A Speculative Inquest

-- By JuliaS - 09 Feb 2008

Prediction markets are aggregations of betting exchanges for contingent future events. On sites like InTrade? and NewsFutures? speculators are invited to trade contracts in the markets 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 father 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.

The markets have a number of interesting implications – from foreseeing threats and managing risks, to guiding policy formulation. Here, however, we will focus only on the relationship between prediction markets and 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.

There is another possibility, however, regarding the nature of the predictions. Given that the market system allows people to buy and sell their shares at any time, it is possible that enterprising speculators are not actually making any judgment about outcome of the trial, but instead are merely speculating about how other people will predict the outcome. That is, a savvy investor might anticipate how others think Tom Delay’s trial will turn out, then buy low, and sell high, all without ever forming any judgment of his own. The prediction markets reward people who can successfully anticipate what other people will expect the Court will decide; it is the market version of the "reasonable man" standard that we see so often in the law.

Imagine if, instead of juries, we create a prediction market for trial verdicts. We post a transcript of the trial online and allow people to buy shares of the outcome they think is correct. We announce the date that the market will expire, and on that date we enter whatever verdict has a higher value in the market. As an investor, you have a financial interest in accurately predicting what other people will think the verdict should be. Again, we see the market fulfilling the ideal of the "reasonable man". A market is perhaps even more fitting for cases that concern so-called matters of law. It is hyper-democratic; by creating a financial incentive for speculators to invest based on how they believe others will perceive an issue, the market encourages consensus based not on personal ideology but on an honest belief about the views of others. By extension, the market creates an incentive for investors to advocate for their position - the more people who agree with you, the more your shares are worth. Imagine if the prediction market had a talk page associated with it, giving investors the opportunity to argue for their positions on the case. The market could potentially fulfill the role of attorneys as well as juries by providing financial incentive for effective advocacy.

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. The idea of markets as judges themselves is even more ludicrous; 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.

---

You are entitled to restrict access to your paper if you want to. But we all derive immense benefit from reading one another's work, and I hope you won't feel the need unless the subject matter is personal and its disclosure would be harmful or undesirable. To restrict access to your paper simply delete the "#" on the next line:

# * Set ALLOWTOPICVIEW = TWikiAdminGroup, JuliaS

Note: TWiki has strict formatting rules. Make sure you preserve the three spaces, asterisk, and extra space at the beginning of that line. If you wish to give access to any other users simply add them to the comma separated list