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Introduction

The  Foresight Exchange (FX) is an implementation of Robin Hanson's Idea Futures concept:  a market in which people invest for and against claims about future events. This article gives an introduction to Idea Futures, then describes the Foresight Exchange's architecture and features at a high-level.. The bulk of the paper focuses on experiences with and lessons learned from the game. The growth of the user community is first discussed, leading to an examination of why the game did not maintain the growth rate of the prototype site that it replaced. Creating claims that people feel comfortable trading in is shown to be a daunting task, despite a rigorous claim creation process. The market's predictive success is analyzed, revealing a bias in the way many claims end up being priced. We note problems inherent to FX's play money economy, such as cheating, collusion between players and the choice between having a restricted or open money supply.  Trading strategies, claim topic trends and related work are also described. The paper finishes with an overall assessment of the viability of Idea Futures based on our experiences and a sketch of possible future directions for the game.

The Idea of Idea Futures

Hanson's Idea Futures concept (1990,1992) describes a market in which the commodities traded are not shares or conventional futures contracts, but ideas. More precisely, an Idea Futures market is made up of claims about future events, phrased in such a way that the claims can be judged true or false by a specified time. A simplified example of a claim might be:

Traders buy and sell shares in the claim, effectively investing "for" or "against" it. Trading prices are percentages of the asset that backs the share; in a market in which shares are backed by dollars, prices would range from 0 to 100 cents, the numbers roughly corresponding to the market's consensus of how likely the claim is to be judged true. At the claim's due date, a judge, normally assigned when the claim was created, judges the claim either true or false. Traders holding shares on the winning side may redeem them for one asset (e.g., $1.00) each; those owning losing shares receive nothing.

The major rationale for such a market is to provide what Hanson, writing on the subject of scientific research, calls an "honest consensus". In science, as in other areas, the attention an idea receives sometimes has less to do with its merit than with how well it meshes with conventional wisdom or pleases those in positions of power. Research funding is difficult to allocate objectively, but only partly because of the uncertainty inherent in evaluating any prospectus. Scientists are people, and their judgment is subject to self-interest and other biases, just like the rest of us.

Putting ideas into a marketplace recognizes this and gives people incentive to overcome it. Someone spending real money on an Idea Futures claim share has good reason to consider the claim's likelihood objectively, regardless of how they feel about it personally. The marketplace does not often reward those who trade based on wish-fulfillment or the desire to make a statement.

More details on the structure of an Idea Futures market and its trading process can be found in the appendix.
 

IF: The First WWW Implementation

In late summer 1994, the members of Daemon Maxwell became interested in Idea Futures. Sean Morgan and Mark James developed a prototype implementation of an Idea Futures market (abbreviated as IF) for the World Wide Web. The market used HTML pages as its interface and let people create and trade on claims in three broad categories: Science, Math and Miscellaneous. The first trades occurred in late September and soon the market, augmented by mailing list discussion groups, was seeing heavy traffic and winning awards. In 1995, Daemon Maxwell presented a paper at the Extro2 conference (Kittlitz, Hewitt, McFadzean, James & Morgan, 1995) describing the implementation and the market behavior.

Unfortunately, IF's prototype code did not scale well to the increasing number of users, leading to frustrating waits for order processing. As well, the group wished to commercialize the game, but this promised to be complicated because Sean and Mark had written it while employees of the Alberta Research Council, using that company's equipment. To avoid such potential conflicts of interest, and to address the deficiencies of the IF system, we decided to re-implement it. Design and implementation of the Foresight Exchange began in the fall of 1995.
 

Features of the Foresight Exchange

The Foresight Exchange is substantially different from the IF implementation; this section describes the exchange's high level structure and key features, with an eye to major differences from its predecessor.

General Structure

The Foresight Exchange (FX) is structured to avoid the performance and scalability problems of IF. The following diagram shows the basic components and how they interact; it is take from Sean Morgan's high-level design.  In IF,  incoming requests from players' browsers accessed the database files directly after acquiring necessary locks, an approach that led to extremely long waits when many requests happened concurrently. Moreover, time-consuming operations such as price plot generation were done within the scope of the lock.

