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Space Digest                Tue, 22 Sep 92       Volume 15 : Issue 232

Today's Topics:
        Space Platforms (political, not physical : -) [Part 1]

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Date: 21 Sep 92 20:04:04 GMT
From: Thant Tessman <[e-mail]>
Subject: Space Platforms (political, not physical : -) [Part 1]
Newsgroups: sci.space,talk.politics.space,alt.politics.marrou,alt.politics.libertarian

To appear in Social Epistemology, 1992.  (version appeared: in Proc.
Eighth Intl. Conf. on Risk and Gambling, London, 7/90.)


          C O U L D   G A M B L I N G   S A V E   S C I E N C E?
                    Encouraging an Honest Consensus

                          by Robin Hanson
              Visiting Researcher, The Foresight Institute
                P.O. Box 61058, Palo Alto, CA 94306 USA
                [e-mail] 510-651-7483

The pace of scientific progress may be hindered by the tendency of our
academic institutions to reward being popular, rather than being right.
A market-based alternative, where scientists can more formally "stake
their reputation", is presented here.  It offers clear incentives to be
careful and honest while contributing to a visible, self-consistent
consensus on controversial (or routine) scientific questions.  In
addition, it allows patrons to choose questions to be researched without
choosing people or methods.  The bulk of this paper is spent examining
potential problems with the proposed approach.  After this examination,
the idea still seems plausible and worth further study.

INTRODUCTION

After reviewing the discrepancy between what we want from academic
institutions and what we get from current institutions, a market-based
alternative called "idea futures" is suggested.  It is described through
both a set of specific scenarios and a set of detailed procedures.  Over
thirty possible problems and objections are examined in detail. Finally,
a development strategy is outlined and the possible advantages are
summarized.

THE PROBLEM

THE SCIENTIFIC REVOLUTION Four centuries ago, some Europeans complained
that 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 that
they and their theories should be judged by how well they agreed with
observations, and not by how they agreed with the authorities of the day
[Gal].  This was the age of utopias [Whi], as these rebels debated
possible academic reforms and imagined whole new social institutions,
for both academia in particular and society in general.

Within a century or so, the intellectual descendants of these outsiders
became the new insiders in a process now called the "Scientific
Revolution".  They introduced a new respect for observations along with
new social institutions, such as the Royal Society of London, inspired
by those utopian ideals.  Since then science has made impressive
progress.  Most controversial issues of four centuries ago seem long
settled by now, and continued research may well settle most of today's
controversies.  Academia can claim some credit for this, and academic
institutions have continued to evolve in response to perceived problems,
formalizing publication in journals, credit in citations, and evaluation
in anonymous peer review.

PROBLEMS WITH ACADEMIA Yet little has really changed.  Academia is still
largely a medieval guild, with a few powerful elites, many slave-like
apprentices, and members who hold a monopoly on the research patronage
of princes and the teaching of their sons.  Outsiders still complain
about bias, saying their evidence is ignored, and many observers
[Gh,Red,SmP,Syk,Tr,Tul] have noted some long-standing problems with the
research component of academia. {footnote: Teaching reform is beyond the
scope of this paper.  I am content to observe that there are no obvious
reasons why the changes I will propose should make teaching worse.}

As currently practiced {footnote: Early peer reviewer consisted more of
personally observing experiments and trying to reproduce analyses.} peer
review is just another popularity contest, inducing familiar political
games; savvy players criticize outsiders, praise insiders, follow the
fashions insiders indicate, and avoid subjects between or outside the
familiar subjects.  It can take surprisingly long for outright lying by
insiders to be exposed [Red].  There are too few incentives to correct
for cognitive [Kah] and social [My] biases, such as wishful thinking,
overconfidence, anchoring [He], and preferring people with a background
similar to your own.

Publication quantity is often the major measure of success, encouraging
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.  A
preoccupation with "genius" and ideological wars over "true" scientific
method [Gh] needlessly detract from just trying to be useful.

