October 14, 2008

Upon release, a plastic balloon filled with helium will ascend and burst. Humankind is also wont to aspire to ever higher status and meet disaster on the way. Should we blame Icarus for ignoring flight instructions or Daedalus for his defective wing design? Who caused the credit bubble? However engrossing, hindsight over past explosions should not let us forget there are other bubbles which inflate as we write.

"Up, up, and away" proclaims the title of Jon Marcus' analysis on spiraling college costs (*). Inevitably, a crash will come and wreak havoc on higher education. Yet, who knows when or how? Rich endowments had made tempting takeover targets of English monasteries too, but who could have foretold Henry VIII's marital woes and their remarkable effects? This uncertainty is why it is so difficult to deal with a bubble. No solution is deemed necessary until it is too late to contain it, by which time no responsible actor wants to risk bursting it voluntarily.

In principle though, bubbles can be contained with proper mechanisms. Helium balloons come with a string attached. Daedalus could have designed wings with less lift. Regarding colleges, Richard Vedder at Ohio University denounces the deleterious effect of rankings to Jon Marcus. They create a star system in which nobody wants to settle for second best. To build a robust solution before time runs out, consider these three measures.

Let all ranking organizations be required to deliver their recommendations according to five levels. Pooling all A colleges together would eliminate harmful competition above what is needed to achieve an A level. Isn't it how colleges grade students? We have already proposed to set up a new prudential threshold to manage financial risk globally. Read Mike Steinberger about the growing number of concussions in American football (**). Wouldn't a ceiling on player weight be an obvious remedy? Ceilings and thresholds are standard tools to ensure system stability by design.

A recommendation service (1) confers power to the issuer over both those who are recommended and those who accept the recommendations. As errors can and will occur, harm is magnified by undue centralization. We argued the US Federal Government errs in turning the Social Security into a universal ID system. Reporting on states' voter roll purges (***), Ian Urbina reminds us indeed that "the federal data base is less reliable than the state lists". To preserve opinion diversity, any de facto monopoly by dominant ranking organizations must be broken.

To understand the third and final measure, one must realize colleges and students create a market, a market however where price, i.e. tuition, is but one factor among the many which govern student choice. We call this a value market, in contrast with ordinary markets such as the Stock Exchange where price acts as the single decision variable. Absent a proper market mechanism, students rely on rankings to regain the simplicity of pricing, unwittingly turning price on its head. Now the higher the price, the better the rank, the more the demand. No wonder equilibrium is out of reach.

The answer is to create a new market mechanism which unbundles all important factors, including tuition and boarding fees. As not all students care to pay for football glory or the hiring of a Nobel prize winner, this would unleash creative cost competition among colleges. Three caveats are in order. First third-party recommendations are as invaluable as before, to help negotiators assess their counterparts. Second value markets perform a matching service and results in the instance need to be finalized "manually", say among one's three or four best mutual choices. Finally to work well, such markets need to be information symmetric, a tall order in our society.

Utopia? I strongly suspect so myself. But this bubble, whose existence is not in doubt, allows us to review what I believe to be indispensable tools and principles. Put all relevant factors into play using value markets, decentralize recommendations, substitute thresholds to ranks. May I suggest the same will come handy when the public recognizes the most pernicious bubble of all, the data bubble?

What energy inflates the data bubble? The fact that modern marketing increasingly depends on consumer data which aggregators extract as a free resource. As environmental science has shown repeatedly, assigning zero cost to any valuable resource, however abundant, creates a runaway phenomenon. What is put at risk by the data bubble? These fillips have documented many answers (2).

Take for instance health related privacy. There must be an associated risk since laws have been passed to protect patients privacy from abuse by health care providers (3). Yet as Sylvia Hsieh reports (****), "Google, Microsoft, WebMD, Revolution Health to name a few" can harvest medical records free from such restraints since they are not "health care providers". Operating in "a murky legal area with few laws, regulations or ethical constraints", what can prevent them to act as data launderers?

Personal credit is another area. The bursting of the credit bubble has made a good consumer credit score ever more important, the "one thing you can control" as Ron Lieber adroitly puts it (*****). Except for the fact of course that this control is shared by whoever steals your ID with the blessing of credit bureaus, to whom you may pay protection money against the risk they created in the first place.

We can only imagine what will happen when the data bubble bursts. As with banks, trust will abruptly disappear. All personal records deemed suspect, are we all going to need an RFID chip in our shoulder? Will the US ask the FBI to control the updates against its paying for the implants?

To escape from responsibility is a universal urge forever waxing. Better design rules must be imposed on Daedalus if Icarus is to remain free.

Philippe Coueignoux

• (*) ......... Up, up, and away, by Jon Marcus (Boston Blobe Magazine) - October 5, 2008
• (**) ....... Significant impact, by Mike Steinberger (Financial Times) - October 11, 2008
• (***) ..... States Purges Of Voter Rolls Appear Illegal, by Ian Urbina (New-York Times) - October 9, 2008
• (****) ... Online health records: new frontier in a "wild, wild West", by Sylvia Hsieh (Massachusetts Medical Law Report) - Autumn, 2008
• (*****) . One Thing You Can Control: Your Credit Score, by Ron Lieber (New-York Times) - October 11, 2008
• (1) see "recommendation mechanisms" in the list of Major Themes of these fillips.
• (2) see for instance "id theft" and "personal data collection" in the list of Major Themes of these fillips.
• (3) for more information, see the documentation for our lecture on Handling of Medical Records