Oh wow, yes, thank you! That disconnect between distributions – one symmetrical, the other roughly log-normal – strikes me as very important and dangerous!
This “ex post penalty” that you suggest would be great… I’ll think about things like offering standard (non-inverted) perpetual futures to make it easy to make a lot of money by shorting risky projects; investing through shorting tokenized public bads or world suck; making robustness against downside risks part of the intervention share governance; and whatever else one might do against this problem.
Re the shorting related ideas: maybe you’re thinking about mechanisms that I’m not familiar with, but I don’t currently see how these approaches can help here. Certificate shares for a risky, net-negative intervention can have a very high value according to a correct fundamental analysis (due to the chance that the intervention will end up being very beneficial). In such cases traders who would “bet against the certificate” will lose money in expectation.
Yes. I think we have different types of asymmetries in mind here. I can see three types at the moment, but maybe there are more that I’m overlooking? How do you define “net-negative” if not in terms of expected value? Stochastic dominance? Or do you mean that the ex ante expected value of an intervention can be great even though its value is net-negative ex post?
Different asymmetries that come to mind:
Investors should be able to short just as easily as they can long, and their profits from correctly predicting downside should be just as unbounded as their profits from correctly predicting upside. This can be approximated with borrowing and lending or with a perpetual future. The first approach requires that someone offers the tokens for lending and that the short trader is ready to pay interest on them. The second only has minor issues that I’m aware of (e.g., see Calstud29’s comment), so that, I think, would be a great feature. Then again the ability to lend tokens that you have would create an incentive to buy and hold.
Profit-oriented investors only care about profits that they make in futures in which they can spend them. So if a trader thinks that a project is vastly net negative, shorts it, then the news spreads (maybe aided by the proof that traders are putting their money where their mouth is, namely in a short), and the project is discontinued before the risk materializes, then everything is fine. But if a trader shorts the project, few others follow the lead, and then we go extinct because of the project, the mechanism failed. So in particular traders who don’t have a big audience will the uninterested in shorting bad projects. I don’t know how to solve that elegantly but getting sophisticated altruists to vote on what projects to include in intervention shares can serve to include only fairly robust projects (to the best of our current knowledge).
Various ethical asymmetries, such as how to weight suffering vs. happiness, making happy people vs. making people happy, maybe stuff like how to think about logical counterfactual, etc. I have various opinions and intuitions about these, but I (tentatively) feel like if I built nudges into the marketplace that push in one direction or another, half the potential user base would perceive the market as unfair and acausally somewhere in the universe someone very much like me would build a marketplace where the nudges push in the opposite direction. So I feel like it’s more fair to resolve these through discussions and trade than through marketplace mechanisms.
If you were just referring to the ex ante vs. ex post distinction, then I think it’s fair that people can get lucky by betting on risky projects (risky in the sense of downside risks) because (1) they need to bet on a lot of them to get lucky, so their contribution to each is smaller, and (2) they can get equally lucky by betting against risky projects. I don’t want people to support risky projects, but so long as we can figure out problems 1 and 2 above, the share prices of risky projects should remain quite low.
Or are you thinking of problems along the lines of the St. Petersburg game? I.e. the expected value is unbounded so the share price of a St. Petersburg game charity should go to infinity to the degree the available capital allows? I don’t think that will happen. The upside of various technology companies is virtually unbounded due to transformative AI and yet the share price remains finite and the market capitalization well below the capital that is available in the world. Admittedly, it makes me uncomfortable to rely on “It’s not happening now, so it’s unlikely to happen in the future,” but in this case it seems like a pretty strong reason to me…
Here’s a concrete example: Suppose there’s 50% chance that next month a certain certificate share will be worth $10, because the project turns out to be beneficial; and there’s 50% chance that the share will be worth $0, because the project turns out to be extremely harmful. The price of the share today would be ~$5, even though the EV of the underlying project is negative. The market treats the possibility that “the project turns out to be extremely harmful” as if it was “the project turns out to be neutral”.
How do you define “net-negative” if not in terms of expected value? Stochastic dominance? Or do you mean that the ex ante expected value of an intervention can be great even though its value is net-negative ex post?
These seem like very important questions. I guess the concern I raised is an argument in favor of using ex ante expected value. (Though I don’t know with respect to what exact point in time. The “IPO” of the project?). And then there can indeed be a situation where shares of a project, that is already known to be a failure that caused harm, are traded at a high price (because the project was really a good idea ex ante).
Investors should be able to short just as easily as they can long, and their profits from correctly predicting downside should be just as unbounded as their profits from correctly predicting upside. This can be approximated with borrowing and lending or with a perpetual future. The first approach requires that someone offers the tokens for lending and that the short trader is ready to pay interest on them. The second only has minor issues that I’m aware of (e.g., see Calstud29’s comment), so that, I think, would be a great feature. Then again the ability to lend tokens that you have would create an incentive to buy and hold.
