
Shrugged depicted a society in economic collapse due to this recurring
cycle, and today’s parallels are obvious. Government manipulation of
money, credit, and lending standards over several decades caused the
mess we’re in. Now, the offered solution is more of the poison that
sickened the economy–more bailouts, more cheap money, more
government-guaranteed loans, and above all, more regulations. “This
chronic cycle will not end until businessmen accept that their production
of profit is neither immoral nor amoral–it is the capstone of moral virtue.
Once they shrug off the role of scapegoat, businessmen can demand with
moral certitude that government punish fraud and enforce contracts but
refrain from interfering with voluntary trades among consenting
adults. “When America’s markets are finally free of all coercion–in
other words, when laissez-faire is achieved–financial crises such as
the one we’re experiencing will never happen again.”

AYN RAND INSTITUTE: ‘GREENSPAN SOLD OUT’
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/23/AR2008102300193.html?hpid=topnews
http://www.aynrand.org/site/News2?page=NewsArticle&id=21757
Greenspan Has No Free Market Philosophy / October 24, 2008
“Opponents of the free market are giddy at Alan Greenspan’s
declaration that the financial crisis has exposed a “flaw” in his
“free market ideology.” Greenspan says he is “in a state of shocked
disbelief” because he “looked to the self-interest of lending
institutions to protect shareholder’s equity”–and it didn’t. But
according to Dr. Yaron Brook, executive director of the Ayn Rand
Center for Individual Rights, “any belief Greenspan ever had in truly
free markets was abandoned long ago. While Greenspan long ago wrote
in favor of a truly free market in banking, including the gold standard
that such markets always adopt, he then proceeded to work for two
decades as leader and chief advocate of the Federal Reserve, which
continually inflates the money supply and manipulates interest rates.
Advocates of free banking understand that when the government inflates
the currency, it artificially increases prices and causes booms in
certain sectors of the economy, followed by inevitable busts. But not
only did Greenspan lead the inflation behind the dot-com bubble and
the real estate boom, he blamed the market for their treacherous
collapses. Greenspan should have recognized that what he wrote in 1966
of the boom preceding the 1929 crash applied here: ‘The excess credit
which the Fed pumped into the economy spilled over into the stock
market–triggering a fantastic speculative boom.’ Instead, he
superficially blamed ‘infectious greed.’ “Should it be any shock that
Greenspan now blames the free market for today’s meltdown–rather than
the Fed’s policies, which fueled an inflationary housing boom, which
rewarded reckless lenders and borrowers from Wall Street to Main
Street? Greenspan didn’t mention the word ‘inflation’ once in his
testimony. “Whatever Greenspan’s economic philosophy is, it is not
anything resembling a free market.””

ENLIGHTENMENT HARD TO REGULATE
http://www.wowowow.com/post/greenspan-shrugged-did-ayn-rand-cause-our-financial-crisis-128286
Greenspan Shrugged? Did Ayn Rand Cause Our Financial Crisis?

“Those of us who have looked to the self-interest of lending
institutions to protect shareholders’ equity, myself especially, are
in a state of shocked disbelief.” So said former Fed Chairman Alan
Greenspan in his dramatic testimony before the House Committee on
Oversight and Government Reform, as he was grilled by committee
members on the causes of the nation’s financial crisis. Greenspan,
whose laissez-faire capitalist leanings led him to reject decades of
calls for more robust government oversight of financial markets, was
repeatedly interrupted by the lawmakers in a contentious exchange that
clearly shows the gloves are off in regard to the former chairman’s
legacy. In his startling admission, the former head of the Federal
Reserve reveals that his long-held and controversial notion that
enlightened self-interest alone would prevent bankers, mortgage
brokers, investment bankers and others from gaming the system for
their own personal financial benefit has, as the English say, come a
cropper. Bankers ruled by anything other than greed?

Where did Greenspan ever get that idea? Ayn Rand. To readers of Atlas
Shrugged, Ayn Rand’s 1957 magnum opus, Greenspan’s hands-off
philosophy of marketplace management sounds very familiar. At its
core, the book supports a radically utopian political-economic system
called Objectivism, which suggests that the morality of rational self-
interest, as opposed to religious or government intervention, should
be the foundation of the ideal political structure.

According to a short description of Objectivism given by Ayn Rand in
1962, “The ideal political-economic system is laissez-faire capitalism
… In a system of full capitalism, there should be (but, historically,
has not yet been) a complete separation of state and economics, in the
same way and for the same reasons as the separation of state and
church.” In other words, Ayn Rand’s theory of the “morality of self-
interest” exactly parallels Alan Greenspan’s testimony today about his
now-shaken belief in the ability of “self-interest of lending
institutions to protect shareholder’s equity.”

