Think cold fusion will l prove practicable[sic]?
China will face civil war following the
death of Deng Xiaoping? Microsoft will
release Windows 95 on time? Sign on to a
Calgary computer and you can bet on it.
Two weeks ago, the developers of the
electronic trading program, called Idea
Futures, flew to Austria to collect a
$10,000 Golden Nica award for the world's
best web site (an electronic publication
linked to the Internet and accessible to
anyone with a computer and modem.) But
Idea Futures is more than a sophisticated
game. If played with real money, it could
revolutionise the way government funds
science and business manages technological
and political risk.
It was California scientist Robin Hanson who first suggested developing a futures market in ideas. A former NASA researcher who is now completing a Ph.D. in computer science at the California Institute of Technology in Pasadena, Mr. Hanson was troubled by the scientific establishment's tendency to dismiss or ignore promising new fields of work. This closed-mindedness, he reasoned, was rooted in scientists' dependence on government for research funding.
Bureaucracy has always stifled innovation and wasted resources, says Mr. Hanson. He points to Ptolemaic Egypt as an example. Scientists of that era, lavishly supported by the Pharaoh, were fond of "big splashy projects" regardless of their usefulness. They built, for example, the largest ship of its time-but it was too ponderous to actually sail anywhere. In the same way, he argues, state-supported scientists in the U.S. today favour such multibillion-dollar projects of dubious value as the space shuttle and super-collider.
Mr. Hanson, influenced by the free market arguments of libertarian friends, started looking at non-bureaucratic alternatives to government science funding. In the 17th and 18th centuries, he says, some of the most important scientific advances had been spurred by awards posted by wealthy patrons. His proposed futures market on important science and technology questions would be a modern-day counterpart.
The idea is simple. Take cold fusion as an example. An agency, much like an existing commodity exchange, would issue coupons based on a claim that the technique, say, would enter commercial use by the year 2000. At that time, if the claim proved true, holders of the coupons would receive their full dollar value; if false, they would receive nothing. Until that time, the coupons would sell at a fraction of their full price, based on the market's estimation of the odds that the claim would be proven true.
According to Mr. Hanson, such a market would provide a more accurate indicator of expert consensus on scientific questions than exists today. "People would be able to put their money where their mouth is," he says. And researchers would be made more accountable to their private or state patrons; the ongoing success of their work would be reflected in the rise or fall of claim prices.
In a world of rapid technological change, however, an idea futures market would also have broader applications. It would, for one, give businesses a greater ability to hedge or minimise risk. Take companies that made Beta video tapes, as an example. They could have bought coupons in a claim that VHS tapes would become the industry standard; when the claim came true, the profits could have helped then replace their now-outdated equipment. The market could also give informed direction to public policy. Rather than having to rely upon the often conflicting warnings about global warming by scientists and environmentalists, for example, politicians might use the change in price of a global warming claim as an indicator of actual concern.
The Calgary web site has proven it could work with play money, at least. University of Calgary graduate students Mark James and Sean Morgan became interested in the concept in 1994, after being introduced to an article by Mr. Hanson in an informal technology discussion group at the U of C. Both then went on to jobs at the Alberta Research Council where they were given approval to develop a trial Idea Futures program. Last fall. it went on-line. Since then, more than 1,000 computer users from around the world have registered at the site* to buy and sell shares in the 200-plus claims being traded.
"People take it pretty seriously," says Mr. James. On computerized mailing lists, investors discuss developments that might affect individual claim prices. And just as in a real market, those prices react quickly to real-world developments. A claim that British Labour Party leader Tony Blair would be the country's next prime minister, for example, fell from 70 cents on the dollar to 50 cents within days of current PM John Major's decision to call a leadership convention-which opened up the possibility that another Conservative MP could succeed him. Sample odds on other claims? Traders are betting that there is a 9% chance Quebec will vote to separate, a 15 % chance cold fusion will be proven, and a 30% chance that an AIDS vaccine will be discovered by the year 2000.
The next step, of course, is to set up an exchange that uses real money. But that isn't going to happen quickly. For now, American and Canadian regulators classify the trading of Idea Futures as gambling, not legitimate dealing in securities. Mr. Hanson, however, is confident that such roadblocks will be overcome. It wasn't that long ago, he notes, that trading in commodity futures and derivatives was similarly illegal.
-Terry Johnson
* For those who want to visit the web site, the address is http://if.arc.ab.ca/~jamesm/IF/IF.shtml