From Stonehenge and ancient goat guts to the Cold War’s Delphi Method to today’s election stock markets, policy gurus have always tried to divine the future. Now, they’ve started playing online games. Modern “prediction markets” – Hollywood Stock Exchange (HSX), the Yahoo/O’Reilly Tech Buzz Game and many others – turn their player base from customers into products. These games tap collective expectations of the player base – their buzz – and the publisher analyzes or sells the results. Customers for this data include the entertainment industry, big media, advertisers and marketers, and anyone who wants to get out in front of public taste without sacrificing a goat.
We never discuss it in such frivolous terms, but the stock market, not to mention the world economy itself, is a gigantic game – not (just) in the symbolic or existential sense, but literally. Participants take specified actions, narrowly constrained by rules meant to protect the system and discourage abuse. The money they gain or lose is their score. The Federal Reserve and equivalent international institutions are the referees. The outcome of the investors’ actions, though unpredictable, is totally determined. Theoretically, if you had complete knowledge of all actions, you could predict stock movements with absolute accuracy. Of course, innumerable players and deeply obfuscated data make the process unknowable in advance. Yet together, investors arrive at a financial judgment of every company on the market.
Buzz games take their game designs straight from the New York Stock Exchange. Using play currency or sometimes real money, players buy “shares” or “contracts” in a property offered by the publisher, such as an upcoming movie, a political candidate or a hypothetical news event. (“Gasoline will reach $3.50 a gallon in the U.S. by June 30.”) The changing price of a share in that property reflects the market’s evolving judgment of the movie or candidate’s success, or the likelihood of the event. At some defined point, such as after the movie’s release or the candidate’s election, the property is “cashed out” and investors receive profits based on the shares they bought.
Prediction markets assume that a large population of diverse individuals, if each acts independently with access to good information, will collectively arrive at a sensible conclusion. In fact, these games do seem to reliably outperform standard opinion polls, at least by a percentage point or two. They can boast high-profile successes, like the venerable Iowa Electronic Markets‘ predictions of presidential elections; the 2004 and 2006 election blowouts, when TradeSports correctly picked every Senate and Congressional race; and the Hollywood Stock Exchange‘s excellent record of Oscar picks: In the last three years, its success rate in the top eight categories was 92 percent.
Who buys this data, and why? The HSX About page says, “HSX syndicates the data collected from the Exchange as market research to entertainment, consumer product and financial institutions, and as original content to radio, television and print media.” The HSX client list includes Warner Bros., MGM and Black Entertainment Television. A prediction market bibliography offers many technical research reports analyzing their benefits. And they never once mention sacrificing a goat.
The doctrine of common wisdom underlies the jury system, democracy, academic peer review and, indeed, language itself. Section I.LVIII of Machiavelli’s Discourses on Livy (written circa 1513-17) is titled “The Multitude is Wiser and More Constant Than a Prince”:
[A]s for prudence and stability of purpose, I affirm that a people is more prudent, more stable, and of better judgment than a prince. Nor is it without reason that the voice of the people has been likened to the voice of God; for we see that widespread beliefs fulfill themselves, and bring about marvelous results, so as to have the appearance of presaging by some occult quality either weal or woe. (Tr. Ninian Hill Thomson, 1883)
With recent web successes like Wikipedia, the idea of common wisdom has gained new popularity. New Yorker Financial Page columnist James Surowiecki published The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations (Little, Brown, 2004). (Surowiecki wrote about prediction markets in his March 24, 2003 New Yorker column.) Dr. David Pennock, architect of the Yahoo Tech Buzz Game, blogs about prediction markets at Oddhead. “Prediction Market Central,” an eccentric “vortal” (“vertical portal”) run by Chris F. Masse, is worth a look.
And buzz games, as decentralized problem-solving systems, have become big business. Business Week covered them extensively in its August 3, 2006 issue. TradeSports Betting Exchange, based in Ireland, has traded 70 million real-money prediction contracts worth over $2.3 billion, and in 2001 launched a non-sports arm, InTrade. Now 10 years old, Hollywood Stock Exchange, “the world’s longest continuously operating prediction market,” has nearly 625,000 active players and half a dozen fansites that read like stock-tip newsletters. NewsFutures runs a prediction market for the World Economic Forum, the Davos guys who control much of the planet. Speaking of running the planet, both Microsoft and Google use internal markets. Dinky but hopeful newcomers track futures for domain names (itsdEx) and Amazon product sales (Smarkets). Even the BBC runs a celebrity stock exchange, Celebdaq.
You, yes you, can start your own buzz game. Consensus Point, which runs both The Foresight Exchange and BizPredict, is one of many companies offering proprietary, custom-built in-house markets for corporate intranets. On the web, CrowdIQ and Inkling both let you define your own markets and contracts. CrowdIQ also offers a good overview of information markets. Open-source roll-your-own solutions include Zocalo and FreeMarket.
