Could Gambling Save Science: Encouraging an Honest
ConsensusTo appear in Social Epistemology, 1992. (version appeared: in Proc.
Eighth Intl. Conf. on Risk and Gambling, London, 7/90.)C O U L DG A M B L I N GS A V ES C I E N C E? Encouraging an Honest Consensus by Robin Hanson Visiting Researcher, The Foresight InstituteP.
O. Box 61058, Palo Alto, CA 94306 USA[email protected] 510-651-7483The pace of scientific progress may be hindered by the tendency of ouracademic institutions to reward being popular, rather than being right. Amarket-based alternative, where scientists can more formally “stake theirreputation”, is presented here. It offers clear incentives to be carefuland honest while contributing to a visible, self-consistent consensus oncontroversial (or routine) scientific questions. In addition, it allowspatrons to choose questions to be researched without choosing people ormethods. The bulk of this paper is spent examining potential problems withthe proposed approach.
After this examination, the idea still seemsplausible and worth further study.INTRODUCTIONAfter reviewing the discrepancy between what we want from academicinstitutions and what we get from current institutions, a market-basedalternative called “idea futures” is suggested. It is described throughboth a set of specific scenarios and a set of detailed procedures. Overthirty possible problems and objections are examined in detail.
Finally, adevelopment strategy is outlined and the possible advantages aresummarized.THE PROBLEMTHE SCIENTIFIC REVOLUTION Four centuries ago, some Europeans complainedthat the existing academic institutions were biased against them. Insiders,it was said, were “inflated by letters” and shunned anyone who dared”speculate on anything out of the common way” [De]. Outsiders –astrologers, chemists, and people like Bacon and Galileo — argued thatthey and their theories should be judged by how well they agreed withobservations, and not by how they agreed with the authorities of the day[Gal].
This was the age of utopias [Whi], as these rebels debated possibleacademic reforms and imagined whole new social institutions, for bothacademia in particular and society in general.Within a century or so, the intellectual descendants of these outsidersbecame the new insiders in a process now called the “ScientificRevolution”. They introduced a new respect for observations along with newsocial institutions, such as the Royal Society of London, inspired by thoseutopian ideals. Since then science has made impressive progress. Mostcontroversial issues of four centuries ago seem long settled by now, andcontinued research may well settle most of today’s controversies.
Academiacan claim some credit for this, and academic institutions have continued toevolve in response to perceived problems, formalizing publication injournals, credit in citations, and evaluation in anonymous peer review.PROBLEMS WITH ACADEMIA Yet little has really changed. Academia isstill largely a medieval guild, with a few powerful elites, many slave-likeapprentices, and members who hold a monopoly on the research patronage ofprinces and the teaching of their sons. Outsiders still complain aboutbias, saying their evidence is ignored, and many observers[Gh,Red,SmP,Syk,Tr,Tul] have noted some long-standing problems with theresearch component of academia. footnote: Teaching reform is beyond thescope of this paper. I am content to observe that there are no obviousreasons why the changes I will propose should make teaching worse.
}As currently practiced footnote: Early peer reviewer consisted more ofpersonally observing experiments and trying to reproduce analyses.} peerreview is just another popularity contest, inducing familiar politicalgames; savvy players criticize outsiders, praise insiders, follow thefashions insiders indicate, and avoid subjects between or outside thefamiliar subjects. It can take surprisingly long for outright lying byinsiders to be exposed [Red].
There are too few incentives to correct forcognitive [Kah] and social [My] biases, such as wishful thinking,overconfidence, anchoring [He], and preferring people with a backgroundsimilar to your own.Publication quantity is often the major measure of success, encouragingredundant publication of “smallest publishable units” by many co-authors.The need to have one’s research appear original gives too little incentiveto see if it has already been done elsewhere, as is often the case, andneglects efforts to integrate previous research. A preoccupation with”genius” and ideological wars over “true” scientific method [Gh] needlesslydetract from just trying to be useful.
Perhaps the core problem is that academics are rewarded mainly fortelling a good story, rather than for being right. (By “right” I includenot only being literally correct, but also being on the right track, orenabling work on the right track.) Publications, grants, and tenure arebased what other insiders think today, independent of whether one’s ideasand results are proved correct or valuable later. Even for researcherswith a good track record, grant proposals must usually describe in somedetail exactly what will be discovered and how; true exploratory work isdone on the sly. This emphasis on story-telling rewards the eloquent, whoknow how to persuade by ignoring evidence that goes against their view, andby other standard tricks [Cia].Admittedly, someone who has published an unusual idea that has provenright is thought of more highly, all else being equal. But all else isusually not equal.
Outsiders find it hard to get an unusual ideapublished, and being able to say “I told you so” is of little help toacademics who have failed to gain tenure. The powerful often get creditfor the successes of those under them [Re]. Only in the most experimentalfields, where feedback is direct and frequent, can we expect people who aredisliked — but usually right — to be rewarded through informalreputations.Perhaps our biggest problem is the distortion evident when a sciencequestion becomes relevant for public policy, as in the recent debates over”Star Wars” or the greenhouse effect. The popular media tend to focus onthose scientists prone to hyperbole. An honest consensus of relevantexperts is often lost from public view, as advocates on each side accusethe other of bias and self-interest. Public policy can suffer dramaticallyas a result, a consequence that becomes more serious as the pace oftechnological change quickens.
On the whole, current academic institutions seem less than ideal, withincentives that reward being popular, fashionable, and eloquent, instead ofbeing right.INCENTIVES MATTER Are these complaints just sour grapes? Those who dowell by an existing system tend to believe problems are minor. But even ifthe best ideas eventually win, we should worry if the people who advocatethose ideas don’t win. Good intentions and culture can only go so far incountering bad incentives; if you must publish or perish, you will do whatit takes to publish (or perish).The social organization of any human effort can have a tremendouseffect on its efficiency.
Consider that different past societies withdifferent ways of organizing science have had very different rates ofscientific progress; compare Europe with China over the last fivecenturies. Our rate of progress may be less than 2% of what it could be[Be].Are we wasting precious resources? Imagine what would happen if weused academic peer review to decide what products to manufacture. Proposalsfor new products would be reviewed anonymously by powerful people whoproduce similar products.
These reviewers would pass judgement withouttaking any personal risk, and those judged favorably would win regardlessof how useful their product turned out to be.I much prefer our current business system, with all of its problems,where investors must take a personal risk when they endorse a product.Institutions like the stock market are comparatively egalitarian andflexible, allowing most anyone to participate in the ongoing debate aboutthe profit potential of any public business or the relative potential ofvarious industries, management styles, etc. Why can’t we have academicresearch institutions more like this?ACADEMIC REFORMS Most efforts to improve academic institutions focus onincremental reform within the existing peer review framework. Shouldreviewers be anonymous? Should submissions be anonymous? How many peopleshould review each proposal?Occasionally someone proposes a more radical reform within the currentframework. The surprising lack of agreement among reviewers [Cic] has leadsome [Gi] to suggest we fund equally or randomly among “qualified”applicants, and let everything be published. Conversely, the fact that asmall fraction of scientists receive most citations [Co] has lead some [By]to suggest that we simple give $1M a year, no strings attached, to the topthousand scientists, chosen by an iterated popularity poll. Some havesuggested universities and private labs be funded in proportion to theirpublication [Ro] or citation [Ts] count.
And some [Tu] advocate prizes,once a central method for funding research [He]. Still others suggestscrapping the whole thing, abolishing tenure [SmP] or government funding[Fe,Wa] in favor of some existing alternative like private patrons, popularmedia, patents, or research tax credits.Once in a while a whole new social institution is proposed. Sciencecourts [Kan] (also called “scientific adversary procedures”) were inventedto blunt hyperbole on science controversies by using court-like proceedingsto encourage cross-examination and to document areas of agreement.
Hypertext publishing [Dr,Han88] imagines an electronic publishing mediumwhere any critic could directly link a criticism to any published item, andwhere readers could decide what is worth reading by have softwareautomatically combine the direct evaluations of previous readers theyrespect.In this paper I propose a new academic institution, tentatively called”idea futures”, intended to overcome some of the limitations of existingalternatives. It is utopian in the sense of describing a coherent visionof how things might be rather different, but hopefully practical in thesense of considering what could go wrong and how to start small.WHAT WE WANT Before considering specific mechanisms, let us reflect amoment on what we want from academic incentives. We want to encouragehonesty and fair play; the game should be open to anyone to provehim/herself. Patrons who fund research, either private foundations orgovernments, presumably want research to be directed toward the academicsubjects and questions of interest to those funders. (Patrons also includethe researchers themselves, to the extent that reduced salaries areunderstood to be in exchange for some research autonomy.