In FX, a clearinghouse has only one database server, and it only accepts one request at a time, thus removing the need for locks and simplifying the caching of frequently-retrieved data. It also returns "raw" data, leaving post-processing and formatting  to client programs. Such programs do not connect to the database server directly, but instead go through a "connection server", a thin intermediate process that protects the database server from rogue clients. A connection server is created for each client, and stays alive as long as the client needs, but only one connection server can be talking to the database server at a time.

Major Features

• Public Trading Protocol: Clients talk to connection servers, and connection servers to the database server, using the Foresight Exchange Transport Protocol (FXTP), which allows for custom interfaces to be written. The FX system comes with four distinct interfaces: web, telnet, email and raw connection server, all which use the protocol; players select the interface that best matches their bandwidth and preferences. Players have written programs to trade and gather data, and recently a market-maker 'bot has been introduced.
• Play Money Economy: To avoid possible legal complications, FX uses a play-money currency, the "credibll", often abbreviated using the standard dollar sign. Players do not bring money into the game and exchange it for credibills, but instead receive a weekly allowance of $50 (i.e., 50 credibills), up to a maximum (originally) of $1000. The IF system had no allowance cap, which had been a source of controversy.
• Player Scores: A score is maintained for each player, to give an indication of how well he/she is doing at the game. The formula used, and its ramifications, are discussed later in the paper.
• Claim Categories & User Profiles: The three claim categories supported by the IF server quickly became inadequate for filtering purposes. FX has more than twenty categories and sub-categories, including science, finance, entertainment and politics. Users can set up profiles of the categories they're interested in, allowing them to focus a specific subset of claims. Built-in profiles are mapped to the claims which the user has holdings or booked orders in. The combination of categories and profiles greatly improves the game interface, while at the same time reducing the amount of data transferred from the server.
• Public vs. Private Accounts: In FX, it is possible to see the trading history, holdings and booked orders of any player, or more exactly, any player's nym (similar to "nickname", taken from Nick Szabo's smart contracts glossary). This helps detect collusion and, since email addresses are by default public as well, allows players to cross-check opinions posted to the mailing lists with actual trading activity. But in some cases, having a public email address may not be a good idea. For example, an Apple employee who wants to bet on the YES side of a claim predicting Apple's demise as a company is unlikely to want his apple.com address visible! For such reasons, it is possible to create an anonymous, or private, account that does not reveal the email address. Private accounts may not create or judge claims, under the assumption that the community might need to contact claim owners and judges.
• Mailing Lists: Two mailing lists are integrated with the game: fx-propose (described below) and fx-claims, to which claim activation and judgement notices are posted. The fx-discuss list, for general discussion of the game and its claims, is where the FX community has really emerged as an entity. Fx-devel focuses on development suggestions and plans, while fx-admin is used to report server downtimes and other general administration notices. (To subscribe to one of these lists, send an email with the line "subscribe fx-discuss" [for example] in the body to majordomo@ideosphere.com.)

The Claim Creation Process

The most significant conceptual change in FX was the new claim creation process. Claim creation was very ad hoc in the IF game. Any player with 50 credibills could create a claim, and many did. A judge would have to be found eventually, but was not required at time of creation, leading to vague, sometimes incoherent claims. In FX, claim creation is a far more rigorous process. A proposed claim does not become active immediately; instead, the proposal is sent to the fx-propose mailing list to allow other players to critique it. The creator may edit the claim while it is in this proposed stage, and any changes are posted automatically to the mailing list. As well, a judge must be found for the claim, and must approve it using a special FXTP command. Once a claim has both been approved by its judge and undergone a seven-day commentary period from the date of its original proposal, it becomes active for trading.

As in IF, claims about sporting events are disallowed, under the assumption that there are other ways to discover their odds. Most other subjects are fair game for claim creation, though the administrators reserve the right to disallow claims they think are in poor taste (e.g., "dead pool" claims).

