Idea futures: gambling on science. (Idea Futures market) Russ Ray 11 January 1997 The Futurist 25 Vol. 31, No. 1, ISSN: 0016-3317 An Idea Futures market, fashioned along the lines of a commodities market, would provide continual scientific consensus and ongoing forecasts of major unresolved scientific, political, social, and cultural issues of the times. You turn on your computer and connect to the Internet, where you type in the Web address of a commodities market. A listing appears with bid/ask prices. You look over the various offerings and see some interesting buys. You type in a "buy 10 at $25" order. Seconds later, a confirmation crawls across the screen. The sale is complete. You have just bought "claims" in a futures market, but unlike any other futures market, this one doesn't sell corn or soybeans - or any other commodity, for that matter. This one trades in ideas. Welcome to Idea Futures, where claims are traded at competitive prices on major scientific, political, sociological, and cultural issues. Sound farfetched? Believe it or not, Idea Futures are a reality and actually began trading in the fall of 1994. The concept has developed into an increasingly competitive market, with trading rules, contract specifications, monitoring procedures, and other attributes of a viable futures market. This unique market trades claims on the resolution of such questions as: Is cold fusion possible? Will the U.S. government collapse? Will there be a third World War? When, if ever, will a cure for cancer or AIDS be found? How old is the universe? And so on, for all the major unresolved controversies of the times. At the moment, the exchange does not deal in real money, but that may change in the foreseeable future. Scientists and other experts are expected to "put up or shut up"; i.e., place bets on their theories, which must be structured into a win/lose format, such as "a cure for cancer by the year 2010." With money and professional reputations at stake, this market is highly "efficient": New scientific information is fully and immediately reflected in prices instead of being slowly channeled through the journal-review process. These prices, in effect, constitute the current scientific consensus on any particular issue. Moreover, all of these prices are immediately available to the popular press, thus narrowing the chasm that often exists between the scientific world and the general public. As in other competitive markets, this market is also vulnerable to "insider trading," since a scientist could easily buy or sell claims on an issue before releasing newly discovered evidence on the particular issue. In any event, scientific research would become increasingly market driven, because scientists and their funding sources could make a significant amount of money by being the first to trade on new information. Conceivably, it would even be possible for private and government agencies to subsidize betting pools of particular interest to them. Also, research labs could finance their future research with winnings from previous pools. The Evolution of Idea Futures In the 1600s, science was largely a "medieval guild" in which a few powerful elites held a monopoly on research subjects and methodologies. Academic insiders ostracized anyone who dared to "speculate on anything out of the common way." Outsiders - Galileo, Bacon, and others argued that their theories should be judged by empirical observations and not by whether their theories agreed or disagreed with the authorities of the day. In an attempt to dismantle this research monopoly, outsiders began to suggest betting as a means to resolve scientific controversies. For example, chemical physicians - barred from teaching in British medical schools - proposed the following wager (c. 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 of them may fall to my share, and the other halfe to yours; . . . we shall see how many funerals both of us shall have. But let the reward of the contention or wager, be 300 Florens, deposited on both sides: Here your business is decided. In 1990, almost three and a half centuries later, Robin Hanson of Cal Tech proposed an organized market for such betting. Hanson argues that academia today is still largely a medieval guild, with insiders, outsiders, and numerous biases: Peer review is just another popularity contest, inducing familiar political games; savvy players criticize outsiders, praise insiders, follow the fashion insiders indicate, and avoid subjects between or outside the familiar subjects. . . . Publication quantity is often the major measure of success. This encourages redundant publication of "smallest publishable units" by many co-authors. The need to have one's research appear original gives too little incentive to see if it has already been done elsewhere, as is often the case, and neglects efforts to integrate previous research. Perhaps the core problem is that academics are rewarded mainly for telling a good story, rather than for being right. As an alternative to the current academic process, Hanson in 1990 proposed an "Idea Futures" market structured similarly to commodities futures markets, in which anyone could bet on the eventual resolutions of current scientific controversies. Hanson methodically details how such a market could be used to resolve major scientific questions. For example, in 1915 Alfred Wegener proposed his theory of continental drift, but his contemporaries considered his theory "impossible." Wegener died an intellectual outcast in 1930. Today, of course, this theory is accepted scientific consensus, supported by a considerable body of evidence. If a market for idea futures had existed in 1915, Wegener could have offered odds - say, 1:3, effectively proposing a 25% probability that he was correct. His critics would either have had to accept this probability or bet against it, driving the odds to, say, 1:100, which would be more representative of their "impossible" mentality. As Wegener, and others who agreed with him, staked additional bets, the odds would lessen, forcing critics again to either bet more money or accept a significant probability of continental drift. Such a market would encourage more research on the subject, since someone could make money by being the first to trade on new relevant