New 'Idea Market' Enters the Gray Area Between Trading and Betting

The operator of a new "dot org" startup is developing an intriguing betting site that would give scientists an opportunity to bet on idea futures. You're no doubt wondering what an "idea market" is, and we've got the answer. "A market in science claims would offer a very powerful social benefit. By quantifying the current consensus on difficult questions of science, technology, and policy, it would give scientists, reporters, and lawmakers very useful information. The market would, in other words, generate a positive externality," explains the founder of Simon Market, Tom Bell.

Bell, currently a visiting professor with the University of San Diego School of Law and an adjunct professor with the Cato Institute, says the idea futures site he's developing would target scientists wanting to wager real money on scientific ideas or claims. The late Dr. Julian Simon, a scholar who worked to debunk scientific misconceptions, as well as the work of Dr. Robin Hanson, who developed the theory behind idea futures, inspired Bell to develop the Simon Market.

The site, says Bell, would let experts "put their money where their mouths are" when they buy or sell coupons payable when or if a particular claim should come true. In a sense, the site would operate much like an online bookmaking site, something that hasn't been legalized in the United States. Even so, Bell, although he's only just become his research, believes that his site would probably be legal to operate in the United States. "A market in claims solely about objective and natural facts would not qualify as gambling under most states' statutes," he argued.

As explained in legal authority Anthony Cabot's Internet Gambling Report III, gambling is defined as follows:

Generally, a bet or wager occurs when a person risks something of value on the outcome of an uncertain event; (1) in which the bettor does not exercise any control; or (2) which is determined predominantly by chance.

Using Cabot's definition, Bell explains why the Simon market is probably legal: "First of all, claims about objective natural facts are not based on uncertain events. Indeed, some such claims--such as the mass of a neutrino--are not based on an event' at all. Even ones that are based on events--such as say, whether global warming has begun--may not turn on the outcome of an 'uncertain' event. The event in such cases may have already taken place and it remains only for us to arrive at some consensus about interpreting it."

He cautions, "I'm not claiming this of all science-related claims, mind you. I'm just saying that some properly-phrased claims could escape the definition of 'bet or wager'."

"Secondly," Bell continues, "and more fundamentally, a market in science claims should not qualify as gambling because it does not at all raise the same policy issues as gambling does. It does not rely on 'artificial' risks created solely for entertainment value. It will almost certainly not give rise to problems of 'compulsive' gambling because its subject-matter will prove too dry and the bets too slow to resolve."

Another scholarly endeavor, the Iowa Electronic Market (IEM) at www.biz.uiowa.edu/iem, is a futures market (operated by the University of Iowa) that allows traders to wager on the future outcome of economic and political events. Although the site isn't technically considered a betting site, it's precedent gives Bell some hope and concerns. For the IEM to operate, the Commodities Futures Trading Commission (CFTC) issued a "no action letter" that requires the site to operate under certain guidelines. Bell sees some similarity between the IEM site and his Simon Market site, calling it a "tough call" whether his site would fall under CFTC regulation.

"CFTC regulation has the advantage of preemption state gambling laws," Bell acknowledged. "It brings with it, though, a huge administrative burden. Getting a 'no-action' letter such as that enjoyed by the IEM may not be an option for the politically unconnected and at any rate would probably require that wins and losses be capped at a rather low rate." In Bell's view, even scientists appreciate winning big money.

Bell outlined several elements courts have identified for a futures contract, including: the use of a standardized agreement; a provision for future delivery of a specified quantity and quality of a commodity; a provision for offsetting transactions without delivery of the commodity; an expectation by the parties that the contract will be offset prior to delivery; and a determination of price at the time the contract is made.

"The sorts of claims traded on the Simon Market would arguably satisfy those elements," Bell said. "The only real question is whether a coupon payable in the event a particular claim turns out true or false constitutes a commodity. Perhaps so. Section 2(a)(1) of the CEA defines 'commodity' to include 'services, rights, and interests.' Commentators have concluded that futures contracts can now be written on intangible items."

While Bell has just opened his site at www.simonmarket.org, actual betting is still a dream. "All I aim for is a low-key, academic site that media folks cite once and a while," he acknowledged. It will be interesting to see how scientists perceive his site, and whether they'll be willing to wager on the future of a scientific claim.