Early in his career, Alan was an avid Rand acolyte, a frequent guest
at the Manhattan salon of the novelist and philosopher, and those who
gathered to hear the litanies of like-minded notables were loosely
known as “The Collective.” It was there that the Rand philosophy of
Objectivism was discussed in the context of current events, world
markets and religion. Today, 40 years after the heyday of those
gatherings, Greenspan surprised many with his “Yes, I found a flaw”
response to a grilling from the Committee. Responding to the clear
failure of the notion of “enlightened self-interest” to stop the
cascade of financial catastrophies that have roiled world markets, he
said, “That is precisely the reason I was shocked, because I’d been
going for 40 years or more with very considerable evidence that it was
working exceptionally well.”

Greenspan’s critics have long charged that his refusal as Fed Chairman
to impose greater government regulations on mortgage lenders is one of
the causes of the sub-prime mortgage meltdown. Committee Chairman
Harry Waxman (D-CA), in a heated exchange told the former Fed
Chairman that he had “the authority to prevent irresponsible lending
practices that led to the subprime mortgage crisis. You were advised to
do so by many others, and now our whole economy is paying the price.”

REBUTTAL
http://www.huffingtonpost.com/2008/10/24/greenspan-shrugged-how-di_n_137465.html?show_comment_id=17224679#comment_17224679
posted BY CharlesMac
“This always astounds me. Even when writers claim to be very well
acquainted with Rand’s work, they miss the most obvious intellectual
contradiction of Geenspan’s entire career with the Fed. Ayn Rand
considered The Federal Reserve one of the greatest abominations ever
created. She had no problem with the concept of a Central Bank created
by the banks to facilitate that private industry. But to give that
entity manipulative control over the American monetary system was
anathema. A TREMENDOUS threat to her laissez faire capitalism. To her,
a horrific concept made worse by its fragmentation from any direct
connection to the democratic Republic process. This stuff is Ayn Rand
101. And Greenspan would become a major influence and Chair it for 18
years? Greenspan never got his PhD. He would be granted it in 1977
without thesis or dissertation. That is not in any way to cast
dispersions on his qualifications. It is to note that he was Ayn
Rand’s #1 economic student/representative. It was their discussions,
from which Greenspan concluded that the schooling was not in line with
his thinking and a waste of time. That’s how close they were. To this
day, Greenspan has never publicly resolved the intellectual
contradiction of his job at The Fed, with the teachings of Ayn Rand.
The gnarliest supposition being he believed only he could prevent this
innate monster from doing its evil. That’s sad.”

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http://www.youtube.com/watch?v=oTf6NK0wsiA

http://www.aynrand.org/site/PageServer?pagename=about_ayn_rand_aynrand_biography
http://www.noblesoul.com/orc/bio/biofaq.html
http://en.wikipedia.org/wiki/Ayn_Rand


http://www.youtube.com/watch?v=FzGFytGBDN8


http://www.youtube.com/watch?v=bUwTHn-9hhU


http://www.youtube.com/watch?v=6N4KbLbGYgk


http://www.youtube.com/watch?v=-q7cje1I3VM


http://www.youtube.com/watch?v=qfqq4VKh1xM

WHO IS JOHN GALT?

http://www.youtube.com/watch?v=YNiJc7yxKHg

A NATION OF INDIVIDUALS
http://www.nyu.edu/projects/sciabarra/essays/randt2.htm
http://www.nationalreview.com/flashback/flashback200501050715.asp
http://ndpr.nd.edu/review.cfm?id=8123
Ayn Rand’s Normative Ethics: the Virtuous Egoist
BY Tara Smith / Reviewed by Helen Cullyer

Those who think of Ayn Rand as the icon of callow youths rather than a
serious moral philosopher are unlikely to recognize the Rand whom
Smith presents to us. Drawing on Rand’s novels, lectures, essays, and
letters, Smith shows that her ethical theory is a form of naturalistic
eudaimonism, which shares some features with the Aristotelian virtue
ethics of Hursthouse and Foot, but differs from them in its
unapologetic ethical egoism. This egoism is, however, as Smith argues,
non-predatory and can accommodate helping others, genuine friendship,
and even in certain circumstances risking one’s life for another.
Ultimately Rand appears as a somewhat paradoxical figure. A veneer of
Nietzschean immoralism conceals the fact that, according to Smith,
serving one’s own interest in Randian fashion entails treating others
in ways that are not as out of line with standard moral thinking as we
may first assume. After tracing the outlines of Smith’s argument, I
will a raise worry as to whether her insistence that the virtuous
agent places non-instrumental value on a variety of social
relationships actually undermines Rand’s egoistic individualism, and
discuss briefly the political implications of Rand’s ethics that hover
just beneath the surface of the book.

