>
> I wrote a review (in two parts:
>
http://www.bayesianinvestor.com/blog/index.php/2008/04/15/predictocracy-part-1/
> and
>
http://www.bayesianinvestor.com/blog/index.php/2008/04/15/predictocracy-part-2/)
> of Michael Abramowicz's book Predictocracy that is is somewhat more
> oriented
> toward laymen than this mailing list is.

Good job. I'm going to add that to the forum's links, if you have no
objection.

> [...]

> He suggests making the
> subsidy more predictable by paying an independent firm to provide
> liquidity
> (i.e. a predictably small bid-ask spread). That approach provides a good
> incentive for that market maker to figure out the optimal price, but that
> market maker has a clear incentive to minimize the rewards available to
> other traders. So it seems to be effective when we need one researcher to
> figure out the right price (i.e. when PMs provide little advantage over
> the best alternatives) and less effective at rewarding the aggregation of
> information from many traders (i.e. when PMs are most likely to be
> valuable).

Good point.

> He points out a potentially fixable problem with the standard approach
> toward subsidies - unless the market maker that is providing the subsidy
> starts with an unusually good estimate of the right price, much of the
> subsidy goes to the initial traders who correct the most obvious
> mispricing,
> when we might prefer to concentrate most of the subsidy on the traders who
> do the harder job of correcting the last small mispricings. A well thought
> out schedule of starting with a small subsidy and increasing it as a
> function of time and/or trading volume should improve the effectiveness
> of the subsidy.

Yes. I've seen that somewhere before.

> He has good suggestions about using market prices (mainly prices of
> insurance) to improve government approaches to regulation. If banks needed
> to get a small amount of private insurance in order to get FDIC coverage,
> the prices of that insurance would be an effective substitute for many of
> the detailed rules that are currently used to limit the moral hazard of
> FDIC insurance.

Interesting idea, but seems vulnerable to collusion.

Tom Breton (Tehom)