Entries in community (5)


Freerisk proposes a crowdsourced solution to risk modeling

The failure of the credit agencies to properly evaluate the risk of securitized assets and the role that this poor performance played in the current financial crisis has been discussed by the Wall Street Journal to Alan Greenspan. But what is the alternative paradigm? Freerisk, a new project by Jesper Andersen and Toby Segeren, suggests than open data and transparent, crowdsourced calculations can provide more accurate risk modeling of the assets that underpin our financial framework.

The common critique is that the current risk rating marketplace is an oligopoly; ratings can only come from three sources: Moody's, Fitch, or S&P. Sellers of securities must shop between these established players with the aim of receiving the best rating possible. Herein lies a fundamental structural problem in the market: The credit rating agencies are incentivized to provide higher ratings than are deserved.

And since there is no real competition, the credit agencies' performances are never seriously evaluated. In the structured finance business, assets that individually were junk could together be classified as extremely safe. Through late 2008, AIG was holding a AAA rating from Moody's. This rating was seriously flawed and provided an extreme disservice to investors seeking to understand the risk of AIG, but even this high-profile case doesn't stop sellers of securities from seeking Moody's stamp of approval.

But what if the marketplace could be re-structured so that incentives were more aligned to truth than to business? Rather than concentrating all ratings power into the hands of a small pool of analysts from Nationally Recognized Statistical Rating Organizations (NRSROs), could this risk evaluation be put out to a broader market?

Freerisk is using open data principles to make information on companies easier to understand and interpret, thus freeing risk modeling to a broader community. SEC records are exposed in RDF via a public API, enabling anyone to make his own risk calculator. The site also plans to use a prediction market-like leaderboard system to help rise top predictors to view. Then all participants can see who is doing the best job of measuring risk and learning more about the marketplace as they refine their systems. Freerisk hopes to eventually compete with the official rating agencies.

One of the best elements of this system is that the risk calculations are fully transparent, unlike the NRSROs who have no requirement to disclose their methods. How many people actually have the expertise to make these types of calculations, however, remains an open question. But at least the site can start building a public record of success. If the Freerisk community can consistently better evaluate risk than the official rating agencies, then than would give more ammunition to real credit agency reform. And it would also provide another example of how a market setting with transparent processes can enable a community to solve problems together.

Thanks to @alexismichelle for the tip!


Crowdsourcing Patent Review: Innovation and transparency at the USPTO


The United States Patent and Tradmark Office (USPTO) may have the mission to promote the progress of science and the useful arts, but it has never been known for exemplifying a culture of innovation itself. That may be changing. A few years ago, a pilot program, the Peer-to-Patent Project opened the patent examination process to public participation for the first time. The project utilizes the collective knowledge of internet users to discover “prior art” that may be used against a patent request. Based upon its initial success, the USPTO has decided to extend the program and an optimist might hope that this signals a new working model for the agency, or perhaps, a broader portion of the government.

Brainchild Beth Noveck of New York University describes the effort as one that explores "how to design a more collaborative culture that involves the scientific community more directly in decision-making." With so many technologies and ideas being shared across the web without formal patent applications, the aim of the project is to reduce the number of frivolous patents and subsequent lawsuits clogging the legal system. Embraced by industry, this development is even better for consumers who should in the future be able to enjoy new products sooner and more cheaply, and without the fear of losing your favorite product as a result of a lawsuit.

Peer-to-patent applies social networking technology to the patent business to ensure that only the worthwhile patents actually receive 20 years of patent rights. The website brings transparency to the patent business, which to many inventors, has in the operated in a shroud of mystery. It also offers opportunities for efficiency, by crowdsourcing evaluation rather than relying only on over-worked patent officers.

And for the casual innovator, the site offers a small window into the type of ideas that people are trying to patent these days (e.g., Continual reorganization of ordered search results based on current user interaction, Process of encryption and operational control of tagged data elements, The community patent review site has new revamped website: http://www.peertopatent.org/.

 Flickr credit: nodomain1


A free market approach to combating global warming

At TechCocktail IV in Washington, DC, we had the pleasure of meeting the folks behind Earth Aid, a platform for consolidating all of your utility bills while earning money for reducing you energy usage.

The new company launched only a month ago and it has found a way of filling a gap in the carbon trading market: companies can buy and sell credits on voluntary carbon markets, but households couldn't participate because there was no system for turning small energy savings into something meaningful. Earth Aid steps in to buy your credits, bundle them with credits from other households, and then sell them just like big business does. If you cut your personal energy usage, Earth Aid will cut you a check.

How does it work?

