Unleashing Prediction Markets
POLITICAL PREDICTION MARKETS—markets that allow the public to speculate on election and policy outcomes—have the potential to improve the capacity of democracy to update on the facts in our day, just as the rise of the press improved its capacity in an earlier era.1 These markets can elicit information about the likely effects of policies even before they are implemented from those who are most knowledgeable about their effects.
Prediction markets temper three of the largest problems of politics. First, they offer a mechanism for overcoming what has been called the “basic public action problem” of collective decision making—the difficulty of persuading individual citizens to provide information that is useful to the whole community. This problem goes back to the origins of democracy: “How does Athens know what Athenians know?”2 Prediction markets give citizens stronger reputational and monetary incentives to inject their private information into the public domain, thus improving social knowledge. Second, the markets help mix expert and dispersed opinion. Expert views influence prediction markets, but they can be tested by outliers who are willing to put their money where their mouth is. Finally, prediction markets are able to draw together information into a single place and numerical form, economizing on the attention of citizens. This latter capacity is particularly important today, because in an age of accelerating technology, people are likely to be distracted from the business of public life by the more compelling entertainment of private life.
Prediction markets can enrich democratic deliberation only if our legal policy toward them is changed. Currently our law inhibits their growth. For the future, the government must not only unchain these shackles but also fund experiments to help discover the most promising designs of such markets.
In prediction markets traders can buy shares that pay off if a specified event occurs, like a candidate’s victory in a presidential election.3 Some