This is not at all the first article in the economics literature that explores the role of social motivations, and the authors provide a good discussion of prior work.

"In Pride and Prejudice: The Human Side of Incentive Theory", Ellingsen and Johannesson add two motivational premises to the standard principal-aget model: people value social esteem, and the value they experience depends symmetrically on who provides the esteem: they value esteem more from those who they themselves esteem.
Their main result is to show how an incentive that otherwise would have a positive effect on behavior can have a negative effect for some people because of what the incentive tells the agent about the principal. For example, they suggest this as an explanation for "the incentive intensity puzzle that stronger material incentives and closer control sometimes induce worse performance" (p. 990).

However, three quite nice articles just appeared in the American Economic Review that are a step in the right direction. They are focused on mechanism design and microeconomics (not social psychology, computation theory, nor specifically applications to information system design). But they are accessible, short, and written by giants in the field; in fact, they are revised versions of the Nobel lectures given the by three laureates recently cited for creating the foundations of mechanism design theory: Leonard Hurwicz, Eric Maskin and Roger Myerson.

Maskin's overview, "Mechanism Design: How to Implement Social Goals", doesn't require any math. He introduces implementation theory, "which, given a social goal, characterizes when we can design a mechanism whose predicted outcomes (i.e., the set of equilibrium outcomes) coincide with the desirable outcomes" (p. 567).

Myerson's article, "Perspectives on Mechanism Design in Economic Theory", begins to introduce some of the basic modeling elements from the theory, so it has a bit more math, but it's not heavy going for those who have had an intermediate microeconomics class. He introduces some of the classic applications from economics: bilateral trade with advsere selection (hidden information), and project management with moral hazard (hidden action).

At the least, social welfare musings aside, providers clearly want to motivate more participation, and more loyalty (that is, convincing folks to keep participating, rather than moving on to new networks). How to do so?

urTurn, an Ann Arbor startup, hopes it can create a market for measuring, monetizing and motivating more social network participation. It's idea is simple, and may work: if there's commercial value to providers in having lots of active users, then share some of that value back to the users. By letting the users benefit not only from the social activities, but also from a share of the commercial value of those activities, they should be motivated to participate more.

urTurn is trying to do this by creating a new currency. They award members points for activity, similar to a frequent flier program. The points can then be converted in various ways into cash or swag. For example, urTurn maintains a marketplace where users can buy and sell points for real cash (in trades with other users), much the way that people actively exchange Linden dollars for US dollars in the virtual world, Second Life. In addition, urTurn offers a store for cashing in prizes: for example, for 7500 points you can buy a $25 Visa cash card (other items for sale include iPods and iPhones). Soon urTurn will also be offering auctions in which users can bid their points to obtain items.

Here are some more details, written by my friend and colleague Prof. Yan Chen. Yan has no financial interest in urTurn (she is studying it for some of her research, and is helping to design the auctions for them in exchange for access to data).

With the launch of Google OpenSocial and its embrace by MySpace, etc.., the ability to cross social networks with a common currency is now readily available. The urTurn Rewards Widget monitors and tracks specific activities on the host social networks – Facebook, MySpace, bebo – and gathers these in a central account on the urTurn Marketplace – activities such as making friends, posting photos, and linking your widget to your urTurn Marketplace account.

Users on social networking sites, can download the widget, and start earning points for certain activities, including subscribing to the widget, forwarding the widget to a friend, friend’s subscription to the widget, posting a blog or photo, adding friends to Facebook, and status update on Facebook.

In contrast to frequent flyer programs, urTurn does not benefit directly from the points it rewards the users of host sites. Its revenue might come from several sources: ads revenue, taxing the transactions on the points market, and possibly the host sites.

To add the urTurn application to your Facebook page, go to the URL:

http://www.facebook.com/apps/application.php?id=17299885707&ref=s

Some of the reviewers acknowledged they had not read or even looked at the book (arguing they shouldn't have to since she reviewed a game without looking at it). Many explicitly criticized her for what she said about the game, without actually saying anything about her book.