) On controversialquestions, we want a clear measure of the current opinion of relevantexperts, a measure which political advocates could not easily distort. Andthose who contribute to such a measure should have clear incentives to becareful and honest.Presumably we want as much progress as possible per effort invested, atleast in situations where the following notion of “progress” makes sense.Consider a well-posed question, such as “Is the Earth basicallyspherical?”, with a handful of possible answers (such as “No, it’s flat”).Experience indicates that, with enough study and evidence, one of theanswers will eventually stand out as best to most anyone who considers thequestion carefully. At least this seems to happen for most questions thathave been traditionally labeled “scientific”; questions about the moralityof abortion or the nature of God may not fare as well. Where there is sucha limiting “right” answer, “progress” can mean the rate at which generalscientific opinion converges to that answer.
footnote: This definition ofprogress is more objective than citation counts [Co], and hopefully avoidsdebates about whether more knowledge is good, or whether there is really anultimate truth.}Translating these goals to an individual level, we want ourinstitutions to reward academics for pushing scientific opinion toward the”right” answer, presumably by somehow increasing their reputation,influence, or resources. Let us imagine an academic who, after somereflection or observation, comes to a tentative conclusion which he/shewould like others to consider. If most everyone already agrees with thisconclusion, even without seeing the new supporting evidence or analysis,the academic should receive little credit for just making an “obvious”claim.However, credit should be possible if the claim is surprising, i.
e., ifpeople who have not yet seen the evidence are not yet willing to agree. If,upon reviewing the evidence, most everyone now agrees with the surprisingclaim, then the academic should certainly receive some credit. And, infact, peer review can handle this case. But what if there is not uniformagreement? It still seems that the academic should be rewarded, if thissurprising claim is eventually born out.
And others who supported thisclaim in the face of disagreement should also gain credit [Led], since theyhelped push the general opinion in the right direction.Why shouldn’t savvy academics now win credit by supporting as manyclaims as possible, or by multiplying controversies? Clearly they shouldrisk losing credit when they are wrong, so that credit is in some waysconserved. The ratio of possible loss to gain should depend on how unusualone’s position is.
Siding with the majority and being right should gainone less than siding with a minority and being right. The total amountgained or lost should depend on how much of their reputation each academichas chosen to stake on this issue, as well as on how interesting the issueis to the ultimate research funders.In summary, part of what we want from academic incentives is a fairgame for staking our reputation, so that on questions of interest tofunders, we converge as fast as possible to the “right” answer.THE PROPOSALSurprising as it may seem, such a social institution exists. It isrelatively simple, cheap, decentralized, and egalitarian. It could createa consensus on disputed science questions that would be clear, expert,honest, and self-consistent across a wide range of issues.
This consensusshould respond quickly to new information, and predict at least as well asany other co-existing consensus mechanism. It is well-grounded in our besttheories of decision and incentives.And it is ancient. We need only revive and embellish a suggestion madeback during the utopian scientific revolution. Chemical physicians,excluded by the standard physicians from teaching in the British schools,repeatedly offered challenges like the following (circa 1651):Oh ye Schooles.
… Let us take out of the hospitals, out of the Camps,or from elsewhere, 200, or 500 poor People, that have Fevers, Pleurisies,etc.Let us divide them into halfes, let us cast lots, that one halfe ofthem may fall to my share, and the other to yours; … we shall see howmany Funerals both of us shall have: But let the reward of the contentionor wager, be 300 Florens, deposited on both sides: Here your business isdecided.
[De]They proposed to bet on their medical therapies, apparently believingbets to be a useful augmentation of the existing academic incentives! Betsare a long-established and robust reputation mechanism, widely seen as acure for excessive verbal wrangling; you “put your money where your mouthis”. In science and elsewhere, phrases like “you bet” are standard ways toexpress confidence. Offers to make token bets are particularly compelling,and scientists of equal stature often make and publicize such bets, withrecent bets on resource depletion, computer chess, black holes [Hal], solarneutrinos, nuclear weapon yields [Ev], and cold fusion [Gar,Lew,WSJ].Nor is gambling foreign to science funding. King Charles II, foundingpatron of the Royal Society of London, was fond of laying wagers on theoutcome of the Society’s experiments [ShS]. Until 1830, public lotteriesfunded Colombia, Harvard, and Yale [Gei].
In 1872 Leland Stanford, founderof Stanford University, hired Eadweard Muybridge to help win his bet that atrotting horse has all four legs off the ground at some point; in theprocess Eadweard invented moving pictures [Jac].Consider the example of Piers Corbyn, a London astrophysicist who hasbeen unable to get academic meteorologists interested in his unusual theoryof long-term weather cycles [NS]. Since June 1988 he has been making betsto gain publicity, betting against the bookmaker William Hill, who usesodds posted by the British Metrological Service. And he has been winning.Over the last 26 months (4/89-5/91), Corbyn has made at least 9 bets amonth (and averaged over 20 bets a month) and has won 80% of these bets,gaining an average rate of return of over 25% per bet. (Depending on whatindependence you assume between bets in a given month, the chance of thishappening randomly is between one in 400 and one in 1050.
) Yet the Servicestill refuses to take Piers seriously, or make even token bets against him.Which doesn’t seem quite fair; hasn’t Pier earned the right to beconsidered? William Hill has taken on the bets for the publicity, but istired of losing, and has adjusted their odds accordingly. Why shouldn’tthese be the odds used for official British agricultural policy, instead ofthe Service’s predictions?Or consider Julian Simon, a population and natural resource optimist,who found he could not compete for either popular or academic attentionwith best-selling doomsayers like Paul Ehrlich.
So in 1980 Simonchallenged Ehrlich to bet on whether the price of five basic metals,corrected for inflation, would rise or fall over the next decade. Ehrlichaccepted, and Simon won, as would most anyone who bet that way in the lasttwo centuries. This win brought Simon publicity [Ti], but mostly in theform of high-profile editorials saying “Yeah he won this one, but Ichallenge him to bet on a more meaningful indicator such as …” In fact,however, not only won’t Ehrlich bet again, though his predictions remainunchanged, but none of these editorial writers will actually put theirmoney where there mouths are! And the papers that published theseeditorials won’t publish letters from Simon accepting their challenges[Si]. Shouldn’t Simon’s open challenges count as much as best-sellers insetting environmental policy?-If the primary way that academics are now rewarded for being right,rather than popular, is an informal process for staking their reputation,which has various biases because of its informality, and if we want abetter reputation game, why not literally make bets and formalize theprocess?Imagine a betting pool or market on most disputed science questions,with the going odds available to the popular media, and treated socially asthe current academic consensus.
Imagine that academics are expected to”put up or shut up” and accompany claims with at least token bets, and thatstatistics are collected on how well people do. Imagine that fundingagencies subsidize pools on questions of interest to them, and thatresearch labs pay for much of their research with winnings from previouspools. And imagine that anyone could play, either to take a stand on animportant issue, or to insure against technological risk.This would be an “idea futures” market, which I offer as an alternativeto existing academic social institutions. Somewhat like a corn futuresmarket, where one can bet on the future price of corn, here one bets on thefuture settlement of a present scientific controversy. This is admittedlyan unusual (though not entirely original [Bru,Ho81,Ho84,Lea,So])suggestion; but consider what might happen.
SCENARIOSCONTINENTAL DRIFT In 1915 German meteorologist Alfred Wegener publishedhis theory of continental drift, for which he had collected extensiveevidence. But contemporaries considered his theory to be “impossible”, andWegener died an intellectual outcast in 1930 [Mar]. Yet in the 1960’s histheory began to be taken seriously, and is now the established view.Wegener eventually gained fame, but overall academia seems to discourageactivity like his. Some of Wegener’s peers, for example, probably foundhis thesis plausible, but decided that to say so publicly would be a poorcareer move.With idea futures, Wegener could have opened a market for people to beton his theory, perhaps to be judged by some official body of geologists ina century. He could have then offered to bet a token amount at, say, 1-4odds, in effect saying there was at least at 20% chance his claim would bevindicated.
His opponents would have had to accept this estimate, and itsimplications about the importance of Wegener’s research, or they would haveto bet enough to drive the market odds down to something a little closer to”impossible”. They could not suppress Wegener merely by silence orridicule.As Wegener increased his stake, buying more bets to move the price backup, his opponents would hopefully think just a little more carefully beforebetting even more to move the price back down. Others might find it intheir interest to support Wegener; anyone who thought the consensus oddswere wrong would expect to make money by betting, and would thereby movethe consensus toward what they believe. Everyone would have a clearincentive to be careful and honest.
The market would encourage more research related to continental drift,as one could make money by being the first to trade on new relevantinformation. Eventually the evidence would more clearly tip in Wegener’sfavor, and the price of his bets would rise. Wegener, or his children,could then sell those bets and reap some rewards. While those rewardswould not make up for years of neglect, at least he would get something.As the controversy became settled, and opinions converged, people wouldgradually sell and leave the market. Few people, if any, need be left forthe final judging, which could usually be avoided (using mechanisms to bedescribed below).COLD FUSION A more recent controversy began in March 1989, when Ponsand Fleishman announced “fusion in a jar” at a dramatic press conference.
