Andrew Gelman’-s post (How do I form my attitudes about scientific questions?) got me attracted to this Wikipedia page:
In a standard application of the psychological principle of confirmation bias, scientific research which supports the existing scientific consensus is usually more favorably received than research which contradicts the existing consensus. In some cases, those who question the current paradigm are at times heavily criticized for their assessments. Research which questions a well supported scientific theory is usually more closely scrutinized in order to assess whether it is well researched and carefully documented. This caution and careful scrutiny is used to ensure that science is protected from a premature divergence away from ideas supported by extensive research and toward new ideas which have yet to stand the testing by extensive research. However, this often results in conflict between the supporters of new ideas and supporters of more dominant ideas, both in cases where the new idea is later accepted and in cases where it is later abandoned.
Thomas Kuhn in his 1962 book The Structure of Scientific Revolutions discussed this problem in detail. Several examples of new concepts gaining acceptance when supported by accumulating evidence are present in the relatively recent history of science. For example:
* the theory of continental drift proposed by Alfred Wegener and supported by Alexander Du Toit and Arthur Holmes but soundly rejected by most geologists until indisputable evidence and an acceptable mechanism was presented after 50 years of rejection.
* the theory of symbiogenesis presented by Lynn Margulis and initially rejected by biologists but now generally accepted.
* the theory of punctuated equilibria proposed by Stephen Jay Gould and Niles Eldredge which is still debated but becoming more accepted in evolutionary theory.
* the theory of prions -proteinaceous infectious particles causing transmissible spongiform encephalopathy diseases- proposed by Stanley B. Prusiner and at first rejected because pathogenicity was believed to depend on nucleic acids now widely accepted due to accumulating evidence.
* the theory of Helicobacter pylori as the cause of stomach ulcers. This theory was first postulated in 1982 by Barry Marshall and Robin Warren however it was widely rejected by the medical community believing that no bacterium could survive for long in the acidic environment of the stomach. Marshall demonstrated his findings by drinking a brew of the bacteria and consequently developing ulcers, subsequently curing himself with antibiotic medication. In 2005, Warren and Marshall were awarded the Nobel Prize in Medicine for their work on H. pylori.
For every new idea that has gained acceptance, there are far more examples of new ideas that were shown to be wrong. Two of the classics are N rays and polywater. However, most new ideas that have gained consesus were shown to be correct. This is because new ideas are typically being put forth by an individual and acceptance involves a great many individuals verifiying and/or duplicating scientific results.
In my view, climate science (which promoted global warming due to human production of CO2) is too young for us to trust the scientific consensus.
Previously: Climate Stats = Sausage Making
2003: Robin Hanson’-s PAM ends up on newspaper frontpages…- – [That’s when I got started in prediction markets.]
2004: James Surowiecki launches “-The Wisdom Of Crowds”-…-
2004: InTrade-TradeSports popularize “-Bush Re-Election”- prediction markets…-
2005: Wannabe prediction market entrepreneurs begin to question the CFTC about the regulation of real-money prediction markets…-
What I find interesting here is the time lag…- It took a while, it seems…-
More info about prediction market history…-
The New York Times:
[…] Long before political prediction markets sprouted on the Internet, election bets — whether the stakes were money or embarrassing public spectacles — were a ubiquitous part of the American political scene. The practice, which began informally with petty stakes in pool halls in the late 19th century, was by 1900 a multimillion-dollar trade on Wall Street.
In the 1916 contest between Woodrow Wilson and Charles Evans Hughes, about $160 million (in current dollars) was wagered on Wall Street’s outdoor “curb exchange.” By contrast, the 2004 election saw less than $25 million in contracts change hands over the outcome on the Dublin-based InTrade.com market, the largest and most active for-profit market for odds on current American elections. […]
“Until the 1920s, New York would have been the center of gambling in the United States, what Las Vegas is today,” said Paul Rhode, a professor of economic history at the University of North Carolina, Chapel Hill. Technically, gambling on the result of an election was — and is — illegal, but the laws were not widely enforced, and newspapers routinely reported the names of prominent bettors and the Wall Street firms that held the stakes. […]
With the rise of polling in the 1930s and a decline in public approval of political gambling, election betting fell out of favor. The expansion of horse-track betting in 1939, giving people another arena in which to place their bets, also weakened interest in the markets.
