Sunday, October 31, 2010

Open Bidding

Open Bidding .
Andre Willers
31 Oct 2010

A transparent market mechanism , incorporating a random element .In a fractal form , more efficient than any present systems .

Discussions :
First , read

The points of note are Error arguments in the 1/3 Reserves and the 200% of Costs in optimal markup .

An example :
I wish to hire my nephew for transport on a short visit .
I do not wish to disadvantage him , but do not wish to be held up for ransom ,either .
Both parties must feel that the deal is equitable and fair .

The Algorithm :
1.The Cost :
Establish boundaries -Iteration (1)
Lower boundary : operational costs (ie petrol) . R0,8/km
Upper boundary : Standard taxi fares: R8.00/km . This includes amortization of all other costs , including profit .
Difference= R7.2/km

Establish boundaries -Iteration (2)
Lower boundary : operational costs related to petrol only . R1,60 /km = 0.8x2
Upper boundary : Standard taxi fares: R8.00/2 = R4.00/km . This would be the cost after all sorts of add-ons .
Difference= R2.4/km

Establish boundaries -Iteration (3)
Lower boundary : 1/3 of the difference (4,00 – 1.6) =0.8 plus lower boundary(1.6) = R2.4/km
Upper boundary : 1/3 of the difference (4,00 – 1.6) =0.8 minus upper boundary(4.0) = R3.2/km
Difference= R1.2 /km

Random Offer : Iteration(4)
When the difference is between 2 and 3 times the lower and upper boundaries , offer a random settlement .
Settlement = 3.2 + Rnd(1.2) , where Rnd(1.2) lies between (–1.2 and +1.2)

Why do this ?:
Fairness .
Fairness is hardwired in , with some very sophisticated algorithms . Millions of years of evolution went into this sense .

If it does not feel fair , humans and many animals start nitpicking at the basic conditions , previously agreed as fair . A fixed outcome is not seen as fair . A chance element involving human skill is . Go figure .

The boundary conditions ensure that nobody loses , but that humans feel they are involved (and actually are) This an open process .

The Fair offer to the nephew :

R 3.2 /km +- R1.2/km depending on your choice of random mechanism .

An interesting aside :
This method can be used in any bargaining process , with the advantage that both parties feel satisfied . Not the usual result in most Market Mechanisms .

Note the importance of the random element at the end .
This is usually interpreted as skill . I hope you do not pay too much for it .

Why is it more efficient ?
The random element enables Futures Markets , with the whole panoply armament of Hedge Funds .
This has been proven to be more efficient .
The difference here is that boundaries are fixed. Nobody can lose their all , but the top end is open ended over many transactions .

Nice , eh?

Andre .

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