Putting Pro-Innovation Bias on the Blockchain

Blockchain Bias

Over the past couple of years I've spent a lot of time listening to people wittering on about "the blockchain". They've claimed it can solve a plethora of society's ills – everything from the elimination of poverty to the overthrow of fiat currencies and the nation state.

Being charitable this is evidence of pro-innovation bias in all its perverse glory. Being cynical it's evidence of people trying to scam investment funds by capitalizing on the halo effect. The blockchain is a brilliant piece of innovation, which will one day – probably – lead to significant economic benefits, but in the end it's just another piece of technology.

Read Full Post >>

Robobias

Advisors' Suck

There’s a new class of financial intermediary in town: the robo-advisor. As I understand it, the human advisor’s financial knowledge is sucked out of their brains and up-loaded into a machine.  So, that shouldn’t take very long then.

But humans being the clever creatures that we are simply replacing the human advisor with a machine won’t save us from our own stupidity. We’re far too clever for that.

Read Full Post >>

Things Investors Should Hate 3/5: Innovation

I love innovation.  My entire career has been spent in technical innovation.  Even now I’m trying to replace the need for cash and credit cards by putting them on a cellphone.  But as an investor, innovation sucks.

Unfortunately we’re attracted to innovation like a moth to a flame.  You can just see the bucks going up in smoke.

Read Full Post >>

Can Software Beat Penny-Flippers?

"Am I doing better than I could do by flipping pennies?" – Paul Meehl

Denial is Futile

The Abnormal Returns website recently highlighted an interesting little spat on the blogosphere, as commentators argue over the benefits of software based investment advice.  It’s a trend with only one outcome, one that probably doesn’t do investors any good, but equally one that’s sadly inevitable.

What’s more interesting, though, is the creaking movements of tectonic plates as various commentators position themselves uneasily on the cusp of a disruptive change.  You can see the status quo bias at work, but like it or not, change is coming: the markets won’t be denied.

Read Full Post >>

The End of Finance, As We Know It

Disintermediate and Die

Over the past twenty years or so we’ve seen a remarkable change in the way a lot of business is conducted.  Publishing, an industry which had run on business models largely invented in the Middle Ages, has been completely revolutionized (see: Book Value).  Other industries have had their economics completely upturned by the interconnectivity of the internet, cheap, distributed processing power and the power of peer review.

Yet this hasn’t impacted the financial industry in anything like the way it might have.  Sure, the introduction of low commission internet share dealing has undermined many old school brokerages, but that’s replaced one set of problems with another.  Now, though, the race is on to disintermediate the middle men: the financial industry is on the cusp of a revolution, and most of the intended victims haven’t got a clue that they’re already an endangered species.

Read Full Post >>

Crowdfunding Heroic Entrepreneurs

Ask Not 

The crowdfunding provisions in the JOBS Act have provided a rich source of material for commentators both for and against the concept. Providing bright eyed innovators with seed capital seems like a good idea, but pushing small investors into dubious schemes with little chance of success is less obviously smart.

In fact the crowdfunding regulations are still being created, so we don’t really know how much investors will be protected from themselves but we know one affected group who do need some help. Step forward the heroically biased entrepreneurs of America. Your country needs you, although you probably need your country more.

Read Full Post >>

The Wisdom of Internet Crowds

Crowds in the Clouds

We’ve already seen signs that internet data can be used for various sorts of prediction. Using Google trend data allows nowcasting of employment trends and the spread of disease (see Nowcasting with Google), Twitter may predict stockmarket movements (Twits, Butter and the Super Bowl Effect) and social media predicts investor sentiment (Noise, Sentiment and StockTwits). Reports suggest that there are already fund managers out there exploiting these ideas.

The question remains whether these sources of information are really reliable or whether we’re seeing data mining biases. The more data you have the more probable it is that you can find a correlation between any two variables, proving little other than having a lot of computing power makes work for idle processors. Not all data is equal, though, and some results suggest that the wisdom or crowds is alive and well in the internet clouds.

Read Full Post >>

Noise, Sentiment and StockTwits

Don't be Sentimental

As we saw in Idiot Noise Traders it very much looks like there are people out there trading on the random oscillations in markets – which themselves make predicting the markets extremely difficult, particularly at times when irrational noise traders are dominating proceedings by synchronising their behavior. If this hypothesis is true then increasing ease of access to real-time internet trading data and opinions ought to be making markets less efficient, rather than more.

This implies that a contrarian investor should be looking to bet against the noise traders, rather than against the performance of stocks, so it’s of significant interest to figure out what the current sentiment of day traders is. Some recent research on the behavior of investors using the microblogging site StockTwits offers some interesting clues to whether this might work.