Reporters, too, could get political forecasts from increasingly reputable polling agencies. While The New York Herald Tribune still reported on the betting as late as 1940, the odds were relegated to an occasional small paragraph on the financial page, and neither bettors nor stakeholders were named.
The online prediction markets that cropped up around 2000 were less a dot-com revolution than a road back to the earlier form of election coverage.
“In a few years, we may regard the second half of the 20th century as the aberration in which the press used polls rather than markets to track political races,” Justin Wolfers, a business professor at the University of Pennsylvania’s Wharton School, wrote in an e-mail message. “And in the 21st century, we may return to the habits of the early 20th century, reporting on political races through the lens of prediction markets rather than polls.”
Justin Wolfers is right that a new form of journalism may emerge (I call it “-prediction market journalism“-). However, my view is that it will be a minor —-most news media will still be reporting polls rather than prediction market odds.
For an updated version of this document, see the “-paged”- Prediction Markets Timeline.
CHRONOLOGY &- HISTORY: Prediction Markets Timeline
#1. Historical Prediction Markets
According to Paul Rhode and Koleman Strumpf, prediction markets almost never got it wrong forecasting the 19 presidential elections that took place from 1868 to 1940. (PDF)
#2. The three Iowa Electronic Markets founders (Robert Forsythe, Forrest Nelson and George Neumann)
“-We ran our first market in 1988. We didn’t have regulatory approval at that point so we were restricted solely to the University of Iowa community. We had under 200 traders and under $5,000.”- –- [Robert Forsythe – PDF file]
- [CFTC’s no-action letter to the IEM – 1992 – PDF file]
- [CFTC’s no-action letter to the IEM – 1993 – PDF file]
#3. Robin Hanson
b) Until evidence of the contrary, it seems that Robin Hanson was the first to set up and run a corporate prediction exchange —-at Xanadu, Inc., in April 1989. See: A 1990 Corporate Prediction Market + Anonymity is important for employees trading on internal prediction markets.
c) Until evidence of the contrary, it seems that Robin Hanson was the first to set up and run a bunch of imagination-based prediction markets. See the Murder Mystery Evening described by Barney Pell —-circa June 8, 1989.
d) Until evidence of the contrary, it seems that Robin Hanson was the first to write a paper on prediction markets created and existing primarily because of the information in their prices (as opposed to markets created primarily for speculation and hedging).
Could Gambling Save Science? –- (Reply to Comments) –- by Robin Hanson –- 1990-07-00
Market-Based Foresight: a Proposal –- by Robin Hanson –- 1990-10-30
Idea Futures: Encouraging an Honest Consensus –- (PDF) –- by Robin Hanson –- 1992-11-00
f) Robin Hanson invented the concepts of decision markets (PDF) and decision-aid markets.
g) Robin Hanson invented a new market design (for the 2000-2003′-s Policy Analysis Market), the Market Scoring Rules, a mix between CDA and Scoring Rules —-now in use for most enterprise prediction markets and public, play-money prediction exchanges. Note that MSR is mainly used in a one-dimension version, but many researchers are interested in its combinatorial version.
#4. Other Pioneering Public Prediction Exchanges (Betting Exchanges, Event Derivative Exchanges) and Inventors/Innovators/Entrepreneurs
a) The Foresight Exchange was founded on September 22, 1994 by Ken Kittlitz, Sean Morgan, Mark James, Greg James, David McFadzean and Duane Hewitt. The Foresight Exchange is a play-money prediction exchange (betting exchange) managed by an open group of volunteers. It pioneered user-created and user-managed, play-money prediction markets. Any person can join the Foresight Exchange and interact with the rest of the Web-based organization. An independent judge (independent from the owner of the claim) should be appointed among the volunteers. [Thus, it’s not “DYI prediction markets”.]
