Genius / madness

I’m happy to report that my research note “Investment in ideas when genius and madness look alike” (pdf) was published yesterday in Economics Bulletin. The paper is about what happens when it’s hard to tell a really creative and ingenious idea apart from a totally ridiculous and terrible idea. (This makes the paper both reflexively immune to criticism and reflexively immune to praise. ¯\_(ツ)_/¯)

What I find is that you don’t need a complicated model of asymmetric information to generate the kind of fat-tailed, bimodal returns to innovation that you see in data. All it takes is that extreme ideas look a little bit like genius and a little bit like madness. Some of the things that are predicted by the model are rational overinvestment in the very worst ideas, rational underinvestment in the very best ideas, abnormally high variation in IPO returns for firms with novel technology, and unfunded “missing ideas” that are much better than some of the truly terrible ideas that receive investment capital.

Economics Bulletin is an open access journal for short articles across all fields of economics. That means that this paper, like all others in the journal, is completely free and available to anyone. As always I wholeheartedly support anything that helps us move away from the unjustifiably expensive world of for-profit journals.