Perhaps the core problem is that academics are rewarded mainly for
telling a good story, rather than for being right. (By "right" I include
not only being literally correct, but also being on the right track, or
enabling work on the right track.)  Publications, grants, and tenure are
based what other insiders think today, independent of whether one's
ideas and results are proved correct or valuable later.  Even for
researchers with a good track record, grant proposals must usually
describe in some detail exactly what will be discovered and how; true
exploratory work is done on the sly.  This emphasis on story-telling
rewards the eloquent, who know how to persuade by ignoring evidence that
goes against their view, and by other standard tricks [Cia].

Admittedly, someone who has published an unusual idea that has proven
right is thought of more highly, all else being equal.  But all else is
usually not equal.  Outsiders find it hard to get an unusual idea
published, and being able to say "I told you so" is of little help to
academics who have failed to gain tenure.  The powerful often get credit
for the successes of those under them [Re].  Only in the most
experimental fields, where feedback is direct and frequent, can we
expect people who are disliked -- but usually right -- to be rewarded
through informal reputations.

Perhaps our biggest problem is the distortion evident when a science
question becomes relevant for public policy, as in the recent debates
over "Star Wars" or the greenhouse effect.  The popular media tend to
focus on those scientists prone to hyperbole.  An honest consensus of
relevant experts is often lost from public view, as advocates on each
side accuse the other of bias and self-interest.  Public policy can
suffer dramatically as a result, a consequence that becomes more serious
as the pace of technological change quickens.

On the whole, current academic institutions seem less than ideal, with
incentives that reward being popular, fashionable, and eloquent, instead
of being right.

INCENTIVES MATTER Are these complaints just sour grapes?  Those who do
well by an existing system tend to believe problems are minor.  But even
if the best ideas eventually win, we should worry if the people who
advocate those ideas don't win.  Good intentions and culture can only go
so far in countering bad incentives; if you must publish or perish, you
will do what it takes to publish (or perish).

The social organization of any human effort can have a tremendous effect
on its efficiency.   Consider that different past societies with
different ways of organizing science have had very different rates of
scientific progress; compare Europe with China over the last five
centuries.  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 we used
academic peer review to decide what products to manufacture.  Proposals
for new products would be reviewed anonymously by powerful people who
produce similar products.  These reviewers would pass judgement without
taking any personal risk, and those judged favorably would win
regardless of 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 and
flexible, allowing most anyone to participate in the ongoing debate
about the profit potential of any public business or the relative
potential of various industries, management styles, etc.  Why can't we
have academic research institutions more like this?

ACADEMIC REFORMS Most efforts to improve academic institutions focus on
incremental reform within the existing peer review framework.  Should
reviewers be anonymous?  Should submissions be anonymous?  How many
people should review each proposal?

Occasionally someone proposes a more radical reform within the current
framework.  The surprising lack of agreement among reviewers [Cic] has
lead some [Gi] to suggest we fund equally or randomly among "qualified"
applicants, and let everything be published.  Conversely, the fact that
a small 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 top thousand scientists, chosen by an iterated popularity poll.
Some have suggested universities and private labs be funded in
proportion to their publication [Ro] or citation [Ts] count.  And some
[Tu] advocate prizes, once a central method for funding research [He].
Still others suggest scrapping the whole thing, abolishing tenure [SmP]
or government funding [Fe,Wa] in favor of some existing alternative like
private patrons, popular media, patents, or research tax credits.

Once in a while a whole new social institution is proposed.  Science
courts [Kan] (also called "scientific adversary procedures") were
invented to blunt hyperbole on science controversies by using court-like
proceedings to encourage cross-examination and to document areas of
agreement.  Hypertext publishing [Dr,Han88] imagines an electronic
publishing medium where any critic could directly link a criticism to
any published item, and where readers could decide what is worth reading
by have software automatically combine the direct evaluations of
previous readers they respect.

In this paper I propose a new academic institution, tentatively called
"idea futures", intended to overcome some of the limitations of existing
alternatives.  It is utopian in the sense of describing a coherent
vision of how things might be rather different, but hopefully practical
in the sense of considering what could go wrong and how to start small.

