Economists Want Legal Protection For Prediction Markets

from the going-legit dept

There continues to be a lot of interest in prediction markets as a way to tap the wisdom of crowds, but for the most part, much of the interest in them is academic, as there’s been a lack of practical examples of their use. One of the big problems is that in the US it’s legally difficult to set up a real-money exchange, and so much of what we have is based on play money, which doesn’t make much sense for something that’s supposed to be a market. The culprit is the government’s attitude towards online gambling, as these sites are treated just like poker sites are. So a group of economists (including Nobel-laureates Kenneth Arrow and Thomas Schelling) has penned an open letter to US regulators encouraging them to lower the barriers to entry to create such an exchange. Currently, one possible way to legally open such a site is to get a special exemption from the Commodity Futures Trading Commission (CFTC), but it’s rather difficult, so economists are pushing to get the CFTC more leeway in the approval process. It’s likely, however, that the request will fall on deaf ears, since this issue probably isn’t much of a priority to many politicians. That’s unfortunate, because until these markets are more widespread, we won’t know useful they could be for business. In the meantime, it’s as though wikis were illegal, and academics were forced to discuss whether collaborative, web documents might theoretically have some value. Of course, this is far from the only instance of anti-gambling laws having a perverse, unwanted effect.

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Comments on “Economists Want Legal Protection For Prediction Markets”

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Lawrence D'Oliveiro says:

Free Markets, Unstable Markets

Didn’t the US military try something like this a little while back? Trying to set up a market for trading in terrorism futures, or something like that. Luckily the idea didn’t get far.

Besides, free markets are prone to boom-bust cycles. What exactly would be the predictive value in that?

John Curran says:

Re: Free Markets, Unstable Markets

These are not production markets, but prediction markets based on events in the future.

The Iowa Electonics Market was set up to get a sense of how elections will turn out based on who is willing to buy a stake in the outcome. The stakes are very small; this is not about making money but about developing a sense of the outcome of a given election. Only certain people can actually buy futures and the limit is $1-$500. The Iowa market has been extemely close to the actual results of various elections. Wikipedia has a good summary of the IEM:

Here is a graph of the market for the Bush-Kerry election:

See also this entry:

The idea for the DOD market was to deploy a similar site for predicting acts of terrorism by allowing people from around the world to participate. The thinking is that people hear things; they read local newspapers; they know people who move in other circles; they develop a sense that something is going on.

In typical fashion, Congress not only did not understand the principle, they did not understand the potential value of gathering input from the public. They saw it only as a gambling enterprise without looking at the potential for analyzing data as part of a pattern recognition program. Which is, in the end, all that the IEM is doing.

Mike Linksvayer (profile) says:

Policy Analysis Markets

Lawrence D’Oliveiro, you’re thinking of which was a very good idea that was killed because a few people had a “terrorism futures!?” reaction similar to yours. Please see and especially the analysis of press coverage — the longer and further out the press is, the more favorable it is.

Also see for ongoing coverage of the petition.

Anonymous Coward says:

Just a thought, and my humble opinion, but here goes. Blah, blah, blah. I don’t know a single person out there that isn’t busy complaining about 3-4 dollar a gallon for gas. Now, with that being said, I might just point out that its the analysis markets driving just that. Oil drops 3-5 dollars a barrel, and gas prices go up? Just a thought, we don’t need anymore analysis, they have done enough damage to this economy in the United States, and soon to be the whole world.

Joe Smith says:


A person could have a legitimate financial concern about political outcomes.

Someone with a high (or low) income should be able to hedge by buying and selling futures contract on who will control Congress in, for example, 2010. A doctor might want to hedge health care reform. Oil companies might want to hedge environmental legislation. Iranians might want to hedge the risk of an invasion.

Lots of people would have some form of interest in hedging sovereign risk. The advocates should just go and bite the bullet and get a listing.

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