Well, there are ways of experimentally validating models/hypotheses
for how people make decisions involving risk. This field is called
behavioral economics, and it basically involves laboratory experiments
where you invite some random people in, and offer them choices between
simple lotteries. It's sort of like playing casino craps, but without
the fun. But it's especially hard to do experiments that involve, for
example, continuous interaction over a really long timespan, really
large payoffs, or the behavior of large companies rather than
individuals.

On Mon, Oct 7, 2013 at 1:58 PM, Amir Taaki <genjix@???> wrote:
> > 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
>>
>>
>>
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--
Andrew Miller