When I first got into prediction markets twenty five years ago, I called them “idea futures”, and I focused on using them to reform how we deal with controversies in science and academia (see here, here, here, here). Lately I’ve focused on what I see as the much higher value application of advising decisions and reforming governance (see here, here, here, here). I’ve also talked a lot lately about what I see as the main social functions of academia (see here, here, here, here). Since prediction markets don’t much help to achieve these functions, I’m not optimistic about the demand for using prediction markets to reform academia.
But periodically people do consider using prediction markets to reform academia, as did Andrew Gelman a few months ago. And a few days ago Scott Alexander, who I once praised for his understanding of prediction markets, posted a utopian proposal for using prediction markets to reform academia. These discussions suggest that I revisit the issue of how one might use prediction markets to reform academia, if in fact enough people cared enough about gaining accurate academic beliefs. So let me start by summarizing and critiquing Alexander’s proposal.
Alexander proposes prediction markets where anyone can post any “theory” broadly conceived, like “grapes cure cancer.” (Key quotes below.) Winning payouts in such market suffer a roughly 10% tax to fund experiments to test their theories, and in addition some such markets are subsidized by science patron orgs like the NSF. Bettors in each market vote on representatives who then negotiate to pick someone to pay to test the bet-on theory. This tester, who must not have a strong position on the subject, publishes a detailed test design, at which point bettors could leave the market and avoid the test tax. “Everyone in the field” must make a public prediction on the test. Then the test is done, winners paid, and a new market set up for a new test of the same question. Somewhere along the line private hedge funds would also pay for academic work in order to learn where they should bet.
That was the summary; here are some critiques. First, people willing to bet on theories are not a good source of revenue to pay for research. There aren’t many of them and they should in general be subsidized not taxed. You’d have to legally prohibit other markets to bet on these without the tax, and even then you’d get few takers.
Second, Alexander says to subsidize markets the same way they’d be taxed, by adding money to the betting pot. But while this can work fine to cancel the penalty imposed by a tax, it does not offer an additional incentive to learn about the question. Any net subsidy could be taken by anyone who put money in the pot, regardless of their info efforts. As I’ve discussed often before, the right way to subsidize info efforts for a speculative market is to subsidize a market maker to have a low bid-ask spread.
Third, Alexander’s plan to have bettors vote to agree on a question tester seems quite unworkable to me. It would be expensive, rarely satisfy both sides, and seems easy to game by buying up bets just before the vote. More important, most interesting theories just don’t have very direct ways to test them, and most tests are of whole bundles of theories, not just one theory. Fourth, for most claim tests there is no obvious definition of “everyone in the field,” nor is it obvious that everyone should have opinion on those tests. Forcing a large group to all express a public opinion seems a huge cost with unclear benefits.
OK, now let me review my proposal, the result of twenty five years of thinking about this. The market maker subsidy is a very general and robust mechanism by which research patrons can pay for accurate info on specified questions, at least when answers to those questions will eventually be known. It allows patrons to vary subsidies by questions, answers, time, and conditions.
Of course this approach does require that such markets be legal, and it doesn’t do well at the main academic function of credentialing some folks as having the impressive academic-style mental features with which others like to associate. So only the customers of academia who mainly want accurate info would want to pay for this. And alas such customers seem rare today.
For research patrons using this market-maker subsidy mechanism, their main issues are about which questions to subsidize how much when. One issue is topic. For example, how much does particle physics matter relative to anthropology? This mostly seems to be a matter of patron taste, though if the issue were what topics should be researched to best promote economic growth, decision markets might be used to set priorities.
The biggest issue, I think, is abstraction vs. concreteness. At one extreme one can ask very specific questions like what will be the result of this very specific experiment or future empirical measurement. At the other extreme, one can ask very abstract questions like “do grapes cure cancer” or “is the universe infinite”.
Very specific questions offer bettors the most protection against corruption in the judging process. Bettors need worry less about how a very specific question will be interpreted. However, subsidies of specific questions also target specific researchers pretty directly for funding. For example, subsidizing bets on the results of a very specific experiment mainly subsidizes the people doing that experiment. Also, since the interest of research patrons in very specific questions mainly results from their interest in more general questions, patrons should prefer to directly target the more general questions directly of interest to them.
Fortunately, compared to other areas where one might apply prediction markets, academia offers especially high hopes for using abstract questions. This is because academia tends to house society’s most abstract conversations. That is, academia specializes in talking about abstract topics in ways that let answers be consistent and comparable across wide scopes of time, space, and discipline. This offers hope that one could often simply bet on the long term academic consensus on a question.