In her Introduction, Smith argues that contemporary virtue ethicists
dance around the question of ethical egoism. The reason is that egoism
is usually considered predatory, hedonistic, or subjectivist. Chapters
2 and 3 provide a rigorous discussion of the Aristotelian grounding of
Rand’s project. Humans, just like animals or plants, have certain
objective ends (food, water, safety) that promote our lives, but
humans’ ultimate goal is not only to maintain our lives, but to live
well, which means excellent functioning, both physical and
psychological (32). Such functioning is manifest primarily, as we
learn in Chapter 8, as the active exercise of the virtue of
productiveness, when we transform our natural surroundings in ways
that meet our material and spiritual needs. Since excellent
functioning is the goal of human life, reasons for acting must be
egoistic; a person can only achieve this goal through her own efforts
(33). Egoistic rational principles “stem entirely from their practical
service to self-interest, as that is judged by rational, long-range
standards” (36), and genuine self-interest cannot truly conflict with
the interest of others (39). To be rational is to recognize and accept
“reason as one’s only source of knowledge. . . It means one’s total
commitment to a state of full consciousness awareness, to the
maintenance of a full mental focus” (52). The human capacity for
reason is grounded metaphysically in free will, but to reason well is
to realize the inescapability of general facts about human nature and
also the context-dependent facts of particular situations.

Chapters 4-9 concern the other six virtues (honesty, independence,
justice, integrity, productiveness and pride), which are forms or
aspects of rationality, the “master” virtue (49). Smith’s discussion
of the six is searching and often compelling. In fact, even those who
do not think that egoism is a viable moral theory will recognize the
importance of many of these virtues for the virtuous life. Pride turns
out to be self-respect plus the desire for self-improvement. Integrity
is strength not only in holding onto one’s ideals, but also in making
them practical reality. The egoistic defense of honesty is also
intriguing: pretense is “metaphysically impotent” in that in
misrepresenting reality we cannot change it (79). Moreover, dishonesty
is detrimental to self-esteem and fosters a sense of worthlessness.

Most controversial is the egoistic defense of justice. Smith argues,
following Rand, that it is in one’s own interests to treat people in
accordance with objective desert. This view entails a rejection of
egalitarianism, and Smith sets the Randian conception of justice
squarely in opposition to that of Rawls. But the Randian view is
tempered by three qualifications: (1) desert is contextual, and one
must distinguish between those things over which people do and do not
have control; (2) justice coexists with rights, since “each individual
has a right to his own life and to pursue his own happiness” (171);
and (3) the virtuous egoist will refuse to sanction evil.

In Chapter 10 and the Appendix, Smith moves away from Rand’s
“official” seven virtues and discusses implications for charity,
generosity and temperance, and for loving others. Although the
virtuous egoist will often have no reason to act generously or
charitably, Smith gives examples of many situations where the virtuous
egoist will act in these ways for the sake of some benefit to herself.
In an Appendix, Smith, employing arguments that bear some similarity
to those of Aristotle in Nicomachean Ethics 9.8, argues that the
virtuous agent can in fact love others for their own sake, although
her own happiness remains her ultimate goal.

Before raising an objection to Smith and Rand, it is worth noting
briefly how they differ from other philosophers in the eudaimonistic
tradition, who tend to view the good of the individual as both social
and political. Most Aristotelians think that character is formed in a
social and political context, and that human flourishing cannot be
understood without considering individuals as parts of a community; as
a result of ethical habituation, but also of natural sociality, we
have reason to promote others’ good. Thus Foot argues that humans are
just particularly complex social animals, and she does not take the
agent-centeredness of her ethical theory to entail that all of the
virtuous agent’s reasons for acting are egoistic. [1] Aristotle
himself asserts that the virtuous agent undertakes fine actions for
the sake of the fine (to kalon). While this motivation is not
altruistic, fine actions are just those that are contextually
appropriate for a socially and politically embedded individual. For
Rand on the other hand, the moral self, while existing in a community,
is free of it, self-created, and materially and psychologically
independent; humans are not by nature “social” but they are
“contractual” (130). Smith endorses not only Rand’s principle that it
is never moral to put another’s good above one’s own but also asserts
that “ethics is not essentially social” (284).

