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JuliaS-FirstPaper 8 - 11 Feb 2008 - Main.JuliaS
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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 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. | |
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< | Information as a Commodity | | | Insider Trading
Time Magazine reports: On Dec. 11, 2003, InTrade? 's contract on Saddam Hussein's capture suddenly began to move. "We noticed that that contract started trading from 9 to 30 for no reason," says Mike Knesevitch, communications director. "Something was happening." In fact, someone may well have been trading on inside information. Two days later, Saddam was in custody. | |
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> | Information as a Commodity
Prediction markets may have the potential to generate enormous wealth - it's a whole new economic frontier. But there is something conceptually curious about trading in predictions. Unlike traditional economic markets, the shares you are buying when you invest in a prediction do not represent any tangible, real world thing. When I buy stock in Pepsi Co., technically speaking, I own a percentage of the Pepsi Company and my stock entitles me to a share of its profits. But when I buy stock in the prediction that Antonin Scalia will be the next Supreme Court Justice to leave the bench, what have I bought? What creates the value in this market? It's similar, of course, to standard forms of betting, in that the value is the probability that an event will occur. But standard betting games are not conducted in market-form. The closest analogy I can come up with is the bond market - which trades in debt securities whose values are determined by their future performance. However, those securities are representative of real financial value-assets in a way that event predictions are not. Frankly, I think I lack the economic proficiency to really understand this issue. If anyone would like to jump in here, I'm really interested in trying to figure it out. The question of how such a market should be regulated is also fascinating. If you look at their FAQ, InTrade? admits that they don't know the legal status of their market, and allocates the risk of using it to the speculators. I'm guessing this is a reflection of the fact that we do not yet sufficiently understand these young markets enough to create regulatory guidelines. | | | Hedging Uncertainty
Self-fulfilling Prediction Markets |
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| Revision 8 | r8 - 11 Feb 2008 - 17:55:25 - JuliaS |
| Revision 7 | r7 - 11 Feb 2008 - 16:51:01 - JuliaS |
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All material marked as authored by Eben Moglen is available under the license terms CC-BY-SA version 4.
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