Experiences

Overall Growth of the System

By June, 1996, the original Idea Futures web game had over a thousand registered users, far beyond the number it was really capable of handling. Moreover, the last programmer at the Alberta Research Council who knew how to maintain the system was leaving the company, at which point the game would be shut down.  We had been beta-testing the Foresight Exchange for several months, and by July we had all the functionality needed to go live. Due to time constraints and ownership issues (it wasn't clear who really owned some of the server data, ARC or the developers), we decided not to transfer user scores and net worth to the new server. Claim data was brought across, and accounts were created for those IF players who had been claim owners or judges, but otherwise FX represented a fresh start.

Our expectation was that the greater functionality and scalability of FX would make up for the loss of user data, but many IF players saw instead that the nearly two years of effort they'd expended to create good scores and portfolios disappeared almost literally overnight. Bugs and other teething problems in the early weeks of FX's life aggravated the situation, and a significant number of IF players dropped out of the game. In retrospect, we should have warned the user community about the ramifications of the transition beforehand instead of acting unilaterally, a mistake we've tried to avoid repeating.

In general, FX's growth has been considerably slower than that of the original game. Trading frequency dropped sharply after the transition, and only fairly recently has started to rival that of IF. Over 2500 players are now registered, but many never trade or trade only a few times before losing interest.  Though this problem also afflicted IF, FX's population growth is much flatter.

There are several reasons for this. When IF debuted in 1994, it quite likely was the first trading system on the Internet -- truly an accomplishment. That the commodities traded were different from those of conventional markets only added to its appeal. Since then, the number of high-quality sites has exploded; several have Idea Futures-like games -- offering prizes to successful traders -- and there are numerous discount brokerages and online gambling sites that allow people to invest and/or wager real money. And all of these are but a fraction of the diversions available.

Compared to many sites, FX looks plain. Its user interface is designed to be functional rather than pretty, and can appear confusing and intimidating to the new user. The mechanics of the market, particularly the concept of "NO" shares, are not very intuitive and can be difficult to understand (people either seem to grasp the idea immediately or have a great deal of trouble with it, and a background in finance or mathematics doesn't necessarily mean a person will fall into the first category). Achieving a good score and the respect of the community are the only rewards for trading well.

Viewed from this perspective, it's hardly surprising that the FX community is small. On the other hand, the kind of people that are interested in the game are non-average indeed, possessing a diverse range of knowledge and experience. Fx-discuss rarely suffers from off-topic or argumentative posts, and makes for fascinating reading.  If some of the other Idea Futures sites (listed on Hanson's Idea Futures page), with claims about sporting events and celebrity popularity, can be termed low-brow, then FX definitely takes the high-brow approach.
 

Claim Creation and Judgement: Still an Art

In the paper describing Daemon Maxwell's experiences with the IF game, we noted that creating good claims seemed to be the biggest challenge in an Idea Futures market. IF provided no mandatory claim proposal stage, allowing anyone with fifty credibills to create a claim without forethought. As well, the creator could potentially change the wording of the claim after it started trading, and could also act as judge for the claim.
 
To mitigate these problems, FX has a much more stringent claim creation process. Claim proposals do not become active for trading until after a seven-day waiting period has elapsed and a player other than the owner has agreed to judge the claim. During the waiting period, the proposal and revisions to the proposal are automatically posted to a mailing list for discussion. Once the waiting period has elapsed and the judge has approved the claim, its wording is frozen.

Nonetheless, creating good claims is still very difficult, the most difficult part of the game, according to many players. The basic problem is that a claim writer is faced with two somewhat contradictory requirements: conciseness and precision. A claim with a long, detailed description is less likely to attract players than one that seems simple; unfortunately, simple claims with "obvious" criteria for judgement often turn out to be not so straightforward. Time and again, situations or ambiguities that the claim creator didn't foresee have been noted by the community, placing the onus on the judge to clarify his/her interpretation of the claim.

