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A Speculative Inquest | | |
Introduction | |
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< | Just as a provisional introduction before I get around to writing a real one: Last Friday I discovered these things called "Prediction Markets" while I was looking for new places to gamble online. (Check out intrade.com - it's pretty self-explanatory.) The ramifications of the prediction markets are pretty fascinating. That last sentence may end up being my thesis if I can't figure out anything more coherent to say. | | | What are prediction markets? | |
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< | The most interesting thing ever.
How do they work? | >
> | Prediction markets are essentially an aggregation of betting exchanges for contingent future events. On sites like InTrade and NewsFutures speculators are invited to bet on - or, technically, to trade contracts in the market for - scores of different socio-political events; from when China will attack Taiwan, to which Supreme Court Justice will be the next to retire, to whether NASA's next shuttle will rove rather than its last. Speculators may buy and sell their contracts at any time, and the market prices - which represent the expected probability of the event - will rise and fall until the contingency occurs, at which point the price will either drop to zero or rise to one hundred and the market will expire. They work like conventional stock markets, except they trade in predictions instead of assets. | | | What are they used for? | |
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> | | | | Forecasting, decision-making, risk management
What is information aggregation? | | |
- What are the class implications of something like this? If you are accused, you better hope you know some rich folks willing to buy some innocent shares! By the way, Prof. Dorf has an interesting blog post on this topic. You can find it at http://michaeldorf.org/2008_01_01_archive.html about 3/4 of the way down the page. --Main.AdamCarlis 11 February 2008
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< | RE: Adam, that's a great point. Class implications are certainly a huge concern. The argument might go: If the case clearly lends itself to one particular conclusion, assuming the market is thick enough, it would be extremely difficult to manipulate. A rich man buying millions of dollars of stock in his own innocence would not be able to tip the market if all the other speculators were convinced of the other side. If it is less clear which way the case should be decided, a wealthy investor could potentially influence a close market. But is that really much different than our current system? A wealthy or well-connected suspect can afford expensive representation and jury consultants whose job is to tip the jury is cases where the verdict is not patently clear - which is essentially the same endeavor as a wealthy investor interested in tipping the market. Moreover, if we allowed for speculators to advocate, it might be more financially prudent for a speculator to focus on effectively advocating for his desired verdict than to merely buy up his own stock. Either way, of course, this is not ideal - we do not want people buying verdicts, so to speak. But Frank would tell us that they already do. There is a class bias in our current system, we try to minimize and ignore it, but it's still there. The market system is certainly no better, but it's arguably not any worse. And at least, in a certain sense, it's more honest. (See below). | >
> | RE: Adam, that's a great point. Class implications are certainly a huge concern. The argument might go: If the case clearly lends itself to one particular conclusion, assuming the market is thick enough, it would be extremely difficult to manipulate. A rich man buying millions of dollars of stock in his own innocence would not be able to tip the market if all the other speculators were convinced of his guilt. If it is less clear which way the case should be decided, a wealthy investor could potentially influence a close market. But is that really much different than our current system? A wealthy or well-connected suspect can afford expensive representation and jury consultants whose job is to tip the jury is cases where the verdict is not patently clear - which is essentially the same type of manipulation as a wealthy investor who tips the market by buying lots of shares. Moreover, if we allowed for speculators to advocate, it might be more financially prudent for a defendant to focus on effectively advocating for his desired verdict than to merely buy up his own stock. Either way, of course, this is not ideal - we do not want people buying verdicts, so to speak. But Frank would tell us that they already do. There is a class bias in our current system, we try to minimize and ignore it, but it's still there. The market system is certainly no better in this regard, but it's arguably not any worse. And at least, in a certain sense, it's more honest. (see below) | | | But of course, concerns about the nature and legitimacy of our justice system still prevail. Those kinds of issues are what ultimately make it a thought experiment rather than a serious proposal.
Shantih, shantih, shantih. | |
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< | In a certain sense, prediction markets for judicial decisions seem absurd. It almost seems to mock the legal system, robbing it of its pomp and solemnity. Imagine if we opened markets for sentencing in capital punishment cases - how morbid and perverse! The notion of betting on whether someone lives or dies is offensive to our moral sensibilities. How could we make a game out of such a grave matter? The idea of prediction markets as juries is even more ludicrous. We have modeled our system around the notion that the mob must be contained – certainly we cannot hand over our most sacred legal function to market speculators. It’s offensive to our notions of justice and demeaning to the value of our judicial verdicts. | >
> | In a certain sense, prediction markets for judicial decisions seem absurd. It almost seems to mock the legal system, robbing it of its pomp and solemnity. Imagine if we opened markets to predict the sentencing in capital punishment cases - how morbid and perverse! The notion of betting on whether someone lives or dies is offensive to our moral sensibilities. How could we make a game out of such a grave matter? The idea of prediction markets as juries is even more ludicrous. We have modeled our system around the notion that the mob must be contained – certainly we cannot hand over our most sacred legal function to market speculators. It’s offensive to our notions of justice and demeaning to the value of our judicial verdicts.