WHAT WE WANT Before considering specific mechanisms, let us reflect a
moment on what we want from academic incentives.  We want to encourage
honesty and fair play; the game should be open to anyone to prove
him/herself.  Patrons who fund research, either private foundations or
governments, presumably want research to be directed toward the academic
subjects and questions of interest to those funders.  (Patrons also
include the researchers themselves, to the extent that reduced salaries
are understood to be in exchange for some research autonomy.)  On
controversial questions, we want a clear measure of the current opinion
of relevant experts, a measure which political advocates could not
easily distort.  And those who contribute to such a measure should have
clear incentives to be careful and honest.

Presumably we want as much progress as possible per effort invested, at
least in situations where the following notion of "progress" makes
sense.  Consider a well-posed question, such as "Is the Earth basically
spherical?", with a handful of possible answers (such as "No, it's
flat").  Experience indicates that, with enough study and evidence, one
of the answers will eventually stand out as best to most anyone who
considers the question carefully.  At least this seems to happen for
most questions that have been traditionally labeled "scientific";
questions about the morality of abortion or the nature of God may not
fare as well.  Where there is such a limiting "right" answer, "progress"
can mean the rate at which general scientific opinion converges to that
answer.  {footnote: This definition of progress is more objective than
citation counts [Co], and hopefully avoids debates about whether more
knowledge is good, or whether there is really an ultimate truth.}

Translating these goals to an individual level, we want our institutions
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 some reflection or
observation, comes to a tentative conclusion which he/she would like
others to consider.  If most everyone already agrees with this
conclusion, 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., if
people who have not yet seen the evidence are not yet willing to agree.
If, upon reviewing the evidence, most everyone now agrees with the
surprising claim, then the academic should certainly receive some
credit.  And, in fact, peer review can handle this case.  But what if
there is not uniform agreement?  It still seems that the academic should
be rewarded, if this surprising claim is eventually born out.  And
others who supported this claim in the face of disagreement should also
gain credit [Led], since they helped push the general opinion in the
right direction.

Why shouldn't savvy academics now win credit by supporting as many
claims as possible, or by multiplying controversies?  Clearly they
should risk losing credit when they are wrong, so that credit is in some
ways conserved.  The ratio of possible loss to gain should depend on how
unusual one's position is.  Siding with the majority and being right
should gain one less than siding with a minority and being right.  The
total amount gained or lost should depend on how much of their
reputation each academic has chosen to stake on this issue, as well as
on how interesting the issue is to the ultimate research funders.

In summary, part of what we want from academic incentives is a fair game
for staking our reputation, so that on questions of interest to funders,
we converge as fast as possible to the "right" answer.

THE PROPOSAL

Surprising as it may seem, such a social institution exists.  It is
relatively simple, cheap, decentralized, and egalitarian.  It could
create a consensus on disputed science questions that would be clear,
expert, honest, and self-consistent across a wide range of issues.  This
consensus should respond quickly to new information, and predict at
least as well as any other co-existing consensus mechanism.  It is
well-grounded in our best theories of decision and incentives.

And it is ancient.  We need only revive and embellish a suggestion made
back 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 of them may  fall to my share, and the other 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. [De]

They proposed to bet on their medical therapies, apparently believing
bets to be a useful augmentation of the existing academic incentives!
Bets are a long-established and robust reputation mechanism, widely seen
as a cure for excessive verbal wrangling; you "put your money where your
mouth is".  In science and elsewhere, phrases like "you bet" are
standard ways to express confidence.  Offers to make token bets are
particularly compelling, and scientists of equal stature often make and
publicize such bets, with recent bets on resource depletion, computer
chess, black holes [Hal], solar neutrinos, nuclear weapon yields [Ev],
and cold fusion [Gar,Lew,WSJ].

Nor is gambling foreign to science funding.  King Charles II, founding
patron of the Royal Society of London, was fond of laying wagers on the
outcome of the Society's experiments [ShS].  Until 1830, public
lotteries funded Colombia, Harvard, and Yale [Gei].  In 1872 Leland
Stanford, founder of Stanford University, hired Eadweard Muybridge to
help win his bet that a trotting horse has all four legs off the ground
at some point; in the process Eadweard invented moving pictures [Jac].