information. Eventually, of course, a growing body of evidence would vindicate Wegener, and the returns from betting - particularly at the earlier "impossible" odds - would be quite lucrative for Wegener and/or his offspring. Hanson also cites the more recent example of the cold fusion controversy. If an Idea Futures market had existed in March 1989, when two scientists announced "fusion in a jar," the market could have fully and immediately reflected the consensus of the thousands of other scientists around the world who argued over the possibility of cold fusion. In total, Hanson describes how 30 scientific controversies could be resolved and abetted by an efficient market in Idea Futures. He concludes his seminal article by suggesting a developmental strategy for such an innovative market. In 1993, the Alberta Research Council agreed to fund the development and operation of Hanson's proposal. Programmers and systems analysts, under the guidance of Hanson and others, designed an "Idea Futures Market," which thereafter became operational in the fall of 1994. Two years later, in the fall of 1996, the Idea Futures Market was renamed "The Foresight Exchange." Some of the claims now being traded are listed in Tables 1 and 2. Trading Procedures Appropriately for the computer age, the Idea Futures market exists entirely in cyberspace at a Web site. The unit of trading is the "credibill," denoted by the $ symbol. Prices are set as a percentage of a credibill (e.g., 70% = .70 credibills = $.70); and, for any given claim, the value of a yes (y) contract and the value of a no (n) contract must sum to 1.0. Since all claims are binary (i.e., resolved yes or no), the value of a contract represents the consensus probability of a claim being realized (y) or not (n). Contracts trade on a bid/ask basis, with the spread being determined by the current interest in the scientific claim. The greater the interest, the smaller the spread. For example, consider the claim, "Cancer cured by 2010," denoted by the symbol CANC. At a given point in time, the market might show a bid/ask spread of, say, 24/28 for a "yes" contract on this claim. Such a spread means that the highest bidder will buy contracts for $.24 each, and the lowest seller will sell contracts for $.28 each. Using the mid-point ($.26) of this spread as a representative value, the current market (and, seemingly, scientific) consensus is that the probability of cancer being cured by 2010 is 26%. Now suppose that a cancer research center made a significant, but not definitive, breakthrough in finding a cure for cancer. Before releasing this information, the center could buy contracts at $.28 each. After release of the results, the bid/ask spread might climb to, say, 44/48, in which case the research center has a sizable profit ($.44 - $.28 = $.16/contract) if it decides to liquidate its position. Other research centers would be similarly market-induced to find other breakthroughs in the search for a cure for cancer. Finally, funding organizations, such as the American Cancer Society, could stimulate more cancer research by simply short-selling "yes" contracts, thus driving down their price and thereby causing subsequent cancer discoveries to be quite profitable. Position Limits Currently, anyone can trade Idea Futures, with each market participant being limited to one account. Initially, a trader receives $50, and then a $50 "allowance" each Monday thereafter. To discourage frivolous claims, a $50 fee is required to make a claim - $25 for transaction costs and $25 for judging. A judge is appointed when a claim is created to determine if and when a claim is realized. In theory, knowledgeable scientists should quickly bankrupt less knowledgeable high-school cyber-techs who, fortuitously, should learn quite a bit about science in the process. The system administrator acts as the "clearinghouse" (administrative watchdog) for the Exchange, the trading rules for which are literally programmed into the market. Violations of trading rules, and even human errors, are simply inoperative. For example, if a trader entered a"B12@30 order (buy 12 contracts at $30 each) when the spread is 24/28, the program would respond with an error message rather than execute the order. Similar messages would occur if a trader attempted to buy more contracts than he or she has cash available. Next Evolutionary Step At present, Idea Futures are an interesting innovation, rich with potential. In less than two years, the market has grown considerably and now includes claims on political, social, and cultural issues, as well as scientific. Currently, however, only reputations and bragging rights are at stake - not real money. Efficient market properties are primarily induced by money - specifically, the profit motive - and not by reputations. In all likelihood, if this market is ever to have significant economic and social utility, real money must be wagered. Britain is the only nation where legalized betting pools exist on any issue on which people desire to bet - provided, of course, that a sufficient number of bettors exists on each side of the issue. However, these pari-mutuel pools are shallow, unorganized markets dominated by gamblers who generally only choose issues they understand. In other words,the scientific consensus is largely absent. In the United States, casinos - which now operate in the majority of states - accept bets on horse racing, football, baseball, and every other sport imaginable. It is quite feasible that casinos will eventually accept bets on "scientific gaming," as well. In fact, this proposal (trading idea futures feasible that it is a current claim in the Idea Futures market - with a consensus probability of 70%! Of course, some legal hurdles remain as to how betting is to be conducted in cyberspace, but such hurdles don't seem to be insurmountable, especially given the difficulty of legally controlling cyberspace. The next step in the evolution of the Foresight Exchange - betting with real money - may well be realized in the foreseeable future. If so, this market would possess significant economic and social utilities. Market Advantage The economic and social benefits of an Idea Futures market based on real money are impressive. First, as already discussed, such a market would provide a continual scientific