Investments as options

Allocating resources between competing projects can, and perhaps should, be quite a sophisticated exercise. New techniques, such as treating investments like stock options, can be more useful than the fairly crude cost-benefit analysis often used by government bodies. One feature of the stock option approach is that it can deal more readily with changing circumstances: for example, it keeps open the possibility of making large investments if a project shows early promise. Holders of Social Policy Bonds, because they would subordinate their investment decisions to targeted outcomes, could possibly deploy such investment criteria more readily than government, which is more heavily constrained by existing institutional structures.
The effect of this sort of tool is to expand the range of projects that are amenable to objective assessment. Within an existing institutional body - a police force, for example - a limited budget may well be spent rationally; that is, in such a way as to maximise the reduction in crime that the police force can achieve. But the decisions about allocating the entire country's crime reduction budget are almost certainly not made on purely rational grounds. Most likely, they will be largely dictated by past patterns of expenditure and the wishes of existing institutions, including police forces, to perpetuate their existence.

We need, instead, investment decisions that are entirely subordinated to targeted outcomes. Holders of Social Policy Bonds would maximise the returns to society's limited capital partly because maximising the returns to society would maximise their own returns, and partly because they would be freer than existing bodies to consider the full range of likely projects, even ones that threaten existing bodies. Sophisticated financial techniques would give bondholders the tools to consider a wider range of projects than bodies who use outdated investment criteria, or who are handicapped by the vested interests of existing institutions.