I don’t see how letting traders bet against a certificate by shorting its shares solves the issue that I raised. Re-using my example above: Suppose there’s 50% chance that next month a share will be worth $10 (after the project turns out to be beneficial) and 50% chance that the share will be worth $0 (after the project turns out to be extremely harmful). The price of the share today would be ~$5. Why would anyone short these shares if they are currently trade at $5? Doing so will result in losing money in expectation.
Perhaps the mechanism you have in mind here is more like the one suggested by MichaelStJules (see my reply to his comment).
Profit-oriented investors only care about profits that they make in futures in which they can spend them.
That’s a great point. This also applies to traders who go long on a share (potentially making them give less weight to the downside risks of the project).
getting sophisticated altruists to vote on what projects to include in intervention shares can serve to include only fairly robust projects (to the best of our current knowledge).
I think something like this can potentially be a great solution. Though there may be a risk that such a market will cause other crypto enthusiasts to create competing markets that don’t have this mechanism (“our market is truly decentralized, not like that other one!”).
If you were just referring to the ex ante vs. ex post distinction, then I think it’s fair that people can get lucky by betting on risky projects (risky in the sense of downside risks)
My concern here is about net-negative projects, not risky projects in general (risky projects can be net-positive).
Suppose there’s 50% chance that next month a share will be worth $10 (after the project turns out to be beneficial) and 50% chance that the share will be worth $0 (after the project turns out to be extremely harmful). The price of the share today would be ~$5. Why would anyone short these shares if they are currently trade at $5? Doing so will result in losing money in expectation.
Ah, you’re right. Not sure why I was so confused about this before.
I might’ve implicitly been thinking about the case where the bad news about the intervention gradually comes to light (in the worlds where it turns out to be bad) and the shorter regularly increases their short to maintain the same leverage while the market drops. Would that work?
I’ve been under the impression that that’s how the HEDGE tokens work, specifically with a rebalancing interval of one day or less (extra rebalancing during the day in case of high volatility), but the result is weird… DMG dropped 77% all at once on Feb. 5, 2021, so I would’ve expected DMGHEDGE to go up 77%? Instead it also dropped 55%. Maybe there was not enough buy-side liquidity to rebalance properly because everyone just wanted to sell?
I wonder if negative impact tokens would work or would fall short for similar reasons. Is there some sort of software for simulating markets? Otherwise I might just try to put together a little custom agent-based model for this.
I wonder, what would happen if we created a USDC/TOKEN market instead of a TOKEN/USDC market?
That’s a great point. This also applies to traders who go long on a share (potentially making them give less weight to the downside risks of the project).
Yeah, sadly.
I think something like this can potentially be a great solution. Though there may be a risk that such a market will cause other crypto enthusiasts to create competing markets that don’t have this mechanism (“our market is truly decentralized, not like that other one!”).
Hmm, it would be completely decentralized. Only the “ICO” would consist of giving the token to specific charities and funds, which would thereby obtain particular voting rights. If a project wanted to avoid that, they could exclude the funds, but they can’t exclude the charities as that would defeat the purpose of the token…
But that’s not much consolation. A lot of the charities I do want to see supported run interventions with potentially vast downside risks, in my opinion. I don’t know if they really have vast or rather limited downside risks, so I would like the market to know more than me about that, not less.
Oh wow, yes, thank you! That disconnect between distributions – one symmetrical, the other roughly log-normal – strikes me as very important and dangerous!
This “ex post penalty” that you suggest would be great… I’ll think about things like offering standard (non-inverted) perpetual futures to make it easy to make a lot of money by shorting risky projects; investing through shorting tokenized public bads or world suck; making robustness against downside risks part of the intervention share governance; and whatever else one might do against this problem.
Re the shorting related ideas: maybe you’re thinking about mechanisms that I’m not familiar with, but I don’t currently see how these approaches can help here. Certificate shares for a risky, net-negative intervention can have a very high value according to a correct fundamental analysis (due to the chance that the intervention will end up being very beneficial). In such cases traders who would “bet against the certificate” will lose money in expectation.
Yes. I think we have different types of asymmetries in mind here. I can see three types at the moment, but maybe there are more that I’m overlooking? How do you define “net-negative” if not in terms of expected value? Stochastic dominance? Or do you mean that the ex ante expected value of an intervention can be great even though its value is net-negative ex post?
Different asymmetries that come to mind:
Investors should be able to short just as easily as they can long, and their profits from correctly predicting downside should be just as unbounded as their profits from correctly predicting upside. This can be approximated with borrowing and lending or with a perpetual future. The first approach requires that someone offers the tokens for lending and that the short trader is ready to pay interest on them. The second only has minor issues that I’m aware of (e.g., see Calstud29’s comment), so that, I think, would be a great feature. Then again the ability to lend tokens that you have would create an incentive to buy and hold.
