Revelation (REV)

Transaction mechanisms can often be designed to cause traders to reveal their secrets, with results that are as good as or better than those that rely on hidden information...

Design Principles:

  • Build mechanisms that autonomously signal a confirmation or denial of the ‘official line’ (e.g., employee stock trading)
  • Exclude previously hidden information from transactions (e.g., inadmissible evidence+). This assumes decision makers cannot be held hostage+ to the success of any one or few research projects
  • Information is easiest to hide in non-competitive transactions – build competition into transactions with an eye towards causing greater revelation+. Build independence into the arbitration of the transaction (i.e., who wins) to avoid perceptions of biased arbitration.

Discussion:

  • Uncertainty in R&D is a natural home for hidden information – it’s difficult to disentangle the uncertain from the hidden. We disentangle the hidden to allow us to better manage the uncertain
  • Recognize that individuals often enter into agreements based on a perceived hidden advantage. Information is not revealed in the hope of securing a better deal. Agreements can be purchases, budgets, sales quotas, knowledge sharing, etc.
  • The Revelation Principle helps us build better structure scientific and investment transactions: the design of these transactions to cause individuals to reveal hidden information. Revelation is at work for example in an eBay transaction which goes to the highest bidder at the 2nd highest bid price, forcing all serious bidders to reveal their highest offers.

Quotes:

Without some dissimulation no business can be carried on at all. Stanhope, Philip. 4th Earl of Chesterfield (1749)

References:

Further Reading