Prize It All!

Prizes and Design of Economic Incentives

One of the most profoundly informative books that I read last year was Fermat’s Last Theorem by Simon Singh. In short, the book takes the reader through a historical account of the three century search for the definite answer to a puzzle that the French amateur mathematician Pierre de Fermat posed. It also bears very interesting mathematical and scientific detail regarding the history of the search for the solution to the problem posed by an amateur mathematician. Notwithstanding the glorious history of science in general and mathematics, this problem was at one time regarded as completely intractable. Then an unhappy set of circumstances led to a late night encounter of Fermat's Last Theorem after which Paul Wolfskehl dedicated an enduring prize fund that acted as a supplementary incentive towards proof of the theorem. There was a surge of interest and the crunching and thinking began again to find this solution. Finally, the prize was taken apart by prof. Andrew Wiles who was not as moved by the financial expectation but by the obsession from mid teens. Without the intention to disparage prof. wiles intentions and declarations, no doubt the primacy of the problem was kept alive by the added incentive of a substantial prize of 100,000 German Marks. Fermat’s last theorem ceased to be a puzzle in 1995 when the solution by Professor Andrew Wiles was accepted.

Many economists now know that the proper design of economic incentives would concentrate mind power and ensure that a distributed and democratic search for a solution to a well defined problem is undertaken. This idea is not overly complicated because it involves an approximation of a market conditions by allowing for competition towards the claim of a sufficiently large prize and allows for knowledge to be built around different findings. Writing in the New York Times, David Leonhardt supports the view that innovation can be hastened with sufficient offer of prize money and reminds readers that the idea of navigation by longitudes was itself discovered by a watch maker partly responding to the incentive of the £20,000 prize. More recently, the X prize of US$ 10 million was a competitive challenge for researchers and thinkers to design a vehicle and ensure the first private space flight. The challenge that was thrown in 1996 but the prize was claimed after eight years. For such a highly technical feat, this was a stellar achievement over an acceptably short time at a comparatively low cost.

Recalling an earlier post on this blog about Sir Richard Branson’s undertaking to invest up to US$ 3 billion on the quest for an alternative fuel source, this blogger stated that the use of a prize would be far efficient and would almost certainly inspire a dedicated and cost-effective solution. Other public problems that should be pursued in the same manner are probably a vaccine or cure for HIV/Aids on the one hand and the cures for other costly diseases such as malaria and cancer. Prizes are an adequate approximation of markets that would ensure that only real solutions are paid for in addition to democratizing the search. A number of firms are also using this approximation of markets to harness brain power in the solution of business problems. Why shouldn’t Richard Branson take the example?

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