Read Full Post >>

Disruption by Digital Wallet: The Sailing Ship Effect Rewritten

From Sailboats to Digital Wallets

When steamships were introduced they caused a significant improvement in the technology of the sailing ship, as shipwrights worked to increase the capability of their ancient craft to keep the newfangled interlopers at bay.  Of course, we now know this was to no avail, as technology and service improvements to steam-power eventually combined to override the best that sail had to offer.  Disruption happened, but slowly.

In the world of payments we now have more disruption: a payment card in your smartphone, integrating retail payments, mobile communication and digital advertising, with Google simply the biggest new entrant on the blocks.   When your smartphone is also your digital wallet and you can use it to buy stuff in shops faster and more securely than with your credit card then the walls of Jericho are really falling: the question is, who are the modern equivalents of the sailing ship manufacturers?

Read Full Post >>

3D Printing Is Not Exogenous

Disruption on Demand

The advent of 3D printing, a technology that will allow you to print your own office furniture – in your office – threatens to overturn the whole basis of the global economy. When you can make anything, anywhere, anytime then the advantage of a pool of low cost labour, no matter how well trained, is vastly reduced. Indeed, capital, knowledge and basic commodities become the only constraints on world markets: the death of distance is nearly complete.

Such disruptive advances in technology occur from time to time and have the power to change pretty much everything. Yet the study of finance regards these events as exogenous: external to the economy and therefore outside of its purview. This is like arguing that medicine shouldn’t take biological research into account in developing treatments: all we need is a better leech. It's just not true: echnology and economics are linked at the hip, whatever the theories tell us.

Read Full Post >>

Nowcasting With Google

Real-time Forecasting

One of the problems for students of matters financial is that predicting stuff is very difficult, especially when it’s about the future. However, this pales into insignificance with the greater problem that we can’t even predict the present. In economic terms, basically, we really have no idea what’s happening in the world at any given time.

Predicting the present, snappily known as “nowcasting” is an area that economists spend lots of time worrying over, developing really neat algorithms that work right up to the next time they don’t. However, the rise of the internet has opened a new window on the world and analysts are now starting to nowcast by looking at trends emerging from data culled from the web. Perhaps, just perhaps, this can be turned this into a model which is near enough real-time to stand some chance of being useful.

Read Full Post >>

Behavioral Anti-Trust: Microsoft To Apple

Slipped Halos

Back in 1999 the world’s stockmarkets were floating high on humankind’s incurable optimism for all things technical. The internet was changing everything and everyone wanted a part of it. As we saw in The Halo Effect: What’s In a Company Name? merely adding “.com” to the end of a corporation’s name was enough to send its price skedaddling skywards.

Then it all went wrong, and by some measures we’ve been paying the price for the associated excess of exuberance every since. Quite why it went wrong is still a matter of some debate, but one of the trigger points appears to have been the finding that Microsoft was using its monopoly status to suppress competition. For 1999 read 2011 and for Microsoft read Apple: could it happen again?

Read Full Post >>

Book Value

Dark Age Done

The printed book has a strong claim to be the most important invention humanity has ever made. To be able to clearly record information for posterity, to hand it down from generation to generation, and to disseminate that information widely and quickly provides the modern world with advantages that are hard to understate: a replay of the Dark Ages is unimaginable.

The economic importance of the book is also hard to understate, as the evidence of economic growth in the pre-industrialised world demonstrates. Yet we're now in the midst of a revolution in the printed world which is changing our society, our behaviours, our economy and our future. Book value is changing, by the day.

Read Full Post >>

Twits, Butter and the Super Bowl Effect

Eclipse of the Twits

As we more or less know, the sheer randomness of the world makes predicting stockmarket movements not so much a fool’s game as Russian Roulette. If you believe you can outwit the markets on a day to day basis it’s only a matter of time before the hammer falls on a firing cap.

Despite this people keep trying, because it’s a basic human urge to try to make sense out of the nonsensical. The ancient Chinese believed a solar eclipse was caused by a celestial dragon munching up the Sun. At the time that counted as advanced thinking: indeed it still does in some parts of the world, but generally it’s a lot harder these days to believe that people could think stockmarket movements can be predicted, say, by something as random as the trivial ramblings of posters on Twitter. Can’t be right, can it?

Read Full Post >>

Moats, Unbundled

From Wheelwrights to Press Barons

Imagine yourself as a fourteenth century European knight: safely tucked up in our crenulated castle, defended by our deep filled moat, we’re the confident lord and master of all we can see. Yet we’re on the cusp of a technological revolution that will overturn our beliefs and destroy our way of life. Cannon are coming and our moats are about to become prisons, not protection.

