Sunday, January 29, 2012

Over-Optimism in Official Budget Agencies' Forecasts

We're always looking for where applications of prediction markets may make sense to improve a process. It looks like official government forecasting may be one such area to tackle.

Jeffrey Frankel from the Kennedy School of Government at Harvard and Director of the Program in International Finance and Macroeconomics at the National Bureau of Economic Research has written a paper entitled: "Over-Optimism in Forecasts by Official Budget Agencies and Its Implications."

From the digest on the NBER site:

...Overly optimistic official forecasts of future budget balances have facilitated complacency and so have contributed to tax cuts and increases in government spending, and therefore to realized budget deficits, during the last decade.

Analyzing data for 33 countries, Frankel finds that the average upward bias in the official forecast of the budget balance, relative to the realized balance, is 0.2 percent of GDP at the one-year horizon, 0.8 percent at the two-year horizon, and 1.5 percent at the three-year horizon. The longer the horizon, and the more genuine uncertainty there is, the more scope there is for wishful thinking.

A prediction market's biggest advantage would be to allow a more diverse opinion pool that would hopefully eliminate this bias. One could imagine not only involving officials at the OMB but various staff from Congressional offices, experts from various Departments, and even industry experts. If the government won't take this on directly, could there be a "shadow" forecasting process with these same people? What would be their incentive to participate? Hmm...

Saturday, January 21, 2012

Your 5 Bullet Points

Last weekend I attended a funeral for a wonderful woman in Bethlehem, Pennsylvania. While funerals are of course sad affairs, when they're for someone who has died of "natural causes" at an old age, I tend to be less sad and more contemplative about how they lived their lives and what I can learn from them.

At the funeral, person after person got up to speak about the generosity of this woman. She was a loving grandmother and great-grandmother. She was a teacher and a librarian. She was an elder in her church and she welcomed new community members with open arms, often being the first "node" they met. She served as a starting point to make them feel more comfortable in their new surroundings.

A 23 year old grandchild got up to speak about how she was his life's exemplar. The career he is pursuing and the values which he lives by are a direct result of his grandmother's influence.

After the graveside service, I was driving with my Dad and we discussed how we've all thought of our own funerals. What will people say about us when we're gone? When the definition of our lives must be condensed down to a 30 minute memorial service, what are our 5 bullet points going to be?

Everyone has heard the adage "no one wishes at the end of their life they had worked more," but what does that phrase really mean? For some it means they wished they had spent more time with their family. For others, more time having fun, or more time with their kids, or giving more of themselves to others.

Among people I know, most earnestly want to achieve a balanced lifestyle (isn't that really what that adage is getting at? A lack of balance?) They want to take care of themselves financially, then they'll begin donating time and money to others. I know until recently this is the attitude I carried, focusing almost exclusively on work and just trying to be a decent friend and family member. After I've "made it" is when I'll start to truly give back.

But then my attitude(?), maturity level(?), begun to change. In my reading I found myself more attracted to the stories about people giving of themselves vs. those whose companies just got bought or earned investments. Sermons reminding me about "giving back" were resonating more.  The plight of others in need begun having a more profound impact on me.

Do I still want to "get mine?" Of course. But I've already begun altering my schedule in fits and starts the last year through volunteering. And I know by doing so I've already had a tangible impact on several people's lives. And those few hours of volunteering felt damn better than any deal we won or compliment we received for our software. Some might say I should therefore find something else to work on. But I think the answer is instead to give even more.

We work. We make salaries. We live in comfort. In turn we have the ability to help others. I realize it's all somewhat symbiotic. But when does one shift the balance? Instead of waiting until a magical time when there are seven figures in my bank account which may never come, why not start spending more of my time giving now? Isn't that simply another way of achieving wealth?

I guess that is why there is so much attention at the end of someone's life about what they gave of themselves. Because despite the incessant focus on money and achievement in our society, in the end, that's how we still judge you. What did you give of yourself?

Tuesday, January 17, 2012

"Gamifying" everything can backfire

Gamification has been all the rage recently. It's assumed now that any social app and even new business app needs some form of gaming associated with them to incentivize people to do something.

A prediction market, in a sense, is gamification personified. The existence of a virtual currency drives you, just like in real life, to start comparing yourself with others and competing with them. We exacerbate that competition by adding leader boards showing who has made the most money.

Conventional wisdom says you lavish the top money makers with prizes and praise.

Unfortunately prizes and an over-emphasis on certain leader boards can incentivize exactly the type of behavior you don't want. In most applications, leader boards are simply meant to drive action: add or edit content, check in somewhere, or perform some task. But in a prediction market, we want people's actions to be more nuanced. We want them to make predictions, but ideally we want the right mindset behind those predictions.

Too much emphasis on leader boards and the virtual currency and you have someone asking themselves: "what prediction is going to make me the most money?" Instead we want people to be asking: "what prediction is going to be right or wrong?"

It's a fine line to walk which is why we've been removing focus from our leader board showing who the top money earners are and emphasizing other activities more focused on participation like making good comments and submitting new questions to be published.

In fact we've been redesigning our dashboard where people track their portfolio and in its current iteration we've omitted leader board information altogether. Instead we're trying to draw people more to how their individual predictions are doing and if there is new information that would drive them to change their mind.

TL;DR It's easy to jump on the band wagon to "gamify" everything but you may inadvertently be incentivizing exactly the type of behavior you don't want.

Friday, January 13, 2012

What the Bagel Man Saw - An Accidental Glimpse at Human Nature

I saw this old Stephen Dubner article from the New York Times Magazine pop up on Longform this week and thought it was a great story.

A former economist decides to quit his job and start selling bagels on the honor system at a few hundred offices in the Washington, DC area. He leaves a couple dozen bagels and a money box, then comes back at the end of the day to collect.

In the process he learns quite a bit about what kinds of offices are more honest in paying for the bagels than others and what external factors affect payment (weather, holidays, etc.) He collected so much data he can now fairly reliably predict what the payment rate will be for any kind of office he sells his bagels at.