When alerted, Amazon apparently deleted most of the reviews. Its strategy apparently was to delete reviews that mentioned the name of the game, or video games at all (the book has nothing to do with video games). With this somewhat conservative strategy, the reviews remaining (68 at the moment) are still lopsidedly negative (57 one-star, 8 two-star, 3 five-star), more than I've ever noticed for any somewhat serious book, though there's no obvious way to rule these out as legitimate reviews. (I read several and they do seem to address the content of the book, at least superficially.)

Aside from being a striking, and different example of book review pollution (past examples I've noted have been about favorable reviews written by friends and authors themselves), I think this story highlights troubling issues. The gamers have, quite possibly, intentionally damaged Lawrence's business prospects: her sales likely will be lower (I know that I pay attention to review scores when I'm choosing books to buy). Of course, she arguably damaged the sales of "Mass Effect", too. Arguably, her harm was unintentional and careless (negligent rather than malicious). But she presumably is earning money by promoting herself and her writing by appearing on TV shows: is a reasonable social response to discipline her in her for negligence? (And the reviewers who have more or less written "she speaks about things she doesn't know; don't trust her as an author" may have a reasonable point: so-called "public intellectuals" probably should be guarding their credibility in every public venue if they want people to pay them for their ideas.)

I also find it disturbing, as a consumer of book reviews, but not video games, that reviews might be revenge-polluted. Though this may discipline authors in a way that benefits gamers, is it right for them to disadvantage book readers?

I wonder how long it will be (if it hasn't already happened) before an author or publisher sues Amazon for providing a nearly-open access platform for detractors to attack a book (or CD, etc.). I don't know the law in this area well enough to judge whether Amazon is liable (after all, arguably she could sue the individual reviewers for some sort of tortious interference with her business prospects), but given the frequency of contributory negligence or similar malfeasances in other domains (such as Napster and Grokster facilitating the downloading of copyrighted materials), it seems like some lawyer will try to make the case one of these days. After all, Amazon provides the opportunity for readers to post reviews in order to advance its own business interests.

Some significant risk of contributory liability could be hugely important for the problem of screening pollution in user-contributed content. If you read some of the reviews still on Amazon's site in this example, you'll see that it would not be easy to decide which of them were "illegitimate" and delete all of those. And what kind of credibility would the review service have if publishers made a habit of deciding (behind closed doors) which too-negative reviews to delete, particularly en masse. I think Amazon has done a great job of making it clear that they permit both positive and negative reviews and don't over-select the positive ones to display, which was certainly a concern I had when they first started posting reviews. But it authors and publishers can hold it liable if they let "revenge" reviews appear, I suspect it (and similar sites) will have to shut down reviewing altogether.

(Thanks to Sarvagya Kochak.)

While preparing for my recent presentation at Yahoo! Research, I wondered whether Yahoo! Mail was still using the the Goodmail spam-reduction system (which is based on monetary incentives). I couldn't find the answer with a quick Google search, nor by searching the Goodmail and Yahoo! corporate web sites (Goodmail claims that Yahoo! is a current client, but there was no information about whether Yahoo! is actually using the service, or what impact it is having).

So, I thought, this is a great chance to give Yahoo! Answers a try. I realize the question answerers are not generally Yahoo! employees, but I figured some knowledgeable people might notice the question. Here is my question, in full:

Is Yahoo! Mail actually using Goodmail's Certified Email? In 2005 Yahoo!, AOL and Goodmail announced that the former 2 had adopted Goodmail's "Certified Email" system to allow large senders to buy "stamps" to certify their mail (see e.g., http://tinyurl.com/2atncr). The Goodmail home page currently states that this system is available at Yahoo!. Yet I can find nothing about it searching Yahoo!Mail Help, etc. My question: I the system actually being used at Yahoo!Mail? Bonus: Any articles, reports, etc. about its success or impacts on user email experience?

