The American Enterprise, July/August 2002, p. 49. by Eli Lehrer

Financial Futurist?

Robin Hanson is a jittery, intense, George Mason University economics professor. Even as a small child he spent lots of time wrapped up in his own mind. His father worked as a preacher and IRS agent, and eventually settled down into a career as a computer programmer. His mother taught school, worked for a finance firm, and now illustrates children's books. "I was a really self-absorbed loner," he says.

A good science student, he majored in physics in college. During his freshman year, he began a several-year effort to make graphs of just about every aspect of the world around him. "I'd have one axis which showed the size of things and another which showed their mass," he explains, "It seemed like a good idea." He went on only a handful of dates, avoided most extra-curricular activities, and had few friends.

Eventually, Hanson took jobs at Lockheed and then NASA, researching artificial intelligence and statistics. He helped develop the Cassini mission to Saturn, using the most complex robotic spacecraft ever built. While auditing classes at Stanford, he worked on the Xanadu project, a collaborative computer experiment that presaged the World Wide Web.

In 1999 Hanson earned a Ph.D. in economics, and today he promotes many controversial free market ideas. He'd like to improve medical care, for instance, by making insurance providers pay large penalties if patients die. His biggest proposal is to use something called "idea futures" to remake the world's financial industries.

Idea futures are betting markets similar to those that bookies run on sporting events, except they would consider serious questions like the potential effectiveness of a new cancer treatment, or a company's likelihood of producing a certain level of earnings. Rather than making decisions by committee or individual fiat, Hanson suggests, corporations, governments, and even individuals could make decisions by sampling market odds.

His proposals grow out of economists' discovery over the past 40 years that prices aggregate an amazing amount of useful information-more, indeed, than any human expert could ever take into account. Although current American laws ban idea futures as a form of gambling (even in Nevada), they have proven effective in real world tests. The Iowa Electronic Markets (which have a special federal exemption) let participants place real-money bets on the fate of political candidates. It turns out that they predict election outcomes better than opinion polls. The Hollywood Stock Exchange, a massive play-money market for entertainment ideas, often does a better job of forecasting movie grosses than the complex economic models used by the studios who film them.

Hanson suggests legal idea-betting markets could allow companies to easily and effectively test new strategies, do market research, and decide the fates of their managers. He would like to see idea futures become not just a centerpiece of investing and finance, but an all-encompassing way of organizing the world. He's even circulated a working paper suggesting that they be used as the basis for public policy decisions. "You could have a heads-up computer display that would let you participate in a betting market as to which restaurant you should pick to eat lunch in," he comments casually, his own head firmly in the clouds.

FYI, this article has several inaccuracies. My mother writes children's books, and has not illustrated for a long time. I doubt I was below the twentieth percentile in number of friends in college, and may have been at the fiftieth. I once made a graph of everything (log size vs. log mass), but that took me at most a month or two. Studios actually use pretty simple models to predict movie sales. Idea futures isn't intended so much to remake finance industries as to use finance to remake other industries. It would make less sense for you to bet on where you should eat lunch than for others to bet on that and for you to pay attention to their betting odds. RH