The Real Power of Artificial Markets

Authors: David M. Pennock, Steve Lawrence, C. Lee Giles, Finn Årup Nielsen

Assessing the probabilities of future events is a problem often faced by science policy makers. For example, CERN, the European laboratory for particle physics, recently had to judge whether the probability of discovering a Higgs boson was high enough to justify extending the operation of its collider (see Science, 22 Sept., p. 2014 and 29 Sept., p. 2260). At the Foresight Exchange (FX) Web site, traders can actually bet on the outcomes of unresolved scientific questions, including whether physicists will discover the Higgs boson by 2005. The going price of the security (0.77 as of 24 Jan) can be seen as the market's assessment of the probability of the particle's discovery. FX is only a game, run with play money (FX dollars). Empirical studies [1], laboratory investigations [2], and policy proposals [3] argue that prices of real-money securities do constitute accurate likelihoods, since traders have strong (monetary) incentives to leverage pertinent information. But can we place legitimate credence on the accuracy of FX prices, which are determined solely through competition in a play-money market game?