A day later I received the following "Violation Notice" from Yahoo! Answers:

You have posted content to Yahoo! Answers in violation of our Community Guidelines or Terms of Service. As a result, your content has been deleted. Community Guidelines help to keep Yahoo! Answers a safe and useful community, so we appreciate your consideration of its rules.

So, what is objectionable about my question? It is not profane or a rant. It is precisely stated (though compound), and I provided background context to aid answerers (and so they knew what I already knew).

I dutifully went and read the Community Guidelines (CG) and the Terms of Service (TOS), and I could not figure out what I had violated. I had heard elsewhere that some people did not like TinyURLs because it it not clear where you are being redirected, and thus it might be used to maliciously direct traffic. But I saw nothing in the CG or TOS that prohibited URLs in general, or TinyURLs specifically.

So I contacted the link they provided to appeal the deletion. A few days later I received a reply that cut-and-pasted the information from the Yahoo! Answers help page explaining why content is deleted. This merely repeated what I had been told in the first message (since none of the other categories applied): my content was in violation of the CG or TOS. But no information was provided (second time) on how the content violated these rules.

Another address was provided to appeal the decision, so I wrote a detailed message to that address, explaining my question, and my efforts to figure out what I was violating. A few days later, I got my third email from Yahoo! Answers:

We have reviewed your appeal request. Upon review we found that your content was indeed in violation of the Yahoo! Answers Community Guidelines, Yahoo! Community Guidelines or the Yahoo! Terms of Service. As a result, your content will remain removed from Yahoo! Answers.

Well... Apparently it's clear to others that my message violates the CG or the TOS, but no one wants to tell me what the violation actually is. Three answers, all three with no specific explanation. Starting to feel like I'm a character in a Kafka novel.

At this point, I laughed and gave up (it was time for me to travel to Yahoo! to give my -- apparently dangerous and community-guideline-violating -- presentation anyway).

I have to believe that there is something about the use of a URL, a TinyURL, or the content to which I pointed that is a violation. I've looked, and found many answers that post URLs (not surprisingly) to provide people with further information. Perhaps the problem is that I was linking to a Goodmail press release on their web site, and they have a copyright notice on that page? But does Yahoo! really think providing a URL is "otherwise make available any Content that infringes any patent, trademark, trade secret, copyright" (from the TOS)? Isn't that what Yahoo's search engine does all the time?

End of story.

Moral? Yahoo! Answers is a user-contributed content platform. Like most, that means it is fundamentally an open-access publishing platform. There will be people who want to publish content that is outside the host's desired content scope. How to keep out the pollution? Yahoo! uses a well-understood, expensive method to screen: labor. People read the posted questions and make determinations about acceptability. But, as with any screen, there are Type I (false negative) and Type II (false positive) errors. Screening polluting content is hard.

(My question probably does violate something, but surely the spirit of my question does not. I had a standard, factual, reference question, ironically, to learn a fact that I wanted to use in a presentation to Yahoo! Research. A bit more clarity about what I was violating and I would have contributed desirable content to Yahoo! Answers. Instead, a "good" contributor was kept out.)

My hosts wrote a summary of the talk (that is a bit incorrect in places and skips some of the main points, but is reasonably good), and posted a video they took of the talk. The video, unfortunately, focuses mostly on me without my visual presentation, panning only occasionally to show a handful of the 140 or so illustrations I used. The talk is, I think, much more effective with the visual component. (In particular, it reduces the impact of the amount of time I spend glancing down to check my speaker notes!)

In the talk I present a three-part story: UCC problems are unavoidably ICD problems; ICD offers a principled approach to design; and ICD works in practical settings. I described three main incentives challenges for UCC design: getting people to contribute; motivating quality and variety of contributions; and discouraging "polluters" from using the UCC platform as an opportunity to publish off-topic content (such as commercial ads, or spam). I illustrated with a number of examples in the wild, and a number of emerging research projects on which my students and I are working.

