Marc Groz of Topos Capital graciously invited me to deliver a guest lecture to his class at NYU last Wednesday. The talk, “-Measured Enthusiasm for Prediction Markets“-, was given to about 20 students, some with significant market experience. It introduced real money prediction and decision markets, then went off into tax and policy markets. As the title suggests, there wasn’-t an evangelical focus, but I hope to have excited a few students about this new frontier. The presentation includes a couple of scenarios that I have not seen discussed yet in the usual places.
Cross-Posted from RM&-P
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[…] Measured Enthusiasm for Prediction Markets – (PDF file) – by Jason Ruspini. […]
These PDF’s are no longer available through these links, but I am very interested in reading them. Could you post new links?
Fixed, thanks. Let me know what you think.
Very interesting work, Jason.
I have to admit, before today I had never thought about the change of incentives that a liquid policy prediction market would bring about.
After a few hours consideration, I too am cautiously optimistic. The way I see it, these are the foreseeable effects, in the order of decreasing trading volume:
1. Subjects of the government could hedge against policies that harm them, from doctors hedging against reduced Medicare funding, to middle class and up hedging against higher taxes. This removes a huge part of the incentive to lobby and/or vote, and provides much more utility than lobbying or voting ever did.
2. Paid Lobbyists could hedge against failure, which reduces the number of times lobbyists feel they need to “fight to the death” for their clients. This would allow lobbyists to give up on difficult battles and focus on more important or likely to succeed ones. Thus we get the bizarre result of making the lobbyists more efficient, while also reducing their power. This dovetails well with the decreased incentive to pay lobbyists in the first place noted above.
3. Politicians could hedge against the failure of bills that they are bribed to support, lessening the hold that the lobbyist has on them. Also, every politician would have pet bills that they heavily bet in favor of when they seemed unlikely. This is little different then the current situation where every politician has pet bills that they are paid to support, except the influence of the special interest is now gone. I think this has the effect of boosting integrity by reducing the influence of lobbyists while encouraging candidates to invest in their outspoken interests.
Overall, I am coming to your side here. Subjects get much more utility from hedging against damaging policy, lobbyists are forced to become more efficient and persuasive, and bribes lose much, if not most of their value.
I even disagree with Patri’s criticism. I think that the easier fundraising for candidates using the markets adds more value in decreasing special interest influence through funding than it loses by disenfranchising poorer candidates, who are already *very* disenfranchised.
Unfortunately, the idea seems very hard to market. Politicians would not be in favor of changing the balance of power, even if we can demonstrate it benefits everyone. Perhaps the better strategy would be to implement this first somewhere very corrupt, like in Africa, where the politicians wouldn’t fight another way to make money; and then demonstrate the decreasing corruption and increasing utility.
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Ryan
Thanks Ryan
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Since I put this presentation together I’ve grown to favor trading prohibitions, at least at first, in these markets in order to a address a few of the possible problems I listed. Low trading limits will also mitigate a lot of issues, and could be raised over time.
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In terms of “marketing” the idea, it is good to see the futures industry making confident and forceful statements when challenged by Congress on specious claims. I am watching this situation closely as it has relevance to the CFTC’s decision on event markets:
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http://www.cmegroup.com/tradin…..-11-08.pdf.
Also you might want to check out the Musto and Yilmaz paper.