Smith works hard, however, to show that the virtuous egoist’s
relationships with other people will be rich and rewarding. The egoist
may even risk her life for another. Consider this example. A man,
Bill, risks his life for the woman he loves, because “for him to
courageously attempt the rescue and not “chicken out” would be in his
interest (assuming that he values the woman’s well-being more valuable
than his life without her)” (194). According to egoism one should not
sacrifice oneself for another (38), but the egoistic defense of the
action is that this woman is one of the things that makes Bill’s life
worth living. Bill is making no sacrifice, but rationally placing her
well-being, which he sees as central to his own happiness, above his
own safety. We should note that Smith makes clear in her Appendix that
the virtuous egoist can love others for their own sake, and not
instrumentally, precisely because “another person might become
valuable by becoming a vital ingredient of a person’s
happiness” (302). But if one’s own flourishing includes the welfare of
others, then we might object that human flourishing is after all a
social rather than individualistic enterprise. For Bill realizes that
his happiness involves loving others and risking himself for them.
Smith will reply that the above example is unusual, and should not be
taken as evidence that morality is somehow social. This kind of love
is the exception and not the norm. It is only moral to put oneself in
harm’s way for another when two self-created, independent, and
rational individuals love each other as friends. Most people will not
merit this treatment. For one must exercise one’s own independent
judgment to figure out who is truly valuable to oneself (130-32).

But in fact Smith recognizes so many social relationships which
enhance the flourishing of the individual (258-61), and which are
based on affection, respect, and shared activity, that the careful
reader may wonder whether Rand’s view that man is a “contractual”
animal, rather than a “lone wolf” or a “social animal” (130) can any
longer be sustained. Smith begins to address this worry by noting that
although generosity is only rational when it represents a fair trade
of one value for another, the return that the benefactor receives in
compensation for his service is not necessarily material: “the return
can take many forms — intellectual, emotional, the pleasure of a
person’s company, the deepening of a relationship” (261). One might
agree with Smith here that if I give away a football ticket to an
acquaintance, I am certainly acting in a way that shows that the value
I place on the relationship is greater than the value I place on the
ticket. I gain from the act of generosity by deepening our friendship,
and ‘trade’ the ticket for something better. But the act of generosity
is not truly a trade with my acquaintance unless I give the ticket to
her with an expectation of receiving a determinate quantifiable and
commensurable benefit in direct return. If I trade a football ticket
for the deepening of a friendship, has ‘trade’ here not become a mere
metaphor? The pleasure of company and the deepening of relationships
are surely benefits to be shared and enjoyed communally, not traded?
If this is the case, then individual human flourishing may turn out to
be activity of the individual who is fully immersed in shared
activities and purposes, rather than the rational trading of benefits
between contractual individuals. The virtuous agent may still be an
egoist formally speaking, in that she realizes that what is really in
her interest is to engage in shared activities and purposes. But the
‘I’ tends to become a ‘we’, and the other and self united in a
relationship that promotes our happiness.

Smith’s discussion of independence (129-30) suggests that one
important aspect of the claim that humans are not social is that the
ethical-intellectual formation of the individual is not dependent on
society. But if social activity is somehow central to the life of a
rational adult, as Rand and Smith admit, might we not object that such
activity is also central to the life of an incipiently rational child
and that it is precisely this social context of human development that
shapes the self? Smith dismisses the idea that individuals’ characters
and actions are determined by the society in which they are raised as
empirically indefensible (129), but there is a more subtle and
convincing position that Smith should address; namely that we are
necessarily influenced, although not determined, by the societies in
which we are raised and that moral and practical reasoning capacities
grow not spontaneously, but out of and in reaction to specific
communities.

Perhaps, however, we can best understand Rand’s and Smith’s position
by putting it into its proper political context. The real claim being
made here is not that humans do not tend towards sociality, but rather
that by nature we are not part of a mutually sustaining political
community or society in which individuals depend on each other. We
must respect others’ rights, but we have no reason to help others whom
we do not know and value personally, although we will trade goods with
many for our own benefit. While altruism is placing others above the
self as a “fundamental rule of life”, egoism does not entail
sacrificing others for the sake of oneself, because the true egoist
recognizes an objective and impartial right of everyone to pursue
their own interest (39).

