Entries in free markets (3)


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!


Kickstarter: A Creative Marketplace for Creative Individuals


The Greek Muses celebrating KickstarterAttention all starving artists and ambitious inventors! We bring you Kickstarter—a P2P platform that helps match creative and inventive individuals with potential funders. Here is the quick rundown:

  • What kinds of ideas are funded? Movies, books, photographs, recordings, crossword-puzzle contests, board games, plush toys, and eccentric pastimes, such as the daily sending of postcards.
  • How it works: Project owners create a profile that details the idea or endeavor they are attempting to materialize. The idea owner states the total amount of money required, the minimum that can be donated and the funding deadline. Interested patrons browse through the projects and contribute in some cases as little as $1 to a project’s fund. No interest is earned because the funds are not investments.
  • Why fund a project? Project funders, or “backers”, receive rewards that let them get a taste of what they are supporting. Free copies of the art, opening-night tickets, and lottery submissions for prizes are just some of the rewards offered. The best funded projects are those that not only have captivating ideas but also those that have the most creative rewards for backers.
  • The good: Some projects have been so successful that they have received more than three times the initial amount of funding requested. And there is no limit to the amount of funding a project can receive.
  • The bad: Currently, the ability to post an idea is by invitation only, and interested applicants are told to sign up.
  • The potentially ugly: If a project isn’t fully funded by its funding deadline, it will receive no money at all. Kickstarter’s creators explain that this prevents artists who have received some funding from feeling pressured to complete a project that was originally envisioned to produce much grander results. It also allows artists to test ideas and see what kind of audience exists for their creation before they start putting money into it, which is a real benefit. It only gets ugly if you wanted $2,000 but got $1,999. There are no deadline extensions.

I like Kickstarter's founding principle of “art for art’s sake.” The general reality has always been that if you are going to be in the arts or any other creative field, you have to strike it big or let it go. Kickstarter allows small ideas to flourish because it helps connect small artists to the small audiences that will appreciate their work. These microartists—as I like to call them—have a realistic ability to create to their heart’s content. It will be interesting to see what kind of ideas emerge in this creative marketplace.

UPDATE: Our friend Cory is now on Kickstarter to fund his project to save sea turtles. It's a good project to check out and experience the site.



Trends point towards increased regulation of high tech success 

Earlier this week, EU regulators levied a record $1.45 billion fine on Intel for anticompetitive practices. Through a suit brought by main competitor AMD, the commission found that rebate conditions and predatory pricing schemes violated anti-trust laws.

This exorbitant fine is bad news for the Intel, but even worse news for consumers. In the current down economy, Intel is a bright light of innovation and success that has not only revolutionized the computing industry but provided a massive engine of job growth. According to the Association for Competitive Technology:

For the past 20 years, the microprocessor industry has delivered more innovation, more speed, more functionality, and lower prices...Over the past 10 years, the average price of Intel's PC microprocessors has dropped by 60 percent. When the only one complaining about the competitive situation is AMD, it raises serious concerns about the efficacy of this action.”

This aggressive action against a company that is currently resilient enough to actually have the cash on hand to pay the fine (CEO Paul Otelinni announced two days ago that Intel has a healthy $10 billion cash balance) may be a harbinger of increased regulatory activity this side of the Atlantic.

Indeed, Ms. Christine Varney, the new commissioner of the Justice Department's antitrust division is scheduled to make a speech on Monday at the Center for American Progress outlining her intent to revive antitrust actions. Technology is one of the industries specifically expected to be targeted.

The question is: Why are governments going after high tech?

From Chairman Craig Barrett:

"The antitrust rules and regulations seem designed for a different era. When you look at high-tech companies, with the high R&D budgets, specialization and market creation they need to hold their big market shares, it's so very different from the old world of oil companies and auto makers that the antitrust regulations were designed for. They are out of sync with reality."

So the EU and American regulators are going to go after Intel (and TechCrunch predicts Google is next) where the vitality and money can be found, while propping up moribund industries like cars and encouraging massive consolidation in finance. How is this a recipe for innovation and growth?