In the months that followed, media aftershocks of confirmation attemptswere tracked by thousands of scientists and others, who argued with eachother about the chances of cold fusion being real. Proposals to bet cameup often, even in the public debates. Critics, uncomfortable with airingscientific disputes in public, complained that Pons and Fleishman broke therules by going to the popular media instead of through normal peer reviewchannels, unfairly gaining extra attention and funding. Supporterscountered that popular media spread information quickly to otherscientists; cold fusion, if right, was too important to wait for normalchannels.In the journal Science, Robert Pool speculated that a market in coldfusion might have gone something like Figure 1 [Poo]. If there really hadbeen a betting market, then there really would have been a market pricethat journalists like Pool could publish as news. A table of going pricesmight appear on the science page in the newspaper, much like the stock pagein the business section, conveying current scientific opinion better thanthe current “balanced” interviews with extremists on all sides. It’s beensuggested [Ze] that the added information in betting market prices mighthave helped resolve the debate more quickly.
FUSION CONFIDENCE INDEXGeorgia confirms Russia heatStanford | neutrons confirmsAnnounce fusionTexaxAM | | |in bottleconfirms | |U.Wash*|Hungarian || *tritium***| BYUneutrons|*** *|* *| confirms|| *** ***| |* ** ** ******* |* * * * *** ** **** * * ** **Georgia** * ** ** *reverses—**** ** ***** * *| TexaxAM *** MIT seeshedges—-* *nothing** Mar23Apr3Apr10Apr14Apr18 Figure 1 A Hypothetical Market in Cold Fusion (Science 28Apr89)There needn’t be a conflict between going through slow proper channelsand getting the word out, if a fast market were a proper channel. Theeffect of staged media events might be reduced as it might not be news ifthe price didn’t change; advocates would have to convince, not the averagelistener, but those people willing to make bets. Remaining biases, such asthe overconfidence evident in figure 1, would be reduced by technicaltraders and other trading specialists.Cold fusion businesses would have been less risky to start.
As it was,a new fusion business had to bet both that cold fusion was real, and thatthey were the best group to develop and market it in that case. With ideafutures they could, by both starting a business and betting against coldfusion (essentially taking out insurance), really only be betting on theirability to develop cold fusion if it were real.Insights from a great many people whose opinions on the cold fusioncontroversy were ignored, such as inarticulate folks without Ph.Ds, couldhave been integrated in a decentralized manner. Popular play would end upsubsidizing professional efforts on questions of popular interest, offeringmore “direct democracy” in setting research priorities.NEUTRINO MASS Betting markets could also function in the absence ofovert controversy, as in the following (hypothetical) story.Once upon a time the Great Science Foundation decided it would be a”good thing” to know the mass of the electron neutrino.
Instead of tryingto figure out who would be a good person to work on this, or what a goodresearch strategy would be, they decided simply to subsidize bettingmarkets on the neutrino mass. They spent millions.Soon the market odds were about 5% that the mass was above 0.1eV, andGung Ho Labs became intrigued by the profits to be made. They estimatedthat for about $300K spent on two researchers over 3 years, they could makea high confidence measurement of whether the mass was above 0.
1eV. So theywent ahead with the project, and later got their result, which they keptvery secret. While the market now estimated the chance of a mass over0.1eV at 4%, their experiment said the chance was at most 0.1%.So they quietly bought bets against a high mass, moving the price downto 2.5% in the process. They then revealed their results to the world, andtried their best to convince people that their experiment was solid.
Aftera few months they mostly succeeded, and when the price had dropped to 0.7%they began to sell the bets they had made. They made $500K off of theinformation they had created, which more than covered their expenses to getthat information.If Gung Ho Labs had failed to convince the world of their results, theywould have faced the difficult choice of quitting at a loss, or holding outfor the long-term. A careful internal review would probably be conductedbefore making such a decision.Internally, Gung Ho would be free to use whatever organizationalstructures it found effective; even peer review, tenure, and fixedsalaries. The two researchers need not risk their life savings to be paidfor their efforts. But the discipline of the external market should keepthese internal institutions from degenerating into mere popularitycontests.
KILLER PEANUT BUTTER Once upon another time, Munchem Biolabs foundcompelling evidence that peanut butter was more deadly than mostpesticides, a conclusion that Lunch Industries Exclusive (LIE) wanteddesperately to suppress. LIE’s usual procedure was to fund a bunch ofcompeting studies to come to opposite conclusions, which usually kept thewaters muddy enough that legislators and customers would ignore it all.But this time they had to deal with an idea futures market on the question,and the public was beginning to take the odds in such markets seriously.Munchem had moved the market odds of deadly peanut butter up ratherhigh.
LIE now had two choices; either they could use overwhelming cash tomove the odds back down, or use competing studies, advertising, etc. topersuade others to bet on their side.If they bet alone, they would know they were throwing their money awaywith no obvious limit on future spending. Not only might Munchem findallies, but LIE employees who knew they were bluffing might be tempted topick up a little free money with some anonymous bets. If word of Lunch’sbluff got out, as insider information often does, investors would flock inand wipe out the effect of LIE’s bets.If LIE tried to throw away other people’s money through a persuasioncampaign, they would face a market dominated, as most liquid markets are,by battle-hardened speculators.
These investors, not easily persuaded byclever jingles, would quickly hook up with research insiders, who generallyknow which labs tend to find whatever results their customers want.So in the end, Lunch Industries accepted the market odds, and beganresearch on non-toxic peanut butter.PROCEDURESRather than just present an abstract utopian vision of market-basedacademic incentives, this paper aims to consider in some detail whatproblems might arise and possible approaches for dealing with them. Thefollowing is a core set of procedures tentatively selected to deal bestwith known problems, a core that will be expanded upon later in this paper.No doubt, experience with real idea futures markets will show many of thesesuggestions to have been naive. I offer them primarily to make plausiblethe idea that betting markets could be applied to a much wider range ofscientific questions than is presently considered feasible. (This sectionis somewhat dense, and may be profitably skimmed on a first reading.
)ASSETS Imagine that John bets Mary $5, at even odds, that it will rainnext Monday. Since they don’t entirely trust each other, John and Mary putthe bet in writing and each give $5 to Frank, a trusted third party. Johnhas essentially paid $5 for an I.O.
U. that says “Worth $10 If Rain Monday”,since if he wins he gets $5 from Mary and his own $5 back. Mary’s I.O.
U.says “Worth $10 If Not Rain Monday”. On Tuesday one of them can cash intheir I.O.
U. for $10 from Frank.This standard betting scenario can be improved by breaking it intodifferent transactions; first create the I.O.U.s and then sell them.Replace Frank with a stable financial institution, let’s call it a “bank”,which will sell a pair of “$10 if rain”, “$10 if not rain” coupons toanyone for a price of $10. The bank takes no risk, since exactly one ofthe coupons will be worth $10 in the end.
And since the bank holds the $10in the meantime, it can afford to offer interest on the $10, and perhapspay a local meteorologist to be an impartial judge. Now Mary can first buya coupon pair from the bank for $10 and then offer to sell her “$10 ifrain” coupon to John or anyone for $5, retaining the “$10 if not rain” forherself.A central clearinghouse for such offers, which matched compatibleoffers and insured that traders made good on their offers, would alwayshold a best current offer to sell and to buy. If the transaction costs ofprocessing an offer through the clearinghouse were small, as currenttechnology allows, then the “spread” between these offers could be quitesmall, leaving a going “market price”. A going price of $3.20 for “$10 ifrain Monday” would represent a temporary consensus of a 32% chance of rainMonday.
In general, these markets trade assets of the form “X if A” (oftencalled “contingent assets”), where X is some pre-existing “base” asset andA is one of a set of mutually exclusive claims that some judgingorganization agrees, eventually, to choose from. The base X can be anystock, bond, currency, commodity, or even another compatible contingentasset. The set of claims constitutes a “question”, and each claim is onepossible answer to the question. To enable trading on a question, werequire an agreement between several parties – an author, a judge, and oneor more banks, registries, clearinghouses, and randomness checkers.An author carefully words a set of claims, and a judging organizationagrees if necessary, to offer a verdict in favor of one of these claims atsome, perhaps indirectly specified, date. Registries hold records ofpublic, i.e. not anonymous, trades made at clearinghouses.
(Clearinghousesmay be required to hold additional private records of all trades, availableto be subpoenaed by criminal investigators.)Consider a question with possible answers A,B,…}.
Any bankauthorized in the agreement on that question can “split” any allowed base X(usually anything) into the assets “X if A”, “X if B”, …}, or “join”those assets back into X. In the example above, $10 was split into “$10 ifrain” and “$10 if not rain”. The bank is trusted to report the net effectof these transactions to a central agent, who keeps track of the net”market capital” that has been split along this question.On the specified date, and a short wait after a public announcement,the judges are given an agreed-upon judging-fee in order to study thequestion and render their verdict. Verdicts assign a percentage ofvalidity to each of the possible question answers.
If the verdict is 98%in favor of A, then banks are authorized to let people exchange their “X ifA” assets for 98% of X.The judging-fee is obtained from the banks, who devalue the currentassets contingent on that question by some percentage, a percentage whichcan be no more than a pre-specified max-judging-percentage. Thisdevaluation creates an incentive for traders to “settle out of court” andsell before the judging date.What if there is too little capital in the market to support therequired judging fee? John and Mary’s market only has $10 in it, and witha 10% max-judging-fee, only $1 is available for judging, short of the $5 ameteorologist judge might require. In this case we can hold an “auditlottery” [Pol]. footnote: This name is suggested by the way an auditormight randomly select expense reports for more careful scrutiny.
