Is there any proof for this hypothesis?

How can we know how things actually are? Is there a way to test models?

On 25/09/13 18:50, Andrew Miller wrote:
> A key reason Bitcoin works is because of its participation
> incentives. The whitepaper provides little enlightenment about
> how/why this works - the proof in the paper assumes that more than
> half the participants *are* honest, without explaining how the
> incentive structure *leads* to this outcome. I'm developing a
> theory for how this might work, but it's taken a strange turn, so I
> want to the idea by you all.
>
> I think most people are familiar with the "expected utility"
> approach to prescribing decision making under risk. If you are
> risk-neutral, then you should take a bet if it has a positive
> expected profit. If the house has an edge, then it's a loser's
> game. (For now exclude games like poker involving skill)
>
> Assuming miners make decisions like this leads to a bad outcome
> for Bitcoin. The reason is that due to economies of scale,
> computational power is cheaper in bulk (i.e., the Cloud). Since you
> earn more the more computing power you put in, the only equilibrium
> is where the most efficient entities (large scale mining operations
> with custom hardware) drive the marginal profit down to zero, and
> in that case it's *unprofitable* for anyone else to participate at
> all.
>
> An easy way out is to say "well people mine Bitcoins because
> they're altruistic," and while this may be true for some people,
> it's not a useful design heuristic overall - it suggests Bitcoin
> might work just as well if there were no mining rewards at all.
>
> As it turns out, the expected utility theory does not describe
> very well how people actually make risky decisions. People play at
> casino slots and state lotteries, even though those have negative
> expected profit (it's similarly not useful here just to call them
> altruistic, though). The Allais paradox (see wikipedia) is a really
> compelling counterexample - you can try it on yourself, it
> describes two options to choose from and almost everyone
> consistently makes a choice that violates EU.
>
> Behavioral economists since the 80s have used an alternate model
> than EU to better describe how people participate in lotteries and
> gambles, the best of which is Cumulative Prospect Theory [1]. It
> says you can predict how people play lotteries by assuming they
> overweight very small probabilities.
>
> This leads to an unintuitive design criteria for Bitcoin's
> incentive scheme, in order to prevent centralized mining. The trick
> is to make it *unprofitable for everyone*. Individuals will
> participate in a lottery, even at negative expected value, as long
> as it has positive-skewed *jackpots*. On the other hand, if
> gamblers keep the expected value quite low, then large firms may
> behave closer to EU agents, and not participate at all.
>
> Bitcoin doesn't just compete with the state monopoly on currency,
> it competes with state monopoly on lotteries!
>
> This theory is really appealing to me, because I think it gives an
> explanation for why Bitcoin isn't a perpetual motion machine,
> where the "money from nothing" source of motivation comes from. It
> harnesses a human psychological trait that systematically deviates
> from (standard EU) rationality. A tendency to gamble on long shots
> may be a feature of the human psyche, not a bug, as it potentially
> leads to a desirable outcome where infrastructure (mining power) is
> diffused widely.
>
> Can you imagine accepting "overweight small probabilities, rather
> than maximizing expected value" as a rational/prescriptive rule for
> making decisions? Would Bitcoin participants tolerate the
> explanation that on average mining is unprofitable, and it's
> *supposed* to be that way?
>
> [1]
> http://psych.fullerton.edu/mBIRNBAUM/psych466/articles/Tversky_Kahneman_JRU_92.pdf
>
>
>