In Science 291:
987-988, February 9 2001 (Letters)
Assessing the probabilities of future events is a problem often faced
by science policymakers. 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 (http://www.ideosphere.com/),
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 , laboratory
investigations , and policy
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?
To an extent, yes. We find that FX prices strongly correlate with
observed outcome frequencies. We collected historical price
information for 161 expired securities, corresponding to questions
that had been definitively answered ``yes'' or ``no'', recorded prices
thirty days before expiration, sorted securities by price, and grouped
them into six price ranges. The figure plots observed frequency (the
actual number of ``yes'' securities divided by the total number)
versus average price (in FX dollars) for each group. Error bars
display 95% confidence intervals, under an assumption that outcomes
are independent Bernoulli trials with a uniform prior. We find similar
accuracy in another play-money market called the Hollywood Stock
Exchange (http://www.hsx.com/). Prices of
securities in Oscar, Emmy, and Grammy awards correlate well with
actual award outcome frequencies, and prices of movie stocks
accurately predict real box office results.
NEC Research Institute, 4 Independence Way, Princeton, NJ 08540, USA.
School of Information Sciences and Technology and Department of Computer Science and Engineering, Pennsylvania State University,
University Park, PA 16801, USA. E-mail: email@example.com.
Finn Årup Nielsen
Informatics and Mathematical Modelling, Technical University of Denmark, DK-2800 Lyngby, Denmark. E-mail: firstname.lastname@example.org.
R. Forsythe, T. A. Rietz, T. W. Ross,
Journal of Economic Behavior and Organization 39, 83
C. R. Plott and S. Sunder,
Econometrica 56(5), 1085 (1988).
R. D. Hanson,
Social Epistemology 9(1), 3 (1995).
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