Information market as a social valuation mechanism

Sean Stannard-Stockton's recent column on the Financial Times envisages that more individuals of moderate income will be interested in the social markets by 2033.

There has been a significant increase recently in the level of interests across the social sector in the possibility of adopting a market mechanism. Many have been trying to emulate the system of stock exchange, but they have been failing so far to achieve the most important purpose of adopting such a market mechanism – to allocate finite resources to their most valued use.

This is because, in my view, they take stock exchange system too literally without recognizing the critical differences between social values and economic values and the needs to adapt and modify the existing market mechanisms to this unique context.

A million-dollar question here is how to assess the non-economic values created by social organizations in the absence of price mechanisms since the society as a whole needs to collectively assign some value to different social organizations’ activities in order to be able to prioritize resource allocation. The social sector has invested enormous money and efforts in elaborating social impact evaluation methodologies and metrics, but I believe that the existing utilitarian approaches will never be sufficient.

I think the way forward is to disaggregate the functions of a market into two, that is, a valuation mechanism and a resource allocation mechanism. This is essentially a two-step system that works in a similar manner as TV advertisement market does. As is the case with the services provided by social organizations, those who benefit from TV programs (audience) are not same as those who pay for TV programs (sponsors). The TV producers succeeded in capturing, albeit imperfectly, the value of their programs using mechanisms such as a gross rating point (GRP), and made it possible for sponsors to allocate their money efficiently to the air time blocks with various valuation.

There already are emerging social investment platforms such as GlobalGiving and KIVA, that can work as resource allocation mechanisms in the social sector. What is lacking, however, is a feasible and credible valuation mechanism that can address unique difficulties of dealing with social values, including their public-good nature, impossibility of linear aggregation, and incommensurability. Information markets such as the Iowa Electronic Market and the Intrade appear to have a great potential in solving all.

When I shared this idea with Sara Olsen of SVT Group, she said that socialmarkets is now planning to experiment a similar idea. No one else in the social sector seems to have seriously tried to use an information market as a valuation mechanism and link it to a social investment platform. The obvious problem with using information market as a social valuation mechanism, however, is that there is no exogenous, observable measurement according to which prediction market participants' bets are rewarded or punished, and ultimately validate the accuracy of information market's results.