Truth Markets
Proposed is a system which achieves two goals:
1.Create an unbiased and trusted rating mechanism for claims that purport to be true statements as well as a related rating mechanism for those who make truth claims.
2. Offer incentive for such a system to be created and self-sustaining without undermining the credibility or impartiality of the system itself.
Mechanism #1:Truth Claims Market
Create an electronic marketplace for truth claims of all sorts where prices range from $0 (false) to $100 (true). This is NOT a futures market; all truth statements are evaluated according to the current state of the world. Each Truth Claim has one or more Claimants who are tied to the Truth Claim for as long as it is listed in the TCM. Here are example Truth Claims that could be on the TCM:
Truth Claim: "E = MC2" (a textual quote)
Claimant: Albert Einstein
Truth Claim: A press release from the White House on Iraq's weapons of mass destruction.
Claimant: George W. Bush, plus each member of his Cabinet
Truth Claim: The documentary movie, "Outfoxed"
Claimant: each individual who has Producer or Executive Producer credit on the film.
Truth Claims are similar to commodities contracts however with two important distinctions: (1) the contract is not between a buyer and seller, but between a true-sider and a false-sider; that is, there is nothing being sold, it's more like a wager, and (2) each contract has a built in annuity that gets paid for the length of the contract. More about both of these nuances in the FAQ below.
Mechanism #2:Claimant Bond Market
It is impractical to have a market for every Truth Claim that we would like to evaluate. A good proxy for knowing the market's belief in a particular claim is to know the reputation of the individual or group that is making the claim. In some ways, the Claimant Bond Market (CBM) is more important than the TCM. When a news reporter or a corporation or a politician makes a new claim, we want to know how credible this Claimant is.
Just like other types of bonds, ClaimantBonds have an underlying net asset value (NAV) and a yield in the form of interest on principal. Unlike most bonds, ClaimantBonds don't have a maturity date, but rather they act more like bond funds, where you can buy and sell shares at any time at the current NAV. The NAV of each ClaimantBond is based on the current price of all TruthClaims that the Claimant is an author on.
Mechanism #3:Authorship Derivative Claim Market
Many Claimants in the world seem to like to deny that they said something, even when there is public record of their claim. Records are called into question, allegations fly of misquotes and quoting out of context. Often there is no credible record to refer to. In light of this, how do we in good conscience allow a Truth Claim to be listed on the TCM? And what do we do when the putative Claimant objects?
The Authorship Derivative Claim Market (ADCM) allows us to trade on the veracity of the meta-claim that the Claimant actually made the alleged Truth Claim. ADCs are really just a limited form of Truth Claim, and as such can work using the same mechanism as the TCM itself. Values range from $0 to $100. Any time a new Truth Claim is created for the TCM, a corresponding Authorship Derivative Claim is made for the ADCM. They are always correlated one to one.
ADCs are an important ingredient in the formula that computes NAVs for the Claimant Bond Market.
Truth Claims Market FAQ
Q:How is the TCM different from a commodities market?
In a commodities market there is an underlying physical good such as wheat or gold that the contract is based on. In a simplistic view, you are buying and selling the underlying commodity when you enter into the contract. With Truth Claims there is no underlying commodity, so there is really no "buyer" or "seller." Instead there is a person who believes in the truth of the claim and a person who believes in the falsity of the claim (at least with respect to the current price). The distinction isn't terribly important, however the annuity is because it is the only underlying value in a Truth Claim. See below.
Q: How is this different than IdeoSphere.com (aka Ideas Futures)?
IdeoSphere.com is for claims about the future, not the present. Also, it is only for "play money". When people have to bet their own hard-earned cash they are notoriously more accurate in their evaluation of truth, and they ignore whatever biases they may have. Long-term, those who are good "truth pickers" will have more money to invest and thus have more influence on the market. Those who are deluded or buy into propaganda pay with their wallets and eventually go broke.
Q: How is this different than BetFair.com and World Sports Exchange?
The TCM is very much like these so-called "prediction markets". The main difference is that prediction markets by definition focus on future events whose outcome is incontrovertible. The TCM is interested in only current truth, and there is a tacit admission that "objective truth" is not relevant. As long as the market is willing to put its money where its mouth is, we can accept that a cost of $80 for a Truth Claim means it's very likely true, or mostly true. Conversely, a cost of $1 might indicate that either a mathematical proof has falsified it, or the Claimant has recanted.
Q:What's this about an annuity?
There needs to be some sort of underlying value proposition for both sides to want to enter into the contract. With a normal commodities or stock options contract, there is some underlying security (be it barrels of oil, bushels of wheat, or shares of stock in a company). Without an underlying security, the possibility for liquidity as the price reaches one of the endpoints ($0 or $100) diminishes. After all, what's the incentive for someone to be a true-sider on a Truth Claim that is already at $99?
To solve this problem, we require that both parties pay an annuity to each other, reconciled frequently at a rate that is proportional to the current market price. At any time, whichever party is on the "wrong" side (i.e. losing on the annuity) can buy out of the contract for the difference between contract price and market price.