Consider the example of Piers Corbyn, a London astrophysicist who has
been unable to get academic meteorologists interested in his unusual
theory of long-term weather cycles [NS].  Since June 1988 he has been
making bets to gain publicity, betting against the bookmaker William
Hill, who uses odds 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 a month (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 what independence you assume between bets in a given
month, the chance of this happening randomly is between one in 400 and
one in 1050.)  Yet the Service still 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 be considered?  William Hill has taken on the
bets for the publicity, but is tired of losing, and has adjusted their
odds accordingly.  Why shouldn't these be the odds used for official
British agricultural policy, instead of the Service's predictions?

Or consider Julian Simon, a population and natural resource optimist,
who found he could not compete for either popular or academic attention
with best-selling doomsayers like Paul Ehrlich.  So in 1980 Simon
challenged Ehrlich to bet on whether the price of five basic metals,
corrected for inflation, would rise or fall over the next decade.
Ehrlich accepted, and Simon won, as would most anyone who bet that way
in the last two centuries.  This win brought Simon publicity [Ti], but
mostly in the form of high-profile editorials saying "Yeah he won this
one, but I challenge him to bet on a more meaningful indicator such as
..."  In fact, however, not only won't Ehrlich bet again, though his
predictions remain unchanged, but none of these editorial writers will
actually put their money where there mouths are!  And the papers that
published these editorials won't publish letters from Simon accepting
their challenges [Si].  Shouldn't Simon's open challenges count as much
as best-sellers in setting 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 a better reputation game, why not literally make bets and
formalize the process?

Imagine a betting pool or market on most disputed science questions,
with the going odds available to the popular media, and treated socially
as the current academic consensus.  Imagine that academics are expected
to "put up or shut up" and accompany claims with at least token bets,
and that statistics are collected on how well people do.  Imagine that
funding agencies subsidize pools on questions of interest to them, and
that research labs pay for much of their research with winnings from
previous pools.  And imagine that anyone could play, either to take a
stand on an important issue, or to insure against technological risk.

This would be an "idea futures" market, which I offer as an alternative
to existing academic social institutions.  Somewhat like a corn futures
market, where one can bet on the future price of corn, here one bets on
the future settlement of a present scientific controversy.  This is
admittedly an unusual (though not entirely original
[Bru,Ho81,Ho84,Lea,So]) suggestion; but consider what might happen.

SCENARIOS

CONTINENTAL DRIFT In 1915 German meteorologist Alfred Wegener published
his theory of continental drift, for which he had collected extensive
evidence.  But contemporaries considered his theory to be "impossible",
and Wegener died an intellectual outcast in 1930 [Mar]. Yet in the
1960's his theory began to be taken seriously, and is now the
established view.  Wegener eventually gained fame, but overall academia
seems to discourage activity like his.  Some of Wegener's peers, for
example, probably found his thesis plausible, but decided that to say so
publicly would be a poor career move.

With idea futures, Wegener could have opened a market for people to bet
on his theory, perhaps to be judged by some official body of geologists
in a century.  He could have then offered to bet a token amount at, say,
1-4 odds, in effect saying there was at least at 20% chance his claim
would be vindicated.  His opponents would have had to accept this
estimate, and its implications about the importance of Wegener's
research, or they would have to bet enough to drive the market odds down
to something a little closer to "impossible".  They could not suppress
Wegener merely by silence or ridicule.

As Wegener increased his stake, buying more bets to move the price back
up, his opponents would hopefully think just a little more carefully
before betting even more to move the price back down.  Others might find
it in their interest to support Wegener; anyone who thought the
consensus odds were wrong would expect to make money by betting, and
would thereby move the consensus toward what they believe.  Everyone
would have a clear incentive 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 relevant
information. Eventually the evidence would more clearly tip in Wegener's
favor, and the price of his bets would rise.  Wegener, or his children,
could then sell those bets and reap some rewards.  While those rewards
would not make up for years of neglect, at least he would get something.

As the controversy became settled, and opinions converged, people would
gradually sell and leave the market.  Few people, if any, need be left
for the final judging, which could usually be avoided (using mechanisms
to be described below).

