My responses to a set of questions Chris Masse recently emailed to me:

Chris. F. Masse: Ken Kittlitz, you co-founded the Foresight Exchange (it went by the name &#8220-Idea Futures&#8221- at the time) in 1994. Would you mind telling me two words on your co-founders? Which ones brought the most into the project? Are you still in touch with them? Do you know what they have become?

Ken Kittlitz: David McFadzean got the ball rolling by bringing one of Robin Hanson&#8217-s early prediction market papers to our weekly discussion group. Sean Morgan realized that the WWW, then still in its infancy, would be a great way to create such a market. Mark James, along with Sean, did most of the coding of the initial prototype. Duane Hewitt and myself did most of the work on a paper and presentation that our group presented at a conference the following year.

I&#8217-m still in touch only with David- he&#8217-s currently a software architect at QuIC, a company that creates financial risk analysis/mitigation products.

CFM: What was the spirit of your group at that time (in 1994). Did &#8220-entrepreneurship&#8221- mean something for you, guys? Did you envision a commercial venture, or was it just collegians&#8217- play?

KK: Our weekly discussion group was known as the &#8220-BS Group&#8221- (Biological Simulation, in case you&#8217-re wondering), so I&#8217-d have to admit that &#8220-collegians&#8217- play&#8221- is a fair summary. In 1995, we did try to turn it into a commercial venture, which quickly revealed our lack of business experience. We were all techies of one sort or another, and techies often struggle in the business realm.

CFM: Would you mind telling me two words on GMU professor Robin Hanson? How would you introduce him to some of our readers (I pity them) who have never heard of him?

KK: Robin&#8217-s one of the smartest people I&#8217-ve ever met and, unlike many smart people, not over-specialized. He has deep understanding of a number of fields: artificial intelligence, physics, economics and likely a few others I&#8217-m not aware of. He has a habit of coming up with fascinating, controversial ideas, prediction markets being just one example.

CFM: You co-founded this play-money prediction exchange (Foresight Exchange) in 1994. In 1999/2000, Andrew Black and Edward Wray created and launched BetFair in England. BetFair became one of the most successful British start-ups and its two co-founders are now sitting pretty on a small fortune. In hindsight, don&#8217-t you think that you should have moved to the U.K. and incorporated the Foresight Exchange there, using real money?

KK: In hindsight, I think that I should have done a massively-leveraged short sale of NASDAQ stocks in March, 2000.

The best way forward is always hard to identify, even with tools like prediction markets&#8230-

When we tried to commercialize the original &#8220-Idea Futures&#8221-, starting a real-money market offshore was certainly something we considered &#8212- though at that point, somewhere in the Caribbean seemed the likely venue. Even back then, it seemed likely that prediction markets would be considered a form of gambling, and hence subject to draconian restrictions. The Caribbean can be a nice place to live, but the prospect of never being able to return to North America to visit family and friends was quite a disincentive.

CFM: One thing that strikes me when visiting the Foresight Exchange is that you forbid sports prediction markets, which are very popular on the betting exchanges. Even Bo Cowgill&#8217-s group of Googlers trade on sports, sometimes &#8212-I believe. Sports trading can be fun. Are you a jock hater?

KK: Not really, but the Foresight Exchange was created primarily to focus on science and technology claims. Having it cluttered with a couple of dozen &#8220-tonight&#8217-s game&#8221- claims per day wasn&#8217-t too appealing.

CFM: If I can count, you have more than 12 years of experience in the field of prediction markets. You&#8217-ve seen them all, in all colors and shapes. Do you agree with what Robin Hanson said at the Yahoo! Confab, namely that the DARPA&#8217-s PAM scandal ignited interest in corporate prediction markets? Was the PAM scandal a &#8220-tipping point&#8221-?

KK: No. I think the real tipping point was the publication of James Surowiecki&#8217-s &#8220-The Wisdom of Crowds&#8221-. Those of us interested in prediction markets tend to overestimate the PAM controversy&#8217-s importance- it was a big deal for us, but only an incremental step in the general public&#8217-s awareness of the topic. The interest generated by Surowiecki&#8217-s book showed that prediction markets had &#8220-arrived&#8221- &#8212- they weren&#8217-t just of academic interest, but instead had real-world applicability.

CFM: Note that the DARPA&#8217-s PAM prediction markets was to be public. Which leads to my next question. You and partner David Perry at Consensus Point help Fortune-500 companies setting up and running their own internal prediction markets. Have you ever had the case where one firm opened its corporate prediction markets to contractors and clients?