That is, one can plausibly just directly express a claim in direct and clear abstract language, and then bet on what the consensus will be on that claim in a century or two, if in fact there is any strong consensus on that claim then. Today we have a strong academic consensus on many claims that were hotly debated centuries ago. And we have good reasons to believe that this process of intellectual progress will continue long into the future.
Of course future consensus is hardly guaranteed. There are many past debates that we’d still find to hard to judge today. But for research patrons interested in creating accurate info, the lack of a future consensus would usually be a good sign that info efforts in that area less were valuable than in other areas. So by subsidizing markets that bet on future consensus conditional on such a consensus existing, patrons could more directly target their funding at topics where info will actually be found.
Large subsidies for market-makers on abstract questions would indirectly result in large subsidies on related specific questions. This is because some bettors would specialize in maintaining coherence relationships between the prices on abstract and specific questions. And this would create incentives for many specific efforts to collect info relevant to answering the many specific questions related to the fewer big abstract questions.
Yes, we’d probably end up with some politics and corruption on who qualifies to judge later consensus on any given question – good judges should know the field of the question as well as a bit of history to help them understand what the question meant when it was created. But there’d probably be less politics and lobbying than if research patrons choose very specific questions to subsidize. And that would still probably be less politics than with today’s grant-based research funding.
Of course the real problem, the harder problem, is how to add mechanisms like this to academia in order to please the customers who want accuracy, while not detracting from or interfering too much with the other mechanisms that give the other customers of academia what they want. For example, should we subsidize high relevant prestige participants in the prediction markets, or tax those with low prestige?
Those promised quotes:
The Angel of Evidence … [is a] centralized nationwide prediction market. Anyone with a theory can list it there. … Suppose you become convinced that eating grapes cures cancer. So you submit a listing to the Angel: “Eating grapes cures cancer”. Probably most people doubt this proposition and the odds are around zero. So you do some exploratory research. You conduct a small poorly controlled study of a dozen cancer patients. … Gradually a couple of people … make bets … maybe saying there’s only a 10% chance that you’re right, but it’s enough. The skeptics, and there are many, gladly bet against them, hoping to part gullible fools from their money. …
These research prediction markets are slightly negative-sum. Maybe the loser loses $10, but the winner only gets $9. When enough people have bet on the market, the value of this “missing money” becomes considerable. This is the money that funds a confirmatory experiment. … Suppose the experiment returns positive results. … Either everyone is entirely convinced that grapes cure cancer. … Or the controversy continues, … [and] a bet can be placed on the prediction market for the success or failure of a replication. …
Who is going to bet for or against the proposition that the Higgs boson has a mass greater than 140 GeV? Only a couple of physicists even understand the question, and physicists as a group don’t command large sums of spare capital. So what happens is that scientific bodies – the Raikothin equivalent of our National Science Foundation – subsidize the prediction markets. … They donate $1 million to the Angel of Evidence to make the prediction market more lucrative. Suddenly the market is positive-sum; maybe you lose $10 if you’re wrong, but gain $11 if you’re right. The lure of free money is very attractive. … “Science hedge funds” would try to figure out what mass the Higgs boson is likely to have, knowing they will win big if they’re right. Although the National Science Fund type organization funds the experiments indirectly, it is the money of these investors that directly goes to CERN to buy boson-weighing machinery. ..
How are the actual experiments conducted? … Having any strong opinion on the issue at hand is immediate disqualification for a consultant scientist to perform a confirmatory experiment. The consultant scientist is selected by the investors in the prediction market. Corporate governance type laws are used to select a representative from both sides. … Then they will meet together and agree on a consultant. If they cannot agree, sometimes they will each hire their own consultant scientist and perform two independent experiments, with the caveat that a result only counts if the two experiments return the same verdict. …
The consultant … decides upon an experimental draft and publishes it in a journal. … It is the exact published paper that will appear in the journal when the experiment is over, except that all numbers in the results section have been replaced by a question mark. … First, investors get one final chance to sell their bets or bow out of the experiment without losses. … This decreases the amount of money available for the experiment. That comes out of the consultant scientist’s salary, giving her an incentive to make as few people bow out as possible. … Second, everyone in the field is asked to give a statement (and make a token bet) on the results. This is the most important part. .. When the draft is published, if you think there are flaws in the protocol, you speak then or forever hold your peace. (more)