Prediction Markets Whup on Copyrights and Patents

by on August 30, 2006 · 14 comments

Want to read about a market-based institution that can improve on copyrights and patents? Check out my paper, “Prediction Markets for Promoting the Progress of Sciences and the Useful Arts,” 14 George Mason Law Review __ (2006) (forthcoming). You can download a copy here. The abstract:

Copyrights and patents promote only superficial progress in the sciences and useful arts. Copyright law primarily encourages entertaining works, whereas patent law mainly inspires marginal improvements in mature technologies. Neither form of intellectual property does much to encourage basic research and development. Essential progress suffers.

Prediction markets offer another way to promote the sciences and useful arts. . .

. . . In general, prediction markets support transactions in claims about unresolved questions of fact. A prediction market specifically designed to promote progress in the sciences and useful arts – call it a scientific prediction exchange or SPEx – would support transactions in a variety of prediction certificates, each one of which promises to pay its bearer in the event that an associated claim about science, technology, or public policy comes true. Like other, similar markets in information, a scientific prediction exchange would aggregate, measure, and share the opinions of people paid to find the truth.

Because it would reward accurate answers to factual questions, a SPEx would encourage essential discoveries about the sciences and useful arts. Researchers and developers in those fields could count on the exchange to turn their insights into profit. In contrast to copyrights or patents, therefore, a SPEx would target fundamental progress. Furthermore, and in contrast to copyrights and patents, the exchange would not impose deadweight social costs by legally restricting access to public goods. To the contrary, a scientific prediction exchange would generate a significant positive externality: Claim prices that quantify the current consensus about vital controversies.

This article measures copyright and patent law against the Constitution’s call for promotion of the Progress of science and useful Arts, to find those traditional forms of intellectual property lacking. As a cure for that policy failure, it suggests scientific prediction exchanges. Given that such exchanges offer the promise of large net public and private benefits, why don’t they already thrive in the United States? Because the laws written for commodity futures, securities, and gambling markets cast a pall of legal uncertainty over scientific prediction exchanges. To ease that unwarranted burden, the article explores a variety of strategies designed to guarantee the legality of scientific prediction exchanges. The article concludes with an all-too-apt illustration of how legal risks can discourage prediction markets from promoting the progress of science and the useful arts.

  • http://www.codemonkeyramblings.com MikeT

    Has any country tried this sort of thing before?

  • http://www.codemonkeyramblings.com MikeT

    Has any country tried this sort of thing before?

  • http://www.tomwbell.com Tom

    Not quite. Some bookies abroad offer bets on a few science questions, but they are not really offering prediction markets. And there exist play-money markets both here and abroad. The paper offers many details, over which you might quibble, but basically U.S. law now stands in the way of the real deal.

  • http://www.tomwbell.com Tom

    Not quite. Some bookies abroad offer bets on a few science questions, but they are not really offering prediction markets. And there exist play-money markets both here and abroad. The paper offers many details, over which you might quibble, but basically U.S. law now stands in the way of the real deal.

  • Steve R.

    I did a quick read of your paper, which means that I might have missed some of what you have said.

    My fundamental question, how does a prediction market actually foster innovation? Your paper did not appear to examine how an inventor would obtain R&D funding to develop a product. I assume (based on the definition of “prediction certificate” (page 48)) that the inventor would “sell” these certificates to the “prediction market” inorder to obtain the funding to develop the product.

    The reason for asking this concern, is that the trading of options usually occurs on existing products where the producer has little motivation to make a better product. For example, organge juice where one is betting on the weather. (To improve the odds, third parties are offering weather predictions and growers will take action to protect their crops. But the intent of the market is manage risk, not to make a better orange. A better orange will result from the grower finding a way to make the orange more tolerant to the weather.)

    On page 8, you wrote “patents fall far short of protecting fundamental and abstract scientific discoveries, such as ones about the string theory fo physics or the epidemiology of Avian flu. This opens a whole can of worms. I am also hoping that I misinterpreted your intent. I believe that patents should not be granted to physical process and abstract ideas. By implication, I would also discourage the use of “prediction certificates” for this. Essentially, a lot of research along these lines is already paid for by the taxpayer through grants, so I would advocate that this “property right” already belongs to the public.

