Would you pay good money for accurate predictions about important events, such as election results or military campaigns? Not if the U.S. Commodity Futures Trading Commission (CFTC) has its way. It recently took enforcement action against overseas prediction markets run by InTrade and TEN. The alleged offense? Allowing Americans to trade on claims about future events.
The blunt version: If you want to put your money where your mouth is, the CFTC wants to shut you up.
A prediction market allows its participants to buy and sell claims payable upon the occurrence of some future event, such as an election or Supreme Court opinion. Because they align incentives with accuracy and tap the wisdom of crowds, prediction markets offer useful information about future events. InTrade, for instance, accurately called the recent U.S. presidential vote in all but one state.
As far as the CFTC is concerned, people buying and selling claims about political futures deserve the same treatment as people buying and selling claims about pork futures: Heavy regulations, enforcement actions, and bans. Co-authors Josh Blackman, Miriam A. Cherry, and I described in this recent op-ed why the CFTC’s animosity to prediction markets threatens the First Amendment.
The CFTC has already managed to scare would-be entrepreneurs away from trying to run real-money prediction markets in the U.S. Now it threatens overseas markets. With luck, the Internet will render the CFTC's censorship futile, saving the marketplace in ideas from the politics of ignorance.
Why take chances, though? I suggest two policies to protect prediction markets and the honest talk they host. First, the CFTC should implement the policies described in the jointly authored Comment on CFTC Concept Release on the Appropriate Regulatory Treatment of Event Contracts, July 6, 2008. (Aside to CFTC: Your web-based copy appears to have disappeared. Ask me for a copy.)
Second, real-money public prediction markets should make clear that they fall outside the CFTC's jurisdiction by deploying notices, setting up independent contractor relations with traders, and dealing in negotiable conditional notes. For details, see these papers starting with this one.
[Aside to Jerry and Adam: Per my promise.]
[Crossposted at Technology Liberation Front, and Agoraphilia.]
Showing posts with label incentives. Show all posts
Showing posts with label incentives. Show all posts
Wednesday, December 12, 2012
CFTC Targets Prediction Markets; Hits First Amendment
Wednesday, September 14, 2011
Aesop Econ: Hercules and the Wagoner
A CARTER was driving a wagon along a country lane, when the wheels sank down deep into a rut. The rustic driver, stupefied and aghast, stood looking at the wagon, and did nothing but utter loud cries to Hercules to come and help him. Hercules, it is said, appeared and thus addressed him: “Put your shoulders to the wheels, my man. Goad on your bullocks, and never more pray to me for help, until you have done your best to help yourself, or depend upon it you will henceforth pray in vain.”This might be a story of simple laziness (or in economic terms, a strong preference for leisure over effort). But here’s what I wonder: what made the carter think Hercules might come and help? What led to such an odd expectation? I suspect the carter, or people he knows, must have tried this strategy before -- and with success. Hercules’ words lend some support to this hypothesis: never more pray for help without first trying yourself, or henceforth pray in vain. Though it’s not entirely clear, it sounds like Hercules might be known for lending a hand in situations like this.
Self-help is the best help.
For that reason, I read this as a story about disincentives to work. Such disincentives come in four primary forms: punishments for working; reduced rewards for working; rewards for not working; and reduced punishments for not working. The last of these is what’s in play here. Knowing that help from Herc is forthcoming, people become less inclined to exert effort themselves.
Work disincentives are a common topic in current policy debates. One example is unemployment insurance. The purpose of such insurance is to help those who cannot find jobs. The worry is that unemployment payments discourage people from seeking and taking jobs. Of course, the claim is not that all unemployed people, or even a great number of them, fall into this category -- only that some unknown number do. (I personally know at least three people who fit the bill and have told me so.) And then the question is whether the gain from helping those who genuinely need help outweighs the loss from those who don’t.
Getting back to Hercules, the question is what policy he should adopt. If he helps everyone who seems to need help, he will encourage dependency by some. If he refuses to help anyone, then some poor souls may be stuck in ruts indefinitely. So Hercules adopts the intermediate policy of demanding people try self-help first before begging his assistance. And then the question will become: how many of those he helps are really trying?
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