} Thecurrent market capital, $10, is gambled with whomever offers the bestprice, among those approved by the randomness checker. If the gamble iswon, every asset contingent on this question increases in value, resultingin enough market capital for judging to proceed, in this case $50. If thegamble is lost, all such assets become worthless and judging is not needed.footnote: Investors can insure against the added risk audit lotteriesimpose by putting money into an pot to be gambled in the same lottery, buton the other side.}Judges can be given more flexibility to deal better with uncertaintiesregarding when a question will be judgeable and how much that will cost.For example, the max-judging-percentage could be spent in discrete units,each with a specific percentage-unit and fee-unit.
After spending eachpercentage-unit, the judges would have the choice to postpone judging to alater date and/or raise the next fee-unit. If necessary, an audit lotterywould be held before each new unit.If desired, judges can also be given a direct financial incentive to becareful and honest.
“Appeals” markets can be created on the same question,but judged by an independent group much later and/or with a much higherjudging-fee. For a limited period after a verdict is announced, an amount,up to a fixed fraction of the original judging-fee, would be spent tryingto move the price in the appeals market toward the verdict specified.Judges would end up with some contingent assets saying their verdict wouldbe upheld in the appeals market, assets they could sell immediately, at aloss, if they so chose.Idea futures markets need no central management. Anyone could author aclaim on any subject of interest to them, contract with different judginggroups to judge that claim on different dates, and allow different banks todeal in each question. And anyone should be able to open a clearinghouseto sell any asset.
All of these groups could compete openly for theattention and respect of investors.INVESTORS Investors could be as diverse as they are in current markets,each focusing on some specialty while avoiding risk from other areas. Forexample, if the market odds are “incoherent”, i.e., deviate from thestandard axioms of probability, a trader who corrects that deviation canmake better than the average rate of return without significant risk.Therefore coherence specialists should keep the market consensus roughlyconsistent over a wide range of subjects. Similarly, technical traderswould keep the pattern of price changes close to the ideal random walk[Mal].
The market odds should also quickly reflect information containedin any co-existing consensus measures, such as opinion polls or reports ofelite committees, as traders could make easy money if alternative measureswere reliably better predictors than the market.A contingent asset, like “X if F”, that is split again createsconjunctive contingent assets like “X if F and A”. Conjuncts which combinemany claims may be popular, since they offer investors the greatestexpected return. Conjunctive assets also allow one to bet the conditionalprobability of A given F and remain insensitive to the verdict on F. Inthis way diverse traders, each of whom has only local knowledge, couldmanage a large network of dependencies such as the currently popular “Bayesnet” models [Pe].SOCIAL ATTITUDES Some new social attitudes toward these new markets areimportant elements of the envisioned approach. As with current financialmarkets, the market odds should be treated as the current social consensuson a question by popular media and policy makers.
While one may of coursedisagree with this consensus in conversation, it is not impolite for othersto inquire whether one who so disagrees has made investments commensuratewith their wealth and the fuss they are making. People who do so investshould receive the same sort of social credit now granted to “do-gooder”advocates who devote personal resources to changing current opinion on someimportant issue. Like Phileas Fogg, the hero of Vernes Around the World inEighty Days, “a man who rather laid wagers for honor’s sake than for thestake proposed” [Ve], these investors should not be treated as mererisk-loving gamblers.Social credit should also go to philanthropists who choose to subsidizea market on some important question. By funding an automaticinventory-based [St] market-maker, which always offers to buy or sell atprices determined solely by its current inventory, one gives away moneyonly to those who move the market price in the direction of its finalverdict.Reputation scores could be computed from each person’s public trades,recorded at registries. A trade is considered “public” if the tradercommitted at trading time to a date at which the trade would be publiclyrevealed, and that date has passed. One simple reputation score would bethe ratio of the current market value of assets held to their value whenpurchased, corrected for a few distortions.
People with high reputationscores should be respected for having been right against the crowd, andsuch scores might even compete with G.P.A.s or number of papers publishedas an evaluation measure.OBJECTIONSThe main difference between “blue sky” fantasies and serious butradical suggestions is in how well they handle the details.
If you arelike most readers, you will by now have thought of one or more problemswith or objections to idea futures. If so, you are encouraged to scan thissection and go directly to the issues of concern to you. (Most of theseissues have been raised by at least three independent commentators inprevious discussions.)ISN’T GAMBLING ILLEGAL? Yes, betting markets on science questionsappear to be only legal in Great Britain, where they are highly regulated.Even Nevada, which allows sports betting, prohibits general betting toavoid scandals that might “taint” the gambling industry. Which is a shamebecause most of the arguments against betting, discussed below, do notapply well to science betting.
We allow scattered markets that give usrather good consensus estimates on horse races and football teams, yet noton important science and technology questions! In the long term perhaps wecan persuade legislators to allow science bets because of their extrabenefits and reduced problems. Science betting certainly seems easier tojustify than the currently popular regressive taxation through statelotteries.ISN’T BETTING A USELESS ZERO-SUM GAME?A standard argument for makingbetting illegal is to keep people from wasting their energies inunproductive activities.
The only obvious value in betting on dice throwsis entertainment, but laws to prohibit this usually also prohibit muchmore. Life insurance, joint stock companies [Bre], and commodity futuresmarkets [Ros] were all prohibited by anti-gambling laws until advocatesmanaged to obtain exemptions.Being monetarily zero sum does not make betting useless.
Bettingmarkets allow traders to reduce risk, and create informative prices. Inliquid markets most of the trading, liquidity, and price rationalizationcomes from speculators, for whom the market is basically a betting game.Buying any particular stock in the stock market, for example, is basicallya bet in a zero-sum game when compared to investing in the standard”market” combination of all assets in the same tax and risk category.(While, if the prices are irrational, such bets may help the economy as awhole, this “externality” also benefits people not betting on thatquestion.)In fact, a standard way to analyze financial portfolios is to breakthem into contingent assets, each of which has value in only one possibleworld [ShW]. A “complete” market, where one can bet on anything, is best,allowing investors to minimize risk and maximize expected return [La].Science bets would not only allow corporations to more easily insureagainst technological risk, but they would create prices embodying the sortof valuable information that governments now fund research to obtain. Whenthe betting stakes are invested in stocks, the money is hopefully being putinto productive use by those companies.
Therefore, ignoring transactioncosts and judging fees, the average rate of return of contingent assetssplit from stocks would be the same as the return on those stocks.DOES ANYBODY EVER BET THIS WAY? Liquid markets in contingent assetsare a somewhat different betting mechanism from the usual bookies orpari-mutuels. But they are not untried. Such markets are widely used toteach MBA students about how markets work [Fo], and are usually done onelections. Financial traders sometimes use them to bet on sports. And Ihave developed a board game where players use such a market to bet on amurder mystery as it unfolds. Most ordinary people learn the mechanismvery quickly.WHAT ABOUT COMPULSIVE GAMBLING? About 2% of the population seemsunable to resist the temptation to risk more than they can afford to lose[APA] in casinos, racetracks, and high risk financial markets.
Lost in thethrill of “action” and the hope that all of their financial worries willsoon be over, they often regret their excess later, and resort to desperatemeasures, like theft, to pay debts.Compulsive gambling is encouraged by advertising and easy access togames with a quick and possibly large payoff. British law reduces thisproblem by requiring casino players to apply 48 hours in advance, byallowing them to sign up on lists of people to be excluded from allcasinos, and by forbidding youth and on-site alcohol, entertainment, andcredit [Ke]. Margin limits in financial markets serve some similarfunctions.Governments may impose similar rules to discourage compulsive gamblingin idea futures, though it is important that any advertising restrictionsnot prevent the wide dissemination of current consensus odds on importantissues. More importantly, unless options (or investments on margin) areoffered, science questions are generally too long term to be a problem,offering no more “action” than long-term stock investments.
Traders whoregret their purchase a few days later can sell and get most of their moneyback. And, given that many other options markets exist, it is not clearthat allowing science options would increase opportunities for compulsiverisky investing.IS THERE ENOUGH INTEREST IN SCIENCE QUESTIONS? A recent sciencefiction [Bre] novel imagined wide-spread betting on science and technologyquestions, supplanting horse racing in popularity. And it is possible thathaving a direct, if small, influence and personal stake in science wouldheighten the public’s interest.
At present, though, fewer people probablyfollow science than football.We don’t need to interest everyone, however, just enough to pay for themodest overheads involved. Few people have interest and opinions about thefuture price of corn, yet corn futures markets thrive. A great many peopleare now involved in scientific research, many more follow scientificjournals, and even more follow science in the popular media.
Many of thesepeople have strong opinions on various science controversies and feel theyhave insufficient opportunity to express them. Idea futures would thriveif it tapped only a small fraction of current interest and effort.Having a fraction of science funding channeled through betting marketswould certainly accomplish this. So might basic attitude changes towardseeing markets as a legitimate place to “take a stand” on important issues,trading scores as indicators of who is right more often, and the marketprice as a valid consensus measure. Idea futures does not need large sumsof money to be successful; even when there is only $100 bet on a question,the market still offers the social benefit of a visible consensus andincentives for honesty.WILL THESE MARKETS BE TOO THIN? In a market with low “liquidity”,there are so few traders that you have to wait a while to find someonewilling to trade with you.
