The Prediction Exchange: A New Way to Promote Progress in the Sciences and Useful Arts
Abstract
Copyright and patent law promote only superficial progress in the sciences and useful arts. Copyright law primarily encourages entertaining works, whereas patent law mainly inspires modest improvements in practical devices, materials, or processes. Neither form of intellectual property does much to encourage basic research or development of natural, social, or mathematical discoveries. To promote those sorts of fundamental advances, we instead rely on hard-won grants and rare prizes.
This paper introduces the prediction exchange as a better way to promote fundamental progress in the sciences and useful arts. As a species of information market (also known as "idea futures," "prediction," or "decision" market), the prediction exchange would provide a forum for the buying and selling of claims about the future. Specifically, the exchange would promote transactions in a variety of prediction certificates, each one of which would promise to pay its bearer in the event a particular claim about science, technology, or public policy comes true.
Because it would reward accurate answers to unresolved questions, a prediction exchange would encourage essential discoveries about nature, math, and human society. Researchers and developers in those fields could count on the prediction exchange to turn their insights into profit. Compared to copyrights or patents, therefore, a prediction exchange would promote more fundamental progress in the sciences and useful arts. Furthermore, and in contrast to copyrights and patents, a prediction exchange would not impose the deadweight social costs of legally restricting access to public goods. To the contrary, the exchange would generate a significant positive externality: Claim prices that quantify the current consensus about important questions of science, technology, and public policy.
This paper measures copyright and patent law against the Constitution's call for promotion of "the Progress of science and useful Arts," to find those traditional forms of intellectual property lacking. It then describes how a prediction exchange would work, and why it would succeed where copyright and patent law have failed. Given that it offers large net public benefits, why doesn't a prediction exchange already exist? Because it remains for now a largely unknown and legally risky institution. This paper aims to ameliorate the first problem by explaining the hows and whys of a prediction exchange. To help us move from theory into practice, moreover, the paper closes with a proposal about how to ensure the legality of prediction exchanges under U.S. law.
Tuesday, November 15, 2005
A New Type of Intellectual Property?
I earlier alluded to my plan to write a paper on how information markets can compete with patents in encouraging innovation. Since then, I've decided to expand the analysis to discuss copyrights, too. I wrote up an abstract of the proposed paper and applied to present it at the American Association of Law Schools' 2006 Workshop on Intellectual Property, in Vancouver, B.C. I offer it, here, as good grist for your critical mill:
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8 comments:
I predict that the explanation for dark energy is going to involve shadow branes and that supersymmetry will be disproved. Could I make money on that? That will be a very expensive prediction to test, possibly requiring the building of something more expensive than CERN. Does this the kind of science have a place in an idea market scheme?
This is a great idea. Companies who would benefit from the invention of a widget could hedge their risk by betting that a widget will not be invented. Meanwhile, inventors could bet that a widget will be invented and benefit if they (or someone else) invents it.
An interesting corollary of this, I think, is that it would encourage collaboration far more than the current system. Unlike patents or academic prizes, this wouldn't be winner-takes-all -- competing inventors could benefit even if someone else beats them to the punch. It seems that this would reduce disputes over idea "ownership," as well as the fear that collaborating or publishing too soon could allow someone else to steal the glory. (Consider Andrew Wiles' secretive, nearly paranoid decade of work on Fermat's Last Theorem.)
If I solve part of a problem, under the current system, I have an incentive to keep my partial solution secret, rather than sharing it through publication or collaboration. This is because I hope to solve the rest of the problem and claim the prize, and I'm worried that someone else might "steal" my partial solution and finish the problem himself -- reaping all the rewards and leaving me with nothing. With an "idea futures" market, however, I have a strong incentive to move the problem closer to completion by publicizing my results as soon as possible.
Very interesting stuff! Can't wait to see the final paper.
It is an excellent idea. Although the people involved with such research tend to be very motivated anyway, the funding, collaborative and hedging aspects seem to have significant potential. The "insider problem" is a lot more palatable with this frame, but consider some extreme cases.. Say the Cold Fusion Dec2030s are trading at 50% and a physicist at a large university or corporation has a sudden discovery, moving their belief to nearly 100%. Within an hour, the institution takes the maximum possible position (possible going from short to long), much to the misfortune of their counterparties. How exactly do you quantify the difference between that case and acceptable ones, or do you think that case is perfectly fine -- good for them, they deserve it?
Jason Ruspini
A lawyer friend points-out that if an Exxon Mobil physicist were to discover cold fusion tomorrow, it would be perfectly legal for them to do with crude oil futures what i described in the example above.
Producers and users constantly trade on "inside" information in futures markets, but my example strikes me as qualitatively different, and the possibility of such large price jumps will be higher with prediction markets, so perhaps this issue will need to be reconsidered.
Murky: Yes. You don't have to test it yourself, though; you need only correctly predict, perhaps by dint solely of theory, what experiments will confirm.
Ari: Thanks for your encouraging words. I agree that a prediction exchange *might* encourage collaboration. But it occurs to me that it might also encourage head-fakes. Take, for instance, Jason's example of Exxon discovering that cold fusion works. They might well issue a paper saying the exact contrary, driving down the price of the "Cold Fusion Works" claim, before snapping up the claims at a discount. So the truth comes out, eventually--but only after a bit of strategic misinformation. Happily, though, the innovator (Exxon) gets rewarded.
Jason: You offer a good hypo, which I borrowed above in replying to Ari. To address it more directly, I'd say that I'm content to let Exxon not only snap up true claims at a discount; I'm content to let them mislead other investors before so doing. Those sorts of things happen in other markets, now, to no systemically bad effect. And, anyhow, I don't think any attempt to cure such phenomena will do more good than harm.
My too cryptic point about the expense of testing was to question the societal benefit or rationale of allowing such a bet. I don't see how it would advance the useful arts in that instance. I remain skeptical about the possibility of benefitting science with such a market, but I'm not so skeptical about the possibility of harm.
Cute idea. But who the hell will decide whether a prediction is "correct" or not? See Thomas Kuhn, The Structure of Scientific Revolutions.
winston churchill, eh?
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