One of the major threats to home computers are viruses that install bots, creating botnets. These bots are code that use the computer's resources to perform something on behalf of the bot owner. Most commonly, the bots become spam sending engines, so that spammers can send mail from thousands of home computers, making it harder to block the spam by originating IP (and also saving them the cost of buying and maintaining a server farm). Bots, of course, may also log keystrokes and try to capture bank passwords and credit card numbers.

The problem is crawling with incentives issues. Unlike first generation viruses, bots tend to be smarter about detection. In particular, they watch the process table, and limit themselves to using CPU cycles when other programs are not using many. That way, a normal home user may not see any evidence that he or she has a virus: the computer does not seem to noticeably slow down (but while they are away from the machine the bot may be running full tilt sending out spam). So, the bot doesn't harm its host much, but it harms others (spreading spam, the bot virus itself, possibly other harmful activity like denial-of-service attacks on other hosts). This is a classic negative externality: the computer owner has little incentive (and often little appropriate knowledge) to stop the bot, but others suffer. How to get the home computer user to protect his or her machine better?

We are developing a social firewall that integrates with standard personal firewall services to provide the user additional benefits (motivating them to use the service), while simultaneously providing improved security information to the firewalls employed by other users.

We don't have any papers released on this new system yet, but for some of the foundational ideas, see "Incentive-Centered Design for Information Security", ICEC-07.

This incident reminded me of one of my favorite stories. It was told by Arlo Guthrie back in the late 60s, around the time he became famous not for being the son of Woody, but for being the composer and performer of "Alice's Restaurant". AR is a long (18 minute) story told to a strummed motif, a "zygote of a melody" (to paraphrase Ani Difranco). Arlo told lots of stories less famous, too. One he would tell before singing "The Pause of Mr. Clause" (which is a song about how the FBI would be very suspicious of Santa Clause (sic), given his long beard, red clothes -- is he a commie? -- and what's in that pipe that he's smoking, anyway?). The story is the classic downward social comparison story. Here it is, copied from the version published in This is the Arlo Guthrie Book (Amsco Music Publishing, NY, 1969):

"During these hard days and hard weeks, everybody always has it bad once in a while. You have a bad time of it and you always have a friend that says, 'Hey, man, you ain't got it that bad. Look at that guy!' and you look at that guy and he's got it worse than you. And it makes you feel better that there's somebody that got it worse than you. But think of the last guy! Nobody's got it worse than that guy! Nobody in the whole world! That guy -- he's so alone in the world that he doesn't even have a street to lay in for a truck to run him over. Nothin's happenin' for that cat!

And all that he has to do to create a little excitement in his life is to bum a dime from somewhere, call up the FBI, say 'FBI' -- thay say, 'Yes'...say, 'I dig Uncle Ho and Chairman Mao, and their friends are comin' over for dinner!' Click. Hang up the phone. And within two minutes (and not two minutes from when he hangs up the phone, but two minutes from when he first put the dime in) they got 30,000 feet of tape rolling! Files on tape. Pictures, movies, dramas, actions on tape -- and then they send out half a million people all over the entire world...the globe...to find out all they can about this guy!

'Cause there's a number of questions involved in this guy. I mean, if he was the last guy in the world, how'd he get a dime to call the FBI? There are plenty of people that aren't the last guys that can't get dimes! He comes along and he gets a dime! I mean, if he had to bum a dime to call the FBI, how was he gonna serve dinner for all those people? How could the last guy make dinner for all those people? ANd if he could make dinner, and was gonna make dinner, then why did he call the FBI?

They find out all of those questions within two minutes! And that's a great thing about America. I mean, this is the only country in the world -- well, it's not the only country in the world that can find stuff out in two minutes, but it's the only country in the world that would take two minutes for that guy! Other countries would say, 'Hey -- he's the last guy. Screw him.' But in America, there is no discrimination and there is no hypocrisy 'cause they'll get anybody. And that's a wonderful thing about America."

Two similar businesses, at least, are already operating: InnoCentive and Cambrian House.