But indeed, perhaps that's precisely the point. Maybe prediction markets have stumbled upon a way to reconcile the dilemma exposed in Frank's Modern Legal Magic. If the uncertainties of our legal system are, as Frank contends, both irreconcilable and unbearable - where does that leave us? What do we do about something we can neither fix nor endure? It might sound foolish, but maybe - just maybe - the answer is that we laugh at it. Commodifying our legal processes through prediction markets can be seen as a sardonic sort of satire. Rather than succumb to the crushing weight of responsibility for an uncertain legal system, we recognize it for what it is, admit that it cannot be solved, and then we don a cynical smile and do the only thing we can do: Try to profit from it. | | | | |
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< | But indeed, perhaps that's precisely the point. Maybe prediction markets have stumbled upon a way to reconcile the dilemma exposed in Frank's Modern Legal Magic. If the uncertainties of our legal system are, as Frank contends, both irreconcilable and unbearable - where does that leave us? What do we do about something we can neither fix nor endure? It might sound foolish, but maybe - just maybe - the answer is that we laugh at it. Rather than succumb to the crushing weight of responsibility for an uncertain legal system, we recognize it for what it is, admit that it cannot be solved, and then we don a cynical smile and do the only thing we can do: Try to profit from it. | | | | |
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< | [NOTE: I don't think I really mean this, it's just food for thought. I promise I'm not an awful person.] | | | Prediction Markets for World Events
Incentives for Sharing Information | | | Very few of these markets have actually been created, so it is difficult to predict how well they would work, but given the market incentives for accurate prediction, it is not implausible to believe that such conditional markets might accurately gauge policy considerations - or, at least, might aggregate information efficiently enough that we get the best possible predictions.
Markets as Legislators | |
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< | Imagine the possibilities of such contingent policy-making markets. They're efficient and potentially quite accurate; they're hyper-democratic in that they offer financial rewards for accurate consensus; they're potentially damage-reducing, as winning policy investors will retain their market-profits even if policies fail. At the risk of entering into the realm of political science fiction, it is possible to imagine these market mechanisms replacing all the decision-making functions of the state. Economist Robin Hanson, who was instrumental in the creation of DARPA's original prediction market, suggests just that. He posits a state where decision-markets are used to weigh all policy proposals against their perceived effect on the national welfare. This new state - the Futarchy - will have solved the problem of information failure that accounts for the unsuccessful policy-making in democracy. (See here for brief summary of Hanson's theory.) Hanson's fascinating proposal flirts with the notion of anarcho-capitalism, a philosophy that advocates a market-economy in place of government. I find this particularly fascinating, because the DARPA project called Total Information Awareness that first instantiated prediction markets - a project in which Hanson himself was involved - elicited publicly outcry when it was viewed as the first step down the road to a totalitarian state. | >
> | Imagine the possibilities of such contingent policy-making markets. They're efficient and potentially quite accurate; they're hyper-democratic in that they offer financial rewards for accurate consensus; they're potentially damage-reducing, as winning policy investors will retain their market-profits even if policies fail. At the risk of entering into the realm of political science fiction, it is possible to imagine these market mechanisms replacing all the decision-making functions of the state. Economist Robin Hanson, who was instrumental in the creation of DARPA's original prediction market, suggests just that. He posits a state where decision-markets are used to weigh all policy proposals against their perceived effect on the national welfare. This new state - the Futarchy - will have solved the problem of information failure that accounts for the unsuccessful policy-making in democracy. (See here for brief summary of Hanson's theory.) Hanson's fascinating proposal flirts with the notion of anarcho-capitalism, a philosophy that advocates a market-economy in place of government. The markets could cause the state, he posits, to wither into obsolesce.
Ironically, while Hanson theorizes decision markets as a replacement for the state, others have imagined that the same technology might be employed as a mechanism of authoritarian control. The DARPA Total Information Awareness (TIA) project that first instantiated prediction markets - a project in which Hanson himself was involved - elicited publicly outcry when it was viewed as the first step down the road to a totalitarian state. To be sure, the TIP project was larger than just the prediction markets, and provoked criticism for a variety of other reasons. Still, it is possible to see how the markets might give rise to such concerns. If event prediction markets proliferate to their maximum potential, they become a vast and valuable informational resource. If the contingent decision-markets prove to be as accurate as theorists predict, they may be the most reliable forecasting method imaginable within the limits of human epistemology. The two competing visions - Hanson's anarcho-capitalist Futarchy and the totalitarian state envisioned by TIA's critics - both recognize the enormous potential of this type of efficient information aggregation. It's simply a question of who controls the market mechanisms. | | | Market Manipulating
Protecting Minority Interests |
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