dominant assurance with a twist
Just wrote this to Alex Tabarrok, creator of the Dominance Assurance Contract (a further tweak of the Assurance Contract, aka Threshold Pledge System, popularized by Kickstarter). In an assurance contract, if pledges toward a financial goal are insufficient at its deadline, then nothing is collected from those who pledged. With Dominant Assurance, “everyone who offered to contribute is given their money back plus a bonus. Thus contribution becomes the dominant strategy.”
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Dear Mr Tabarrok,
Thanks for your idea of the Dominant Assurance Contract (DAC). I thought of a way to extend it to further open up opportunities in investment and value creation and make crowdfunding possibly more interesting than gambling. Maybe your students have already come up with all this and more, but what the heck.
Here are the rules of what I call Cooperative Dominant Assurance*:
1. The proposer seeds the failure-payback pot with any amount of money, sets the maximum payback rate between 100% and infinity, and sets the maximum profit rate. She can revise these rates upward until the proposal’s deadline. She also sets the investment reduction rate (explained below).
2. A contributor sets her rate of payback from 0% to the maximum.
3. Contributors with payback rates of less than 100% get the difference added to the payback pot. Any contributor can revise her contribution upward and her rate downward until the proposal’s deadline. The investment reduction rate determines the percentage of her contribution that reimburses the proposer’s seed investment and how much increases the pot.
4. In case of failure, the pot is divided amongst contributors in proportion to their contributions and according to their final payback rates.
5. In case of success, contributors with average payback rates of less than 100% are treated as investors who profit in inverse proportion to their average rate. Or get other bonuses, such as the opportunity to collaborate.
6. Contributors can make multiple contributions with different payback rates.
Thus someone with a really good idea but little seed money could still create an attractive DAC. Whole-hearted contributors (those with <100% rates) could profit from the risk of enticing the half-hearted (>100% rates ). The higher the maximum payback rate, the wilder the game gets.* It could be a spectacle of brinkmanship between the whole-hearts and half-hearts. Half-hearts would help attract attention to the proposal initially. Whole-hearts would help continue to attract half-hearts as the deadline approached.
*For example, due to Rule 4, a sole contributor of $1 (maximum payback rate) toward a failed proposal with an infinite payback rate would win the entire pot. A second max-rate contributor of $99 would take away 99% of the pot. If the proposer set the max rate to 110%, then the first would only get back $1.10 and the second $108.90, regardless of pot size. Due to Rule 5, in a successful proposal with a 20% profit rate, a contributor whose rate was 60% for 10 days and 20% for 10 days would have an average rate of 40%, earning her 12% on her contribution (to be paid upon proposal execution).
What do you think?
I’m not sure the rules are free of conflicts or redundancy, nor do I grasp the math or game theory involved. But it was fun and exciting to think about.
Which is ironic because I came across your uber-cool dealio while looking for ways to finance my recovery from exhaustion-depression. (Take something worse than chronic fatigue syndrome but better than death and combine it with clinical depression. A real kick in the pants!) Because I have less-than-zero confidence in medicine or its common alternatives, I spent 21 years looking for a way to heal from it before hitting upon darkness retreating (see website below). It’s relatively cheap ($2500), but money-making is not my strong suit.
Anyway, thanks again, and,
Cheers,
Andrew Durham
(*EDIT: I just removed this sentence from the third to last paragraph: “And I could not decide what to call this variant of DAC: Self-Funding, Autonomous, Automatic, Inclusive, Cooperative, or Viral DAC? DA Orgy?” I decided on “Cooperative”. If you think of a better name, please let me know.)