When you sign up for the free service, you provide Earth Aid with access to your utility statements. They can only see how much you've paid the utility companies per month and how much energy you used. With this data, they create your personal "baseline" of energy usage and suggest ways that, given your energy consumption profile, you could probably save energy and cut down on your energy bills. If you implement these solutions and succeed in reducing your energy use from the baseline, then voila, you get a check in the mail.

Why is this site awesome?

The first reason is that the site empowers individual households to contribute to fighting climate change at the micro level.  By actually compensating individuals for taking positive steps for the environment, it encourages these behaviors on a larger scale. Let's say you are considering buying compact flourescent lightbulbs, but when you get to the store, you see that traditional incandescent bulbs are so much cheaper. If you knew that you would immediately reap savings from both a reduced energy bill and from a direct check for your reduced energy consumption, then you might see that the more expensive, efficient bulb is worth it.

Second, this company is encouraging a purely voluntary, free-market solution to the global warming problem. Households sell credits because it benefits them financially to do so and companies buy the credits so they can claim carbon neutrality. It's win-win and no regulators need to be involved. Granted, households are a very small piece of the climate change challenge, but this sets a good example on a micro scale.

Finally, I just love how the site organizes my utility information. What Mint is to personal finance, Earth Aid is to energy consumption -- clear charts and visualizations help make sense of my household energy usage and where I might find opportunities for reductions and savings.

Best of luck to this new venture.


Mint vs. Wesabe: the value of online communities


I recently had to pay the library on overdue charge for a personal finance book called “You’re so Money!” Unfortunately, my life is full of such “ironies” where my attempts to make the most of my money cost me more than I save. So when I heard about mint.com I ran home from work to check it out. The free personal finance website aggregates all of my financial statements from checking and savings accounts, credit cards, and investors in one place on a daily basis and then provides me with colorful charts on how I spend my money, ideas for how I can save, and alerts when I break my budget.

Like the p2p market places, social lenders, and prediction markets we’ve profiled, Mint is an example of how technology can cut out the middle man (financial planners in this case), heighten transparency, and facilitate informed decision making. By transforming our daily financial dealings into meaningful graphs and tools, Mint helps to demystify and even beautify (with its universally-loved interface) the world of personal finance.

Mint.com is not the first site of its kind. It competes with Wesabe, a site that began in 2005 and offers similar personal finance services. Many bloggers have compared the two: They both h aggregate all of your financial statements, track your cash flow, and help you create ad stick to a budget. Mint.com is more convenient and user friendly because it automatically updates your graphs and budget every night. It is also the Marcia, Marcia, Marcia of the bunch. Wesabe is more flexible and secure because it allows you to easily change how your expenses are bucketed and also gives you the option to manually update your financial statements—a slower but more secure process to aggregate your personal financial information.

While both models enhance transparency, cut the middleman, and engender more informed decisions Wesabe brings the extra element of community to the table. Its users join a social network where discussion groups allow them to ask questions and contribute to a variety of ongoing personal finance conversations, from limiting consumption to planning retirement, traveling the world and buying a house.

Nevertheless, the younger Mint appears to be doing better than its predecessor. (For an interesting analysis click here.) Is it because users don’t value the element of community? In p2p markets, social lending, and prediction markets, it is the online community that provides the key service. Etsy, Kiva, and Intrade bring no service to the user if there isn’t another user (to sell, lend/borrow, or trade with), but Mint brings the same value for the user regardless if he or she is the only user or one of millions. While Wesabe’s community might provide good advice to users it is not central to the provision of personal-finance services.

This is a reminder that there is a difference between an online community that provides support and one that provides a service. For Wesabe to increase its competitive advantage it will have to stop relying on its element of community and focus on its provision of personal-finance services. The twist is that its online community provides the key. The close relationship between the Wesabe’s management team and its users on the site’s discussion groups is where the answers lay. Improving its interface and convenience are the users’ first requests.



Integrating even more community into the marketplace at Etsy

Etsy announced today that they are launching a trial run of a "Community Council" to discuss the state of the Etsy marketplace. From The Storque:

In order to better serve the entire Etsy community, we are forming a council of community members on Etsy with whom we will meet directly. This council will help us test new products and features, report on the the state of the marketplace and generally just let us know how things on Etsy are for them. At the same time, we will make ourselves available to them to answer questions about Etsy — past, present and future. Our hope is to expand on those things we learn via our forums, virtual labs, usability sessions, customer support emails, and social media by engaging in still more direct, two-way conversation.

Yet another example why Etsy is a great place to be both a buyer and a seller. The community makes the market stronger.