Foretelling the Future: Online Prediction Markets

"He took all those bets, and put 'em all together, and what he finished with was this kind of map of the ocean floor," Surowiecki said. "And on this map there was this one spot where his team said, 'This is where we think the submarine is most likely to be.' It wasn't anywhere near where the Navy had been looking … and they found it."

The submarine was just 220 yards away from where the bets said it would be.

More recently, officials in the Department of Defense wanted to use the same principle to set up a market that would predict where and when the next terrorist attack would take place, but when the news broke there was an enormous backlash.

"The idea of a federal betting parlor on atrocities of terrorism is ridiculous and it's grotesque," Sen. Ron Wyden, D-Ore., said at the time.

The Department of Defense quickly backed away from the idea and Surowiecki thought that was a mistake.

"These are potentially tremendously useful tools for improving our national security," he said. "It's much more egregious not to use them than to use them."

John Delaney, the founder of Intrade, pointed out that his Web site's data, which predicts the likelihood of such things as earthquakes and bird flu outbreaks, still proves a very powerful predictive tool for a wide range of people.

"The Intrade market data is used by the Navy, it's used by the Federal Reserve, it's used by 50 or 100 universities," he said. "All of these people see a benefit to Intrade and a benefit to the Intrade market data, but still there's confusion as to how -- how your government would treat Intrade."

Delaney has headquartered Intrade in Ireland, and he's hesitant to expand his business into America because our government has passed laws against Internet gambling.

"I've been told I don't look good in an orange jumpsuit," Delaney said jokingly.

Bethan and Jonathan said they're pretty sure that what they're doing is legal, but the law is vague. They understand why prediction markets might have a negative connotation.

"It sounds dirty," Bethan said. "It's politics and money. … It's very taboo."