Idea Futures

(a.k.a. Prediction Markets, Information Markets)

(This is my top web page on idea futures. Go here to find my publications on idea futures.)

The Idea Our policy-makers and media rely too much on the "expert" advice of a self-interested insider's club of pundits and big-shot academics. These pundits are rewarded too much for telling good stories, and for supporting each other, rather than for being "right". Instead, let us create betting markets on most controversial questions, and treat the current market odds as our best expert consensus. The real experts (maybe you), would then be rewarded for their contributions, while clueless pundits would learn to stay away. You should have a free-speech right to bet on political questions in policy markets, and we could even base a new form of government on idea futures.

One can subsidize a market on a question, offering extra rewards to those who bet right on this question. This subsidy is an "information prize", offered to those who first provide information on a question, in contrast to an "accomplishment prize", given to those who first accomplish some task. Instead of patronizing academic basic research via proposal peer-review, we should use prizes more.

Publications Idea Futures has been described in many publications by myself and others, including both academic journals and popular media.

Web Games There are many web sites which let one bet on sports, but the Foresight Exchange (FX, previously called Idea Futures) was the first general web betting game, and was the first to allow users to introduce new claims to bet on. Begun by Sean Morgan, it won the 1995 Prix Ars Electronica Golden Nica for world's best web site. Over 1500 players now bet play money on over 200 questions of their choosing. Check out the current betting odds, an independent 'Zine, and m o r e. The game's developers once formed a business, Ideosphere (now wholely owned by Kumo Software) that now seems defunct. Recently other play-money markets have appeared, such as Hollywood Stock Exchange, Invisible Hand Electronic Market, Fanatasy Futures, and NewsBet. (I have no relation with or stake in any of these ventures.) I think the odds in these markets are often too optimistic, but they do pretty well considering, and a real money market would do much better.

(Another web market, Java Idea Futures, isn't really an Idea Future in the above sense; they trade perhaps-not-yet-written Java Applets.)

Other Demonstrations

Real money political markets, such as Iowa Electronic Markets and WahlStreet, predict election outcomes better than opinion polls.
All of our familiar financial instruments - stocks, insurance, commodity futures, options -- were once forbidden by anti-gambling laws. Laws could change to favor Idea Futures too.
Some credit derivatives pay out if agencies downgrade the credit rating of a company's debt. This shows that subjective judgements by established judges can be used to settle bets.
Governments tend to use prizes less than private patrons. When science was patronized more by private sources, prizes were used much more often. Prizes are not infeasible now.

Legal Limits The main immediate limitation to larger scale demonstrations are the facts that betting is generally illegal, and that securities are highly regulated.

To get an Idea Futures market approved as a security in the US, you'd need CFTC approval. But they require expensive review, require you to set up a physical pit for trading there, and are sure that there is no point to markets where there is not substantial hedging demand. (Respected academics can sometimes get exceptions though.)

Betting is illegal in most of the world (including Nevada), with exceptions carved out over the years by special interests, such as for horse bets, lotteries, and casinos. Only the UK, to my knowledge, allows non-sports betting. Some off-shore gambling places are now soliciting folks citizens to bet with them by phone (e.g., 1-800-I-CAN-BET) or internet (e.g., Internet Casino). It will be interesting to see how strongly U.S. police and legislators react to discourage U.S. citizens using the web to bet in these foreign markets. See also these discussions of legal issues.

Close, but not enough

Stocks and bonds are bets on big bundles of ideas: underlying technology, business strategy, marketing skill, prices of input factors, market demand, etc. You want to bet on just what you think you know about.
Derivatives are usually required to have prices predictable from the underlying instruments they derive from. Many believe that the right combination of existing instruments can reproduce any bet, so new instruments only lower transaction costs. They're wrong.
Insurance companies can sell arbitrary bets, but only to those with an "insurable interest".
Regulators only allow Commodity Futures where someone needs to insure against big risks.
British bookies can take any bets, but insist on setting prices instead of being market-makers. So they won't bet on stuff, like science, they don't understand. The British government takes a big bite of off-shore gambling firm profits via a point of consumption tax.

History I generated this idea in the fall of 1988. See our article describing some history of the web game and of my involvement with the idea. I've found several prior publications where others had similar ideas. I think I've thought the idea through more though.

Critics Here is all the web published criticism of idea futures that I know of.

Sasha Chislenko long ago offered some friendly criticism, to which I responded in print.
I replied to some criticism published in special issue of Social Epistemology.
A variety of informal criticism is found in the if-discuss archives. See for example comments by Ken Fishkin, Hugh Hoover, and Peter McCluskey. My replies can be found from those posts.
Henry See and Michael Century are artists who complain that since Idea Futures uses numbers, it limits human expressiveness. I reply.

Robin Hanson rhanson@gmu.edu First version, June 12, 1996