Sunday, November 13, 2005

The Prediction Exchange Legalization Act of 2006

I'm wrapping up yet another visit to the annual AALS meat market. While here in D.C., I cobbled together a dinner with some local friends of information markets (a.k.a. "idea futures," "prediction markets," "decision markets," etc.), to discuss legalization strategies. Kurt Schuler graciously hosted the confab at his Arlington home. Robin Hanson (Assoc. Prof., GMU Economics Dept.), David Perry (Washington Stock Exchange co-founder), and Brad Watson (Senior Legislative Assistant, Rep. Tom Cole) joined us.

I worked up a draft bill for the event. We didn't end up discussing it very much, instead focusing on more convivial and interesting issues. Thinking that others might want to comment on my proposed act, I offer it here. My comments appear in brackets.

Section 101. Short Title

This Act may be cited as "The Prediction Exchange Legalization Act of 2006."

[I chose that somewhat idiosyncratic usage both to distinguish the type of idea future market at issue from other types and because I think it offers rhetorical benefits. No "markets," please!]

Section 102. Prediction Exchange Policy

It is the policy of the United States Government to:

(a) encourage the development of market-based mechanisms for resolving questions of science, technology, and public policy;

(b) clarify the legality of qualifying prediction exchanges; and

(c) protect such exchanges from state and federal regulation to the fullest possible extent.

[I could say more under this heading, granted. Robin Hanson thinks, for instance, that some sort of "public benefit" clause would prove useful. I've yet to figure out a useful and graceful way to squeeze that in, though.]

Section 103. Definitions

(a) A "prediction exchange" is a forum that uses instrumentalities of interstate commerce to facilitate the buying and selling of "prediction certificates"

(b) A "prediction certificate" is a document promising to pay, upon the demand of its owner, a specified amount of money on condition that the "prediction claim" referenced by the certificate be judged true by a particular "prediction judge."

(c) A "prediction claim" is an answer to an unresolved question of science, technology, or public policy that can be resolved primarily by the application of skill. A "prediction claim" is not an answer to an unresolved question about the outcome of a sporting event or the future price of a commodity transaction currently regulated by the Commodity Futures Trading Commission.

(d) A "prediction judge" is a person, persons, organization, or entity referenced by a "prediction certificate" and authorized to designate as true a prediction claim, subject to any limits or requirements specified on that prediction certificate.

[Boring though these definitions may appear, they do a lot of heavy legal lifting. Here, as with the title of the bill, I adopt somewhat idiosyncratic usages. I don't want anyone to confuse these items with those discussed in the more general literature on idea futures.]

Section 104. Preemption

(a) No Federal agency, State, political subdivision of a State, or political authority of 2 or more States may enact or enforce any law, regulation, or other provision that has the force or effect of law and that relates to any prediction exchange except as otherwise provided in this chapter.

(b) No provision of this chapter shall in any way abridge or alter remedies now existing at common law.

[That is the strongest of three preemption clauses I've drafted, and the version I naturally favor. Here is the moderate preemption clause:

(a) (First paragraph same as above)

(b) No provision of this chapter shall in any way abridge or alter remedies now existing under the common law of contract, tort, or property.

Here is the weak preemption clause:

No Federal agency, State, political subdivision of a State, or political authority of 2 or more States may enforce against any prediction exchange a law, regulation, or other provision that has the force or effect of law and that pertains to gambling, commodities futures, securities, bucket shops, insurance contracts, or contests of skill or chance.]


Murky Thoughts said...

What's the point? To incentivize forecasting? To capitalize desired outcomes? Wouldn't we be incentivizing half the people to prevent or retard the desired outcomes?

Tom W. Bell said...

Yes and yes.

Presumably, they could not meaningfully retard those outcomes without violating contract, tort, or property rights. They might badmouth the judgement of those who hold contradictory prediction certificates, but we should welcome that as part of an adversiarial process that tends towards truth.

Murky Thoughts said...

Huh. Do you have anything online in plain language about the scenario you're envisioning? I'm intrigued.

Murky Thoughts said...

Prediction judging seems like it would require something like the patent office. It would be administratively humungous, wouldn't it?

Murky Thoughts said...