COLD FUSION A more recent controversy began in March 1989, when Pons and
Fleishman announced "fusion in a jar" at a dramatic press conference.
In the months that followed, media aftershocks of confirmation attempts
were tracked by thousands of scientists and others, who argued with each
other about the chances of cold fusion being real.  Proposals to bet
came up often, even in the public debates. Critics, uncomfortable with
airing scientific disputes in public, complained that Pons and Fleishman
broke the rules by going to the popular media instead of through normal
peer review channels, unfairly gaining extra attention and funding.
Supporters countered that popular media spread information quickly to
other scientists; cold fusion, if right, was too important to wait for
normal channels.

In the journal Science, Robert Pool speculated that a market in cold
fusion might have gone something like Figure 1 [Poo].  If there really
had been a betting market, then there really would have been a market
price that journalists like Pool could publish as news.  A table of
going prices might appear on the science page in the newspaper, much
like the stock page in the business section, conveying current
scientific opinion better than the current "balanced" interviews with
extremists on all sides.  It's been suggested [Ze] that the added
information in betting market prices might have helped resolve the
debate more quickly.

                      FUSION CONFIDENCE INDEX

                Georgia confirms  Russia heat    Stanford
                               |  neutrons       confirms
   Announce fusion    TexaxAM  |  |              |
   in bottle          confirms |  |   U.Wash     *
      |         Hungarian  |   |  *   tritium    ***
      | BYU     neutrons   |   *** *   |         *  *
      | confirms     |     |  *    *   *        *    **
       \    |        |      * *     * **        *      *****
        \   *        |     * *       *  *       *
         ** **       *     *            *      *
        *  *  *     * *   *   Georgia    *     *
       *       *    * ** *    reverses---*     *
     **        **  *    *                 *   *
               * * *    |        TexaxAM  *   *
                  *  MIT sees    hedges----*  *
                     nothing                **

       Mar23      Apr3     Apr10     Apr14     Apr18

  Figure 1  A Hypothetical Market in Cold Fusion (Science 28Apr89)

There needn't be a conflict between going through slow proper channels
and getting the word out, if a fast market were a proper channel.  The
effect of staged media events might be reduced as it might not be news
if the price didn't change; advocates would have to convince, not the
average listener, but those people willing to make bets.  Remaining
biases, such as the overconfidence evident in figure 1, would be reduced
by technical traders 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
that they were the best group to develop and market it in that case.
With idea futures they could, by both starting a business and betting
against cold fusion (essentially taking out insurance), really only be
betting on their ability to develop cold fusion if it were real.

Insights from a great many people whose opinions on the cold fusion
controversy were ignored, such as inarticulate folks without Ph.Ds,
could have been integrated in a decentralized manner.  Popular play
would end up subsidizing professional efforts on questions of popular
interest, offering more "direct democracy" in setting research
priorities.

NEUTRINO MASS Betting markets could also function in the absence of
overt 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
trying to figure out who would be a good person to work on this, or what
a good research strategy would be, they decided simply to subsidize
betting markets on the neutrino mass.  They spent millions.

Soon the market odds were about 5% that the mass was above 0.1eV, and
Gung Ho Labs became intrigued by the profits to be made.  They estimated
that for about $300K spent on two researchers over 3 years, they could
make a high confidence measurement of whether the mass was above 0.1eV.
So they went ahead with the project, and later got their result, which
they kept very secret.  While the market now estimated the chance of a
mass over 0.1eV at 4%, their experiment said the chance was at most
0.1%.

So they quietly bought bets against a high mass, moving the price down
to 2.5% in the process.  They then revealed their results to the world,
and tried their best to convince people that their experiment was solid.
After a 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 the information they had created, which more than covered their
expenses to get that information.

If Gung Ho Labs had failed to convince the world of their results, they
would have faced the difficult choice of quitting at a loss, or holding
out for the long-term.  A careful internal review would probably be
conducted before making such a decision.

Internally, Gung Ho would be free to use whatever organizational
structures it found effective; even peer review, tenure, and fixed
salaries.  The two researchers need not risk their life savings to be
paid for their efforts.  But the discipline of the external market
should keep these internal institutions from degenerating into mere
popularity contests.

