Greshams Law of Information Economics for the Web

Recently I've had cause to look at Evolution/Intelligent Design, various contentious historical issues, and one or two about more controversial current political movements (think children's exams....) and have of course gone to the Internet as a first source. The result has left me a bit disturbed, in that the Page 1 of Google is increasingly not full of truth, but full of very biassed (and wrong) information put out by very enthusiastyec special interest groups. I can't measure it, but I am fairly certain it has got a lot worse over the last few years since the Web became mainstream. I think the reason is twofold

(i) Idealogues/Zealots/Enthusiasts/Extremists/Evangelists of all stripes are just far more active than the silent majority, and put their stuff out there, link to it, read it often etc. Google's search algorithms and Social Graphs see "popular" as "better", so up go the ratings of this content.

(ii) Good information is increasingly being hidden behind paywalls. When we started Broadsight in 2005 there was a lot of good information that was easily available on-net (so reaserch via Google was easy), but over time we have noticed the owners have erected paywalls around it. I count research papers, reports, tabular data and articles by respected journals and publications among these.

The result is seemingly that "Bad Information is driving out Good" - which of course reminded me of Gresham's Law

Gresham's law states: "When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation."[1] It is commonly stated as: "Bad money drives out good", but is more accurately stated: "Bad money drives out good if their exchange rate is set by law."

This doesn't mean one has to value poor money more highly, it is as bad if they are valued equally. When there are two forms of commodity money in circulation which are required by legal-tender laws to be accepted as having similar face values for economic transactions, the then artificially overvalued bad money tends to drive the artificially undervalued good money out of circulation.

When I replaced "money" by information, and "Government" etc as "Search System" I got this:

Gresham's law of information states: "When a search algorithm compulsorily overvalues one type of information (poor/false information) and undervalues another (good/true information), the undervalued information will leave the open Web or disappear from circulation into hoards, while the overvalued information will flood into circulation." It is commonly stated as: "Bad information drives out good", but is more accurately stated: "Bad information drives out good if their exchange rate is set by (search algorithmic) law."

As above, you don't have to value the poor information more highly, this law applies equally when there are two forms of information (good and bad) in circulation which are required by search algorithms to be accepted as having similar face values for search transactions. The Nobel prize-winner Robert Mundell believes that Gresham's Law could be more accurately rendered if it were expressed as "Bad information drives out good if they exchange for the same price." The "same price" is that a search engine treast all links as of the same value. The now artificially overvalued poor information tends to drive an artificially undervalued good information out of circulation (ie off Google Page One).

Replacing "money" with "information" for Greshams law thus seems to be quite a useful thought experiment. It is therefore worth taking Gresham's analysis further, and looking at some research summaries of its impact from Wikipedia and see if here are parallels:

Rolnick and Weber (1986) argued that bad money would drive good money to a premium rather than driving it out of circulation. However, their research did not take into account the context in which Gresham made his observation. Rolnick and Weber ignored the influence of legal tender legislation which requires people to accept both good and bad money as if they were of equal value. They also focused mainly on the interaction between different metallic monies, comparing the relative "goodness" of silver to that of gold, which is not what Gresham was speaking of.

So you have to have the rule of accepting good and bad as equal value for Greshams Law to apply, though I do think there is some truth in the statement "bad money would drive good money to a premium", as that is what I also see happening now - bad information is driving good information to a premium, ie if you want truth you have to pay, if you want "free" information its likely to be poorer information. That is echoed in this example:

^Adam Fergusson pointed out that in 1923 during the great Inflation in the Weimar Republic Gresham's Law began to work in reverse, since the official money became so worthless that virtually nobody would take it. This was particularly serious since farmers began to hoard food. Accordingly, any currencies backed by any sorts of value became the circulating mediums of exchange.In 2009 Hyperinflation in Zimbabwe began to show similar characteristics^

I think this is parallelled now with people "hoarding" good information behind paywalls, and I think those "in the know" increasingly only go to sites they trust. But that is not what the mass search and social graph algorithms are aiding and abetting, they are still "accepting good and bad as equal value" by going on quantity oh links etc, and assuming that quantity = quality. This same effect is seen in some corollaries elsewhere:

The experiences of dollarization in countries with weak economies and currencies (for example Israel in the 1980s, Eastern Europe and countries in the period immediately after the collapse of the Soviet bloc, or South American countries throughout the late 20th and early 21st century) may be seen as Gresham's Law operating in its reverse form (Guidotti & Rodriguez, 1992), since in general the dollar has not been legal tender in such situations, and in some cases its use has been illegal

For money, the argument is that, in the absence of legal tender laws, Gresham's Law works in reverse. If given the choice of what money to accept, people will transact with money they believe to be of highest long-term value. If required to accept all money, good and bad, they will tend to keep the money of greater perceived value in their possession, and pass on the bad money to someone else. In short, in the absence of legal tender laws, the seller will not accept anything but money of certain value (good money), while the existence of legal tender laws will cause the buyer to offer only money with the lowest commodity value (bad money) as the creditor must accept such money at face value. This reverse of Gresham's Law, that good money drives out bad money whenever the bad money becomes nearly worthless, has been named "Thiers' Law" by economist Peter Bernholz, in honor of French politician and historian Adolphe Thiers."Thiers' Law" will only operate later [in the cycle] when the increase of the new flexible exchange rate and of the rate of inflation lower the real demand for the inflating money.

