Other Prediction Markets...Installment 1

Especially due to Intrade’s wild success during the 2004 and 2008 election seasons, the major prediction exchanges have received a lot of hype and most people [interested in this sort of thing] generally know the big ones: Intrade, Hubdub, IEM, etc.

There are some intriguing and less well known ideas out there (some in practice and others theoretical) that utilize the concept of prediction markets. We will profile these occasionally [Let us know if you have ideas]. Here is the first installation.

Futarchy

A concept of government-by-prediction-market proposed by economist/philosopher/rationalist Dr. Robin Hanson where individuals would “vote on values but bet on beliefs”. The term itself got some attention following its selection as a New York Times buzzword of 2008 (never mind that it was first proposed by Hanson in 2000).

The gist is the legislators define a measurement of national welfare and then voters bet on the policies that they believe are most likely to raise national welfare according to the definition. This form of government disentangles values (which we can’t do much to change) from beliefs (which are too often biased by our values). By attaching a real incentive to predicting whether a certain policy will in fact increase national welfare, futarchy uses the information aggregation and bias reducing power of prediction markets.

To be clear, this concept is very different than government-by-referendum. Individuals do not vote on which policies they like or want but rather those that they would be willing to place money on to exceed a precisely defined measurement of national welfare. The main challenge to me seems to be how to define national welfare and whether legislators would be able to agree on a formula.

GDP would be a natural component of such a formula (due to its high correlation with so many signs of positive “national welfare”), but many other possible variables may be contentious (increased income equality? Increased diversity?). Defining a national welfare formula would ignite a fierce partisan debate that gets to the heart of the question of values. The concept of futarchy takes that into account; that is why we vote on values (i.e., we elect politicians whose most closely resemble our own). But then, we don’t ascribe too much confidence to the politicians’ ability to get things done to best advance our values; that is why we bet on beliefs (i.e., bet money in a prediction market on policies that will most raise national welfare as defined by the politicians we voted for). The “wisdom of crowds” should lead to the best policies…of course, if you lost the politician vote, then you won’t agree with the national welfare formula and then I suppose you either choose to sit out the betting round out or else bet money the wrong way in the hope of distorting the results.

For more, see HERE and HERE. There are also those who doubt the clear delineation between values and beliefs as seen HERE.

Futarchy is only a theoretical concept at present and has yet to be tried in practice, although Dr. Hanson stands ready to assist any government willing to give it a try.

Comments

[Robin Hanson]

A good summary.