Prizes for all

The New York Times recently published an article on how prizes could be used to encourage innovation. Prizes were common in the 18th century.

Most famously, the British Parliament offered the £20,000 longitude prize to anyone who figured out how to pinpoint location on the open sea.

Times changed.

Eventually, though, prizes began to be replaced by grants that awarded money upfront. Some of this was for good reason. As science became more advanced, scientists often needed to buy expensive equipment and hire a staff before having any chance of making a discovery.

But grants also became popular for a less worthy reason: they made life easier for the government bureaucrats who oversaw them and for the scientists who received them. Robin Hanson, an economist at George Mason University who has studied the history of prizes, points out that they create a lot of uncertainty — about who will receive money and when a government will have to pay it. Grants, on the other hand, allow a patron (and the scientists advising that patron) to choose who gets the money. “Bureaucracies like a steady flow of money, not uncertainty,” said Mr. Hanson, who worked as a physicist at NASA before becoming an economist. “But prizes are often more effective if what you want is scientific progress.”

Recently, though, prizes have made a comeback in the private sector- the article describes two: a million-dollar prize which Netflix is offering for any system that is at least 10 percent better than their own system (Cinematch) at predicting how many stars someone would give a movie, and the X Prize, which was created in 1996 as a $10 million purse for the first private manned flight into space. The latest prediction model is already 6.75% better than Cinematch, and there are 4.5 years to go before the prize expires. The X-prize was awarded just eight years after it was announced.

The advantages of prizes are two-fold:

They pay for nothing but performance, and they ensure that anyone with a good idea — not just the usual experts — can take a crack at a tough problem. Much to the horror of the leading astronomers of the day, a clockmaker ultimately claimed the longitude prize

Another day, another prize.

Richard Branson and Al Gore announced today a $25 million prize for the best way to remove significant amounts of carbon dioxide from the atmosphere.

The key insight is that the best way to handle a problem is not to impose a solution, but to provide people with incentives to come up with their own solutions.