Today I want to highlight a category of financial instruments that many people think are a bad idea but I think are actually good ideas with marketing and PR problems
If you think about it, a type of financial instrument cannot be good or bad, just like how any given technology is not good not bad nor neutral (Kranzberg’s Laws of Technology). Moreover, there isn’t really such a thing as bad risk, there’s only mis-priced risk.
OK, let’s talk about credit default swaps. In the simplest form, a credit default swap is a contract that lets one party transfer the credit risk of a borrower to another. The buyer of the swap pays a periodic fee (like an insurance premium) to the seller, and in exchange, the seller agrees to compensate the buyer if a specific bond or loan goes into default or experiences another credit event.
CDS have had their name dragged through the mud because they’re very often mistakenly blamed as the culprit for the 2008 global financial crisis.
But if we think of this from first principles, credit default options can be thought of as insurance against bonds. Bonds are already a very sophisticated way of monetizing a worldview (fixed upside, often uncapped downside) and a credit default swap is a derivative on that. It is something that triggers when that bond meets a certain condition.
In general, there are a lot of great ways that credit default swaps are also used:
Now that we’re warmed up let’s talk about the real reason I wrote this blog post. An assassination market, in colloquial terms, refers to a prediction market where the underlying event is whether or not someone will be alive at a certain date.
Robin Hanson first introduced the “assassination market” thought experiment in the late 1990s as part of his broader writing on prediction markets and policy markets. The most directly relevant piece is:
Robin Hanson, “Shall We Vote on Values, But Bet on Beliefs?” (1999) — https://mason.gmu.edu/~rhanson/valuesbet.html
That essay explores how conditional prediction markets could guide decision-making by letting people “bet on beliefs” rather than vote on policies. In later online discussions (circa 2000–2001), Hanson and others in the early cypherpunk/prediction market communities extended the concept toward markets tied to real-world outcomes involving individuals, which popular culture later rebranded as “assassination markets.”
But again, let’s look past the marketing and branding and just think from first principles. This thing that we call an assassination market is actually something different and an assassination market is just one way that this thing could be used.
Just like how a golden retriever is a dog, that doesn’t make all dogs golden retrievers. Same thing with assassination markets; I think we do ourselves a disservice by calling that category of instruments that name. Better to call it a correlated prediction market. It’s correlated because the probability of the underlying event triggering is correlated to the price of the underlying contract in that market.
There are a lot of interesting ideas that open up when you start using these better names. In general, there’s a whole idea space of financial instruments that inspire collective action and anybody with an opinion on this, or with the intent of actually causing the event to trigger can take positions in this market.
I think that some of the most complicated problems that we face today as humanity are actually best solved through some form of financial engineering. After all, finance is just how we keep track of things and share with one another.