b) The Hollywood Stock Exchange was founded on April 12, 1996, by Max Keiser and Michael Burns. See the patent for the Virtual Specialist. For more info, see: Is HSX the “longest continuously operating prediction market”??? –- REDUX
c) BetFair was founded in 1999 by Andrew Black and Edward Wray, and was launched in England in June 2000. As of today, BetFair is the world’-s biggest prediction exchange (betting exchange, event derivative exchange).
d) NewsFutures was founded in March 2000 and launched in September 2000 in France and in April 2001 in the US by Emile Servan-Shreiber and Maurice Balick. See: NewsFutures Timeline. NewsFutures was the first exchange to let people buy or sell contracts for each side of a binary-outcome event. The advantage of this design is that it avoids the need for “-shorting”-, a notion that tends to confuse novice traders. NewsFutures later extend that approach to deal with n-ary outcome events while implementing automatic arbitrage.
e) TradeSports was launched in Ireland in 2002 by John Delaney. InTrade was later purchased and became a non-sports prediction exchange (betting exchange). As of today, InTrade is the biggest betting exchange on the North-American market —-where betting exchanges are still illegal. As for TradeSports, it closed at the end of 2008, alas.
#5. The Policy Analysis Market Brouhaha
a) Robin Hanson was the main economist behind the 2000–2003 US DoD’-s DARPA’-s IAO’-s FutureMAP–Policy Analysis Market project. (For this project, Robin Hanson invented a new market design, the Market Scoring Rules.) On July 28, 2003, two Democratic US Senators called for the termination of PAM, the the big media gave airtime to their arguments, and the US DOD quickly ended the IAO’-s FutureMAP program.
b) The second branch of the 2000–2003 US DoD’-s DARPA’-s IAO’-s FutureMAP program was handled by the Iowa Electronic Markets and was intended to predict the SARS pandemic. (This project later gave birth to IEM’-s Influenza Prediction Market.)
#6. James Surowiecki’-s The Wisdom Of Crowds
a) James Surowiecki’-s book, The Wisdom Of Crowds, was published in 2004.
#7. Recent Public Prediction Exchanges (Betting Exchanges, Event Derivative Exchanges) and Inventors/Innovators/Entrepreneurs
a) US-based and US-regulated HedgeStreet was launched in 2004 by John Nafeh, Russell Andersson, and Ursula Burger. A designated contract market (DCM) and a registered derivatives clearing organization (DCO), HedgeStreet is subject to regulatory oversight by the Commodity Futures Trading Commission (CFTC). In November 2006, IG Group bought HedgeStreet for $6 million.
b) Inkling Markets was launched in March 2006 and co-pioneered (with CrowdIQ, which later bellied up) the concept of DIY, play-money prediction markets.
c) In September 2006, TradeSports-InTrade was the first prediction exchange (betting exchange, event futures exchange) to apply Chris Masse’-s concept of X Groups. See: TradeSports-InTrade prediction markets on Bush approval ratings.
d) HubDub was launched in early 2008 and is the second most popular play-money prediction exchange, behind HSX.
#8. Enterprise Prediction Markets
a) Until evidence of the contrary, it seems that Robin Hanson was the first to set up and run a corporate prediction exchange —-at Xanadu, Inc., in April 1989. See: A 1990 Corporate Prediction Market + Anonymity is important for employees trading on internal prediction markets.
b) In the 1996–-1999 period, HP ran a series of internal prediction markets to forecast the sales of its printers.
c) Eli Lilly sponsored 10 public, industry-level prediction markets in April 2003 (on the NewsFutures prediction exchange).
d) Eli Lilly began using internal prediction markets in February 2004 (powered by NewsFutures).
e) Google‘-s Bo Cowgill published about their use of internal prediction markets in October 2005.
f) Since then, many companies selling software services for enterprise prediction markets have been created.
#9. Disputes Between Traders And Exchanges
a) The scandal of the North Korean Missile prediction market that erupted in July 2006 is, as of today, the biggest scandal that rocked the field of prediction markets.