Automated market-makers [Hak], always ready totrade at prices determined by their current inventory, can increaseliquidity and maintain a small “spread” between their buy and sell priceoffers. And they can be very cheap if the basic transaction costs are low,which they could be if thousands of markets shared the same computerizedmarket place.But the market might remain “thin” in the sense that prices couldchange quickly against a trader in response to each small amount traded, sothey would have to wait to get a “reasonable” price. A lack of expectedmarket thickness can be a self-fulfilling prophecy, since traders preferthick markets [Ec]. This is a standard explanation for the limited numberof futures and options markets currently available.Funding channeled through market-makers would of course thicken themarkets, as would consistency arbitrage and conditional offers that connectquestions.
And improving computer technology, with lower transaction costsand automated trading strategies, should make thinner markets moretolerable. Besides, two people making a bet is a very thin market, but ithappens all the time. And just one person posting an offer to bet on a newsubject could be an important contribution to our social consensus.Thin markets are known for being good places to find overlookedbargains, and are less prone to speculative bubbles (a single rationalperson can squash one).
A thin idea futures market may actually seembetter to some people, as the cost to change the current market consensuswould be less. But thicker markets are better in general.DOESN’T BETTING ONLY WORK FOR CLEAR CUT QUESTIONS LIKE HORSE RACES?Most organized betting focuses on questions which, like sporting events,will become very clearly resolved in a fixed time. This minimizes disputedverdicts and judging costs, and it makes sense for risk andentertainment-seeking bettors to focus on such subjects. But this does notimply that, given a specific subject area, betting markets are not areasonable alternative to other consensus, reputation, and incentivemechanisms.
Any incentive mechanism must pick some arbiter of quality, andsubjects that are difficult for bets are also difficult for otherapproaches. For example, peer review, which uses averages of anonymousexpert reviews as a quality measure, is widely believed to work better inthe “hard sciences” than elsewhere.Eventually most scientific controversies seem to get resolved enough tosettle a bet. This resolvability is in fact central to popular notions ofwhat defines science. Scientific claims are often defined as claims of”fact” which future evidence could possibly disprove [Pop], or at leastalter our degree of confidence in.
And science is widely believed to be”progressive”, so that as evidence accumulates and relevant studiescontinue, opinions gradually converge. Beautiful theories killed by uglyfacts are left behind. Or as Bacon said, “Truth is the daughter, not ofauthority, but of time”.Actually, most people believe that opinions on most questions of factusually convergence with time, evidence, and sincere study. We hope thathistory will prove us right. We debate and discuss, essentially saying”I’ll bet if we talked it out, you’d see I’m right”. We take the advice ofexperts, indicating that we think we would come to believe what the expertsbelieve, if only we were to study what the experts have studied.Even if we aren’t sure whether opinions will converge, we think thereis a good chance they would converge if only a knowledgeable and detachedenough group would spend enough effort to study and debate the question.
And if that group is diverse and independent enough, we believe we wouldprobably agree with them. If so, we should accept their verdict to settlea bet.HOW OFTEN DO BELIEFS REALLY CONVERGE? Just because people believetheir opinions converge, doesn’t mean that they do. After all, there arestrong social reasons to want to believe in convergence. Even if mostquestions that are settled today were once controversial, this doesn’t meanthat most old controversies are now settled. Perhaps yesterday’s questionsreferred to concepts that are not even considered to make sense today.Historical studies, examining random scientific questions and claims ofseveral centuries ago, should be done to shed light on these doubts.But there are reasons to be optimistic.
Standard decision theory,though it does not adequately account for the computational costs ofdeducing the implications of theories and evidence, is instructive andindicates that rational agents should come to agree [Se]. Consider an idealdecision theory agent who has a degree of belief in some particular claim Aand continues to observe new evidence. Asymptotically, either all newevidence will be irrelevant and have no bearing on A, or the agent willbecome certain about whether A is true or false.
Now imagine that theclaim A specifies a detailed possible world, i.e. says that the real worldis one particular world out of the many possible worlds. If two idealagents start out with wildly different beliefs, but neither of them iscompletely certain about A, and if they both observe the same notasymptotically-irrelevant evidence, then they will asymptotically come toagree about A.Studies indicate that people also have strong tendencies to conform andagree when exposed to each others opinions [Li] and arguments [My]. Infact, the rate at which they come to agree often seems faster that can berationally justified by decision theory.
Randomly selected legal juriesusually come to a unanimous verdict on complex legal questions.WHAT IF BELIEFS NEVER CONVERGE? Even if beliefs usually converged,idea futures might be unworkable if it dealt badly enough with situationswhere beliefs don’t converge. One approach is to have mutually exclusiveclaim sets include a “this question too vague to judge” claim which thejudges could choose if it seemed clear that no amount of study or timewould ever allow a choice between the rest. Most people could then bet onthe question conditional on it being resolved. This solution fails,however, if sincere beliefs never converge and yet it never becomes clearwhether or not beliefs will converge.
A deadline by which a question mustbe resolved could deal with this, but has other disadvantages.If investors can reasonably estimate the chances that a question willbe unresolvable in this manner, then the problem is manageable. High-riskquestions will only be traded if there is enough disagreement [Jaf] orsubsidies to justify it, and for low-risk questions the problem can beignored. And, it seems, resolvability can be estimated. Questions aboutreligion and morals are more difficult, as are certain long-standingriddles like the nature of consciousness. On the other hand, a questionabout a physical property of a substance, like a bond angle in some newmolecule, seems quite resolvable. As a rule, one should prefer questionscloser to direct observations.
And general claims for which relevantevidence will always be available should do better than claims like whatsomeone had for breakfast ten years ago.WHAT DO CONVERGENT BELIEFS HAVE TO DO WITH TRUTH? The philosopherPeirce claimed that “The opinion which is fated to be ultimately agreed toby all who investigate, is what we mean by the truth” [Th]. However, thequestion of whether the convergent opinion we might all come to withunlimited evidence, study, and debate is the way the world “really” is, isbeyond the scope of the paper. Even if it isn’t “truth”, we are allinterested in it, and it’s hard to think of a better truth-estimate onwhich to base academic incentives.
WHAT ABOUT BADLY WORDED CLAIMS? Even if an issue becomes settled, apoorly worded claim on that issue may be unresolvable. To avoid this, weneed techniques for avoiding ambiguity and incentives for players to usethem.Wording a claim so it is both relevant to some important issue andminimally ambiguous is a skill that is routinely learned in manyprofessions. Lawyers and philosophers obtain clarity through standardizedwords and language, and experimental scientists are adept at findingconnections between abstract theories and specific observations. Claimsshould avoid slippery concepts and phrasing which allows manyinterpretations. Verbose annotations can also help by discussingmotivations, examples, intended word meanings, judging criteria, etc.If copyright laws are interpreted as applying to claim wordings, thenclaim authors may be able to charge an extra royalty fee for each join.
Claim authors would then compete with each other for royalties frominvestors, who would prefer authors with reputations for writing clear andinteresting claims. Added incentives come if authors bet against theirclaim being judged too vague.To avoid excessive costs in forming a claim, a question could hold a”clarification lottery”. After a certain time, or when the market capitalreached a certain amount, judges could be funded in the usual manner toreplace a hastily worded claim with a more considered one.Even when one cannot really word a good claim to bet on directly,markets offer other ways to bet on a subject.
For example, if one believedthat when physicists disagree with chemists, the chemists are usuallyright, one could invest in a “basket” or mutual fund which bets on the sideof chemists in as many controversies as possible.CAN’T WRONG IDEAS STILL BE USEFUL? Absolutely. If you think an ideais probably wrong, but is probably more like the right answer than anythingelse around, then bet on that. If you just think that work on the idea islikely to inspire something interesting, then bet on that. These questionswill be harder to judge though.WHAT IF THE FINE PRINT DIFFERS FROM THE SUMMARY? Verbose claims wouldprobably be described by short summary sentences or phrases in price lists,offers, etc. As with contracts and political ballot initiatives, there areproblems when a deceptive title differs from the fine print. In extremecases people might sue for misrepresentation, but usually we can onlyencourage the buyer to beware.
WHAT ABOUT SUCKER BETS? If a stranger offers to bet you on an oddballsubject, there is a good chance they are trying to trick you with adeceptive claim. Even if it looks like you couldn’t lose, you arewell-advised to decline; the fact that they are making an offer gives youinformation.In markets on pre-existing controversies where many traders havealready examined the claims, this is less likely, though still possible. Ingeneral, traders should look claims over carefully and not bet unless theyhonestly think they know better than than the other traders.DON’T SCIENCE QUESTIONS RESOLVE TOO SLOWLY? The fundamental questionsthat get people interested in science, such as whether the universe isinfinite, can take decades or even centuries to resolve.
