Entrenched interests and corrupted systems

A great post from Andrew on Everything discusses the problem where a “game” can be gamed to such an extent that what you achieve violates the original spirit or intent of the game.

He gives many examples, including the patent system (exploited by patent trolls), stock markets (exploited by high frequency trading firms), politics (exploited by politicians great at getting elected but bad at governing), and test taking (exploited by those who take intensive SAT prep courses.)

The problem is that the rules do not evolve to avoid exploitation, and so the ‘spirit’ of the system is increasingly corrupted. For example, high-frequency trading┬ádemonstrably increases market volatility, which is bad for the average investor. It also is nearly completely orthogonal to the original intent of stock exchanges, which is to allow companies to raise money and citizens to put their money to work. The only parties that benefit are the high-frequency trading firms and the exchange, which caters to HFT because of increased revenues.

At some point the rules, even if they no longer make sense, become entrenched. There becomes a large financial interest with significant power that will oppose changing those rules because they benefit from exploiting them. Political parties are a good example of this; the two-party system in the US with its archaic electoral college system, is definitely not the best way to decide who runs the country. Who benefits from this ridiculous system? The entrenched parties and the professional politicians, but definitely not the average citizen.

One thing to be aware of, is that these perverted systems can also be opportunities. The existing exchanges cater to HFT but not average citizens; could an alternate exchange that adheres more strongly to the original intent of investment transform the system? Tests like the SAT become meaningless when money can buy access to intensive over-optimizing prep courses that will not increase the student’s ability to succeed in college; they no longer measure what they are supposed to. Could a test that better correlates with college performance transform the testing market?

Although examining these examples of perverted systems can make one cynical, it seems like there ultimately must be some way to change them; those that are hurt by the systems so far outnumber those that benefit from it, if only they could organize or were actively offered the choice of an alternative.

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