Physicist, Startup Founder, Blogger, Dad

Saturday, January 14, 2006

Prediction markets and the LHC

We're nearing a new era in particle physics, when the Large Hadron Collider (LHC) at CERN begins operation, and hopefully we'll finally discover the mechanism by which spontaneous symmetry breaking occurs in the electroweak theory. The vacuum state of our universe chooses a direction in the SU(2) x U(1) gauge space, thereby making the W and Z bosons heavy, and giving masses to spin-1/2 particles like the electron. We've been waiting for decades now to understand the detailed dynamics by which this occurs. Had the US SuperCollider project not been terminated in the early 1990's, we would have known the answer back in the 20th century. Now our hopes rest on a less powerful machine in Geneva.

In an earlier post I noted the inability of "experts" in certain fields (economics, political science, foreign affairs) to predict the future. They barely outperform monkeys throwing darts, and do not outperform well-informed lay people in their predictions. Can particle theorists do better? Over the years, theorists have expended an incredible number of high IQ person-hours investigating certain models of electroweak symmetry breaking (ranging from supersymmetry, to strong QCD-like interactions, to extra dimensions, etc.). These are more or less mutually exclusive possibilities, so it will turn out that much (if not most) of the time spent will have been completely wasted once the dust settles and the data tells us how Nature really works. (You might argue that time spent on exploring a speculative particle physics model is not wasted, even if the model fails to describe reality, and I might accept that point of view for the 10 or 100 best papers written on a particular model or idea, but not for the 1000th!)

I propose that we set up a prediction market where theorists can put their money (inevitably, small sums :-) where their mouths are. In a prediction market one trades outcome contracts which pay off a fixed amount (say, one dollar) in the event that the outcome matches reality (Kerry wins 2004 election, superpartner to gluon discovered with mass less than 100 GeV, etc.). If the set of contracts is exhaustive -- constructed to cover all possibilities (in our case, there may have to be a "none of the above" contract), the prices of each contract will reflect the probability that the community collectively assigns to a given outcome. It would be very interesting to see if this market does a good job of predicting the future, or if proud particle theorists are just as subject to the madness of crowds as stock and real estate speculators.

We might get the Iowa Electronic Markets to help us with this.


Wolfgang said...

I would think that arXiv.org is already a good proxy for such a prediction market.
Simply counting the number of papers published for each proposal should be a good proxy of the numbers of people betting on a particular theory.

If you want, you can rank papers by the "salary" of the authors (professors have higher weight than post-docs) but I am not sure if this would improve anything.

Otherwise, if you would find that the Iowa Electronic market gives significantly different results from an arXiv count, it would indicate that physicists bet differently from what they publish (or that there are people better informed about physics than professional physicists, which is possible if you assume that D.E.Shaw, J. Simons etc. hire the smartest guys).

steve said...

Number of papers is not a perfect proxy, since people may choose to publish in a certain area because it is fashionable -- even if they don't believe Nature works that way. Also, models which are calculable (i.e. weakly coupled) are easier to poduce results in, so many people might think the Higgs sector could be strongly coupled, yet not be able to produce innumerable models and signatures and papers the way that you can in other frameworks (e.g., SUSY).

I think the guys in finance are sharp, but probably (on average) the ones who stay in physics are better at physics. Having market participants who are former theorists might be a good way to shake off the herd mentality, though.

Anonymous said...

At places like tradesports.com you can already wager small amounts on future political, social, and economic events. And you can do it for small amounts... even a physics grad student like me can afford the initial wager.

steve said...

Can you bet on the Higgs mass (for example) on Tradesports? I would imagine there is not enough popular interest.

Also, I'd like to see a market which is primarily made up of the "experts" - perhaps you would have self-screening at Tradeports (uninformed people would refrain from betting), but then again maybe not.

Wolfgang said...

> since people may choose to publish in a certain area because it is fashionable -- even if they don't believe Nature works that way.

This is of course a terrible statement. It suggests that the number of publications is more important than the number of good (= predictive) publications.

If this is true one could correct for it by putting a lower weight on post-docs and over-weight tenured physicists.

steve said...


Not to be too cynical, but even tenured physicists have to publish in certain accepted areas of research to keep their grants up. Also, once you are an expert in (e.g.) some particular class of models, it is much easier to write the (N+1)th paper on that topic than to try to get up to speed in some totally new area. So, the easy way to maintain your research support and publication rate is *not* to branch out, even if you think everything good or useful has been done in the area in which you have been working! This is a much more common situation than people know.

Successful professional scientists are in a sense *selected* for being boring in research interests, and anti-selected for being too adventuresome. Of course, if you a genius like Feynman everthing will work out, but for the rest of us it is best not to stray too far from the mainstream in our sub-field. I suggest you have a look at Ken Wilson's Nobel lecture, where he admits that he would have been in trouble for following his interests rather than the trends of his day. Lucky for him a lot of influential people had a very high opinion of him, so he ended up a junior fellow and got tenure at Cornell despite his lack of "productivity". And, of course, physics eventually benefitted immensely from his original thinking.

I once mentioned to a postdoc after a colloquium when I was at Yale that I was ashamed that (for career reasons) we were chasing the latest hot fad (Seiberg-Witten theory), while admittedly both of us had a fairly shaky understanding the rather fundamental physics covered in the colloquium (I think it was on superfluidity or superconductivity). I resolved not to work like that, and I haven't since.

Anonymous said...

Having a market limited to "experts" isn't really a free market. Hmmm... I wonder if there would be problems related to the fact that even though the market participants are limited, as long as the transactions were public, the trades made in this limited-market could be mirrored in external markets.

Another problem with having the market limited to experts, is the same problem as having any market limited. Eventually you run out of new capital to invest, or you run the risk of having the rate of capital influx fall too low. (Consider the effect on a stock market if no new money is being injected). I'd hate to be making trades only with experts. It's kind of like a poker game where no new players are entering, and it's just you along with all your buddies who think like you do, and know all your tricks. You just can't make money in that type of situation.

Anonymous said...

It is an interesting proposal, but you might want to consider the following trends which can distort the market:

(1) markets tend operate using imperfect information; and
(2) traders do not necessarily act as rationale individuals but may instead be subject to a herd/mob mentality.

The result can, under the correct conditions, be irrational market movements.

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