KILLER PEANUT BUTTER Once upon another time, Munchem Biolabs found
compelling evidence that peanut butter was more deadly than most
pesticides, a conclusion that Lunch Industries Exclusive (LIE) wanted
desperately to suppress.  LIE's usual procedure was to fund a bunch of
competing studies to come to opposite conclusions, which usually kept
the waters 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 rather
high.  LIE now had two choices; either they could use overwhelming cash
to move the odds back down, or use competing studies, advertising, etc.
to persuade others to bet on their side.

If they bet alone, they would know they were throwing their money away
with no obvious limit on future spending.  Not only might Munchem find
allies, but LIE employees who knew they were bluffing might be tempted
to pick up a little free money with some anonymous bets.  If word of
Lunch's bluff got out, as insider information often does, investors
would flock in and wipe out the effect of LIE's bets.

If LIE tried to throw away other people's money through a persuasion
campaign, they would face a market dominated, as most liquid markets
are, by battle-hardened speculators.  These investors, not easily
persuaded by clever jingles, would quickly hook up with research
insiders, who generally know which labs tend to find whatever results
their customers want.

So in the end, Lunch Industries accepted the market odds, and began
research on non-toxic peanut butter.

PROCEDURES

Rather than just present an abstract utopian vision of market-based
academic incentives, this paper aims to consider in some detail what
problems might arise and possible approaches for dealing with them.  The
following is a core set of procedures tentatively selected to deal best
with 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 these suggestions to have been naive.  I offer them primarily to
make plausible the idea that betting markets could be applied to a much
wider range of scientific questions than is presently considered
feasible.  (This section is somewhat dense, and may be profitably
skimmed on a first reading.)

ASSETS Imagine that John bets Mary $5, at even odds, that it will rain
next Monday. Since they don't entirely trust each other, John and Mary
put the bet in writing and each give $5 to Frank, a trusted third party.
John has 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 in their I.O.U. for $10 from Frank.

This standard betting scenario can be improved by breaking it into
different 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 to anyone for a price of $10.  The bank takes no risk, since
exactly one of the coupons will be worth $10 in the end.  And since the
bank holds the $10 in the meantime, it can afford to offer interest on
the $10, and perhaps pay a local meteorologist to be an impartial judge.
Now Mary can first buy a coupon pair from the bank for $10 and then
offer to sell her "$10 if rain" coupon to John or anyone for $5,
retaining the "$10 if not rain" for herself.

A central clearinghouse for such offers, which matched compatible offers
and insured that traders made good on their offers, would always hold a
best current offer to sell and to buy.  If the transaction costs of
processing an offer through the clearinghouse were small, as current
technology allows, then the "spread" between these offers could be quite
small, leaving a going "market price".  A going price of $3.20 for "$10
if rain Monday" would represent a temporary consensus of a 32% chance of
rain Monday.

In general, these markets trade assets of the form "X if A" (often
called "contingent assets"), where X is some pre-existing "base" asset
and A is one of a set of mutually exclusive claims that some judging
organization agrees, eventually, to choose from.  The base X can be any
stock, bond, currency, commodity, or even another compatible contingent
asset.  The set of claims constitutes a "question", and each claim is
one possible answer to the question.  To enable trading on a question,
we require an agreement between several parties - an author, a judge,
and one or more banks, registries, clearinghouses, and randomness
checkers.

An author carefully words a set of claims, and a judging organization
agrees if necessary, to offer a verdict in favor of one of these claims
at some, perhaps indirectly specified, date.  Registries hold records of
public, i.e. not anonymous, trades made at clearinghouses.
(Clearinghouses may be required to hold additional private records of
all trades, available to be subpoenaed by criminal investigators.)

Consider a question with possible answers {A,B,...}.  Any bank
authorized 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 if rain" and "$10 if not rain".  The bank is trusted to report
the net effect of 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 the
question and render their verdict.  Verdicts assign a percentage of
validity 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 if A" assets for 98% of X.