KK: Some of the firms we deal with are certainly interested in having a fairly wide audience, including customers and contractors, for their markets. I can&#8217-t go into specifics at the moment, however.

CFM: How is Consensus Point doing, so far? Can you draw for us the portrait of the firm that wants to use internal prediction markets? Is it always to forecast sales? Do you sense that the requests come from senior executives or from mid-level prediction markets-enthusiast managers?

KK: Consensus Point is doing very well so far. A lot of inquiries do indeed originate from mid-level managers and researchers, but a fair number also come from the executive level. Sales forecasting is a popular application of the market, but project completion times and commodity price forecasting have also proved to be frequent questions.

CFM: Sorry to ask you this question bluntly. Would TradeSports and Betfair make great competitors of Consensus Point if ever they decided one day to sell prediction market services to organizations?

KK: Quite possibly, but it&#8217-s certainly not a given. Both companies have great trading platforms, but their expertise is in running real-money, public markets. Corporations aren&#8217-t really looking for that sort of domain knowledge when considering how to implement and use a prediction market.

CFM: Would you mind describing in a few words the prediction market services you sell? I guess it&#8217-s web-hosted CDA, but are some firms interested in web-hosted MSR?

KK: We offer both hosted and on-site installations of our software, as well as training, analysis and consulting services. As for MSR versus CDA, see below.

CFM: Speaking of Market Scoring Rules, why did you decide to use this design as the engine for the Washington Stock Exchange? What is its main competitive advantage to CDA? How can MSR best be described: &#8220-betting&#8221- or &#8220-simplified trading&#8221-?

KK: The line between an MSR and a CDA is thinner than you might think! We have a market maker for each stock that provides liquidity by placing bid and ask orders- this is a convenient way of implementing an MSR within a CDA framework. An MSR really helps to start (and keep) the market going, because people always have a price they can buy or sell at. With an unadorned CDA, the bid/ask spread can be enormous, and trading volumes very thin. This alas, is often the case on the Foresight Exchange.

I&#8217-d describe an MSR as allowing for &#8220-simplified trading&#8221- rather than &#8220-betting&#8221-, though I suppose it depends on how much thought the person interacting with it puts in!

CFM: Just curious. When a prediction exchange decides to use MSR, does it have to pay fees or royalties to its inventor, Robin Hanson?

KK: I don&#8217-t believe so, but Robin is in a far better position to answer that question than I am&#8230-

CFM: What is the biggest mistake (if any) you have made since the grand opening of Consensus Point? What did you learn from this big mistake?

KK: No really big mistakes come to mind. Of course, such things are often only obvious in retrospect, so ask me again in a few years.

CFM: What are corporate prediction markets competing against (if any)? Internal polls? Groups of in-house experts? The firm&#8217-s executives? Something else?

KK: Generally, the firm&#8217-s executives. We haven&#8217-t encountered too many cases where firms have been trying to use internal polls as part of their forecasting efforts.

CFM: Are you positive that corporate prediction markets will show something for it? Will the economics literature soon be filled with business cases on how firms can clearly benefit from using internal prediction markets?

KK: Based on my experiences in the field thus far, I&#8217-m confident that prediction markets will prove to compare favorably with the other forecasting methods companies use. This isn&#8217-t to say that they&#8217-ll always yield good information, or be the best thing to use in all situations, but I think they will turn out to be valuable.

Am I positive of this? Not absolutely. But then, I try not to be absolutely positive of anything!

CFM: Now, the question that kills. Tell me frankly. Are corporate prediction markets a &#8220-fad&#8221- or are they just started?

KK: Great question! I think it largely depends on how the prediction market community presents the ideas. There&#8217-s a very real danger that the topic will be over-hyped and, consequently, ultimately dismissed, just as so many other trendy business ideas have been in the past. Today&#8217-s darling is often tomorrow&#8217-s pariah. That would be a shame, since (obviously) I think the markets have a lot of merit.

Note by &#8220-prediction market community&#8221-, I&#8217-m referring not only to those who create and sell prediction markets and associated services, but also people who blog about the topic, create vortals, etc. Not mentioning any names here .

CFM: Are prediction markets just one forecasting tool, or do they have a bigger function, in your view?

KK: The pragmatist in me says they&#8217-re just one tool, albeit a great one. The idealist finds something profoundly appealing in their ability to democratize how information is gathered and, ultimately, how decisions are made. The idealist thinks they&#8217-re something more.