Friday, June 21, 2013

Transparency Drives up the Value of Secrets

I do almost all of my magazine reading on airplanes in the 20 minutes at takeoff and landing when I can't use my laptop or eReader (because dangerous Kindle rays have been implicated in over a dozen fatal airplane crashes in just the past 12 months).  Two items in this month's New Yorker caught my interest (emphasis mine).  The first by James Surowiecki:
The consequences of being caught [insider trading] have never been higher...but hard-pressed fund managers continue to be tempted.  Competition in the investing world is fierce: there are now nearly eight thousand hedge funds, and on average they have underperformed the stock market for nine of the past ten years.  Whatever your supposed market-beating strategy is, someone else is probably duplicating it, and everyone is desperate to find an informational edge.  There was a time when big investors could come by that edge quasi-legally, as companies leaked information to select investors and analysts.  [c.f. the Facebook IPO -ed]  But in 2000 the S.E.C. passed a rule called Regulation F.D., which required companies to disclose material information publicly or not at all.

And, from The President and The Press: "Obama said that he would make 'no apologies' for zealous press-leak investigations, since unauthorized disclosures of secrets jeopardized the lives of soldiers and the spies he sent in danger's way."

The common thread between these two articles is the rising value of secret information.  The internet has given us a huge amount of information, which can be utilized by almost anybody to help them understand market trends, world changing events, and communities.  The governments are increasingly being pressured to put everything online, and not just DMV forms, but raw data in computer readable formats, ("Empowering People").  And others are using that data to create ever more sophisticated analyses and make them available to others, such as Open Secrets.

In a society where everybody knows everything, the ability to trade on secret information becomes impossible.  The problem is that trading on insider information is a really, really lucrative way to make Money for Nothing and your Checks for Free.  Surowiecki suggests that the solution (to the insider trading problem) is to simply disclose yet more and more.  But companies have very little incentive to deter insider trading, especially when the 'tips' come from third party sources (like expert networks.)  Moreover, this strategy will simply drive the value of the secrets up further, and drive up the excesses people will go to in order to obtain them.  The explosion in top-secret data (as well as the explosion in leaking of that data to the press) is based on the same principle.  The internet makes it possible for everyone to know everything that's publicly available at the speed of light, so where is my next Huge Scoop going to come from?  It's got to come from a secret source.

Hypothesis: The demand for fraud in the world is pretty much a constant; if you squeeze it via regulation, prosecution, or disclosure, it simply increases the value until supply reaches demand, at least to first order.

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