Think you're smart, but don't have time or capital to turn your ideas into businesses? Go sell your ideas online!

(Based on reporting in Putting Innovation in the Hands of a Crowd - New York Times)

Peer to Patent is a project started by Prof. Beth Noveck and her Do Tank group at NYU Law School. The US Patent Office adopted it for a one-year pilot starting 15 June 2007. It is a system to post patent applications for public comment, in particular seeking suggestions about possible prior art, to assist USPTO examiners determine whether a patent should be granted. It was motivated by a widely held sense, particular in the area of software and business process patents, that the USPTO has been overwhelmed with the number of applications and the advances in technology in recent years, and that many and patents have been granted which can have the effect of stifling new innovation. During the first six months of the pilot, over 1800 people have registered to participate, and over 150 prior art references have been submitted on 24 patent applications that can be reviewed through this system.

In the February 2008 issue of the Communications of the ACM, Andy Oram published a column about the project in which he discussed the incentives challenges that may stand in the way of success. First, of course, not just any user is likely to be able to make quality contributions: to be useful, a contributor must have serious expertise in the area of the patent in order to be able to understand the application well enough to recognize possible prior art, and must know the literature well enough to identify the prior art. That's not a lot of people, and they aren't the type who have a lot of underpaid hours to volunteer. Indeed, he quotes Jon Bentley of Avaya Labs who points out that the whole essence of patenting is making money, and that the people in the best position to contribute may be those least interested in doing so.

One of the hopes of the project is that it is the monetary incentive itself -- not provided by Peer to Patent, but indirectly -- that will induce people to contribute: competitors. That is, if some company is using technology on which a patent is proposed, or is developing something similar, it will have a financial interest in seeing that the patent is not granted. Thus, they might be the ones to put the time in to review the application and propose the prior art. Although they are interested parties, as Oram says "prior art is prior art no matter who finds it".

Interesting problem, and I'm looking forward to seeing whether or not Peer to Patent can succeed (and I hope it does, because I tend to think that too many software and business patent applications are approved).

The task: there are currently about 1.8 million known species; the relevant scientific community thinks there are about 18 million more to be discovered. And an encyclopedia does not merely name the speciies: it compiles a wide range of useful information (some of the current developed pages have 20 or more subheadings, multiple photographs, extensive bibliographies, even references to the species in literature; see, e.g., Eastern White Pine).

And what about the usual incentives problems: why contribute? what make the effort necessary for quality contributions? how to limit pollution? By focusing on a specialized and visible community of scientists, some of these problems may be smaller than in other settings. In particular, I expect that quality will be handled by a mix of contributors not wanting to look foolish to their colleagues, and other contributors delighting in showing how much better their knowledge is as they make quality-improving edits. The rewards are similar to the standard rewards of recognition and satisfaction with documenting and adding to knowledge that have kept academia moving for the past several hundred years.

Pollution and quality also will be managed, it appears, by having volunteer experts assigned as "curators", or moderators for each page. This is reminiscent of the method that seems to work well on Slashdot, for example.

But what about inducing contributions in the first place? The project's Executive Director, Prof. James Edwards, said

“We have not given enough thought to the people who provide the information on which the Encyclopedia of Life is built. “We are looking into ways to keep that community going.”

Indeed, in a twist not often heard when talking about getting people to contribute to, say, Wikipedia, the founders are worried about the community dying off:

"The ranks of taxonomists — the scientists who describe species and revise old descriptions — have been shrinking steadily for decades. Dr. Wilson hopes the Encyclopedia of Life will foster the growth of that group."

My student, Lian Jian, is currently working on a project to discover reasons why contributors "exit" (stop contributing to) Wikipedia. Here is a poster describing her preliminary work. As the many new and exciting user-contributed content projects mature, inducing a flow of new contributors to replace those who exit, and passing along the organizational memory and routines, will become important determinants of long-term success.

These are provocative examples of the manipulation problem --- one species of managing the quality of user-contributed content --- because GiveWell's business is evaluating the reliability and quality of other nonprofits in order to provide advice on where to give one's charitable donations.

