Legalize Prediction Markets Now!

I do not want to shock readers of the blog, but Washington is a spin city where many politicians and pundits say a policy will deliver a set of results without really believing it. It would be very beneficial to counter this band of dissemblers with an army of people focused on the accuracy of policy results, particularly if evaluations can capture the attention of their fellow citizens. A technology that made the results of policy clearer could also energize the many people who are interested in promoting public goods like economic growth and better education but are genuinely uncertain what programs will deliver those goods.

Fortunately, we have today a technology that has such potential—information markets. These markets were big winners in last year’s elections. Many respected pundits forecast a Romney victory but information markets universally and correctly foretold Obama’s win. Indeed, on the day before the election, the vote share market run by the University of Iowa predicted the vote shares of both candidates more accurately than the consensus of opinion polls on Real Clear Politics.

This performance is not surprising, because markets gather dispersed information, encouraging citizens with knowledge to put their money where their mouth is. The resulting distillation of many minds is better than experts, because it includes experts and adds people who are willing to bet against the conventional wisdom.

We could use these same markets to predict the results of policy as well. For instance, each house of Congress should require that any legislation be made public ten days in advance of the vote. Markets can then be created to analyze the consequences of the legislation.

One market could be conditional on the fiscal proposal’s passage and people could bet on outcomes in the coming years, such as the economic growth rate and the deficit. Another market could be made conditional on the same bill’s failure to pass and consider the same factors.

We would then have some better sense of whether it would be a good idea for Congress to enact the law. Of course, such predictions are not likely to be perfect or uncontested, but they are far better than relying on the self-serving comments of politicians and special interests that fill the air today. Information markets are an emerging platform in which different markets makers could experiment with different designs for promoting accuracy. Governments might even offer subsidies for promoting this public good.

Unfortunately, our laws make widespread and the effective operation of such markets in the United States practically impossible. Prediction markets on the internet are often confused with internet gambling, although such markets create information benefits for the public, whereas gambling on cards or horses merely sustains a personal proclivity. Recently, the Commodities Future Trading Commission prevented a domestic company from creating a new election market and sued an offshore market, Intrade, the most important information market in the world. (Intrade recently shut down but the issues there apparently had nothing to do with its making of markets but with allegations of malfeasance among corporate officers).

Congress should immediately remove the legal impediments to information markets with a bona fide public policy purpose. These markets today may prove the 21st century equivalent of the printing press in their importance for politics. They apply the magic of the market to policy debates, gathering information from diverse sources and putting the results before the public in a compelling way.

Powered by WordPress. Designed by Woo Themes