    One of the big failures with patent law today appears to be incremental improvements. Virtually every advance is dependent on some form of “prior art” consequently we have many patent infringement lawsuits. How would the proposed “prediction market” squash these frivolous lawsuits?

  • http://www2.blogger.com/profile/14380731108416527657 Steve R.

    I did a quick read of your paper, which means that I might have missed some of what you have said.

    My fundamental question, how does a prediction market actually foster innovation? Your paper did not appear to examine how an inventor would obtain R&D; funding to develop a product. I assume (based on the definition of “prediction certificate” (page 48)) that the inventor would “sell” these certificates to the “prediction market” inorder to obtain the funding to develop the product.

    The reason for asking this concern, is that the trading of options usually occurs on existing products where the producer has little motivation to make a better product. For example, organge juice where one is betting on the weather. (To improve the odds, third parties are offering weather predictions and growers will take action to protect their crops. But the intent of the market is manage risk, not to make a better orange. A better orange will result from the grower finding a way to make the orange more tolerant to the weather.)

    On page 8, you wrote “patents fall far short of protecting fundamental and abstract scientific discoveries, such as ones about the string theory fo physics or the epidemiology of Avian flu. This opens a whole can of worms. I am also hoping that I misinterpreted your intent. I believe that patents should not be granted to physical process and abstract ideas. By implication, I would also discourage the use of “prediction certificates” for this. Essentially, a lot of research along these lines is already paid for by the taxpayer through grants, so I would advocate that this “property right” already belongs to the public.

    One of the big failures with patent law today appears to be incremental improvements. Virtually every advance is dependent on some form of “prior art” consequently we have many patent infringement lawsuits. How would the proposed “prediction market” squash these frivolous lawsuits?

  • http://www.tomwbell.com Tom

    Steve,

    An innovator could use the SPEx to raise funding because he would have an edge, by dint of the innovative nature of his discovery, over other traders. That, my friend, we call arbitrage.

    I don’t think that futures markets have any “intent”; how you use them depends on what you want. Granted, many traders use them to hedge against risk. But traders can and sometimes do use them to profit from insights they have and others do not.

    You describe the limits of patents accurately. However, the policy reasons that justify those limits do not apply to predicition markets. Why? Because, in brief, a patent limits use of a valuable idea, whereas as prediction market does not.

    I don’t think a PM would stop frivolous patent suits. That is a separate problem calling for a different cure.

    Tom

  • http://www.tomwbell.com Tom

    Steve,

    An innovator could use the SPEx to raise funding because he would have an edge, by dint of the innovative nature of his discovery, over other traders. That, my friend, we call arbitrage.

    I don’t think that futures markets have any “intent”; how you use them depends on what you want. Granted, many traders use them to hedge against risk. But traders can and sometimes do use them to profit from insights they have and others do not.

    You describe the limits of patents accurately. However, the policy reasons that justify those limits do not apply to predicition markets. Why? Because, in brief, a patent limits use of a valuable idea, whereas as prediction market does not.

    I don’t think a PM would stop frivolous patent suits. That is a separate problem calling for a different cure.

    Tom

  • Steve R.

    Tom, Thanks for responding.

  • http://www2.blogger.com/profile/14380731108416527657 Steve R.

    Tom, Thanks for responding.

