Why Prediction Markets Make The World A Better Place
One of the greatest mythologies of political television is the perception that campaigns, independent expenditures and other political actors have access to frequent, on-demand and reliable information about where they stand with voters. In the television show Parks and Recreation, Leslie Knope has tracking polls of her city council race — a geography no pollster would even attempt with current response rates. While competitive Senate races have frequent public polls, most House races will not see a single public poll this cycle and even sophisticated political actors go weeks without updated information. For businesses, nonprofits, journalists and other actors for whom political outcomes impact decision-making, there is even less knowledge. Prediction markets can close this gap.
However, the future of prediction markets is in flux due to a murky regulatory environment. In addition, the markets of the present are insufficient for the demands of the media, non-profit and private sector. The strict limits on trading (on one platform, PredictIt, traders can only place $850 on each contract), lack of liquidity and dearth of institutional interest have limited the ability of markets to translate information efficiently. When I wrote this last week, an individual could buy a PredictIt contract that Senator Mark Kelly (D) will win re-election for 61 cents and buy that a Republican will *not* win the same election for 56 cents. In a two-party race, those prices should be identical, and their divergence suggests a market failure.
Prediction markets help political professionals fill in the gaps where polls do not exist and even can help account for polling error. They frequently are the most reliable source of real time election night results. However, the current caps on how much an individual can invest means institutional investors have no reason to utilize these markets leaving them open to distortion by political ideologues. In addition, the lack of ability to leverage large amounts of money over a long term reduces the incentives to correct some market failures. In addition, many markets, particularly those that do not excite ideologues, see very little trading. Many companies, such as those in the solar and wind industries, have large political exposure. More reliable political prediction markets could help allocate investments more efficiently.
Prediction markets offer a powerful benefit in combating misinformation. By providing an unbiased, market-driven data point about the state of the world, prediction markets offer an alternative to the media that so many low-trust Americans view with skepticism. Consider the case of climate change: participants in a prediction market on global temperatures or future storm intensity need to become well-versed in the science of climate change–relying on conservative fictions about climate change will only lose them money. And responsible media organizations reporting on climate change now have unbiased, non-partisan data points to point to that are amenable to those inclined to trust markets over government agencies.
The value of prediction markets to supplement other indicators is clear. Several recent studies find that prediction markets are more accurate than polls and other political and economic indicators to predict election results. That makes sense, since prediction markets are able to combine polls with other sources of public information. Several concerns about prediction markets are worth addressing — and skepticism is certainly fair. However, these concerns can be addressed easily with a wise regulatory regime.
- Prediction markets are not gaming or gambling enterprises, and a professionalized regulatory structure could reduce concerns. Unlike games of chance like roulette, these markets create public interest information. Political consultants like myself frequently use these markets to inform tactical decision making. Well-regulated markets would be used by businesses for hedging, further distinguishing them from gambling.
- Prediction markets strengthen election integrity, and concerns are mostly due to the lack of safe, regulated markets. Companies like Kalshi monitor markets for insider trading, and a regulated environment would reduce such concerns. Other countries like the UK have had prediction markets for decades without undermining election integrity. The true threat for election integrity is politicians violating norms.
- Alternatives to prediction markets don’t currently exist. Currently, investors rely on expensive contracts to hedge electoral risk. The existence of these contracts indicates the value of markets and the fact that the status quo is not fulfilling a vital need for these markets and that options that exist contain significant costs for investors.
Recently, Kalshi, a prediction market platform, proposed contracts on which political party will be in control of each chamber of the U.S. Congress. The CFTC (Commodities Futures Trading Commission) sought public comment and received nearly 200 responses. Commenters included numerous academics, bipartisan politicians and industry leaders in favor of political prediction markets, including Facebook Co-founder Dustin Moskovitz and OpenAI CEO Sam Altman. It is rare to see such an outpouring of opinion in response to a CFTC request for public comment.
The main impediment to the development of efficient information-creating prediction markets is a stable and well-defined regulatory agenda. Given the huge potential value of these markets, it is imperative that the CFTC develop a framework that allows them to thrive. In addition, the reliability of political forecasting markets for election results should cause us to re-evaluate their uses for other political events that are directly relevant to media, political and non-governmental organizations: passage of legislation, the outcome of Supreme Court decisions and the outcome of regulatory processes. These markets would improve media coverage and public knowledge of the legislative process, allow companies to hedge or make decisions and inform decision-making.