For instance, suppose there is a claim that Bin Laden is alive and free, and the current price for it is $85. Let's say that you take TRUE and I take FALSE (I believe that he's either dead, or the U.S. military will capture him soon). No money changes hands yet but we've agreed on the contract as of today. Assume the price closes at $85 (no change). Assume that the "reconciliation factor" is 1% per day. Meaning that I pay you 1% of $85, and you pay me 1% of $15 (i.e. $100 - $85). The net effect is that I end up paying you $0.60. Tomorrow, a new Bin Laden videotape comes out and the price shoots up, closing at $93. Now we reconcile and I pay you $0.86. This goes on for a while and the price stabilizes at $90 for a month, and you've earned $25 on the annuity portion of our contract. I lose faith that Bin Laden will be caught, and decide I want out of the contract. I am on the "wrong" side because I am losing money on the annuity. I decide to exercise my wrong side option to get out of the contract by paying you $5 (i.e. the difference between the current price of $90 and the contract price of $85). Thus, in a month of being in the contract you've made $30 ($25 from the annuity and $5 in price change).
As we see, the annuity provides underlying value, and a reason for someone to enter into a contract at the extremes when their upside on price change diminishes. This assures market liquidity at all price points.
Q: What about market manipulation?
Who cares? The only people hurt are those who allow themselves to be misinformed. The smart investor does research on a stock before buying. The smart "claim staker" becomes well informed before buying or selling a Truth Claim. Eventually the market reaches the "true price" as the misinformation gets traded out.
Q: Isn't market manipulation illegal, immoral, or at least fattening?!
The argument has been made by some well-respected authorities that insider trading and other forms of market manipulation should not be regulated as they are in current markets. Proponents of this view say that information that flows within company walls is really no different than the so-called public information. Insiders buy and sell stock all the time without being accused of insider trading. Outsiders create sophisticated computer algorithms using an army of math whizzes to glean small nuggets of insight on whether to buy or sell. The mantra of the markets is that eventually the truth will out in the form stock price.
The counter argument says that company insiders directly affect the information that is traded on by their actions as employees of the company. An otherwise bad business deal might look really attractive to a manager if they can trade on information that other people won't have until the damage is done.
The good news about the TCM is that there is no distinction between insider and outsider. We are all outsiders trying to get better insight. If you are a better researcher, or you are better at letting your biases and ignorance be tempered by objective evidence, then you should be rewarded in the TCM. If a corporate or political interest buys or sells large amounts of a Truth Claim so that they may profit on fluctuations, they will be thwarted by market forces. Yes, there will be those who are caught in the manipulation crossfire and who will lose perhaps worse than the manipulators themselves. But they knew what they were buying and selling when placed the trade. They just chose to follow the market rather than research the underlying value of the Truth Claim.
Q: Does every Truth Claims have to be entered into the TCM as a written piece of text?
No. The TCM can easily be built to work on document repositories such as web pages cached by Google, or by unique identifiers (e.g. URLs) that specify where the Truth Claim can be found. Technology exists for assuring that the Truth Claim document is not altered after trading has begun.
Q: Are there market makers for the TCM like in other markets?
No. Market makers lead to unfair trading practices and statistical arbitrage that runs counter to the mission of the TCM. The TCM will match buyers and sellers at exact prices using stochastic algorithms that are guaranteed to be fair.
Q: Will the TCM take transaction fees in the form of bid/ask spreads?
No. This would hamper market liquidity and cause irregularities near the extremes of $0 and $100.
Q: How do new Truth Claims get onto the market?
In theory, anyone can submit a Truth Claim to the market as an IPO. Because there are no market makers or transaction fees, all new issues can be set at $50. Market forces will drive the price to a "fair" point quickly after trading begins.
Q: How do Truth Claims get removed from the market?
Truth Claims need never be removed. Even if a Truth Claim asymptotically approaches certainty at $0 or $100 and volume drops to zero, new information could come out at any time in the future to fire up the volume and move the price off the end. Also, the annuity assures that there is pressure to move off of the extremes.
Any Truth Claims that are made about a particular time or range of time must include that in the TruthClaim itself, thus obviating the temporal relevance issue. For instance, you may wish to trade now on a claim about how many genocide victims there were in Rwanda by the end of 1994. Perhaps more victims will be discovered even today, or information about a cover-up will be released.
Q: What happens when a putative Claimant denies making a Truth Claim?
In such cases, the Authorship Derivative Claim (ADC) value for the underlying Truth Claim suffers greatly. The lower the ADC value, the less of an impact that Truth Claim will have on the NAV of the Claimant Bond of the Claimant. Thus, if someone lists a Truth Claim and the Claimant denies having made it, then assuming they are telling the truth, there will be little to no impact on their reputation in the Claimant Bond Market.
Q: Have you left out any details on how the TCM works?
Yes, there are a few notable ones, but I don't believe they need to be answered upfront:
- What's the exact right formula/frequency for reconciliation? Does there need to be a dampening factor near the extremes, or some other curve to smooth out liquidity incentives?
