Economists Speak Out on Prediction Markets

We’ve blogged quite a bit about prediction markets. Now, some very prominent economists (including four Nobel prize winners) have come together to release a joint statement asking the U.S. government to make it easier for researchers to create them.

While the statement argues the merits of prediction markets extremely cogently, and while I’m completely in favor of prediction markets and absolutely against governmental prohibitions on them, I elected not to sign the letter for two reasons:

First, and most importantly, I never sign any letter of this kind. These sorts of letters get circulated all the time, often by friends and colleagues. If you sign one them, it becomes harder to say no to the ones that you don’t really believe in. So, my rule is: Don’t sign anything. Having your name attached to something you don’t believe in is far worse than not having your name attached something you do believe in. Plus, I have other ways than letters (like this blog or a New York Times column) to communicate my opinions.

Second, I didn’t think the letter went far enough. It attempts to draw a sharp distinction between prediction markets created by academics for research and other kinds of markets. A subtle implication of that distinction is that the government has some legitimate role in restricting access to prediction/gambling markets more generally. To me, there is no difference between a “prediction” market and a “gambling” market. If there is demand for people who either want financial risk surrounding an event or want to hedge risk, why should the government get in the way? It doesn’t matter whether it’s the value of a bond, a share of stock, a presidential election, a firm’s likelihood of hitting its quarterly numbers, or the chances that the White Sox will win the pennant. In general I am not much of a libertarian, but our government’s policy towards gambling is completely idiotic and rife with internal contradictions. (Case in point: A state run lottery that pays out fifty cents on the dollar is okay, but U.S. casinos are prohibited from being involved in internet gambling sites).

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  1. Thank you for being a voice of common sense regarding prediction markets.

    I want to emphasize your second point; that the letter did not go far enough. After living in the UK for a number of years now, it is odd to see the puritanical view towards gambling that the American government so often takes. If an individual is willing to risk their money on a future event (whether the price of oil or the Cubs winning the pennant) why should the government stop them?

    Prediction markets have the potential to be a very disruptive tool in many industries. I run a consulting company specialising in prediction markets; working in Europe (without the US-style regulations) allows my clients here to be much more innovative than they could be in the United States.

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  2. Thank you for being a voice of common sense regarding prediction markets.

    I want to emphasize your second point; that the letter did not go far enough. After living in the UK for a number of years now, it is odd to see the puritanical view towards gambling that the American government so often takes. If an individual is willing to risk their money on a future event (whether the price of oil or the Cubs winning the pennant) why should the government stop them?

    Prediction markets have the potential to be a very disruptive tool in many industries. I run a consulting company specialising in prediction markets; working in Europe (without the US-style regulations) allows my clients here to be much more innovative than they could be in the United States.

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  3. egretman says:

    As Bill would say, I feel your pain here, Mr. Levitt. I was with you 100% until the last two lines.

    our government’s policy towards gambling is completely idiotic and rife with internal contradictions. (Case in point: A state run lottery that pays out fifty cents on the dollar is okay, but U.S. casinos are prohibited from being involved in internet gambling sites).

    It’s only idiotic if you think guvment doesn’t need to protect it’s income sources. Just look where gambling has been approved outside of Nevada, almost always in depressed areas needing revenue. The need for revenue and jobs has often trumped religious objections to gambling even in bible-thumping states such as Mississippi.

    We need taxes, Mr. Levitt, for all those Cadillac-driving welfare queens hopped up on drugs with 6 kids Or all those 500 lb bombs that we are dropping on Iraq.

    I actually think your linking of gambling and prediction markets is a big mistake, if your goal is to see more prediction markets.

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  4. egretman says:

    As Bill would say, I feel your pain here, Mr. Levitt. I was with you 100% until the last two lines.

    our government’s policy towards gambling is completely idiotic and rife with internal contradictions. (Case in point: A state run lottery that pays out fifty cents on the dollar is okay, but U.S. casinos are prohibited from being involved in internet gambling sites).

    It’s only idiotic if you think guvment doesn’t need to protect it’s income sources. Just look where gambling has been approved outside of Nevada, almost always in depressed areas needing revenue. The need for revenue and jobs has often trumped religious objections to gambling even in bible-thumping states such as Mississippi.

    We need taxes, Mr. Levitt, for all those Cadillac-driving welfare queens hopped up on drugs with 6 kids Or all those 500 lb bombs that we are dropping on Iraq.

    I actually think your linking of gambling and prediction markets is a big mistake, if your goal is to see more prediction markets.

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  5. alecjarvis says:

    I don’t follow #2′s point. We need tax revenue; why don’t we allow US casinos to run online casinos, then, when we can collect tax revenue from their operations? A ban only sends online gamblers to Australian or Caribbean sites.

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  6. alecjarvis says:

    I don’t follow #2′s point. We need tax revenue; why don’t we allow US casinos to run online casinos, then, when we can collect tax revenue from their operations? A ban only sends online gamblers to Australian or Caribbean sites.

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  7. pparkman says:

    Unlike egretman, I agree completely with Dr. Levitt. Prediction markets, stock markets, horse racing, craps, lottery, investing in real estate; it’s all gambling if you define gambling as placing money at risk based on the outcome of chance events. And what other definition of gambling do you have?

    I’m not familiar with the laws against prediction markets, but I assume that they are just the laws against gambling, and that the letter-circulators are asking that an exemption be carved out of the gambling statutes for “prediction markets”. Sounds iffy to me; legalize gambling, don’t draw finer distinctions.

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  8. pparkman says:

    Unlike egretman, I agree completely with Dr. Levitt. Prediction markets, stock markets, horse racing, craps, lottery, investing in real estate; it’s all gambling if you define gambling as placing money at risk based on the outcome of chance events. And what other definition of gambling do you have?

    I’m not familiar with the laws against prediction markets, but I assume that they are just the laws against gambling, and that the letter-circulators are asking that an exemption be carved out of the gambling statutes for “prediction markets”. Sounds iffy to me; legalize gambling, don’t draw finer distinctions.

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