To facilitate this, the concept of a judge's statement was added to the game about eight months after it went live. A claim's judge can create and update a statement about how he/she intends to judge the claim; the statement appears on the claim's detail page. This has helped clarify many claims, but even judge's statements can be ambiguous. A fairly common statement, referred to by some as the "Standard Ambiguity Clause", has emerged:

Standard ambiguity clause: If the wording is found to be ambiguous I will judge on the basis of the obvious intent. If the intent is
ambiguous I will judge on the basis of precise wording. If both are ambiguous or if both are clear but conflict, I will look for a
solution that causes the least damage to FX as a market and game.

This sounds reasonable, yet to some extent only moves the possible uncertainty: a prospective investor is left wondering what the judge considers to be "precise" wording and "obvious" intent -- how is the presence of ambiguity established? Of course, many judges have more detailed statements, but in general these use one of two competing approaches to judging: based on intent or based on wording.

Those who prefer judgements based on intent argue that the meaning, or "spirit", of a claim is usually obvious, and that its judgement should reflect this meaning, not some technicality or loophole caused by ambiguous wording. Those who support judgement based on wording alone reply that there is often more than one "obvious" intent of the claim's wording; a judgement that one player would consider to be in the spirit of the claim might surprise and anger another. They believe that the claim's literal wording is the only common ground for judgement, even if the results are not would the creator originally intended.

Of course, proponents of the claim's "spirit" would counter-argue that there is no such thing as the "literal" meaning of a claim: by definition, the reader interprets the words of its description, and interpretations may differ. The debate has been vigorous, with no consensus emerging. At this point, it's not clear which approach, if either, is desirable.

To be fair, many of the claims that have sparked debate over how they should be judged were those imported from IF; FX claims are generally much better-worded, thanks largely to the new approval process. But though this has lessened the problem, it hasn't eliminated it.

FX's Predictive Success and Responsiveness

Despite a small number of  booked orders on many claims, the predictions of the FX market have generally been good, continuing a trend started with IF. Douglas Hubbard, a consultant specializing in risk assessment and forecasting in the IT industry, analyzed the performance of the market, as follows:

Interestingly, many players had suspected that such an effect exists. Termed the "50 cent bias" when it was first discussed in an IF mailing list, its most likely explanation is that the price structure of Idea Futures shares allows people to "push" prices near either end of the spectrum towards the middle. That is, if I wish to bid up the price of a claim trading at say, 3, it costs me 3 cents per share to do so. Someone who wishes to trade with me to keep the price down needs 97 cents per share (assuming they held no shares before the trade). Similar leverage exists for those wishing to drive down the price of a claim trading near 100. Thus, market consensus near the price extremes is hard to achieve, because a few players with contrary opinions can exercise considerable weight; they may do so because they genuinely disagree with the consensus or because an artifact of FX's score algorithm makes such behavior a viable trading strategy.

Hal Finney argued that the "50 cent bias", if it really existed, might not be a true bias at all, but instead a reflection of market uncertainty. To further characterize the phenomenon, Hal proposed the CRAK claim, which is to be judged true if any of six "crackpot" (i.e., very unlikely) claims comes true. His reasoning was:

CRAK is currently trading at about 20 as this article is written; the five claims it monitors are trading at 6, 15, 4, 5 and 13. Thus, the odds of none of them coming true are about 63%. In other words, if the claim prices are realistic, CRAK should be trading at 37, considerably higher than it actually is. This indicates that a bias does indeed exist.

(One more note on CRAK: the price soared in mid 1997, because a player announced he'd found a loophole in the wording of one of its constituent claims, Uran, that would allow an immediate YES judgement of both claims. The judge disagreed, and the price dropped back accordingly.)

As was the case with IF, the market incorporates new information very quickly. For example, the claim XLif (Extraterrestrial Life by 2050), reacted extremely quickly to NASA's announcement in August, 1996, that a rock originating from Mars contained evidence of organic compounds (see price plot).
.

Even with a small number of traders, trading play money, FX behaves very much like a real market. This sometimes works to the disadvantage of players who book orders but don't monitor the game frequently, because a claim's price may change quickly and radically as a result of new information, consuming booked orders as it moves up or down. Unlike real markets, FX orders do not have expiry dates, though this feature has been suggested. Other players view the situation as "caveat emptor" and think it should be left as-is.