Profit-oriented investors only care about profits that they make in futures in which they can spend them. So if a trader thinks that a project is vastly net negative, shorts it, then the news spreads (maybe aided by the proof that traders are putting their money where their mouth is, namely in a short), and the project is discontinued before the risk materializes, then everything is fine. But if a trader shorts the project, few others follow the lead, and then we go extinct because of the project, the mechanism failed. So in particular traders who don’t have a big audience will the uninterested in shorting bad projects. I don’t know how to solve that elegantly but getting sophisticated altruists to vote on what projects to include in intervention shares can serve to include only fairly robust projects (to the best of our current knowledge).
Various ethical asymmetries, such as how to weight suffering vs. happiness, making happy people vs. making people happy, maybe stuff like how to think about logical counterfactual, etc. I have various opinions and intuitions about these, but I (tentatively) feel like if I built nudges into the marketplace that push in one direction or another, half the potential user base would perceive the market as unfair and acausally somewhere in the universe someone very much like me would build a marketplace where the nudges push in the opposite direction. So I feel like it’s more fair to resolve these through discussions and trade than through marketplace mechanisms.
If you were just referring to the ex ante vs. ex post distinction, then I think it’s fair that people can get lucky by betting on risky projects (risky in the sense of downside risks) because (1) they need to bet on a lot of them to get lucky, so their contribution to each is smaller, and (2) they can get equally lucky by betting against risky projects. I don’t want people to support risky projects, but so long as we can figure out problems 1 and 2 above, the share prices of risky projects should remain quite low.
Or are you thinking of problems along the lines of the St. Petersburg game? I.e. the expected value is unbounded so the share price of a St. Petersburg game charity should go to infinity to the degree the available capital allows? I don’t think that will happen. The upside of various technology companies is virtually unbounded due to transformative AI and yet the share price remains finite and the market capitalization well below the capital that is available in the world. Admittedly, it makes me uncomfortable to rely on “It’s not happening now, so it’s unlikely to happen in the future,” but in this case it seems like a pretty strong reason to me…
Here’s a concrete example: Suppose there’s 50% chance that next month a certain certificate share will be worth $10, because the project turns out to be beneficial; and there’s 50% chance that the share will be worth $0, because the project turns out to be extremely harmful. The price of the share today would be ~$5, even though the EV of the underlying project is negative. The market treats the possibility that “the project turns out to be extremely harmful” as if it was “the project turns out to be neutral”.
These seem like very important questions. I guess the concern I raised is an argument in favor of using ex ante expected value. (Though I don’t know with respect to what exact point in time. The “IPO” of the project?). And then there can indeed be a situation where shares of a project, that is already known to be a failure that caused harm, are traded at a high price (because the project was really a good idea ex ante).
I don’t see how letting traders bet against a certificate by shorting its shares solves the issue that I raised. Re-using my example above: Suppose there’s 50% chance that next month a share will be worth $10 (after the project turns out to be beneficial) and 50% chance that the share will be worth $0 (after the project turns out to be extremely harmful). The price of the share today would be ~$5. Why would anyone short these shares if they are currently trade at $5? Doing so will result in losing money in expectation.
Perhaps the mechanism you have in mind here is more like the one suggested by MichaelStJules (see my reply to his comment).
That’s a great point. This also applies to traders who go long on a share (potentially making them give less weight to the downside risks of the project).
I think something like this can potentially be a great solution. Though there may be a risk that such a market will cause other crypto enthusiasts to create competing markets that don’t have this mechanism (“our market is truly decentralized, not like that other one!”).
My concern here is about net-negative projects, not risky projects in general (risky projects can be net-positive).
Ah, you’re right. Not sure why I was so confused about this before.
I might’ve implicitly been thinking about the case where the bad news about the intervention gradually comes to light (in the worlds where it turns out to be bad) and the shorter regularly increases their short to maintain the same leverage while the market drops. Would that work?
I’ve been under the impression that that’s how the HEDGE tokens work, specifically with a rebalancing interval of one day or less (extra rebalancing during the day in case of high volatility), but the result is weird… DMG dropped 77% all at once on Feb. 5, 2021, so I would’ve expected DMGHEDGE to go up 77%? Instead it also dropped 55%. Maybe there was not enough buy-side liquidity to rebalance properly because everyone just wanted to sell?
I wonder if negative impact tokens would work or would fall short for similar reasons. Is there some sort of software for simulating markets? Otherwise I might just try to put together a little custom agent-based model for this.
I wonder, what would happen if we created a USDC/TOKEN market instead of a TOKEN/USDC market?
Yeah, sadly.
Hmm, it would be completely decentralized. Only the “ICO” would consist of giving the token to specific charities and funds, which would thereby obtain particular voting rights. If a project wanted to avoid that, they could exclude the funds, but they can’t exclude the charities as that would defeat the purpose of the token…
But that’s not much consolation. A lot of the charities I do want to see supported run interventions with potentially vast downside risks, in my opinion. I don’t know if they really have vast or rather limited downside risks, so I would like the market to know more than me about that, not less.