Chapter 3. Ideological and Economic Foundations of Information Markets (Author: Sanghoon Bae)

Why

1. With the growing popularity of information markets concepts among scholars as well as practitioners, critiques also increase on the viability and reliability of the information markets systems as a measurement technique to support the organization's decision-making.
2. While some of critiques are about the methodological accuracy of information markets, many others relate to ideology and theoretical assumptions that information markets concepts involve.
3. In theory, it is natural that people with different belief systems have different viewpoints.
4. In practice, when the organizations make a decision on whether to adopt a new system or management technique, they not only consider its methodological excellence but also see if it conforms to the policy and the collective ideological inclination of the organizations.
5. The difference in the understanding of the world and economic, social, and political behaviors of the human leads to disagreement on the viability of information markets as a decision making supporting mechanism.
6. Therefore, Better understanding of information markets concepts starts with the proper appreciation of the ideologies and economic principles that the information markets mechanism involves and employs.

What

1. Ideological Roots of Information Markets
1. Classical Liberalism
1. Given the emphasis on divers participants, highly decentralized and privately held information, free entry and exit from the market, and independency of the individuals, the ideological roots of information markets may be found at Hayekian classical liberalism.
2. A belief system of information markets is that the idea (prediction) on the future events can be better obtained from the wisdom of crowds than a few experts’ opinions which often are of self interest.
2. Weberian Rationalization and Information Markets
1. The idea of information markets embraces the Weberian theory of Rationalization in that both emphasize efficiency, predictability, calculability (measurability) of subjects.
2. Every objects (idea, benefits, profits, etc) traded in information markets should be calculable, and measurable.
2. Economic Fundations of Information Markets
1. Efficient Market Hypothesis (EMH)
1. The EMH is highly controversial and often disputed.
2. An 'efficient' market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value (Fama, 1995)
3. In the stock market setting, stocks always trade at their fair value on stock exchanges, and thus it is impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. Thus, the crux of the EMH is that it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.
2. Rational Expectations Theory
1. Rational expectations are "the best guess of the future (the optimal forecast) that uses all available information (from Wikipedia).
2. Information markets' behaviors are dependent up on the behaviors of the market participants. People are generally rational and use all neccessary information to their advantage.
3. problems: Adaptive expectation and information buble or trap as a result.
3. Profit Maximization and Price
1. Total profit in a perfectly competitive market reaches its maximum point where marginal revenue equals marginal cost (from Wiki). Therefore, the prices exactly reflect the value of objects traded in the markets. The same holds true for information markets.

Note

1. This chapter deals with ideological backgrounds and economic principles that information markets employs.
2. Focus is given to how those ideas are implied in information markets concepts and what is controversial.
3. This chapter thus provides clues for the next chapter on challenges on information markets which would deal with theoretical, legal, ethical problems of information markets.
4. To be further developed.