- What is the proper penalty for buying out of the contract? I arbitrarily chose the difference in contract price and market price, but it could be a multiple or factor thereof, or it could be dependent on the reconciliation factor or the market price. Is there a need to give the "right" side an out, or can they just choose to hedge their way out in the market itself?
- Is the reconciliation factor standardized for the entire market, or is it specified in each contract individually? If the latter, perhaps the buy-out penalty changes so as to give proper incentive for taking the wrong side near the extremes. If the reconciliation factor were allowed to vary, then the volume-weighted average would be a market indicator that would give good perspective on volatility.
Claimant Bond Market FAQ
Q: How is this different than StarMine.com
StarMine.com does objective analysis of market forecasters based on track record over time. StarMine and the CDM both serve similar purposes, however the CDM is more general and is applicable in cases where the jury is still out on the underlying claims. Also, StarMine is not a market itself but rather an information source that can be used in a market.
Q: What exactly is the formula for NAV?
This is to be determined. However, it is clear that it should include the value of all Truth Claims that the Claimant is listed on WEIGHTED by the corresponding ADC values.
Authorship Derivative Claim Market FAQ
Q: Won't there be market equivalents of slander and character assassination campaigns if the truth of claim authorship is allowed to be called into question?
Very likely. It may desirable to put mechanisms in place that automatically de-list Truth Claims whose ADC value drops below a threshold. At the very least, the ADC value will be displayed as a part of the ticker quote for the underlying Truth Claim. Thus anyone who is researching the value of a Truth Claim will always know how firm the authorship credit is.
Q: If the ADC value is low, how does that affect the underlying Truth Claim market price?
It doesn't necessarily. Truth Claims are about the world, not about who makes them. However, for the purposes of doing research on a Truth Claim and deciding to make a trade on it, the ADC value could be a relevant piece of information. A low ADC value could easily dry up the market for the underlying Truth Claim, depending on the nature of the claim.
General FAQ
Q: If you don't have bid/ask spread, how does the market itself stay in business and become profitable?
There are several potential revenue streams that make sense:
1) Fixed transaction fees per trade, independent of trade volume
2) Monthly subscription fee for all traders
3) Selling advertising (e.g. pay-per-click web ads)
4) Premium content offerings
Q: Nobody is going to invest in "truth". How is this really going to work?
Billions are already being invested in electronic marketplaces on information futures for politics, weather, entertainment, current events, etc. The twist suggested here is to invest in the current truth value of a proposition as opposed to its future truth value. The annuity provides underlying value to assure that this is not a Ponzi scheme.If you have any doubts about the demand, see the following:
The Economist
http://www.economist.com/printedition/displayStory.cfm?Story_ID=3400241
Wired Magazine
http://www.wired.com/news/politics/0,1283,59818,00.html
"The price of orange juice futures has even been shown to accurately predict the weather"
"Traders on the Hollywood Stock Exchange last year correctly picked 35 of the 40 Oscar nominees in the eight biggest categories, according to The New Yorker magazine."
Trade Exchange Network
http://www.tradesports.com/aav2/TEN/TENhome.html
"The Global Marketplace where Communities of People Invest in their Opinions"
"3 platforms, 1 pool of liquidity, 65,000+ members & 1000's of innovative products to trade"
Prediction Market Summit
http://blog.commerce.net/?p=233
"Mike Knesevitch talked about TEN's (Trade Exchange Network, also TradeSports, and InTrade) markets. The fact that they trade in real money allows investors to hedge. Mike said their sports markets are extremely efficient because there are a number of arbitrageurs who know the statistical relations between various outcome, and take advantage whenever prices exceed certain bounds. Since they don't take a position in any of the trades, Mike said they aren't subject to the 1961 Wire act, which regulates interstate gambling in the US. It also means they couldn't get a bookie's license in the UK if they wanted one. TEN has approval from the CFTC to operate as an exempt Board of Trade. eBOTs can only support trading between certain large firms and qualified investors. My understanding of what Mike said is that TEN intends to operate a separate exchange for these large players, allowing them to hedge positions by trading in prediction markets. One area TEN intends to grow in is weather contracts. Mike said TEN, as one of their criteria for approving a new claim, looks for natural trading partners who would take opposite positions. He pointed out that Ski resorts (whose business falls in a light snow year) have exposure that is opposite to that of big cold weather cities (whose snow removal expenses grow in a heavy snow year.)"
Founder of Trade Exchange Networks on Google blog
http://www.google-ipo.com/message-board/viewthread.php?tid=263
I've heard of the book, and the 'predicitive power' of money and opinion has long been recognised as being a VERY powerful tool....
We KNEW 100% certain that Arnie would win the California recall, before the announced result....as our contract had virtually closed out at 99 hours before the polls closed.
We also knew something was happening with George Tenet at the CIA 3-days before he resigned....the money moved significantly.
Saddam was captured, but hours before we saw massive volumes trading....
The question will always be about the 'money following money'...but in reality seldom does a market shift unless there is supporting FACT behind the trading.
Its a great theory which in practise we have seen time and time again: "When people state their opinion and back it up with hard cash, its a hard opinion to ignore!"