Claim Trends

We identified several interesting trends in the original IF game: as expected, claims about scientific and mathematic events were common, since that was the intended focus, but there were also a large number of "disaster" claims, including one about the ultimate collapse of the universe, and several claims that referred to the system itself (e.g., "25 short-term claims by date X"). Financial and political claims were also popular.

To some extent, claims created in FX continue this trend. Many are scientific in nature or involve the proof/disproof of mathematical conjectures. Financial claims such as  DJIA (which seeks to predict the year-end Down Jones Industrial Average) generally attract interest, perhaps because they are usually unambiguous.  Some players argue that because other mechanisms -- the real stock markets -- effectively predict the same thing, such claims should be lumped in with sports claims and disallowed. Be that as it may, these claims have not yet proliferated to the extent of cluttering the exchange, and so don't seem pose a serious problem.

Disaster-based claims seem to be on the decline, though that may be because most of the obvious ones were created in the IF days. A number of Y2K claims have emerged in the past year or so:
 

...and so on. Though these may be the intellectual descendants of some (ignoble?) IF claims, they do have a use beyond idle speculation. Many people are concerned with what will actually happen at the start of the year 2000, and these claims try to shed light on that subject.  Still, in a real money market, it's likely that many claims would be used as a way of funding research, and there'd be less incentive to pose "Will bad thing X happen?" questions.

(A complete list of claims can be found here.)

Perils of a Play Money Economy

FX's play money economy introduces a number of problems that would not occur in a real-money market.

The Need for a Score

Each FX player has a score, given by the formula:

"Net worth" includes the player's cash balance and the value of his/her holdings; FX uses a claim's last trade price to determine its value for this calculation. "Fees out" include claim creation fees; "fees in" include judgement income. The algorithm is almost identical to that used by IF, except that in the earlier game a claim's bid price was used when calculating the value of holdings.

The score is an indication of how well a player is doing at the game; a score of 1.000 is average; anything above that is good, anything below, bad. The list of user accounts can be sorted by score, and many players take the score seriously, sometimes seriously enough to cheat for. Yet it is hard to imagine a real money market needing such a calculation in order to attract participants. When real money is used to purchase shares, one's "score" is simply return on investment, something FX's score algorithm measures only imperfectly. Indeed, players have pointed out that scores tend to converge towards 1.000 as more allowance payments are made, since these factor in both the numerator and denominator of the equation.  A score based solely on ROI would be much more realistic, but also more computationally expensive to calculate on the fly. Nevertheless, a ROI-based algorithm may eventually replace the current one.

Choosing Between an Open or Closed Money Supply

In the IF web game, players received an unlimited allowance of $50 a week. This led to fears that older players, especially those who were not invested heavily, could use their large cash balances to exert control of the market by exhausting the money of those who traded against them. As well, scores tended to be diluted by the allowance payments, slowly converging towards the average value of 1.0 as time went on. To mitigate these problems, FX uses a "closed" allowance scheme, originally capping the allowance at $1000 per player. An unanticipated effect of this policy, is that players tend to become less likely to create new claims and trade speculatively when they are no longer receiving a regular influx of cash. The cap was increased to 2000 credibills about a year ago to stimulate trade and claim creation, and people have suggested that the cap be removed entirely.

It may be removed at some point, but others have argued that the limited allowance has made them better traders than they would be if they could always rely on receiving fresh capital to work with. As well, not having a cap tends to dilute the effects of a player's actions. With one in place, "mistakes are more strongly disciplined and good guesses are more strongly rewarded" (Karl Evan Hallowell, personal communication).

Cheating and Collusion

A player's score increases as a result of good trading: buying low and selling high. To boost your score, it's possible to create multiple accounts, or collude with other players, in order to transfer wealth between accounts. The easiest way to do this is to pick a claim with few booked orders and have the accounts trade in it.  For example the "sacrificial" account(s) sell shares at a low price to the "blessed" account, then buy the shares back at a higher price, thus transferring money to that account.