The judging-fee is obtained from the banks, who devalue the current
assets contingent on that question by some percentage, a percentage
which can be no more than a pre-specified max-judging-percentage.  This
devaluation creates an incentive for traders to "settle out of court"
and sell before the judging date.

What if there is too little capital in the market to support the
required judging fee?  John and Mary's market only has $10 in it, and
with a 10% max-judging-fee, only $1 is available for judging, short of
the $5 a meteorologist judge might require.  In this case we can hold an
"audit lottery" [Pol]. {footnote: This name is suggested by the way an
auditor might randomly select expense reports for more careful
scrutiny.} The current market capital, $10, is gambled with whomever
offers the best price, among those approved by the randomness checker.
If the gamble is won, every asset contingent on this question increases
in value, resulting in enough market capital for judging to proceed, in
this case $50.  If the gamble is lost, all such assets become worthless
and judging is not needed.  {footnote: Investors can insure against the
added risk audit lotteries impose by putting money into an pot to be
gambled in the same lottery, but on the other side.}

Judges can be given more flexibility to deal better with uncertainties
regarding 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 each percentage-unit, the judges would have the choice to
postpone judging to a later date and/or raise the next fee-unit.  If
necessary, an audit lottery would be held before each new unit.

If desired, judges can also be given a direct financial incentive to be
careful and honest.  "Appeals" markets can be created on the same
question, but judged by an independent group much later and/or with a
much higher judging-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 trying to move the price in the appeals
market toward the verdict specified.  Judges would end up with some
contingent assets saying their verdict would be upheld in the appeals
market, assets they could sell immediately, at a loss, if they so chose.

Idea futures markets need no central management.  Anyone could author a

claim on any subject of interest to them, contract with different
judging groups to judge that claim on different dates, and allow
different banks to deal in each question.  And anyone should be able to
open a clearinghouse to sell any asset.  All of these groups could
compete openly for the attention 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.
For example, if the market odds are "incoherent", i.e., deviate from the
standard axioms of probability, a trader who corrects that deviation can
make better than the average rate of return without significant risk.
Therefore coherence specialists should keep the market consensus roughly
consistent over a wide range of subjects.  Similarly, technical traders
would keep the pattern of price changes close to the ideal random walk
[Mal].  The market odds should also quickly reflect information
contained in any co-existing consensus measures, such as opinion polls
or reports of elite committees, as traders could make easy money if
alternative measures were reliably better predictors than the market.

A contingent asset, like "X if F", that is split again creates
conjunctive contingent assets like "X if F and A".  Conjuncts which
combine many claims may be popular, since they offer investors the
greatest expected return.  Conjunctive assets also allow one to bet the
conditional probability of A given F and remain insensitive to the
verdict on F.  In this way diverse traders, each of whom has only local
knowledge, could manage a large network of dependencies such as the
currently popular "Bayes net" models [Pe].

SOCIAL ATTITUDES Some new social attitudes toward these new markets are
important elements of the envisioned approach.  As with current
financial markets, the market odds should be treated as the current
social consensus on a question by popular media and policy makers.
While one may of course disagree with this consensus in conversation, it
is not impolite for others to inquire whether one who so disagrees has
made investments commensurate with their wealth and the fuss they are
making.  People who do so invest should receive the same sort of social
credit now granted to "do-gooder" advocates who devote personal
resources to changing current opinion on some important issue.  Like
Phileas Fogg, the hero of Vernes Around the World in Eighty Days, "a man
who rather laid wagers for honor's sake than for the stake proposed"
[Ve], these investors should not be treated as mere risk-loving
gamblers.

Social credit should also go to philanthropists who choose to subsidize
a market on some important question.  By funding an automatic
inventory-based [St] market-maker, which always offers to buy or sell at
prices determined solely by its current inventory, one gives away money
only to those who move the market price in the direction of its final
verdict.

Reputation scores could be computed from each person's public trades,
recorded at registries.  A trade is considered "public" if the trader
committed at trading time to a date at which the trade would be publicly
revealed, and that date has passed.  One simple reputation score would
be the ratio of the current market value of assets held to their value
when purchased, corrected for a few distortions.  People with high
reputation scores should be respected for having been right against the
crowd, and such scores might even compete with G.P.A.s or number of
papers published as an evaluation measure.