consensus on the major unresolved issues of the times. Moreover, new scientific information would be fully and immediately reflected in Idea Futures prices. This is significant information for universities, government agencies, funding organizations, and others as they attempt to wisely allocate their research capital. It also enables policy makers to better formulate plans, legislation, and regulation related to scientific issues. TABLE 3 Idea Futures Contract Specifications Unit of Trading: The credibill (symbol: $) Price Basis: Prices set as percentages of credibill's face value (e.g., 70% = $.70 credibills = $.70) Standards: For any given claim, the value (i.e., probability) of a YES contracts and the value of a NO contract must sum to 1.00 Trading Mechanism: All claims trade on a Bid/Ask basis; short selling allowed Trading Times: Continuously (24 hours/day, 7 days/week) Trading Location: At the "Foresight Exchange" on the Internet, Web address: http://www.ideosphere.com/ Position Limits: One account per participant Claim Resolution: Decided by expert judge(s), appointed at time of claim creation, who determine if a claimed event or prediction has occurred. Second, an Idea Futures market would enable hedging - the traditional raison d'etre of futures markets. For example, if an Idea Futures market had existed during the Beta vs. VHS video "war" of the early 1980s, a manufacturer of the former, such as Sony, could have hedged against obsolescence by buying "yes" contracts on the latter. Similarly, a small cadre of computer scientists today predict that DNA computing, with its incredible multitask capabilities, will eventually replace chip-based computing. (DNA computing uses chemicals instead of a processing chip.) A manufacturer of computer chips, such as Intel, could hedge against obsolescence by buying "yes" contracts on the DNA computing claim. Third, a real-money Idea Futures market would induce a cost-efficient funding process for research. Funding agencies could subsidize research of particular interest to them by simply shorting (i.e., betting against) a claim, just as a trader shorts a stock in the stock market. As a result, the process would avoid the costs associated with grant applications, research stipends, journal reviews, and other time-consuming procedures of the status quo. Predicting the eventual resolution of scientific controversies is a fourth advantage. A growing body of anecdotal evidence suggests that efficient markets possess significant forecasting abilities. For example, economist Richard Roll of UCLA finds that orange juice futures can predict the weather more accurately than even the National Weather Service in spite of all its meteorological manpower, satellite systems, simulation software, and other forecasting resources. If the Idea Futures market exhibits such forecasting properties, society may be able to obtain reasonable predictions of when and how current controversies will be resolved. As a fifth advantage, a real-money Idea Futures market would also enable scientific research to become primarily market-driven, as researchers could earn considerable profits by being the first to trade on new scientific information. Such profit incentives are already the driving force behind pharmaceutical research, computer research, and cutting-edge research in other key commercial industries where success is readily apparent. Quite possibly, market-driven research would exhibit similar success in every area of science, and not just those driven primarily by the profit motive. Finally, since trading is conducted in a free market at competitive prices, an Idea Futures market would exhibit "Pareto-optimality" - economic jargon for maximizing society's satisfaction with a particular process. Needless to say, maximizing everyone's satisfaction with scientific research would be an impressive accomplishment. Conclusion The Idea Futures market, in just a few short years, has progressed from theoretical concept to actual trading. This remarkable market has the potential for significant economic and social utility, particularly if trading is conducted with real money. The transition from "funny money" to hard cash is logically the next evolutionary step in this promising innovation. TABLE 1 Selected Scientific Claims Now Trading on the Foresight Exchange * Cancer cured by 2010. * HIV cured by 2005. * Device to view the human mind by 2025. * Commercial DNA computers by 2005. * Cold fusion possible. * Self-driving cars by 2010. * Dinosaur re-created by 2050. * Genetic defects deleted via DNA science by 2020. * Moonbase by 2025. * Universe proved older than 13 billion years. * Immortality achieved by 2050. TABLE 2 Selected Political/Sociological/Cultural Claims Now Trading on the Foresight Exchange * Collapse of U.S. government by 2025. * Europe monetarily integrated by 2001. * Castro still in power in 1999. * U.S. converts to flat tax in 1998. * World government before 2100. * 30 amendments to U.S. Constitution by 2000. * Computer chess champion by 2000. * Death of Deng triggers revolt in China. * New U.S. state by 2005. * World population to 10 billion by 2050. * Nuclear weapons used by 2010. * Non-Christian U.S. president by 2016. * Military conflict between U.S. and China by 1998. d War III by 2050. Further Information For more information, contact: The Foresight Exchange, Ideosphere, Inc., Kumo Software Corporation, 1400, 520 Fifth Avenue, S.W., Calgary, Alberta, Canada T2P 3R7. Telephone 403/294-4282; fax 403/294-4301; URL http://www.ideosphere.com/. Robin Hanson, creator of Idea Futures, can be reached at Mail Code 228-77, Division of Humanities and Social Sciences, California Institute of Technology, Pasadena, California 91125. URL http://hss.caltech.edu/~hanson/home.html. Hanson's article "Could Gambling Save Science? Encouraging an Honest Consensus" was published in the Proceedings of the Eighth International Conference on Risk and Gambling (London, 1990). About the Author Russ Ray is a professor of finance at the University of Louisville, Louisville, Kentucky 40292. Telephone 502/852-4832; fax 502/852-7557; e-mail jrray001@ ulkyvm.louisville.edu. His last article for THE FUTURIST was "Catastrophe Futures: Learning to Predict Natural Disasters," which appeared in the November-December 1995 issue.