Introducing Nobel Economics Laureate Eric S. Maskin's talk on Cryptocurrency and Bitcoin - Mountain View, CA on March 8, 2019

by Usama M. Fayyad (Twitter: @usamaf)

Co-Founder & CTO, OODA Health, Inc. and Founder & Chairman, Open Insights

Last Friday March 8, 2019, I made my way fast from Hillsborough to Mountain View, CA to arrive before 8AM and avoid the morning commute traffic. I was uncharacteristically early at this meeting at the BCG Digital Center because I had a special assignment. My friend Steve Gotz (@SteveGotz) had asked to introduce one of the pioneers of Mechanism Design in Economics, Professor Eric S. Maskin of Harvard. The even was co-hosted by Silicon Foundry and by BCG. The place was buzzing with excitement with many old acquaintances in attendance as well as a host of people interested in Blockchain and Cryptocurrencies.

I am including my introductory remarks here. And will make another post on my impressions of the talk.

Text of the Introduction:

Good morning everyone. It is my pleasure and my honor to be presenting Prof Eric Maskin this morning who will be talking to us about Blockchain and Bitcoin. Thanks to Steve Gotz from Silicon Foundry for asking me to do this intro. I was very excited to take 10 mins or less to make this introduction.

 Why did I find this invitation relevant? Why would a Computer/Data Scientist/Engineer like me be excited about such an intro? There are two not so obvious reasons I wanted to share with you this morning:

The first reason dates back 14 years… In 2005, during my second year at Yahoo! after they acquired my second startup in 2004 and I became the first person to hold the title “Chief Data Officer”, I was asked to to take on an additional executive duty to start a research lab for Yahoo! I chose to pick areas in Computer Science that were not well-covered by universities and industry research groups. It felt like we needed to understand this Internet thing better and develop the Sciences underlying what we do on the internet. We wanted to create a new kind of research organization with Yahoo! Research Labs.

Microeconomics of the Web was amongst the 4 areas we chose to focus on (The three other areas were: Social Systems & Trust, Algorithmic Advertising, and Search & Navigation of unstructured data). We chose Economics for a variety of reasons, the biggest was auction theory. Why? because Search advertising was an auction business at scale...

For an Economics amateur like me, an auction just meant an English Auction, where the highest bidder wins and pays her bid… I then learned that in search advertising we use a Vickrey Auction (aka 2nd price auction) – named after William Vickrey of Columbia University who died in 1996 a few days after receiving the Nobel Prize…

To my amazement, the auction mechanism that Vickrey came up with by making the winner of an auction not pay her bid, but pay the second highest bid resulted in substantially more value generated by the overall system! This was counter-intuitive… why leave money on the table when you can make the highest bidder pay the highest bid? Google and Yahoo! and others were charging second price to the top search ad bid and giving the top ad slot to the winning bidder… but what do you do about the second ad slot? and the third? You sell it to the second highest bidder and you charge them the third price… and so on… This was called by engineers; Generalized Second Price… Sounds nice? Not really as it turn out!

This led me to learn about mechanism design in Economics, a field pioneered by Prof Maskin and for which he won the Nobel Prize in Economics… With shock, I was introduced to a paper by a Harvard economist, Michael Schwarz, who wrote a paper saying this generalization of Second Price auctions is theoretically not optimal! That the mechanism of second price auction should NOT be generalized to the case of multiple winners the way Generalized Second Price as was being done… Imagine that! A multi-billion Dollar industry using the wrong auction mechanism??? 

This was my first hard lesson that

dangerous things happen when Engineers try to do Economics!  

The correct generalization was already known to economists, and we now know about the difficulty of computing it correctly. But that is another story…

 I learned much more about these fields after we hired Michael Schwarz at Yahoo!, and then with the help of Prabhakar Raghavan we also recruited Preston McAfee to Yahoo! Research Labs from Caltech… Preston is an established authority on mechanism design for auctions. In fact, with that team we were able to do amazing things at Yahoo! Two years after all this happened, I heard that Eric Maskin was a co-winner of the Nobel Prize in Economics in 2007. As I listened to his acceptance speech, it struck me hard that he opened his speech by introducing the Theory of Mechanism Design as the “Engineering part of Economic Theory”. I thought that was ironic to my realization that engineers can be dangerous when they try to do Economics… It also reinforced the fact that these “parallel universes” exist and have much to do to help each other; yet practitioners in the two fields so often ignore very relevant breakthroughs in these separate fields. It is great to see Data Science being used by Economists these days and to see some of the more computational applications to Economics.

Economic Theory is about understanding existing economic institutions. Mechanism Design is the approach of working backwards by setting some desired goal(s) and then design the institution that will implement the mechanism to get us to reach the goal(s) as optimally as possible. The proper mechanism creates the environment in which people are incentivized to reveal the right information to lead to the right outcomes. A beautiful field. Professor Eric Maskin played a huge role in establishing the theory and foundations for this beautiful area.

After thinking about what to say in introducing Prof. Maskin, I called my friend and ex-colleague Preston McAfee (now at Microsoft and Caltech) and asked him about his thoughts on Prof. Maskin. He got very excited and reminded me that he was actually in attendance at the Nobel Prize ceremony in Oslo in 2007. He mentioned that the original group we started at Yahoo! (we called it MESS – MicroEconomics and Social Systems) grew and spread. He said that now there are hundreds of micro-economists at Amazon alone, also at Microsoft, Google, Uber, Facebook, Zillow, and many others. Preston said, and I quote: “We all use the tools that Prof Maskin pioneered and developed. We use them every day in all these companies, and we owe him a lot for making the implementation possible at so many companies today!” 

IMHO, this is a powerful, true, and practical testimonial of impact of Eric Maskin’s contributions to science and technology.

What is the second reason I was excited about doing this introduction?

 It has to do with today’s topic: Bitcoin, Cryptocurrencies, and Blockchain. During my tenure as Global Chief Data Officer at Barclays in London (2013-2016), and with my friend and colleague Derek White, we were actively involved in the Barclays Accelerator for Fintech, and we were evaluating many startups and projects in utilizing the blockchain. So after many experiences and projects with Blockchain and Cryptocurrencies, I formed my own views and theories about all the hype surrounding cryptocurrencies. I was particularly excited to see that Prof Maskin was turning his attention to this area.

I then called my colleague and friend, Berkeley economist Jon Kolstad (Twitter: @jtkolstad) about this upcoming talk. Besides sending me a couple of relevant papers, when I asked him about my experience with the dangers of engineers doing Economics poorly, he commented that this “abuse” of economics by engineers continues in many organizations to this day; he further noted that perhaps the most pertinent example is Bitcoin and the notion that cryptocurrencies can be an alternative to fiat currencies… A very astute observation indeed.

I look forward to hear more on this topic from Professor Maskin this morning.

Professor Eric S. Maskin earned his Ph.D. at Harvard, and then became a professor at MIT, and later moved back to Harvard. He took a 10 year break from Harvard to be a professor at Princeton’s Institute for Advanced Study where he won Nobel Prize in recognition of his contributions to mechanism design theory. His recent work includes fascinating observations on how elections work and some commentary on Donald Trump winning the 2016 presidential election…

With no further ado, please help me welcome Prof Eric Maskin who will talk to us about Bitcoin