OBJECTIONS

The main difference between "blue sky" fantasies and serious but radical
suggestions is in how well they handle the details.  If you are like
most readers, you will by now have thought of one or more problems with
or objections to idea futures.  If so, you are encouraged to scan this
section and go directly to the issues of concern to you.  (Most of these
issues have been raised by at least three independent commentators in
previous discussions.)

ISN'T GAMBLING ILLEGAL?  Yes, betting markets on science questions
appear to be only legal in Great Britain, where they are highly
regulated.  Even Nevada, which allows sports betting, prohibits general
betting to avoid scandals that might "taint" the gambling industry.
Which is a shame because most of the arguments against betting,
discussed below, do not apply well to science betting.  We allow
scattered markets that give us rather good consensus estimates on horse
races and football teams, yet not on important science and technology
questions!  In the long term perhaps we can persuade legislators to
allow science bets because of their extra benefits and reduced problems.
Science betting certainly seems easier to justify than the currently
popular regressive taxation through state lotteries.

ISN'T BETTING A USELESS ZERO-SUM GAME?   A standard argument for making
betting illegal is to keep people from wasting their energies in
unproductive activities.  The only obvious value in betting on dice
throws is entertainment, but laws to prohibit this usually also prohibit
much more.  Life insurance, joint stock companies [Bre], and commodity
futures markets [Ros] were all prohibited by anti-gambling laws until
advocates managed to obtain exemptions.

Being monetarily zero sum does not make betting useless.  Betting
markets allow traders to reduce risk, and create informative prices.  In
liquid markets most of the trading, liquidity, and price rationalization
comes from speculators, for whom the market is basically a betting game.
Buying any particular stock in the stock market, for example, is
basically a 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 a whole, this "externality" also benefits people not betting
on that question.)

In fact, a standard way to analyze financial portfolios is to break them
into contingent assets, each of which has value in only one possible
world [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 insure
against technological risk, but they would create prices embodying the
sort of valuable information that governments now fund research to
obtain.  When the betting stakes are invested in stocks, the money is
hopefully being put into productive use by those companies.  Therefore,
ignoring transaction costs and judging fees, the average rate of return
of contingent assets split from stocks would be the same as the return
on those stocks.

DOES ANYBODY EVER BET THIS WAY?  Liquid markets in contingent assets are
a somewhat different betting mechanism from the usual bookies or
pari-mutuels.  But they are not untried.  Such markets are widely used
to teach MBA students about how markets work [Fo], and are usually done
on elections.  Financial traders sometimes use them to bet on sports.
And I have developed a board game where players use such a market to bet
on a murder mystery as it unfolds.  Most ordinary people learn the
mechanism very quickly.

WHAT ABOUT COMPULSIVE GAMBLING?  About 2% of the population seems unable
to resist the temptation to risk more than they can afford to lose [APA]
in casinos, racetracks, and high risk financial markets.  Lost in the
thrill of "action" and the hope that all of their financial worries will
soon be over, they often regret their excess later, and resort to
desperate measures, like theft, to pay debts.

Compulsive gambling is encouraged by advertising and easy access to
games with a quick and possibly large payoff.  British law reduces this
problem by requiring casino players to apply 48 hours in advance, by
allowing them to sign up on lists of people to be excluded from all
casinos, and by forbidding youth and on-site alcohol, entertainment, and
credit [Ke].  Margin limits in financial markets serve some similar
functions.

Governments may impose similar rules to discourage compulsive gambling
in idea futures, though it is important that any advertising
restrictions not prevent the wide dissemination of current consensus
odds on important issues.  More importantly, unless options (or
investments on margin) are offered, science questions are generally too
long term to be a problem, offering no more "action" than long-term
stock investments.  Traders who regret their purchase a few days later
can sell and get most of their money back.  And, given that many other
options markets exist, it is not clear that allowing science options
would increase opportunities for compulsive risky investing.

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End of Space Digest Volume 15 : Issue 232
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