We want a New Information Revolution for Christmas. Open Prediction Markets are the New Information Revolution - specifically, the Seventh Information Revolution.
The Internet is often labeled The Information Revolution or the Information Age, as if it were only one, but that is grossly inaccurate. It’s actually the sixth, at best, and we might be on the brink of a new one with implications no less breathtaking than the ones that preceded it.
An Information Revolution can be defined as a quantum leap in the speed, quality, ease, depth and/or breath of the transmission of knowledge among humans from how information had been previously transmitted. It's a big change that sharply expands the scale and scope of human access to knowledge and massively reduces the scale and scope of ignorance, confusion, deception, risk and uncertainty, hopefully propelling our species forward.
These are the Seven Information Revolutions, in our humble opinion:
1. Language - structured, spoken and written, whether through heiroglyphics, other symbols or characters – was the First Information Revolution. Before that, communication might have amounted to no more than random grunts among cavemen, slaps and the occasional (ok, probably frequent) clubs to the head. Men and women were not much more highly evolved than babies in their ability to convey thoughts to one another. That wasn’t very efficient (try mindreading a screaming infant), and it didn’t facilitate much technological progress.
2. Prices for goods and services were the Second. Now, this one doesn’t get nearly enough credit, and we highly recommended reading Adam Smith’s writings on what he called “The Invisible Hand” as well as Friedrich von Hayek" The Use of Knowledge In Society (1945) in which the Austrian economist eloquently lays out (in a way that's quite passionate for an Austrian economist) how prices were actually the world’s first decentralized communications network.
Hayek explained that prices aren't just numbers on a menu. They are a communications system that transmits actionable, digestible intelligence about which goods and services are relatively low-value and high-value, where the scarcities and surpluses are and where more or less production and investment are required.
All that from a simple easily understood number and its day to day fluctuations. Prices reduce the burden on individuals — making it easier for us to share information and coordinate our actions without having to know everything about everything.
As Hayek said: “The mere fact that there is one price for any commodity…brings about the solution which…might have been arrived at by one single mind possessing all the information which is, in fact, dispersed among all the people involved in the process.”[15]
This excerpt – which goes into more detail on this idea with the example of prices for tin – is long, but it’s quite good and amounts to one of the early, eloquent defenses of decentralization (and one of the stronger arguments for prediction markets, for that matter):
The whole acts as one market, not because any of its
members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all… the most significant fact about this system is 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. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned.
It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement…the marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; i.e., they move in the right direction.
I have deliberately used the word “marvel” to shock the reader out of the complacency with which we often take the working of this mechanism for granted. I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind...remember this: The problem is precisely how to extend the span of our utilization of resources beyond the span of the control of any one mind; and therefore, how to dispense with the need of conscious control, and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do.
In other words, the price system many of us take for granted evolved organically into a hyper-efficient communications, coordination and incentive network that allowed mankind to manage its affairs with greater efficiency, less central control and less communication over a wider expanse of geography and wider scope of activity than we could possibly do through conscious planning, design and action (just ask escapees from the Soviet Union, Cuba, North Korea or any other country that ever butchered their market price system).
In Adam Smith’s words, this is “The Invisible Hand.” It allowed civilizations to develop to the next level. In the way they work and convey information, as described by Hayek, prices serve as a precursor to pure prediction markets.
3. The Printing Press was the Third Information Revolution, helping to more quickly spread reading, information and ideas to the masses, propelling humanity out of the Dark Ages into the Renaissance.
4. Electricity facilitated instantaneous two-way, interactive transmission of voice and text information over long distances. Phones were a later extension of it. That was the Fourth Information Revolution.
5. TV and radio enabled one-way wide broadcast of audio and video information across entire nations. That was the Fifth Information Revolution.
6. The Internet (and the preceding wave of digitization that helped enable it) has allowed for easier multi-way, multi-person, nearly-instantaneous, interactive, transmission, broadcast and feedback of a wider spectrum of multimedia (voice, sound, text, imagery, etc.) over any distance. That was the Sixth Information Revolution.
We now suffer from information overload – and a lot of it is bad information.
7. Open Prediction Markets are a Seventh Information Revolution which will enable quicker, cleaner, easy-to-monitor, easy-to-track broadcast of knowledge. Prices in markets for predictions, powered by “The Wisdom of the Crowd,” represent the market's collective judgement about the chances different events will happen. Prediction markets, presented the right way on an open platform, could make the current state of the world (the path we’re all on and perhaps the path we should be on) a lot easier for anyone anywhere to understand, track, benefit from and hedge against.
Unlike previous information revolutions that dramatically increased the quantity of information, the single biggest contribution of prediction markets is a revolutionary improvement in the quality, digestibility and access to information.
As Hayek might say in an unguarded moment after a bit too much Weissbier, “Wunderbar!”