This is almost entirely an artifact of FX's play money economy -- the costs to the "sacrificial" players are negligible compared to what they would be in real money market, after all, and a real money market is likely to be less thin, meaning that other investors could intervene and profit from the collusion attempt (e.g., by trading with the sacrificial accounts).. FX's score algorithm, at best a crude approximation of trading talent, is taken seriously enough that some players wish to boot their score artificially. There have been a number of collusion incidences, some quite subtle and involving many accounts. Because a unique email address is all that's required to open an account, it's difficult to limit players to just one, despite warnings on the account creation page.

Fortunately, FX's policy of an "open" ticker (the IDs of the buyer and seller appear on each ticker line) allows the user community to watch for such activity. All instances of cheating/collusion detected so far have been discovered by observant players, not the game's administrators. Owners of suspect accounts are sent an email describing the situation and are asked to explain themselves. If no explanation is forthcoming (and none usually is) the accounts are suspended.

Cheating thus represents one of the imperfections of FX's attempt to accurately simulate an Idea Futures market, but at the same time shows that the market can be self-policing.

Miscellaneous Topics

Automated Agents

The FXTP protocol allows players to write trading software. The first example of this was Markybot, a trading agent written by Jay Scott that uses Markov to model price fluctuations and trade according to those fluctuations. Markybot debuted in February, 1997, and has been active ever since. The 'bot did fairly well in its first year, averaging a score of 1.129, and is currently sitting at 0.989, technically below average but still better than many human players manage.

More recently, Neal Gafter has introduced a "market maker" 'bot based on Hanson's design. The market maker attempts to improve liquidity by placing both buy and sell orders in a claim to narrow the price spread, but is designed such that players cannot exploit it (e.g., force it to consistently lose money).  At this point, the 'bot hasn't been in use long enough to tell if it's really succeeding at its goal.

Trading Strategies

FX allows many  trading strategies. The obvious one is to buy shares you think are underpriced, or sell those you think are overpriced, then sit back and wait until events prove you right. For long-term claims, waiting for the judgement date may not be a viable option, so players may choose to divest their holdings once the claim price has moved enough for them to make a reasonable profit.

Trading in short-term claims is often more intense, because players know that the claim will be resolved relatively quickly. For volatile claims, one strategy is to place both buy and sell orders in the hopes of benefiting from price fluctuations in the claim, a practice that generally requires more time spent monitoring price changes than does a simple "buy and hold" strategy. It's also perfectly legal to place orders, then reveal new information about the claim via a mailing list post. After all, what's the advantage of inside information if you can't put it to good use?

Another strategy, first popularized in IF, is to pick a thinly traded claim and boost the price up or down (depending on whether you're buying or selling). Since claim holdings are valued on last trade price, this activity can increase your score, at least temporarily. Usually, however, other players will act to push the claim price back to what they think is reasonable.

Research and Associated Projects

FX and the user community that has grown around it has attracted attention from a number of researchers and other Internet sites. Rick Borovoy of the M.I.T. Media Lab is doing research in tools to support on-line dialogues. He is "...especially
interested in helping communities build richer collective understandings of complex opinions and issues.  To this end, I have begun exploring how technology can help two members of a community discussing a particular opinion locate this conversation in a larger space of people and opinions."  Because FX users have to make their opinions explicit (via trading), the game serves as a good field for his research. Rick has been augmenting hypermail archives of the fx-discuss list to provide more information to the message authors (e.g., "you replied to Author X, who has bet similarly to you on claims Y and Z"). Rick is working on publications based on his experiments.

Douglas Hubbard of Hubbard Ross, has invented a system called Applied Information Economics for helping executives make IT decisions, and has worked with such firms as Entergy, the Giga Information Group and the European Space Agency. He is interested in Idea Futures markets as a means for capturing probabilities of various outcomes. Douglas did an analysis of retired claims to gauge the accuracy of the market.

Vladimir Nuri's Memelink is a site for tracking the popularity of memes as they move through the 'net. He considers FX to be an interesting meme, and we arranged a cross-link between the sites. FX claims that have been proposed but not yet activated (e.g., those needing judges) are listed on a Memelink page, allowing people to vote for claims they would like to see open for trading. The votes can only serve as rough indication of preferences, since there is no way of preventing people from voting multiple times, but it's obvious from looking at the tallies that some claims are more popular than others.