Turning this round to information economics, I see the following at present:

(i) I'm trying to think of a case where the bad information is so bad that no one trusts it, and will only trade in good infirmation. I think we are getting there with advertising overall, as people are trusting it less and less so it has to become more and more obtrusive/underhand/agressive. However, although for money the examples show that in the absence of legal tender laws, Gresham's Law works in reverse, I can't see it easily in Information at present. I don't see people preferring Paid Search (though that may come), but I do see people preferring reccomendation based systems where the recommenders can be verified as bona fide.

(ii) Looking at Thiels law, in the Information cycle I can see the "flexible exchange rate" as some form of tunable search (away from recommendation by mass popularity - maybe recommendation/social graph based search). Information "inflation" may work differently in that the increasing amount of crapformation reduces the amount of Ad money per (inflating numbers of pages) it can attract and it collapses under its own Freeconomic weight, but I just can't see that its a given that eventually good infirmation will come back in and be used in preference to bad information overall.

(iii) I don't think this really applies in information flow, the closest parallel I can think of is entities keep good information (about customer real behaviour) but pass out false information in their own data. i see this a lot in campaigning statistics, where special interest lobbyists continually stretch teh definition of what is included in their cause to argue a larger % of the population is impacted by X, or is a Y, or whatever, wheres their researchers are probably well aware of what the actual reserach says.

The Nobel prize-winner Robert Mundell believes that Gresham's Law could be more accurately rendered, taking care of the reverse, if it were expressed as, That would be re-stated as "Bad information drives out good if they exchange for the same price."

The question is, will the same be true with information, given that it is hard to see easily what is true and what is not (and the huge amount of effort being put into ensuring that it is hard to tell the false apart - information counterfeiting is rife). The way this will work out is probably that some "information issuers" will become more trusted. However, the more fundamental (ist) issue I see is that will only ever be true for those who seek truth, as the reason so much of the poor information is on the Web is that it panders to those who want to believe it in the first place.

Which makes me think there are 2 main types of "bad" information:

(i) Belief based - wrong information to support a particular belief set

(ii) "Lemon" based - crap information, there to try and hide the selling of lemons

Dealing with lemons first, there is a convenient economic "Law of lemons", from George Akerlof

Akerlof uses the market for used cars as an example of the problem of quality uncertainty. A used car market is one in which there are good used cars ("cherries") and defective used cars ("lemons"), normally as a consequence of several not-always-traceable variables such as the owner's driving style, quality and frequency of maintenance and accident history. Because many important mechanical parts and other elements are hidden from view and not easily accessible for inspection, the buyer of a car does not know beforehand whether it is a cherry or a lemon. So the buyer's best guess for a given car is that the car is of average quality; accordingly, he/she will be willing to pay for it only the price of a car of known average quality. This means that the owner of a carefully maintained, never-abused, good used car will be unable to get a high enough price to make selling that car worthwhile.

The result is a Greshams Law effect, in that owners of good cars will not place their cars on the used car market. The withdrawal of good cars reduces the average quality of cars on the market, causing buyers to revise downward their expectations for any given car. This, in turn, motivates the owners of moderately good cars not to sell, and so on. The result is that a market in which there is asymmetric information with respect to quality shows characteristics similar to those described by Gresham's Law.

For information markets the not-always-traceable variables are that the reqder cannot easily test the information to know its veracity. What i am not sure I am seeing is a market where all buyers (readers of information) treat the information with increased scepticism, though as noted above the Ad industry experience (and popularity of recommendation based choice) seems to indicate this is true.

An economic lemon market will be produced by the following:

- Asymmetry of information, in which no buyers can accurately assess the value of a product through examination before sale is made and all sellers can more accurately assess the value of a product prior to sale
- An incentive exists for the seller to pass off a low quality product as a higher quality one
- Sellers have no credible disclosure technology (sellers with a great car have no way to disclose this credibly to buyers)
- Either a continuum of seller qualities exists or the average seller type is sufficiently low (buyers are sufficiently pessimistic about the seller's quality)
- Deficiency of effective public quality assurances (by reputation or regulation and/or of effective guarantees/warranties)

The rules for information lemon markets seem to be similar, the key to finding cherries would seem to be the ability to give sellers of good information a way to prove it, and/or making up the deficiency of public quality assurances for the buyer. As noted above, the way this seems to be working now is the trusted source route, allied with strong (and validated) recommendations from peers.

Which leaves us with the thorny problem of dealing with the second type of "wrong" data - belief based misinformation (eg Creationism etc), where people want to believe it, want to be misled rather than being unwittingly misled, and that drives a huge market for information publishing that drives out good information. Also, its is often funded (or at least volunteer produced) rather than purely freeconomic so will probably not collapse under its own Weimar information inflation.

This to me is the more dangerous one, as its not clear what market forces will displace it - if anything, the market forces are destroying good mainstream journalism, only the paywall material seems to be surviving. I don't see how social media solves this, as the social graph will collaborate in its own pollution and dumbing down. At the moment I am coming to the rather worrying conclusion that in the future people will have to pay for truth, which of course limits its market - so do we wind up on a 2-part state of mind here?