But this does notprevent markets in such questions. Most any newspaper will show that peopleregularly buy bonds scheduled to mature in forty years. Fifty year-olds whobuy such bonds are not counting on living to be ninety; they know they cansell the bonds in the market at any time.At present, you usually can’t get a Ph.D. on whether the universe isinfinite; you focus instead on a smaller question that is hopefullyrelevant for the bigger ones. Idea futures investors will similarly prefershorter-term questions.
A question that takes ten years to resolve (saystarting at 50/50 and ending more than 90% certain 90% of the time) shouldhave the same sort of daily price fluctuations (around 1.5%) as stocks do,and so support a similar mix of short-term speculators, and long-termfundamentals-oriented investors.But for longer-term questions, investing in fundamentals is lessattractive. Less information comes out per unit time in a long-termmarket, so there is less money to be made for a given market thickness.
Andif you must hold out for decades until other investors come to theirsenses, the extra rate of return above the market average that you get foryour information may be very small, and so you may prefer to quit now ifyou have better opportunities elsewhere. To make things worse, thiscreates an opportunity for strategic behavior. Someone might move theprice in some direction and try to hold it there in the hope that othertraders will not be willing to hold out as long and therefore quit at aloss.
Finally, you may not trust the underlying financial institutions toremain stable over a century or more. Few people would probably bet that”Nuclear war will destroy most of civilization”, even though many peoplewould like to for insurance reasons. And even if the banks don’t gobankrupt, uncertainties about the relative long-term value of differentbase assets the betting stakes could be invested in may completely swampany added return from winning a bet. This problem could be minimized ifthe “market asset” [ShW], a maximally diversified world mutual fund, becamethe standard base asset.Even with all these problems, there will probably be rather thick andwell subsidized markets on a few very basic science questions, as fundingagencies and amateurs seeking to influence important issues would focus onthem. Such questions could be connected, through a network of conditionaloffers, to related shorter-term questions which research could moredirectly resolve, allowing researchers of simpler questions to obtain someof the subsidies on the basic questions.
In financial markets, the conventional wisdom is that longer-term pricemovements are less rational, as there is less incentive to correctirrational deviations. But there is still some incentive, and so ideafutures may still offer an improvement over the existing situation.WHY SHOULD I TRUST THE JUDGES? Even when sincere opinions wouldconverge, investors may worry about judges being biased by bribes orvarious shared interests and associations. Fortunately, investors get topick the assets they buy, and therefore the judges they bet on. So theycan prefer long-lived judging organizations with reputations for fairnessand avoiding scandals, and which use various available means to discouragefoul play.Incentives for traders to settle out of court and avoid judgingaltogether certainly help avoid judging foul play.
So do clear-cut claimsand judging criteria that leave little room for judging discretion. If wewait so long that the right verdict becomes “obvious” it would also be hardfor judges to cheat. Also more trustworthy are juries of people who havenever had a stake in the question, randomly selected from a largepopulation, deliberating openly and offering to consider any relevantevidence.The question of whether some proposed evidence is relevant for somedeliberation could even have its own betting market; juries could offer toconsider any evidence for which the market odds of relevance were abovesome threshold.Incentives to detect foul play could come from both the ability to suecheating judges, and possibly from large bonds which judges might postpayable to anyone who uncovers such corruption. Also, any persistentdifference in the market odds on the same claim with different judges wouldconstitute consensus about judging bias, flagging those judges for closerscrutiny. Judge rating agencies might form.
Finally, “appeals” marketscan give judges a direct incentive to be careful and honest, since judgesmust then bet that their verdict will be upheld on appeal.WON’T JUDGING COST TOO MUCH? Through audit lotteries, one can keep thepercentage taken by judges below any given threshold, and still afford topay for very detailed judging, even going so far as to choose many jurorsfrom widely different cultures and train them in one or more specialtiesbefore having them adjudicate some specific issue! This approach is mainlylimited by risk aversion, which limits the attractiveness of large wins.Most people will not want to bet so much on any one question that theamount they might win would be much more than their total wealth.
A one ina billion chance of winning a billion dollars is not worth as much to mostpeople as a one in a thousand chance of winning a thousand dollars. If theamount one would need to bet to avoid this effect is too small, it is notworth the bother and people will bet nothing on the question.WON’T WEALTHY PEOPLE HAVE TOO MUCH INFLUENCE? Markets are not opinionpolls where the rich get more votes; to use market influence one must risklosing it. As in existing financial markets, rich investors who are notspecialists in some particular area will prefer to get investment advicefrom someone who is a specialist, or avoid investing in that area entirely.This is similar to the way that powerful people defer to academicspecialists now. Rich people who carelessly throw their weight around willlose their riches.Even so, the wealthier social classes will have more influence, as theydo now in most areas of life, including academia.
If this is a problemwhich you are willing to invoke the force of government to solve (I amreluctant to do so), then the natural solution is general wealthredistribution. This is much more cost-effective than crudely trying tokeep the rich out of any particular walk of life.If you worry that markets would create large inequalities in academia,don’t.
Influence in academia, as measured for example by number of paperspublished [Pr], is far more concentrated than in most walks of life. Itseems unlikely that markets would make things worse, and could well makethings much better, as people would not need degrees or the blessing of theacademic elites to play as equals.WON’T THE MARKET BE DOMINATED BY FOOLS? Again, markets are not opinionpolls. Anyone can invest in any open market, but they only choose toinvest where they think they have special insight or insurance needs. Evenif they are mistaken about their special insights into, say, the goldmarket, they are fairly quickly taught otherwise. Most people who playcommodity markets, for example, lose their stake and quit within a year.
Such markets are dominated by the minority who have managed to play and notgo broke. If you believe otherwise, and know of some market where theprices are obviously wrong, I challenge you to “put your money where yourmouth is” and take some of that free money you believe is there for thetaking. It’s easy to bad-mouth the stupid public before you have tried tobeat them.WON’T ADVERTISING MANIPULATE OPINION? Advertising, in the sense ofcampaigns to persuade through evidence and arguments, exists now inacademia and would certainly persist.
Advertising, in the sense of cleverjingles and sex appeal to grab the subconscious of the impulse buyer,should not be a problem. People do not try to affect the price of cornfutures with clever jingles; it would be like trying to sell cars byoffering free balloons to Consumer Reports technicians. The savvy investorswho dominate markets are smarter than that.AREN’T MARKETS FULL OF CHEATS AND THIEVES? Yes, but this does notusually distort the incentives or the consensus price much. Most cheatingis not “manipulating the price”, which is rather hard to do in a liquidmarket, but conflicts of interest where people who supposedly representothers instead act in their own interest, giving poor advice to clients andusing information gained from clients.Insider trading is mentioned below.
But brokers and investmentadvisors are the worst case. In markets you win whenever you can getothers to do what you just did, or when you predict what they will do anddo it first. Brokers and investment advisors often tell you to buy whateverthey would like to sell, and charge you large commissions for the “advice”.Brokers often trade for themselves just before they execute trades for you;stop orders and margin calls are especially lucrative.
To avoid being cheated, be careful who you trust. Avoid brokers whotrade for themselves, and advisors who do not take the same risk theyadvise for you.As bets, idea futures markets cannot be cornered or monopolized.
Nomatter how many bets have been made, other people are always free to betmore.WHAT ABOUT INSIDER TRADING? When an employee of a company makes moneyby trading on inside information they have about that company, or bytelling someone else so they can trade, that employee is considered to begoing against the interest of the other stockholders who own the company.Employment contracts and laws can forbid this conflict of interest, thoughprice movements just before major announcements show that a substantialamount of such trading happens anyway.
Fortunately nature has no insiders or employees. The only similarproblem in idea futures is when a research lab is trying to keep a resulttemporarily secret before trading on it, and an employee sneaks out andtrades first. This could be dealt with exactly as stock insider trading isnow, through private trading records accessible to criminal investigators.WHAT ABOUT “MORAL HAZARD”? One of the advantages of a market is thatit offers incentives to anyone to come and contribute their knowledge aboutthe world. A disadvantage is that, since changing the world can give onespecial knowledge about it, people may have an incentive to cause harm. Ifwe allow anyone to bet on your lifespan, then someone may decide to killyou just to win a bet.
And this murder may be much harder to solve thanmost since, with anonymous trading, most anyone might be a potentialsuspect. (Though criminal investigators may be able to learn who reallymade what “anonymous” trades.) For this reason, there are usuallyrestrictions on who may buy how much life insurance on you.Moral hazard should be less of a problem for basic questions aboutnature that people cannot change, though it could conceivably be a problemfor short-term trading and options that bet on when information will comeout. We wouldn’t want someone to blow up the latest accelerator to preventresults from coming out, or to kill some patients to slant a medical study.Yet we shouldn’t prevent open markets if the chance of foul play seemssmall.
Anyone is allowed to trade stock, even though there is apossibility that someone will sell short the stock of the makers of a painreliever, and then poison some packages to depress their sales. Only forthe rare claim where the risk of harm seemed particularly high might onejustify a prior restraint limiting who could have how much stake on thedifferent sides of a question.WHAT ABOUT INCENTIVES TO START FALSE RUMORS? A “rumor” is justinformation, perhaps false, passed informally through a social network.
