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).