Innovation through prizes

In an interesting coincidence, the Wall Street Journal and NYTimes covered this idea. Here's David Wessell in WSJ:

InnoCentive, a company spun off six years ago by drug maker Eli Lilly, charges clients ("seekers") to broadcast scientific problems on a Web site where scientists ("solvers") are offered cash -- usually less than $100,000 -- for solutions; more than 50 challenges are now pending (see the site). Netflix, the mail-order movie company, is offering $1 million for an algorithm that does 10% better than its current system for predicting whether a customer will enjoy a movie, based on how much he or she liked or disliked other movies. ...

In the NYTimes David Leonhardt covers the Netflix contest in greater detail:

Within days, many of the top people in a field known as machine learning were downloading the 100 million movie ratings Netflix had made public. The experts have since been locked in a Darwinian competition to build a better Cinematch, with the latest results posted on a leader board at Netflix’s Web site.

Last week, I called Geoffrey Hinton, a professor of computer science at the University of Toronto whose team had been in first place when I last checked. But by the time I reached him, his team had been bumped down to second by a Hungarian team.

Along the way, Leonhardt quotes Robin Hanson on the difference between prizes and just plain old grants:

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.”