Technological advances beget market dislocations, as old business models are overturned and new ones tentatively created. English surnames tell of such changes – Wrights and Smiths now far outnumber wheelwrights and blacksmiths, vocations long in vogue and now irrelevant. Now a new generation of knights stand watching their battlements blown apart as newspaper barons and music moguls desperately try to shore up their crumbling estates. They’re on a hiding to nothing, of course; the invisible hand is unbundling their once impregnable moats through the medium of the internet.

Read Full Post >>

Weightless Economies

Dangerous Economists

Although economists are generally a fairly harmless group there’s the ever present danger that they’ll get someone or other with some real power to actually listen to their beliefs. Once that happens we’re all potentially in trouble as the subtlety of the real-world gets lost in an economic miasma. A case in point was Selective Employment Tax (SET).

Introduced into the UK in the 1960’s it was a levy so self-evidently stupid even most of Britain’s notoriously supine representatives recognised its imbecility. Yet, backed with the imprimatur of one of the foremost economists of the day, the government went ahead and implemented it anyway in the quaint, old-fashioned belief that money earned through manufacturing is somehow “good” and that through services “bad” – just in time to miss the growth of the knowledge economy. Thus proving that the only thing worse than a politician with an idea is an economist with a Big Idea.

Read Full Post >>

An Age of Miracles and Wonders

S-t-r-e-t-c-h

Stretch your arms out to either side and imagine you’re looking at the economic growth of the human race over its entire four thousand year documented history. From the fingertip on your right hand to the first wrinkle on its index ftinger more or less covers the first three thousand eight hundred years. From there to the end of the index finger on your left hand represents growth over the nineteenth and twentieth centuries.

We truly live in an age of miracles and wonders. Medical advances have ensured more people live longer than ever before, scientific achievements have created a world in which we’re surrounded by astonishing labour saving creations and inventions which allow us to waste the time we’ve saved and the extra years of life we’ve been granted. Meanwhile our economic understanding of how this happened has, well, gone nowhere very interesting really. How did we achieve this state of grace?

Read Full Post >>

From the Railroad to the Internet … and Back Again

The Death of The Death of Distance?

Although our digitally networked world has seen some remarkable changes in the last two decades the need to physically move goods around the world has remained unchanged. I can communicate my thoughts to you without leaving my desk, but sending you this banana requires considerably more effort on my part. Anyway, I’m hungry, so keep your thieving minds off it.

Most research shows that the death of distance – the collapse in transportation and communication costs – first prophesised back in the nineteen nineties has failed to materialise. Although it’s certainly the case that the internet has caused some costs to fall others haven’t. This matters because the idea that global growth is mainly driven by technological innovations is almost certainly wrong: technology matters but what governments and people do matters more. And so it turns out that it’s the railroad, not the internet, that’s more important for our future prosperity.

Read Full Post >>

Pulling Up The Intellectual Property Ladder

Tragedy of the Anti-Commons

Human ingenuity has been behind much of the economic boom that the world’s undergone since the late eighteenth century. Sparked by the rise of reason in the form of deepening scientific knowledge and backed by increasingly large flows of capital there’s been an ever increasing range of ideas and inventions, some of which have even added to the sum of human happiness. I was particularly taken by the motorised ice-cream cone.

Behind this sparkling cascade of cleverness lies the ability of inventors to temporarily protect their inventions from competition by use of intellectual property rights – patents, copyrights and so on. Unfortunately, as we move forward, these monopoly rights may, in some cases, actually result in a slowing of progress as we increasingly face the Tragedy of the Anti-Commons.

From Monopolies to Patents

The development and evolution of patent laws stretches back hundreds, if not thousands, of years. We know that the Ancient Greeks granted temporally limited monopoly rights on particularly tasty recipes which seems to suggest that the modern cult of the celebrity chef isn’t so modern after all. By 1331 we find Henry VI of England granting John Kempe and his Company a patent in respect of the textiles industry. In fact this appears to have been an early attempt to attract skilled foreign workers to England rather than a reward for genuine innovation. Nearly seven hundred years on we’re still bribing scarce overseas workers to come here rather than fixing our education system.

Something like the first proper patent was granted in 1422 in Florence to the architect, genius and key Renaissance figure Filippo Brunelleschi for a barge with hoisting gear. In 1449, in England, John of Utynam received a 20 year monopoly to make stained glass and in the following year the Republic of Venice created the modern patent, mainly to protect its native glassblowing industry, presumably to stop England pinching all of its skilled workers, another continuing trend.

Patents were systematically abused by money-grabbing monarchs, particularly in England where the rulers were always short of money, granting monopolies for even commonly used stuff like salt and coal. Eventually the English, as is their wont, revolted and forced the introduction of the Statute of Monopolies in 1601, which is really the start of the modern patent system, as it enshrined the novel concept that the idea had to be new, rather than simply purloined, in order to be awarded a patent.

