http://www.biz.uiowa.edu/iem/
http://hanson.gmu.edu/ideafutures.html
http://hanson.gmu.edu/infomkts.html
http://en.wikipedia.org/wiki/Futures_exchange
Idea Futures
(a.k.a. Prediction Markets, Information Markets)
by Robin Hanson
(This is my top web page on idea futures. Go here to find my
publications on idea futures.)
The Idea Our policy-makers and media rely too much on the "expert"
advice of a self-interested insider's club of pundits and big-shot
academics. These pundits are rewarded too much for telling good
stories, and for supporting each other, rather than for being "right".
Instead, let us create betting markets on most controversial
questions, and treat the current market odds as our best expert
consensus. The real experts (maybe you), would then be rewarded for
their contributions, while clueless pundits would learn to stay away.
You should have a free-speech right to bet on political questions in
policy markets, and we could even base a new form of government on
idea futures.
One can subsidize a market on a question, offering extra rewards to
those who bet right on this question. This subsidy is an "information
prize", offered to those who first provide information on a question,
in contrast to an "accomplishment prize", given to those who first
accomplish some task. Instead of patronizing academic basic research
via proposal peer-review, we should use prizes more.
Publications Idea Futures has been described in many publications by
myself and others, including both academic journals and popular media.
Web Games There are many web sites which let one bet on sports, but
the Foresight Exchange (FX, previously called Idea Futures) was the
first general web betting game, and was the first to allow users to
introduce new claims to bet on. Begun by Sean Morgan, it won the 1995
Prix Ars Electronica Golden Nica for world's best web site. Over 1500
players now bet play money on over 200 questions of their choosing.
Check out the current betting odds, an independent 'Zine, and m o r e.
The game's developers once formed a business, Ideosphere (now wholely
owned by Kumo Software) that now seems defunct. Recently other
play-money markets have appeared, such as Hollywood Stock Exchange,
Invisible Hand Electronic Market, Fanatasy Futures, and NewsBet. (I
have no relation with or stake in any of these ventures.) I think the
odds in these markets are often too optimistic, but they do pretty
well considering, and a real money market would do much better.
(Another web market, Java Idea Futures, isn't really an Idea Future in
the above sense; they trade perhaps-not-yet-written Java Applets.)
Other Demonstrations
* Real money political markets, such as Iowa Electronic Markets
and WahlStreet, predict election outcomes better than opinion polls.
* All of our familiar financial instruments - stocks, insurance,
commodity futures, options -- were once forbidden by anti-gambling
laws. Laws could change to favor Idea Futures too.
* Some credit derivatives pay out if agencies downgrade the credit
rating of a company's debt. This shows that subjective judgements by
established judges can be used to settle bets.
* Governments tend to use prizes less than private patrons. When
science was patronized more by private sources, prizes were used much
more often. Prizes are not infeasible now.
Legal Limits The main immediate limitation to larger scale
demonstrations are the facts that betting is generally illegal, and
that securities are highly regulated.
To get an Idea Futures market approved as a security in the US, you'd
need CFTC approval. But they require expensive review, require you to
set up a physical pit for trading there, and are sure that there is no
point to markets where there is not substantial hedging demand.
(Respected academics can sometimes get exceptions though.)
Betting is illegal in most of the world (including Nevada), with
exceptions carved out over the years by special interests, such as for
horse bets, lotteries, and casinos. Only the UK, to my knowledge,
allows non-sports betting. Some off-shore gambling places are now
soliciting folks citizens to bet with them by phone (e.g.,
1-800-I-CAN-BET) or internet (e.g., Internet Casino). It will be
interesting to see how strongly U.S. police and legislators react to
discourage U.S. citizens using the web to bet in these foreign
markets. See also these discussions of legal issues.
Close, but not enough
* Stocks and bonds are bets on big bundles of ideas: underlying
technology, business strategy, marketing skill, prices of input
factors, market demand, etc. You want to bet on just what you think
you know about.
* Derivatives are usually required to have prices predictable from
the underlying instruments they derive from. Many believe that the
right combination of existing instruments can reproduce any bet, so
new instruments only lower transaction costs. They're wrong.
* Insurance companies can sell arbitrary bets, but only to those
with an "insurable interest".
* Regulators only allow Commodity Futures where someone needs to
insure against big risks.
* British bookies can take any bets, but insist on setting prices
instead of being market-makers. So they won't bet on stuff, like
science, they don't understand.
History I generated this idea in the fall of 1988. See our article
describing some history of the web game and of my involvement with the
idea. I've found several prior publications where others had similar
ideas. I think I've thought the idea through more though.
Critics Here is all the web published criticism of idea futures that I know of.
* Sasha Chislenko long ago offered some friendly criticism, to
which I responded in print.
* I replied to some criticism published in special issue of Social
Epistemology.
* A varitey of informal criticism is found in the if-discuss
archives. See for example comments by Ken Fishkin, Hugh Hoover, and
Peter McCluskey. My replies can be found from those posts.
* Henry See and Michael Century are artists who complain that
since Idea Futures uses numbers, it limits human expressiveness. I
reply.
Robin Hanson (e-mail address removed) First version, June 12, 1996
