Will the next US President legitimize outcome trading?
…would seem to be an interesting question to put to the various ‘prediction markets’ that seem to be proliferating. (see Jed’s blog for a reasonably comprehensive round-up) Ironically most of these are US based - as is much of the ‘academic’ activity surrounding these new information markets - and so are limited (mostly) to play-money and fantasy leagues. (Rather than repeat myself, I refer you to this previous post as to the hypocrisy and inanity of the US legislation in this regard…)
My cynical take is that it will only happen when the corporate incumbents (with their big beltway lobbying armies) figure out how to capture these markets, ideally without cannabalizing their existing rents. It will be interesting to see who moves first on this - the Wall Street/Chicago (financial) trading complex or the Las Vegas gambling cabal; indeed one of the biggest psychological barriers is that these new information markets would - if legitimized - by their very existence, break down the illogical sematic barrier (between gambling and trading) that both sides seem so keen to preserve. But at some point the opportunities created (for providers, users and the economy generally) by legitimate traded markets in outcomes will simply become too big for either industry (or politicians) to ignore.
I’ve thought for some time that this would happen sometime in the next 2-6 years (post-Bush) and would probably need to happen under a Democratic administration (due to the Republicans now seeming to be institutionally incarcerated by the evangelical flat-earth constituency) although either a McCain or Giuliani administration might be able to buck this trend (if by miracle either managed to find himself in the Oval Office in the first place.) And I wonder if seeing mainstream media like the WSJ finally acknowledging the usefulness of prediction markets in their election coverage (teaming up with intrade to show political markets on their home page and creating their own - albeit fantasy - market) isn’t a harbinger of changing winds. And it can’t hurt either when the New York Times reports on Google’s internal use of prediction markets (an initiative run by Bo Cowgill)…
…hey maybe the Valley lobbyists might get behind this one? Although probably not as they have enough on their plate with Net Neutrality, wireless spectrum, biotech, greentech, …
January 11th, 2008 at 12:38 am
There’s a green angle to prediction markets, if you offer contracts on climate change measurements such as sea levels, ice cap area, and temperatures. Besides the obvious hedging, it gives traders an incentive to get the climate models right.
January 14th, 2008 at 5:28 pm
I know there is some academic literature on the subject stating otherwise - that it doesn’t matter whether or not prediction markets are for real or play money, the resulting implied probabilities turn out the same - but I don’t think illiquid or play money prediction markets are particularly useful. I’m not saying they are harmful, but the value in these markets lies not in the predictions per se, but in the ability to gain or lose financially (whether hedging or speculating) based on an outcome. This would indeed be useful in the climate change context - or any other ‘tragedy of the commons’ situation - in that it would allow a real price to be put on externalities and could - indirectly - facilitate/catalyze capital raising for any number of potential mitigation strategies. So yes I agree but only in the context of real money markets. Write to your congressman!