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JuliaS-FirstPaper 7 - 11 Feb 2008 - Main.JuliaS
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| | | Prediction Markets and Judicial Decisions
Markets for Trials | |
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< | Consider the markets for trials. There are thousands of people currently trading on InTrade in the market for the outcome of Tom Delay's criminal trail. Thousands of people with (presumably*) no actual knowledge of Tom Delay's activities are betting their money on whether or not he is guilty. But that doesn't make any sense - how can we form opinions about events we have no connection to? Why would rational, financially motivated investors insist on the truth of a proposition they have no real knowledge of? Simply put: they wouldn't. These people are not betting on the factual truth of the charges - they aren't asserting that Tom Delay is actually guilty of money laundering - rather, they are merely anticipating how the court will decide. In a way, the very existence of these markets admits Frank’s modern legal magic. We can make a game out of predicting the outcome of cases, even though we have no idea about the truth of the issue on trial, simply because we understand the mechanisms of our legal process. Assuming shareholders are astute, the market will fluctuate in predictable ways as new information relating to the trial surfaces. If these markets existed in the early nineties, the price of shares for an acquittal in the Rodney King case would have soared the moment the trail was moved to Simi Valley. The markets reflect our perception of our legal system. | >
> | Consider the markets for trials. There are thousands of people currently trading on InTrade in the market for the outcome of Tom Delay's criminal trail. Thousands of people with (presumably*) no actual knowledge of Tom Delay's activities are betting their money on whether or not he is guilty. But that doesn't make any sense - how can we form opinions about events we have no connection to? Why would rational, financially motivated investors insist on the truth of a proposition they have no real knowledge of? Simply put: they wouldn't. These people are not betting on the factual truth of the charges - they aren't asserting that Tom Delay is actually guilty of money laundering - rather, they are merely anticipating how the court will decide. In a way, the very existence of these markets admits Frank’s modern legal magic. We can make a game out of predicting the outcome of cases, even though we have no idea about the truth of the issue on trial, simply because we understand the mechanisms of our legal process. Assuming shareholders are astute, the market will fluctuate in predictable ways as new information relating to the trial surfaces. If these markets existed in the early nineties, the price of shares for an acquittal in the Rodney King case would have soared the moment the trail was moved to Simi Valley. The markets reflect an honest understanding of the nature of our legal system. | | | *This is an important presumption. See InsiderTrading? for more on this. | | | Incentives for Sharing Information
Analysts have found that prediction markets tend to be rather accurate - markets for elections are more precise than Gallop polls, prediction markets for stock market behavior outperform experts economists. Admittedly, the markets have not been around long and ideas about their accuracy are largely unverified. But, in the abstract, it makes sense that they should be accurate. People with good information have an incentive to share it. People without expertise have incentive to stay out of the market, lest they eventually lose their money. Prediction markets are an extraordinarily efficient way to aggregate information.
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< | The first prediction market was created by DARPA, a research group within the Department of Defense, as an experiment in predicting geopolitical risk, by creating markets for social and political events. The project was widely criticized as an endeavor in "betting on terrorism," and eventually shut down. And the critics had a point: by creating markets for the prediction of terrorist activity, DARPA could have unintentionally caused some. Prediction markets for any unwanted event are problematic; a sinister actor could invest all his money in the prediction that a terrorist attack will occur tomorrow, and then going out and commit one in order to collect on his bet. But ironically, this effect actually fulfills the original goal of the DARPA project - to aggregate information as a way of predicting events. When the would-be terrorist starts trading for shares of the market that predict his attack, the market sees it. It's as though he is announcing his intentions, issuing a warning to the Department of Defense. Moreover, any person at all with any information - not only the would-be terrorist - has a strong incentive to share it. The more accurate and less known the information is, the more valuable it is to the speculator. | >
> | The first prediction market was created by DARPA, a research group within the Department of Defense, as an experiment in predicting geopolitical risk, by creating markets for social and political events. The project was widely criticized as an endeavor in "betting on terrorism," and eventually shut down. And the critics had a point: by creating markets for the prediction of terrorist activity, DARPA could have unintentionally caused such activity. Prediction markets for any unwanted event are problematic; a sinister actor could invest all his money in the prediction that a terrorist attack will occur tomorrow, and then going out and commit one in order to collect on his bet. But ironically, this effect actually fulfills the original goal of the DARPA project - to aggregate information as a way of predicting events. When the would-be terrorist starts trading for shares of the market that predicts his attack, the market sees it. It's as though he is announcing his intentions, issuing a warning to the Department of Defense. Moreover, any person at all with any information - not only the would-be terrorist - has a strong incentive to share it. The more accurate and less known the information is, the more valuable it is to the speculator. It's arguably more likely that the market will simply act as a harbinger of impending events than it is likely that it will actually catalyze those events. That is to say, it seems unlikely that a man who is not already inclined to commit atrocities will be persuaded to do so simply because of opportunity to profit through the market. But if terrorist activity is already being planned, those who are aware of it have a clear incentive bet that information on the market. | | | Information as a Commodity
Insider Trading |
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| Revision 7 | r7 - 11 Feb 2008 - 16:51:01 - JuliaS |
| Revision 6 | r6 - 11 Feb 2008 - 15:51:11 - KateVershov |
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