Maliciously false rumors occur whenever people both have an interest inwhat other socially connected people think about a question, and when thereis inadequate feedback for learning what rumors were false, so that peoplecan discount unreliable sources.In current academia, there is often enough feedback to discourage falserumors about what results are about to be published. Word of mouth whichdiscredits a junior researcher, however, can trash his or her reputationwithout others ever really finding out if the rumors were right.Markets both encourage and discourage false rumors. Markets give morepeople an interest in fooling other people, but also improve the feedbackabout what rumors were right. And the market price offers an alternativeto informal information channels. Again, don’t believe everything youhear; trust advisors with a good track record who take the same risk theyadvise you to.
WHAT ABOUT INCENTIVES TO KEEP INFORMATION SECRET? If you acquired apiece of information where it was clear which side of what questions theinformation favored, then your best strategy would be to buy on thosefavored sides, reveal and publicize your information (perhaps after sellingit to other traders), wait for the price to rise, and then sell at aprofit. If, however, the implications of the information are not clear,you might be tempted to sit tight and wait for further revelations, eventhough you risk other people stumbling on to your insight in the meantime.It is similar with incentives to publish. Unless you can connect yourinsight to currently popular issues, and package enough of them together tomake a paper, you cannot get published and so you may keep the idea toyourself.One approach might be to formulate a question more closely related to yourinformation, and then try to convince some funding agency that yourquestion is interesting, even if its implications are not clear. Or youcould subsidize your question, in the hope that this would encourage othersto figure out its implications and create conditional offers connecting itto other questions. Either approach might induce enough market thicknessto make your information pay off.WON’T AN APPARENT CONSENSUS CREATE A CROWD MENTALITY? People might thinkthey agreed more than they actually did, defer to a consensus that hadlittle thought behind it, and so create the social analogues of anchoringand overconfidence [Kah]. Would creativity be suppressed?Markets with less thought behind them should give themselves away by beingthinner. If not, and some of us catch wind of this trend, we could makemoney by correcting for it. And, for what it’s worth, the market odds athorse races actually tend to be underconfident, being biased towardlong-shots. Markets encourage people to be contrarian; the only reason totrade, to not own the same mix of investments as everyone else, is becauseyou think the consensus is wrong, or for insurance needs.WILL THE NEW INCENTIVES SLOW OR STOP CONVERGENCE? This is the oppositeof the above problem. People with a stake on a certain side may becomementally biased toward that side, resisting the rational implications ofmounting evidence. This is of course not a new phenomenon in academia, andso it’s hard to see why the problem would be worse. Except for issuesclosely connected to basic “ideologies” about which most everyone has anopinion, we can hope to find impartial jurors not overwhelmingly biased byeither side.WON’T DIFFERENT CLAIM WORDINGS, JUDGES, AND BASE ASSETS CONFUSE THECONSENSUS? Unless the performance of a base asset correlates with a claim,the claim’s market odds should be independent of base, and arbitrageurs caneasily enforce this. If the prices on the same claim judged by differentjudges were persistently different, this would constitute consensus aboutjudging bias, a situation that judges would want to avoid. If differentclaim wordings on an issue have very different prices, this representsconsensus that there are really several different issues to bedistinguished. For each distinguishable issue, traders seeking liquiditywill probably congregate around one or a handful of baseasset/wording/judge combinations, thereby avoiding a combinatorialexplosion.WON’T THE CONSENSUS REFLECT RISK PREFERENCES AS WELL AS BELIEFS? Yes,the amount one should bet depends on one’s beliefs, attitude toward risk,and the stake one already has in a question [Kad]. Risk-avoiders bet lessthan risk-takers, and bet less on the side that they already have a stakein. Price distortions from this should be minor, unless most everyone hassubstantial non-betting stakes on the same side, or if beliefs correlatesignificantly with such stakes, and if the stakes held approach eachperson’s total wealth. One exception is that few people would bet for”Technology will soon make us all too rich to care about money”, even ifthey believed it.It might seem that questions with extremely lop-sided odds would alsobe a problem. Too few people might bet that “energy is conserved” (EC) ifthey very confidently expecting to win very little. But by splitting ECassets along other questions, people could jointly support EC, debate otherquestions, and get a higher average return. In general, traders shouldkeep splitting until liquidity or risk considerations dominate.Some people have worried that opinionated yet extremely risk aversepeople, unwilling to bet on anything, would be unfairly labeled “insincere”debaters. But it is hard for me to imagine that they could not afford torisk even $10 a year so that we could develop a reputation score for them.If it is the risk of a low reputation score that scares them, perhaps theyshould not act so opinionated.WON’T BETTING CHALLENGES DISCOURAGE CREATIVITY? If people wereexpected to bet on every idea that comes out of their mouth, they would bemore reluctant to think up wild ideas, most of which are going to be bad.Hopefully we can maintain a distinction between saying “Here is aninteresting idea to think about” and “This is the way it is, why won’t youagree?”, only expecting people to put up or shut up in the second case.WHAT’S THE POINT OF A “CONSENSUS” THAT PEOPLE DISAGREE WITH? Regardlessof the name used, people often want to pool their differing individualestimates on some issue into a composite estimate. This is most clearlyneeded in the “public choice” problem, where citizen estimates must becombined into government policy. But we also have a more general need forsocial institutions where experts combine their estimates on some subjectinto composite estimates, estimates that non-experts can use to makeindividual choices. Several such institutions may compete for attention,but the need remains.Most work on consensus measures [Gen,Gr,Syn] focuses on variousexplicit functions for combining individual beliefs, and some simplevariations of these [Man] are now used as academic consensus mechanisms.Compared to these, betting markets not only offer superior incentives [Ei]for people to bother to make their beliefs explicit and honest, but bettingmarkets have the following unique claim to the word “consensus”.It is in the personal interest of an ideal decision theory agent tomake all external actions as if they agreed with the market consensus[Kad,Na], without any coercion. Agents should buy contingent assets up tothe point where their marginal rates of substitution are the same, i.e.where they all agree on the relative value of getting one more dollar forsure vs. even more dollars in some contingency. An external observer, whocan offer agents trades or choices but cannot tell how much each agent hasalready bet, cannot tell that the agents internally disagree.Insurance-based proposals [Fa] are similar in spirit to the bettingmarkets proposed here, as is the following proposal for dealing with thepublic choice problem [Mu]. If a government threatens to make a change,sells insurance on the change either way, and then makes the choice that ischeapest for them, they produce an efficient “Pareto optimal” result.ISN’T IT BETTER FOR PEOPLE TO ARGUE OUT THEIR OWN DISPUTES? Yes, whichis why we want incentives, such as audit lotteries, for parties to settleout of court and avoid judging. Idea futures is only intended todiscourage insincere debaters.Another way to avoid judging is to hold “argue lotteries” which arelike audit lotteries except that judges are not invoked. The idea is tofocus attention on a smaller number of markets where more is at stake. Thisshould induce more discussion and examination of such questions, perhapsresulting in more related questions being formed. Hopefully, opinions wouldnaturally converge, and people would leave the market. Judges are reallyonly there to discourage self-deception and strategic bargaining, so thatthe market odds eventually reflect the “obvious”.WON’T THIS HAVE THE SAME PROBLEMS AS PATENTS? No [Hir]. With patentswe must decide who owns an idea, and so a centralized legal system mustmake a great many subtle decisions with insufficient evidence andexpertise. We must examine history to decide who contributed how much tothe idea. We must define some sharp legal boundaries that determine whatit is to use the idea. With present patent law, we must also decide if anidea is true, if it is “original”, if it is “obvious”, if it is a”process”, if it was revealed properly, etc. Bets are much more flexible;we need only decide if an idea is right, and we can each choose who is tojudge that question. Government intervention and international agreementare not needed.WOULDN’T ANONYMOUS TRADING SCREW UP REPUTATION STATISTICS? Perhapspeople could make private trades to move prices out of line, and then makepublic trades on the other side to bring them back, so that those trades dobetter than average. This is somewhat like giving someone a wad of moneyby dropping it in the park and having them wander by an hour later to pickit up. If the park is crowded enough, someone else will have found it bythen. In the market, anyone else could make money by stopping the pricefrom moving out of line. The problem is more serious, however, if everyoneaccepts that only one trader has any information about a question, and sono one else wants to bet there. If identifiable, such markets should beexcluded from reputation scores.IF THIS IS SO GREAT, WHY HASN’T IT HAPPENED ALREADY? If it was inpeople’s interest, wouldn’t there be such markets by now? Well, if wealways assumed this we might never do anything new, but it’s important toask this question. The fact that science bets have been legal only inBritain, and then only in the last three decades is only part of anexplanation.English bookmakers perceive little demand for science bets, and so takethem mainly to induce popular articles mentioning the going odds on unusualsubjects [ShG]. This publicity brings in new clients, who may then beswitched to the “real” betting on sports. Because of this, bookies prefersmall bets on subjects “in good taste” that anyone can understand, likeUFOs, Yetis, and Moon landings. They avoid subjects that seem too esotericfor the general public, like the recent “cold fusion” claims, and subjectsthat won’t very clearly resolve themselves, as a judging industry has notyet evolved.Bookmakers traditionally prefer to set prices and stick to them, ratherthan setting up markets in order to play market-maker with the fluctuatingprices. Because