  • http://sbcglobal.net michaelawandersee

    when will there every be some one something,some understandeing of making judgments on fact that are so lossly placed into protictable meaning the interlecttual people place as the means to the truth and becomes there law. You need to start reailiazing that there is not just one side that fit all and is the furthis from the realy reality that you’ve mannaged to distort to make sences out of, that is to all that may not have any clue to how judgment are formed and is in pace with goverment laws that do the same thing in that passing judgments when there is no plaintive to deffend one self and is claimed is not able to understand the legal mombaljumbal. Shue that may be the case but that what there are lawyers that still we coldn’t get for reasons we were being gaged and sandboxed for almost a decade and still here in the finally finding a way to display the true were still left in limbo and are not given are opertunaty and are constutional righ as Americans and the fact the law of such a herandis crim which we have been persacuted to a leavel, that can never be douplacated and stated by the srepreme courts that it was twice a big a any cace in history. yet to sulvive is still a barly doing it and hope the punishing of us as that grow fat was day and relentles and on a rising scale that never stopped placing hug omount of pressure to us by the very ones that were never and still are above the law for there is yet any thing that the law stats should have been put in motion for not just fraud,crims,exstortion,privacy and civil and exstrementa,and the list althou is endles and we are phyicaly,mentaly,emotional,finacaly,been to a short amoumt of time left befor they distuction we be realaty.And this is the exsact path your taking me on I am the creator that placed a fomula of my on invention that is inovated that brought bact 2 strings in design with more facks of what is of an enterest to mant, but not me is how the interlectulas would have it . Field after field all I see is greed,stealing,loss of dignaty,no honor no respeat, all lock in are fine be you from the out side there is no reconition,no feeling to a human that is not treated as done what they didn’t do so will do as a group to bury the facts and me, I can see how somany last so much as bening any where close to human and civalilised. And laws in are goverment How did that become laws when there is no fairness,it all about paying to pass for commencence will show huge loss to what can’t be a real law made by responsable intelegent people,that we vote to protect are right and never lifed a finger to doing what was there duty of gainat continuely bettin the crap out of us and then hadinh us back ot the same people and truning there backs the beeting got worce for goverment had been involved . And know I see that feild after feilf why goverment is now tring to do some thing but although your not bettin the crap out of me, you are doing much of the same in disallowing any reconition and this is unfortunatly the same as all groups that I’v show much interest in but not bother to consider as anything but a lucky ticket that I bought at the store so we no the out come to that right gentelnem

  • http://sbcglobal.net michaelawandersee

    when will there every be some one something,some understandeing of making judgments on fact that are so lossly placed into protictable meaning the interlecttual people place as the means to the truth and becomes there law. You need to start reailiazing that there is not just one side that fit all and is the furthis from the realy reality that you’ve mannaged to distort to make sences out of, that is to all that may not have any clue to how judgment are formed and is in pace with goverment laws that do the same thing in that passing judgments when there is no plaintive to deffend one self and is claimed is not able to understand the legal mombaljumbal. Shue that may be the case but that what there are lawyers that still we coldn’t get for reasons we were being gaged and sandboxed for almost a decade and still here in the finally finding a way to display the true were still left in limbo and are not given are opertunaty and are constutional righ as Americans and the fact the law of such a herandis crim which we have been persacuted to a leavel, that can never be douplacated and stated by the srepreme courts that it was twice a big a any cace in history. yet to sulvive is still a barly doing it and hope the punishing of us as that grow fat was day and relentles and on a rising scale that never stopped placing hug omount of pressure to us by the very ones that were never and still are above the law for there is yet any thing that the law stats should have been put in motion for not just fraud,crims,exstortion,privacy and civil and exstrementa,and the list althou is endles and we are phyicaly,mentaly,emotional,finacaly,been to a short amoumt of time left befor they distuction we be realaty.And this is the exsact path your taking me on I am the creator that placed a fomula of my on invention that is inovated that brought bact 2 strings in design with more facks of what is of an enterest to mant, but not me is how the interlectulas would have it . Field after field all I see is greed,stealing,loss of dignaty,no honor no respeat, all lock in are fine be you from the out side there is no reconition,no feeling to a human that is not treated as done what they didn’t do so will do as a group to bury the facts and me, I can see how somany last so much as bening any where close to human and civalilised. And laws in are goverment How did that become laws when there is no fairness,it all about paying to pass for commencence will show huge loss to what can’t be a real law made by responsable intelegent people,that we vote to protect are right and never lifed a finger to doing what was there duty of gainat continuely bettin the crap out of us and then hadinh us back ot the same people and truning there backs the beeting got worce for goverment had been involved . And know I see that feild after feilf why goverment is now tring to do some thing but although your not bettin the crap out of me, you are doing much of the same in disallowing any reconition and this is unfortunatly the same as all groups that I’v show much interest in but not bother to consider as anything but a lucky ticket that I bought at the store so we no the out come to that right gentelnem

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