There's already plenty unseemliness in science when all that's being competed for is prestige. Throw in money and you'd have espionage and vandalism. Things fail 99% of the in experimental science, and the other 1% of the time you don't know what the right outcome of an experiment looks like, so it could be impossible to detect or prove vandalism. You'd have to turn all research into a high-security, high-surveillance exercise. You'd probably end conferencing and preliminary information exchange as well. What's going to happen with peer review? Right now predictors compete for honor. Competing for money, who knows what competitors would do? I'm retreating to my first blush instinct and calling this lunacy, until and unless exceptionally well argued otherwise.

Chris Hibbert said...

Judging is not as hard as you (murky thoughts) seem to think. At (a play money market), volunteers agree to judge claims, and their names are listed so the other participants can take that into account. Few judgements are controversial. (a real money market) doesn't say who judges, but they stick to claims with pretty objective outcomes. Tom's proposal says judging policy is up to the operator, and the customers can decide who has the best policy. Most of the commercial exchanges do their judging in-house without attribution.

There's a good article at

The questions would probably be on general issues in science rather than particular experiments or scientists. Sabotaging a particular experiment would muddy the evidence, but that can already happen, and many scientific questions are relevant to public policy issues that people care about.

Tom W. Bell said...

In addition to the Wikipedia article suggested by Chris, I recommend simply googling "idea futures" to you, Murky. You would surely find the many carefully written explanations thereby readily put at your disposal more convincing and clear than any brief and ad hoc writing I'd offer, here.

Murky Thoughts said...

I went to wikipedia and found it helpful. Thanks. I could use an example of the kind of science claims that are envisioned for such a market. Are claims intrinsically date-oriented: e.g. "No cure for cancer before October 12, 2007" Or do you want things like "Drinking tomato juice reduces the risk of cancer." Would a claim that vague be allowed? How about "Drinking more than two liters per day of fluids reduces the risk of cancer." Can anybody make as vague a claim as the market will bear? It seems you'll have competing standards of claim with regard to any area of science. The NYSE doesn't have that kind of power on the kind of bets people can make.

Murky Thoughts said...

Sorry: wasn't responding to your comment, Tom, but Chris's. I think you and I were posting at the same time.

Murky Thoughts said...

FYI I'm taking the current reality of such markets as a persuasive argument against lunacy thereof. Just having a hard time imagining the science claims.

Chris Hibbert said...

The best examples of science claims are at This is a play money market, and it's all run by volunteers and the participants, but the science claims are well thought out. People spend a fair amount of time getting the terms of the claims right so that by the due date, nearly everyone is in agreement as to whether the claims are true or false.

Here's a claim about Carbon Dioxide levels.

You can find more claims here. (Choose something under Science and Technology.)

Jason Ruspini said...

Hi Guys, so who's going to sponsor the bill? Dorgan, right?

Seriously, this might be a good idea insofar as it is would remove the legislative and regulatory uncertainty hanging over the development of prediction markets. Investors will be much more willing to fund the creation of such exchanges without the threat of having the rug pulled-out from under them. (Recall how stock trading exploded in New York in the 1800s after the institution of limited sharedholder liability.. people tend to overestimate small risks, etc) But -- although the CFTC has so far opted against considering the interesting prediction contracts as "commodities", if they see this proposal move forward, what is to stop them from changing their minds? To what extent does the label of "certificate", etc actually do any work in eliding all of the existing security and futures-related US code?

The "sporting event" reference that Chris Masse is so enamored with seems to be the current manifestation of the "public good" desire, which is its own sort of "marketing" -- targeting the legislators. Assuming that you gentlemen are going ahead with this, maybe some rationale such as "to ensure that the U.S. leads the world in financial innovation and flexibility" should be also included. At any rate, the precise clarification/differentiation needs to be offered in the bill, and this would be the main task.

Lastly, where does everyone stand on the "insider" issue? Your prediction markets are meant to provide useful price signals to researchers, and so the foremost experts' insights are desirable , but when less-informed participants actually lose money to researchers influencing the resolution of the contract, they are going to be something less than happy, and I'm not sure that's a tenable situation. Where exactly is the line drawn? This needs to be ironed-out.

Good luck, Jason Ruspini

Chris Hibbert said...

Most of the proponents will argue (as I do) that the value of disseminating information outweighs considerations of making a fair playing field. As long as everyone knows that insider trading is encouraged (though malfeasance or dereliction of duty remains actionable) they should be able to anticipate and prepare for the actions of people with better access to information. The idea that the market is a lottery with only ignoramuses allowed to participate is a very bad one.

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