Looking Back

Notwithstanding the limitations and biases resulting from a play money economy, the Foresight Exchange is a fairly realistic implementation of an Idea Futures market. What do our experiences with it say about the viability of the concept?

First, that the trading mechanism can be hard to understand. People have difficulty with the idea of "No" shares and how they relate to "Yes" shares. Creation of shares, via a player buying a Yes/No pair from the bank in order to sell part of it to another player, is also non-intuitive, though likening it to taking a "short" position in a conventional market sometimes clarifies the process for someone with an investment background.  Some argue that these problems can be minimized given the right user interface, but although their point is well-taken, various interfaces have been tried both within FX and some of the trial markets based on it, and none has proved entirely satisfactory. It seems that part of the complexity is inherent to the trading process itself, raising doubts as to how broad a user base an Idea Futures market could expect to have.

More seriously, creating good claims, claims that are precise and unambiguous while still being readable, has proven to be a challenge. FX's claim creation process attempts to filter out obviously flawed proposals, but ambiguities and loop holes are found nonetheless in claims that initially appear solid. The onus is then placed on the claim's judge to resolve the problem; her decision may vary greatly, depending on whether she rules based on the claim's wording or on its perceived intent. Thus, a player must assess not only  the quality of a claim's wording, but also the disposition of its judge before deciding whether to trade in it. Little surprise, then, that claims about simple, clear-cut events tend to generate the most traffic Unfortunately, these are seldom the interesting scientific or policy claims that Idea Futures was designed to shed light on. Given that the market's predictive value depends on how comfortable people are trading and booking orders, a good claim creation and judging process is the single biggest hurdle to its success.

The Idea Futures trading mechanism may inherently bias claim prices  towards the middle (i.e., 50%) because of the leverage available to traders who wish to push a claim's price away from the extremes. In practice, this may not be a terribly serious problem, because the truly interesting claims are likely to be those around which there is considerable uncertainty rather than those that are almost certainly true or false. It's also possible that the bias may be somewhat mitigated in a real money market, where people are less likely to act contrarian and liquidity will presumably be higher.

Added to the above issues is the simple fact that a real money Idea Futures would likely contravene existing gambling laws -- certainly a disincentive to either run or trade in such a market! Nevertheless, such a goal is worth pursuing. The Foresight Exchange shows that even a play money system can attract serious participants to both trade in and create interesting claims, and that the resulting market does provide information that is, on the whole, accurate. Though there is obviously much more room for experimentation, our experiences with FX indicate that the concepts of Idea Futures are valid.

Future Plans

Now almost three years old, FX has held up remarkably well as more users have registered and trading volumes increased. The game is far from perfect, however and, like any good experiment-in-progress, is changing as time goes by. Some of the major initiatives include:

• voting system: Players often have suggestions for rule changes or new features, and these are frequently discussed on the mailing lists. Alas, consensus is rarely achieved. To help prioritize development efforts we introduced an Approval voting page at the beginning of the year. The first, "meta", vote was to help decide what topics future votes should be about. Players are allowed to create options, and vote for all options they support (a key feature of Approval voting). The winner was "rewards for claim owners/judges", and was the subject of the second vote. At this point, it's unclear whether the current system  is an improvement over the mailing lists -- over forty options on the topic were proposed! The vote results are understood to be only advisory, and it's likely that further work will go into the voting implementation before long.
• re-implementation: Although the software shows no signs of reaching the limits of its performance, a redesign is in the works to address some of its deficiencies, which include lack of a good query facility, reliance on the UNIX operating system (some would hardly consider that a deficiency) and loss of code organization after years of feature additions and re-development. When the new version is ready, existing user data will be ported to it, the goal being a smooth, painless transition, precisely what did not occur when IF changed to FX.
• trials in industry and academia: several companies and universities are using the software on a trial basis is a probability-gathering tool. Despite the unfamiliarity of the concepts, and the requirement of a relatively large number of users for accurate markets, some of the trials have yielded encouraging results.
• a real-money market: the true test of an Idea Futures market would come when real money is used to invest in the games, but the murky legality of such an enterprise is certainly a worry. However, we remain alert for ways of making it come about...