Monopoly Rewards

That patents and other intellectual property rights have had a beneficial impact on economic growth is beyond dispute. By ensuring that an inventor has a limited time to exploit their idea the system rewards innovation, encourages exploitation and eventually gives the rest of the world free access to the accumulated wisdom of the ages. However, as we can see, patents are closely entwined with monopolies and anti-trust issues, which means that these rights need to be carefully managed if we’re all to benefit properly.

Underlying the awarding of patents is the idea that they’re a public good – the benefit of the temporary monopoly outweighs the downside of monopolist price gouging. This isn’t always an easy coupling – particularly as we’ve seen with large pharmaceutical companies demanding first world prices of third world countries for treatments for diseases like AIDS. On one hand, without the excess profits that come from patent exploitation these corporations have no reason to invest the billions of dollars that they do. On the other, denying millions of sick people drugs that could usefully extend their lives is morally objectionable.

There isn’t an easy solution to the problem and the resulting mess where governments have effectively forced the drugs companies to sell to them cheaply will almost certainly result in less investment in treatments for diseases targeted at those countries. It’s not a happy situation.

The Tragedy of the Anti-Commons

However, there’s another more insidious problem with patents and the ever-increasing pace of innovation. This was first pointed out by Michael Heller, who’d been puzzling over why there were so many empty stores in ex-communist countries despite the fact there was obviously huge demand for retail space. Drawing on Hardin’s idea of the Tragedy of the Commons, where property owned by no one is ruthlessly exploited to the detriment of all – think overfishing of deep sea stocks or pollution of the air we breathe – he postulated the idea of the Tragedy of the Anti-Commons.

The problem in Moscow and other Eastern European cities, it turned out, was that the ownership of the property rights for the stores was widely distributed between lots of different groups each with different agendas. The sheer difficulty of getting these disparate parties to agree on something that would have been beneficial to all of them meant that the stores stayed empty while open air booths sprung up in front of them.

Technology Patent Anti-Commons

Since Heller postulated this idea it’s been suggested that a similar problem exists for modern corporations attempting to develop new technologies. The issue comes because, increasingly, any new device requires the use of hundreds and possibly thousands of patented inventions: even the humble CD player requires at least a dozen licences, a microprocessor needs thousands. It only takes a single hold-out to prevent the possibility of a useful advance in technology.

As the pace of technological innovation has increased the sheer impossibility of avoiding patent infringement has increased. The dispute that nearly shut the Blackberry network down is caused by a single disputed patent in a device which uses thousands. Nokia is now suing Apple over ten patents on the iPhone – no doubt they’ve been trawling their patent library for months to find these and, doubtless, there are many more to be found around the world.

Biomedical Patent Anti-Commons

Another area where the spectre of anti-competitive problems arise due to anti-commons issues is in biomedical research, particularly where commercial organisations are patenting human gene fragments and other fundamental biological intellectual property. This is likely to prevent further useful exploitation of these discoveries because in order to test the effectiveness of any treatment it may be necessary to test the whole spectrum of the human genome. By splitting it up into ever greater groups of patents owned by differing parties it may become impossible to effectively conduct medical research.

While we might expect that the market would find a way of solving these issues – say as the music industry has by developing groups holding copyright for lots of artists – simple behavioural biases may restrict their development. Hewson and Eisenberg suggest that the problem we have estimating the likelihood of low probability events of high importance to us and the associated issue of tending to overvalue stuff we’re committed to – essentially facets of the availability heuristic and commitment bias – may prevent the effective resolution of anti-commons intellectual property disputes.

Basically the problem is that any patent which leads to a new treatment for something important – cancer or AIDS, say – will obviously be immensely valuable and the patent holder won’t want to give this up cheaply. Unfortunately no one can know in advance which patents will be valuable and which won’t so you end up with asymmetric valuations on the part of patent holders and potential licencees. The result being deadlock.

The Growth of Patents

The pace of patent creation is increasing – it took 18 years for the first 250,000 patents to be filed under the global Patent Co-operation Treaty, a further four years to double that and a further four years to double it again. Anti-commons issues are only going to grow and as patents and other intellectual property are central to the economic progress of the planet anything that can impede it is a cause for concern.

However, using patent disputes to disrupt parts of the global telecommunications network that people rely on, or to control access to parts of the human genome, may bring the system into disrepute if not handled carefully – a case of the owners pulling up the Intellectual Property Ladder behind them to the detriment of all. It’s often suggested that we’re in an age in which information is power and certainly the ownership of critical patents is going to be increasingly valuable to corporations and individuals. Learning to exploit that power wisely may be the biggest challenge of the Information Age.


Related Articles: The Tragedy of the Financial Commons, Black Swans, Tsunamis and Cardiac Arrests, Akerlof’s Lemons: Risk Asymmetry Dangers for Investors