of this, they are usually unwilling to offer bets onclaims where they do not know how to estimate the odds, and few bookieshave advanced science educations. As a result, they mainly take safe bets,siding with the scientific establishment against “crazy” outside theories,which doesn’t help the image problem betting has in many quarters.English bookmakers do not seem to have seriously tried to sellimagine-conscious academics on science bets, through arguments like thosein this paper. Nor, to my knowledge, has the possibility for bettingmarkets as a funding mechanism been pointed out. Questions of interest toacademics are now avoided and no visible influenceable consensus is formed;one cannot even subscribe to a publication listing the going prices onscience questions. It should be possible to improve on this.CAN NATIONS FUNDING RESEARCH THIS WAY APPROPRIATE THE BENEFITS? Apopular argument for government-funded research says that, left tothemselves, people won’t produce enough basic knowledge [Pa]. If aknowledge producer publishes its results, then “free riders” can use thisknowledge without paying the producer. Patents on basic knowledge areconsidered too fuzzy to enforce, and trade secrets are said to fail becauseof difficulties keeping basic information secret, and in figuring out whowould find basic knowledge useful.Of course if nations do subsidize research, they can fall victim tointernational free riders, i.e., countries that mainly apply research doneelsewhere.Some discount this by saying that most research knowledge isnever published, but tacit and embodied in the skills of the researchers.Thus subsidies largely benefit researchers and companies located nearenough to easily collaborate with and hire such researchers. Of coursesuch a locality of benefits would suggest that research is best funded at alocal level, or even privately within a large university campus.A need for local appropriation of benefit argues against indirectfunding methods, like prizes or idea futures, which cannot as easilycontrol where the research they induce is performed. But such mechanismsmight be well suited for science-for-its-own-sake philanthropy and forinternational funding of research, as such indirect methods can betteravoid favoritism toward any particular nation.SHOULDN’T WE APPEAL TO HIGHER MOTIVES THAN GREED? The very formulationof the patron’s problem, how to best promote scientific progress given afixed pile of money, forces one to deal with money. Money is what thepatron has to offer. So the patron can only influence people that care tosome degree about money, or that care about something else controlled bypeople who care about money.STRATEGYIt’s a lot easier to sketch a grand utopian vision than it is to figureout how to get there from here. An ideal development strategy would showhow to grow incrementally, with each self-supporting step leading naturallyto the next one. Most utopian visions fail because they, instead, requiretoo many things to change all at once.One advantage of idea futures is that, if not legally prohibited orsocially shunned, it can co-exist with existing academic institutions andincrementally attract investors, patrons, and controversies. Papers wouldstill be published and elite committees would still convene. Professorswould gradually make more side bets, and begin to challenge each other tobets. Journalists would gradually rely more on the market odds for newsstories, and funding agencies would gradually try larger levels ofsubsidies. Idea futures could rise or fall on its own merits, as peoplestudied how well its predictions compared to other consensus measures, andhow the rate of progress in a field depends on the fraction of fundingchanneled through the markets.Unfortunately, there seem to be some obstacles to overcome beforegradual growth is possible. Economies of scale in forming reputablejudging organizations or building secure computerized marketplaces may meanthat certain levels of participation may be required before idea futurescan “take off”. But the major hurdle seems to be attitudes toward the veryidea, attitudes reflected in the world-wide legal prohibitions. There areseveral possible strategies here.One approach is more discussions, like those in this paper, of the needfor alternative academic institutions, and of betting markets as aparticular alternative. Perhaps we need simple word tricks, like insuranceand stock bets have used, to disassociate idea futures from ordinarybetting, though the concept of bets is very useful in explaining how itworks.Also helpful is further research on markets in conditional assets, suchas recent attempts to show them superior to opinion polls at predictingelections [Fo]. Laboratory experiments [SmV] comparing betting markets tosome mockup of existing peer review institutions would be very interesting,though not of course decisive.A different approach, which I am also pursuing, would be to create anelectronic mail-based reputation game, where people play for “braggingrights” instead of money. This would avoid legal problems and thediscomfort academics have in dealing explicitly with money, and would allowmany people from around the world to participate in a less-threateningpartial test of markets as an academic consensus mechanism. However,avoiding money makes the incentives suspect, and precludes many of theadvantages, like insurance, that idea futures offer. In particular, itmakes it hard to pay judges enough to do a careful job. If enough peopleplayed, the scores would mean something to observers, and so people mighthave an incentive to play and play well. But building a game up to thisstatus would be hard, probably requiring some “big name” players to attractothers.If the basic idea became plausible enough to enough private patrons inBritain (because that’s where it’s legal) or government patrons anywhere,idea futures could be seriously tried. The initial field would preferablybe one where bets are easier to settle, like number theory, though suchsubjects tend to be ones where existing institutions also work better, andso perceive less of a need for change. A socially important question withminimal opportunities for conflict of interest would also be nice.Attractive initial candidate fields include number theory, meteorology,remote sensing, and particle properties.Idea futures will have “made it” when it becomes known as a good placeto find out the latest thinking on certain issues, reliably predicting whatwill later become consensus in other social contexts.ADVANTAGESIf its potential problems can be overcome, and a development pathcharted and followed, idea futures offers many advantages, most of whichhave already been mentioned.There would be a clear incentive to be careful, honest, and expert whenmaking public statements. Opinion holders could be rewarded for beingright, rather than just for being liked by academic insiders. Those whoinvest wisely would accumulate capital and gain influence, which they couldreinvest in discretionary research or in influencing future consensuses.Funding agencies would only need to pick important questions, not whowould be good to research them, what methods aught to be used, nor whenrtheresearch should be done. Diverse approaches could be tried to research aquestion, without arbitrary penalties against crossing disciplinaryboundaries, ignoring fashion and insiders, integrating pre-existingknowledge, violating methodological ideologies, or using insights too smallor inarticulate to make a publishable unit. Any approach by which one couldreliably make the consensus odds better informed could be financiallyrewarded.Anyone, not just articulate Ph.D.s, could contribute directly to theworld’s corpus of knowledge. Easily published science odds and amateurbetting should increase popular interest in science. And even if the”great unwashed” turn out to be poor contributors, they would subsidizeprofessional efforts on questions of popular interest, and perhaps increasethe general savings rate. And I suspect they will do better than mostelites expect.Clear market odds would ease science reporting. A visible scientificconsensus would be available to guide public policy, a consensus whichwould be self-consistent across a wide range of issues and harder for mediacampaigns to distort. Compared to competing consensus mechanisms, ideafutures should be relatively simple, cheap, decentralized, egalitarian,responsive to new information, and at least as informative. This consensusshould correct for many current biases, such as overconfidence.The mere threat of betting challenges could improve incentives indiscussions and debates. If the market consensus carried social weight, itcould serve as a coordination point for thousand of independentconversations. A rejected visionary would have a new way to get publicityfor his ideas, and a reward for being right against the establishment; truecranks would subsidize leveler heads. As debates became settled, they wouldleave a trail of agreed-upon statements which could be used to counterbogus claims made by those ignorant of solid expert consensus.Businesses could make insurance hedges against technological risk, asin the cold fusion case. While such insurance may be legal now, theintroduction of speculators would increase market thickness to a pointwhere it might be practical.Reputation scores offer an new way to evaluate people’s ability toseparate the wheat from the chaff in ideas and arguments, and these scoresshould depend less on whether one has curried favor from the right people.Idea futures is well-grounded in our best theories of decision andincentives. Once legal and accepted, idea futures could growincrementally, and perhaps dramatically increase our rate of scientificprogress per funding spent.CONCLUSIONMarkets in contingent assets, more commonly known as “bets”, offer aneeded alternative to existing academic institutions. Betting marketscannot solve all current problems, or replace all current institutions. Butif this paper has been successful, the potential of such markets should beclear, and most of the obvious problems with such markets should have beenaddressed in enough detail that we can say the idea still seems plausibleon a closer examination.If so, more serious intellectual discussion isjustified, and perhaps some small-scale experiments. We could do muchworse than having intellectual institutions as open, flexible, diverse, andegalitarian as the stock market, with incentives as well-grounded and withestimates on important issues as unbiased and predictive.ACKNOWLEDGEMENTSThese ideas germinated in the fertile ground of discussions withfriends interested in similar problems, most of whom are associated in oneway or another with the company Xanadu. K. Eric Drexler, Mark Miller, andPhil Salin have been particularly influential. And my wife Peggy Jacksonhas influenced me in more ways than I know. Several hundred people, morethan I can list here, have provided useful comments and criticisms on allaspects of the idea.REFERENCES[APA] (1987) Diagnostic and Statistical Manual of Mental Disorders Third Edition, Revised, American Psychiatric Association, Washington D.C.[Be] Bernal, J. (1989) “After Twenty-Five Years”, Science and Public Policy, 16:3, June, pp.143-151.[By] Byrne, G. 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