Steven Levitt On The Move To Legalize Prediction Markets

from the six-and-one-half-dozen dept

As we mentioned, a group of economists recently penned an open letter to lawmakers urging them to relax regulations that prevent prediction markets from opening up in the US. While the list of signees was pretty impressive, one name that was notably absent was Steven Levitt of Freakonomics fame, who is a fan of prediction markets. On his blog, he discussed his reasoning for not signing the letter. In addition to being hesitant to get involved in any such letters (which probably aren’t that effective), he felt that this particular letter didn’t go far enough, in that it sought to carve out exemptions for societally useful prediction markets, whereas Levitt sees no reason to separate prediction markets from other forms of gambling. This is an important point. Too often, people take a rather parochial view in their definitions of things like investments, markets and gambling when in fact they’re all basically the same thing. So while it would be nice to see prediction markets allowed to flourish, this shouldn’t necessarily be a separate goal than undoing the many absurd regulations pertaining to online gambling.

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Comments on “Steven Levitt On The Move To Legalize Prediction Markets”

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Lawrence D'Oliveiro says:

Markets ... Predictive of What?

Free markets are prone to boom-bust cycles. They’re also prone to abuses like price-fixing, insider trading, deceptive advertising, and just plain fraud.

As a result, free markets need ongoing regulation in order to remain free.

If these prediction markets are following the same basic model, then they will be prone to all the same problems. You’re going to need an SEC, Commerce Commission/Better Business Bureau/whatever (as appropriate for your jurisdiction) to try to rein in the worst of these. And yet you’re still going to get the occasional October 1929 or Enron.

And what happens to the predictive value in all that?

Bill says:

Terror prediction market

Adm. John Poindexter formed a Terror Futures Market while he was at DARPA which would have allowed investors to profit by correctly predicting terrorist attacks, assassinations and overthrows of regimes. He was ridiculed at the time and was forced to resign for this. I felt at the time it was very foresighted and would have brought together the greatest minds in the field and would have helped to predict much of what we’ve gone through since then. There was a huge politically correct outrage in the media about it and the whole project was canned.

Bill says:

Re: Re: Terror prediction market

The insider trading would be pretty easy to track, the profits, if any, are very small and not worth such a huge risk and insider trading would be self predictive leading to capture. The benefit of such a system could be huge. This is not a system like the stock market with huge amounts of money it’s more like small time poker if they even use real money. It’s more a way of people to freely communicate and place value on different ideas.

Doug says:

Not quite like gambling

While there is little difference between short-term investment and gambling, long-term investment is not quite the same. You provide money (IPO) or borrowing power to a company in hopes that they will succeed and be able to pay you back. This provides a benefit to the overall economy, for which you take a cut (if the company succeeds). Investing makes the pie bigger. Gambling does not.

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