Before I summarize his framework,I'll mention that his multidisciplinary lens is somewhat different than what my group of colleagues and students and I usually do. Our focus so far has been on the interaction between economics (rational choice theory) and computation (information processing). We've talked for a while, and a few of us are starting to integration social psychology perspectives as well (especially to think about non-monetary and intrinsic incentives). We also see a role for personality psychology, and maybe cognitive.

Bob, like me, starts from the foundation of economics. (By the way, Bob was hired by MIT as an assistant professor in Economics while I was there as a grad student, so we got to know each other a bit -- as he reminded me the other day, we played basketball together. He's now a full professor in the business economics group of the Sloan School of Management at MIT.) But then he moves into politics and complex systems perspectives. In particular, he relies on March's approach to control and hierarchies in organizations, and on Winter's work that predicts path dependence.

On to Bob's 5-step program:

1. The formal is flawed
2. The relational is required
3. The formal and relational interact
4. Institutional design
5. Building & changing relationships

These suggest a way of explaining why cross-disciplinary approaches are important for ICD, and a framework for moving forward. I can barely do these justice in a short note; Bob gave a detailed 80-minute talk with this outline. I'll try:

Formal is flawed. Formal models that rely on a few narrowly drawn incentive instruments are incapable of doing a very convincing job of describing complex incentive problems. For example, for the standard price model, Bob poses this challenge: "Find an employee with fabulous incentives created solely by a formula." Formulae are not enough: there are too many measurement problems, contingencies, etc.

Relational is required. A quote from Leamer (2007) summarizes the point better than I can: "Most exchanges take place within the context of long-term relationships that create the language needed for buyer and seller to communicate, that establish the trust needed to carry out the exchange, that allow ongoing servicing of implicit or explicit guarantees, that monitor the truthfulness of both parties, and that punish those who mislead.” A point that Bob made is that most organizational interactions are more like long-term repeated games than they are like one-shot strategic interactions. As a general matter, long-term relationships can lead to a wide variety of outcomes (cf. the Folk Theorem). And, another general implication of repeated games is that the "shadow of the future" is pivotal, so investing in and respecting the relationship is crucial.

Formal and relational interact. The way that relations are structured can have a strong (even dispositive) impact on the effectiveness of the formal incentives. For example, because of the shadow of the future, it can make sense to include a subjective bonus in a compensation plan (that is, the principal says something like "trust me to honestly assess your performance and pay you an ex post bonus based on it" -- trust because the performance is not verifiable by a court and thus not contractible).

(Intermediate summary: Some prices can be chosen, but not the right ones because of gap between performance goals and contractible measures. Relationships help, but not enough. Reliance on relationships affects the desired structure of formal incentives.)

Institutional design. Cyert and March (1963): An organization "is basically a coalition without a generally shared, consistent set of goals. Consequently, we cannot assume that a rational manager can treat the organization as a simple instrument in his dealings with the external world. Just as he needs to predict and attempt to manipulate the ‘external’ environment, he must predict and attempt to manipulate his own firm.” And here's where politics, authority and control come in: Pfeffer (1981): "it is necessary to understand who participates in decision making, what determines each player’s stand on the issues, what determines each actor’s relative power, and how the decision process arrives at a decision.” Gibbons' conclusion: Choose the formal to facilitate the relational. He didn't spend much time on this idea, but one of his examples is that the best allocation of control for spot conditions may not be best for relational decisions.

Building and changing relationships. The driving point here is that seemingly similar organizations experience persistent performance differences. Bob explains this as a consequence of path dependence. The paths may differ in (among other things?) the extent to which they rely on formal and on relational incentives. He suggests a stylized, extreme case, in which a concave possibilities frontier between a very controlled firm and a very decentralized firm is traced by relational restructurings, whereas primary reliance on formal incentives carves out a path convex and far inside the frontier. Where the firm ends up, then, depends on the mix of formal and relational incentive structures it employs. (See his slides 49 and 50.)