The directions FX goes in, and how quickly it travels, are somewhat constrained at the moment due to resource limitations.  Ideosphere Inc. and Kumo Software Inc, companies that at separate times helped fund development, are now both defunct, meaning that FX is basically a hobby of the administrators (with bandwidth generously supplied by Merak Projects, via David McFadzean). But as hobbies go it is uniquely challenging and stimulating, and we look forward to see where it will take us.

Acknowledgements

 The author would like to thank those who contributed to this paper, by suggesting topics, furnishing anecdotes or proof-reading: Karl Evan Hallowell, Patrik D'haeseleer, Robin Hanson, Douglas Hubbard, David Blenkinsop, Terry Sikes, Don Bixler, Richard Woods and Lawrence Crowl..
 

Appendix: Details of an Idea Futures Market

The Structure of an Idea Futures Market

An Idea Futures market consists of number of elements:

• claims about future events;
• banks that issue share pairs (see "Trading", below) in claims in exchange for an asset (e.g., a dollar) and that redeem pairs for an asset;
• clearinghouses that match buy and sell orders for shares;
• claim creators who sponsor new claims;
• traders who buy and sell shares with each other;
• judges who judge a claim true or false at its due date.

Not all roles are distinct: some implementations may conflate banks and clearinghouses, for example, and traders may wish to create or judge claims. Normally, however, the judge of a claim is prevented from trading on it to prevent conflict of interest.

Typically, costs will be associated with creating a claim; banks and clearinghouses may demand fees for supporting/listing it, and a judge having a reputation for fairness may expect remuneration for his/her efforts. Alternately, the judging fee may partly financed by a percentage of the claim's capitalization, or if necessary, by audit lotteries (Hanson, 1990).
 

Trading in an Idea Futures Market

When a claim is created, no outstanding shares exist for it. Traders place buy and sell orders, and eventually the prices of  two such orders will match. At that point, the following occurs:

1. The trader who placed the sell order buys the required number of share pairs from a bank for the price of one asset each. The shares in each pair are termed YES and NO, representing a position "for" and "against" the claim, respectively.
2. The seller sells the YES shares to the buyer at the agreed upon price.
3. The buyer now has the YES shares, and the seller has the NO shares.

For example, suppose a claim uses dollars as its assets. John has a buy order for ten shares in the claim at a price of $0.35 each, and Mary, holding no shares, places a sell order for ten shares at the same price. Mary's account would purchase ten share pairs at a bank for $1.00 each (cost: $10.00), and sell the YES shares to John for $0.35 each (income: $3.50), leaving her with ten NO shares purchased at an effective price of $0.65 each (net cost: $6.50).

Effectively, a trader who sells shares she doesn't have is "shorting" the claim. However, unlike conventional market shorting, her gains or losses are bound by the range of possible share prices (0 to 100 percent of its underlying asset). Thus, the short seller can be required to maximally cover the short at the time of the trade.

Like most short sellers, Mary is hoping to sell high and later buy low.  Suppose the claim's price later drops, and she is able to buy ten YES shares at $0.20 each (cost: $2.00). She now has ten share pairs which she can redeem at the bank for $1.00 each (income: $10.00). She thus made $8.00 net from this trade, and spent $6.50 in the trade with John, leaving her with a profit of $1.50.
 

Claim Judgment

When the claim John and Mary traded on reaches its judgment date, its judge will render a true or false verdict for it. If judged true, John would receive $1.00 for every share he held. If judged false, John would receive nothing and Mary, assuming she hadn't disposed of her NO shares, would receive $1.00 for each of them.

Although claims with binary outcomes are the most common, scaled claims, in which share holders can receive a percentage of the share's asset (other than 0 or 100) are also possible. For example, a scaled claim may pay out YES shares at $0.57, meaning that NO share holders receive $0.43 per share.
 

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