In writing an entry motivated by Justin Wolfers’s article on prediction markets, I had another thought, which was a bit tangential to my main point (a poll is a snapshot, not a forecast, etc.), so I’m putting it separately here.
Justin writes,
It is the accuracy of market-generated forecasts that led the Department of Defense to propose running prediction markets on geopolitical events. While political rhetoric about “terrorism futures” led the plug to be pulled on that particular experiment . . .
I don’t know exactly why the plug was pulled on that program, but I seem to recall that it was being run by convicted criminal John Poindexter—a guy who was actually involved in what were arguably terrorist activities (the project of secretly sending weapons to Iran in the 1980s). So, yeah, maybe we should be a bit suspicious! Labeling this as “political rhetoric” dodges the real concerns about this program.
Beyond concerns about foxes guarding the henhouse, etc., even the “good guys” (however you define them) are subject to all sorts of cognitive biases, and I don’t know that I want somebody in a position of power being in the position to make money if there is a terrorist attack. Even if it’s small amounts of money, this sort of thing can affect people’s judgment. Maybe it would affect people’s judgment in a good way, I don’t know, but it’s certainly not obvious to me that the “terorrism futures” thing is a good idea.
The plug was pulled not because of Poindexter's background, but because most non-economists feel that it is distasteful to profit handsomely from terrorist attacks.
Sean,
I find it distasteful too, although I am sympathetic to the argument that we should balance our distaste with consideration of whatever gains in public safety could be achieved by the program. And I suppose you could even justify Poindexter's involvement, following a theory along the lines of, "it takes a terrorist to catch a terrorist." In any case, the objections to the program are more than "political rhetoric."
The argument was also made that one person could take up a position in the market and then cause the event to occur.
The working papers that are available on the Iowa Electronic Markets website also point out that prediction markets work well only when there is a lot "thickness" i.e. a lot of trading going on. There are some examples in the papers where there was very little trade where the "predictions" do not hold up. I don't know if any analysis have been done to validate how well other more recent events that prediction markets have participated e.g. climate change, etc. See for instance, the article in VoxEU http://www.voxeu.org/index.php?q=node/802 on climate change prediction.
So what exactly is the concern, beyond that somehow having made a small bet might influence someone's judgment? Would you want to ban small talk too, as that might also influence judgment?
Robin,
(1) Nobody's trying to "ban" anything here; I think the question is about having an official Federally-funded program.
(2) In the abstract, I'm in favor of the rehabilitation of convicted criminals. But, as noted above, given that what Poindexter was actually convicted of were arguably terrorist activities, yeah, I'm suspicious of any terrorism-related project he's involved with. I think that's a perfectly legitimate political judgment.