This is all a bit vague, largely because I don't have a good grasp of the ideas yet. I'll follow Bob's work and see if I can make it more concretely useful for the ICD research programme.

In a novel twist, The Industry Standard is now combined online newspaper and a prediction market. With a free account, readers can place (fake currency) side bets on various predictions about industry events. For example, markets open today include whether Yahoo! will accept Microsoft's bid by the end of the week, and whether Google, Yahoo! or Microsoft will buy Tivo by the end of the summer.

Prediction markets are a type of incentive-centered design that have become widespread and hot in the past few years. The first significant example I recall is the 1988 Idea Futures market by Robin Hanson, though academic articles by Hofstee (1984) and Leamer (1986) came a bit earlier.

There are quite a few well-known and active prediction markets now, such as Hollywood Stock Exchange, TradeSports, and News Futures. However, the new Industry Standard is the first time I've seen a significant market that is so closely linked to an online news source (though others sometimes provide a limited news feed). It seems like a natural idea: an industry-focused news site (if successful) is bringing in knowledgeable people with an interest in the likelihood of industry events.

Why is a prediction market an incentive-centered design? It is providing incentives to induce knowledgeable people to make the effort to reveal their knowledge and beliefs, and to do so honestly (so they address problems of both hidden action and hidden characteristics). Traditional stock markets provide this information revelation and aggregation role for the futures of publicly-traded companies; prediction markets play the same role for other outcomes.

Most of them, due to gambling and securities laws in the US, run based on funny money (valueless currency). Thus, the substance of the incentives is not immediately clear, and it is a topic for future research to determine how well these markets do induce effort and truth revelation. (The Iowa Electronic Markets, which has approval to trade in small amounts of money, mostly on political outcomes, has performed extremely well -- almost always better than professional polling organizations such as Gallup -- for many years.) It is going to be interesting and instructive to analyze participant responses to non-pecuniary incentives.

Former Michigan Ph.D. student Dave Pennock (now with Yahoo! Research) publishes an excellent blog about predicion markets: Oddhead.

(Image courtesy of "Financial Aid Podcast" on Flickr.

In Homer's epic, when nearing the Sirens whose entrancing song would lead men to dash their ships on the rocks, Odysseus had his men tie him to the mast and plug their ears with beeswax so they could hear neither the Sirens, nor his orders to doom them (all of this because he was curious and couldn't resist listening himself!).

There is a well-known story among economists that Nobelist Thomas Schelling advised those who wanted to diet: "Write a large check to the American Nazi Party and put it in an addressed envelope. When you break your diet, mail it." (Steven Levitt writes that he heard the advice first-hand.) This sensible scheme to increase our incentives to stick with a commitment suffers the problem of a bit of circularity: if you decide to break your diet (or other) commitment, what is to stop you from breaking your commitment to mail the check?

Yale economists Ian Ayres (a classmate of mine while getting our Ph.D.s) and Dean Karlan (also an MIT grad) have started a Web-based company to help implement this tempting but difficult to implement scheme: StickK.com. The scheme is pretty simple: mail them the check and they will hold it in escrow, and if you break your commitment will mail it for you.

"But what", you say, "will force me to let them know I broke my commitment"? Here's where the time-honored mechanism of a trusted-third party referee comes in: set up your commiment in a way that can be verified, and then have a friend or other trusted third-party monitor you, and agree to notify StickK.com if you break your promise.

(Yes, yes, of course: what's to stop you from offering your buddy half of the money if she doesn't report you? Isn't recursion fun?)

This is a fun example of a principal-agent problem: you are the principal and the agent, and you have what amounts to a hidden action problem. That is, you cum principal can't enter an enforceable contract with you the agent to ensure performance because the agent can take an "unobservable" action: instructing you the principal to not enforce. The third-party mechanism transforms this into a symmetric information problem with verifiable, enforceable action.

(Thanks to Buzzy Nielsen for pointing me at StickK.com.)