But betting on the death of a leader or another country’s demise raised qualms that Congress could not ignore. One senator who helped spike the program called it “ridiculous” and “grotesque.” Economists worried too. Nobel laureate Joseph Stiglitz feared the market would create an incentive for bad behavior: Terrorist groups such as Hamas could get a payoff by betting that a terrorist attack would occur, and then carrying it out. Manipulation was another concern. Investors might try to influence real-world events, as an investor recently did by pushing the price of John McCain’s Intrade “stock” up 10 points, perhaps in the hopes of boosting the Republican presidential nominee’s chances on Nov. 4.
The markets’ supporters claim such criticisms usually don’t stand up. If terrorists, for example, placed bets on their upcoming missions, the trades would inform policymakers of the impending doom—the very motive for creating the markets in the first place. “It’s like leaving their business card at the crime scene,” says Delaney, the Intrade CEO. Manipulation, too, is easy to track and costly for the manipulator. An investigation quickly pinpointed the inflationary McCain trader, who surely lost thousands of dollars.
Since DARPA’s 2003 debacle, just one other government entity has dabbled in the markets. The Joint Planning and Development Office, a body set up to coordinate between government agencies, hopes to use prediction markets in designing NextGen, a revamped air-traffic control system for the United States set to launch in 2025. Traders from the airline industry, government bodies, and technical firms will be able to bet on when interim deadlines can be met, giving managers a more accurate timeline of progress. As a bonus, the markets will help the bureaucracy take into account factors such as changes of administration and shifting congressional priorities. “Politics is very hard to talk about for a civil servant. So the market allows you to avoid difficult discussions,” says Yuri Gawdiak, the NASA engineer charged with setting up the system.
Prediction markets can also help officials judge whether certain policies will work, says Robin Hanson, chief scientist at Consensus Point and an economist at George Mason University who worked on the Pentagon’s futures project. “If you are imagining a major initiative in African health, or if you’re trying to stabilize a trade agreement, you can ask the markets whether or not you can expect success.”
Cleaning up Wall Street, Delaney argues, might be another good use for prediction markets. In lieu of traditional ratings agencies such as Standard & Poor’s or Moody’s, for instance, the markets could be used to evaluate corporate debt or predict bank failures: As of Oct. 22, Intrade gave a 94 percent chance that more than 15 U.S. banks would collapse by mid-December, and a 57 percent chance that the number would exceed 20.
Hanson, however, worries the financial crisis might prevent the markets from going forward. “A whole bunch of things lately have been blamed on speculators. That doesn’t sound like a good environment for authorizing a wider range of [market tools].” But regardless of what U.S. regulators decide, the policy world is jumping in. And while there is no way of knowing the outcome of the CFTC’s ruling, there is one tried-and-true way to predict it. How about a market?
