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Prediction Markets in Science

In a short piece in the latest Science journal, about the Promise of Prediction Markets, we provide a short review of the literature on prediction markets — how and why they work, and the accumulated empirical evidence.

But our key point is public policy:

Unfortunately, however, current federal and state laws limiting gambling create significant barriers to the establishment of vibrant, liquid prediction markets in the United States. We believe that regulators should lower these barriers by creating a legal safe harbor for specified types of small stakes markets, stimulating innovation in both their design and their use.

The rest of the piece goes into greater detail, suggesting a way for the C.F.T.C. to provide a safe harbor for research-based prediction markets, and for companies or government agencies to set up small-scale internal prediction markets.

I am one of 22 co-authors of the piece, although the real credit goes to Robert Hahn who has been pushing hard on these issues.

The fun part for me is that I can now claim three Nobel Laureates as co-authors: Ken Arrow, Thomas Schelling, and Vernon Smith.

I was a bit surprised that this illustrious list of 21 co-authors didn’t lower my Stiglitz number, but then remembered that Joe is a prediction market skeptic (despite his earlier scientific writings on futures markets).