The coexistence of rights (to life, liberty, and property) and egoism
is crucial to Rand’s ethics and politics. Smith does not try to argue
here that recognizing and respecting the rights of others is directly
or indirectly in one’s self-interest (174-5). In fact, the grounding
of individual rights that she delineates looks rather Kantian: “Every
living human being is an end in himself, not the means to the ends of
the welfare of others. . . ” (171). The respecting of others’ rights,
therefore, looks like it is a constraint on and exception to the
egoistic ethical norm; act in self-interest except when it would
infringe the rights of others. Yet Rand’s theory of rights and ethical
egoism rest on the same teleological basis; since the goal of each
individual is to maintain her life and to flourish, each individual
requires freedom from the predatory actions of others.[2]

Rand’s egoistic individualism supports her libertarian political
outlook, and this is certainly not concealed in Smith’s treatment,
although it is not in the foreground. Rand’s view of the virtuous
egoist as self-created, contractual, and productive provides the
ethical basis of her political ideal of unregulated laissez-faire
capitalism in which government’s only role is to protect basic liberty
and property rights. We should note that Rand’s libertarianism is
consistent in some respects with social liberalism, having no truck
with discrimination on the basis of sex, race, or sexual orientation,
and supporting freedom of speech in all contexts. But if we ask why
the virtuous egoist should not be a social democrat, voting for higher
taxes in order to ensure not only freedom from predation, but basic
opportunities (like healthcare, education, social insurance) which
benefit not only others but also herself, the Randian will reply that
such taxes would violate property and liberty rights, and true
justice. The social democrat’s reply may argue for expanded
conceptions of rights and freedom. But it will also surely attack as
far too stringent Rand’s assumption that virtue requires that each of
us is able to be materially independent, providing for the self “all
the material values that his life requires” (202), and stress that the
libertarian ignores the increased opportunity and power that
individuals enjoy when they act in common. It is not to be taken as a
criticism of Smith’s book that she does not engage more fully with
these issues, given the ethical rather than political focus of the
book. In fact, her 1995 book (see n. 2) does engage with some of these
issues, although not from an explicitly Randian perspective. I raise
the issue of Rand’s politics only to point out that her ethics and
politics are intertwined.

It should be stressed in conclusion that whether one is a fan or a
detractor of Ayn Rand, the issues raised by this book are manifold and
provocative. This book should force a debate of renewed vigor about
what we mean by egoism, whether and how the egoism / altruism
dichotomy should be applied within eudaimonistic ethical theories, and
what our ethical theories imply about our political outlook. Smith
provides us with a version of egoism that will need to be argued
against by those who find it distasteful or misguided, rather than
simply dismissed.

NATHANIEL BRANDEN’S POST-MORTEM
http://www.nathanielbranden.com/catalog/rand.php#
http://www.nathanielbranden.com/catalog/articles_essays/benefits_and_hazards.html
The Benefits and Hazards of the Philosophy of Ayn Rand
A Personal Statement by Nathaniel Branden / May 25, 1982

MILTON FRIEDMAN ON ECONOMICS OF WAR ON TERROR

http://video.google.com/videoplay?docid=7261962210478584499
http://www.hoover.org/multimedia/uk/participants?participantID=2811696&c=y

OH MILTON
http://nobelprize.org/nobel_prizes/economics/laureates/1976/friedman-autobio.html
http://en.wikipedia.org/wiki/Works_of_Milton_Friedman
http://en.wikipedia.org/wiki/Chicago_School_of_Economics
http://www.nybooks.com/articles/19857
http://mfi.uchicago.edu/faq.mfi.shtml

http://www.friedmanfacts.com/institute-controversy/
http://divisionoflabour.com/archives/003456.php
http://www.druglibrary.org/special/friedman/war_we_are_losing.htm
http://www.friedmanfoundation.org/friedman/Welcome.do
http://www.miltonfriedmancores.org/
http://en.wikipedia.org/wiki/Chicago_Boys

FRIEDMAN ON GREENSPAN’S FED
http://online.wsj.com/article/SB116372965543825880.html
http://online.barrons.com/article/SB120917419049046805.html
http://www.hoover.org/multimedia/uk/3001916.html

PREVIOUSLY ON SPECTRE
CROWD-SOURCING THE FUTURE
http://groups.google.com/group/spectre_event_horizon_group/browse_thread/thread/9c5ebd174a3048eb/3d571146a24b0106
MECHANISM DESIGN THEORY
http://groups.google.com/group/spectre_event_horizon_group/browse_thread/thread/91b759cf4f34438/68bf28ae3e81243b
SWARM INTELLIGENCE
http://groups.google.com/group/spectre_event_horizon_group/browse_thread/thread/b41b1e6509387751