Perhaps prediction markets may grow even bigger someday. Robin Hanson, Associate Professor of Economics at George Mason University in Fairfax, Virginia, has proposed “futarchy” – predictions as a system of government. In “Futarchy: Vote Values, but Bet Beliefs,” Hanson expounds the idea: “In futarchy, democracy would continue to say what we want, but betting markets would now say how to get it. That is, elected representatives would formally define and manage an after-the-fact measurement of national welfare, while market speculators would say which policies they expect to raise national welfare. The basic rule of government would be: When a betting market clearly estimates that a proposed policy would increase expected national welfare, that proposal becomes law.”
One of Hanson’s attempts to use markets in government met a calamitous end. In 2001, the Defense Advanced Research Project Agency (DARPA) funded a prediction market research program. One of the winning bidders, Net Exchange, undertook to forecast political and military instability by creating a public real-money Policy Analysis Market (PAM); Hanson was a subcontractor on PAM. He writes, “For each nation in each quarter of a year, we planned to have traders predict its military activity, political instability, economic growth, US military activity, and US financial involvement. In addition, traders would predict U.S. GDP, world trade, U.S. military casualties, and western terrorist casualties. … [W]e wanted to let our traders predict combinations of these, such has how moving U.S. troops out of Saudi Arabia would affect political stability there, how that would affect stability in neighboring nations, and how all that might change oil prices.”
In December 2002, PAM fell under the purview of DARPA’s Information Awareness Office. The IAO was run by DARPA executive Admiral John Poindexter, whose 1990 felony convictions for conspiracy, obstruction of justice, perjury, fraud and other Iran-Contra Affair crimes had been reversed on a technicality. At the IAO, Poindexter drew widespread public criticism for his Orwellian “Total Information Awareness” proposal, a “counterterrorism information architecture” that could eventually data-mine all government databases to assemble dossiers on private citizens. On July 28, 2003, this criticism carried over to PAM, when two senators denounced the program as a “terror market.” Oregon Senator Ron Wyden wrote, “Some of the possibilities the Policy Analysis Market website offers for sale are the overthrow of the King of Jordan, the assassination of Yasser Arafat, and a missile attack by North Korea. … Terrorists themselves could drive up the market for an event they are planning and profit from an attack” – so PAM would become not so much a prediction market as its malign variant, an assassination market.
PAM brought a firestorm of ghastly publicity. DARPA cancelled it immediately, and Poindexter resigned a month later. (Several Total Information Awareness programs are still funded under classified appropriations.) In a Slate commentary called “Bookmakers for the Bomb-Makers,” Daniel Gross observed that “the market might defeat itself. The Pentagon wanted to create the PAM in order to gather information it could use to stop terrorism and reduce instability. If it saw, say, that people were betting heavily on the assassination of Iraq’s interim president, the Defense Department would start searching for some assassination plot in the hopes of rooting it out. But preventing the assassination would cause all the people who bet on it to lose their money. Insofar as the market helped the United States stabilize the region and prevent terror, investors would suffer. The more it succeeded on policy, the more it would fail as a market, and the sooner it would collapse.”
One interestingly irate blogger, among many, was “Greg” at The Talent Show. On July 29, 2003, he wrote, “If there’s anything to be learned from the last few years, it’s that rampant speculation can often obscure an economic (or in this case, terrorist) reality. Any number of factors could quickly lead to a terrorist threat being falsely exaggerated to the point of turning into the Enron of this pseudo-market.”
The unanswered question: Are buzz games fun?
In principle, there’s no reason they can’t be. Buzz games don’t belong to the “serious games” category, in that they have no avowed educational goal. Rather, they are what Carnegie Mellon professor Luis von Ahn calls “games with a purpose” – games that “run a computation in people’s brains rather than in silicon processors.” These markets embody the general Web 2.0 emphasis on community intelligence, or “crowdsourcing.”
From a design standpoint, all these buzz games are the exact same game. True, some let you buy options or sell short while others don’t, but it’s all buying and selling. People complain that most MMOGs are whack-a-mole level grinds, but at least some of them make token efforts to satisfy different player types (socializers, explorers, etc.). In contrast, if you don’t enjoy buying and selling, the activity itself, then not one of these buzz games will interest you. Casual entertainment isn’t what they’re for.
Buzz gameplay also differs from other online games in that you’re supposed to be relentlessly rational. One big part of the attraction of MMOGs, at least for some players, is the ability to act without consequences – to fling yourself against a higher-level monster, for instance, just to see how fast you die. In a buzz game, such frivolity would damage your ranking and pollute the data.
Furthermore, guilds are right out. To elicit the wisdom of crowds, the publisher wants a good statistical sample; each individual must exercise independent, decentralized judgment. Linked crowds become vulnerable to “information cascades” that lead to mob folly. The more individual voices in the choir, presumably, the better its chance to hit the right note.
You have to wonder – if you get deeply invested in a buzz game, wouldn’t it be more sensible to get deeply invested in, you know, investments? The energy you expend on buying and selling fake stocks should translate well to real stocks or (more appropriately, if you’re coming from the prediction market) futures derivatives, as trafficked on HedgeStreet. Conversely, if you go bankrupt in several buzz games, that’s a hint to stick to Treasury bonds and a 401(k). Maybe these are educational games after all.