Political prediction markets are a public good

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Recently, the Commodity Futures Trading Commission, or CFTC, withdrew its no-action letter from Victoria University of Wellington, which since 2014 has been allowed to operate the political prediction market PredictIt.

The original no-action letter allowed Victoria to operate limited-scope markets for political events for research purposes. Since its inception in 2014, data from PredictIt has been made freely available to researchers in a wide range of disciplines, including economics, statistics and political science. Research coming out of these markets has led to a deeper understanding of a wide range of topics, including the impact of Brexit on trade between countries, the extent of Russian trolling on Twitter and what makes a trader financially successful.

From the perspective of Victoria's initial mandate from the CFTC, PredictIt has more than upheld its end of the bargain. But beyond their use in public policy and social science research, political prediction markets serve an invaluable public good.

If anything, the CFTC should be lifting its restrictions on PredictIt and other markets, rather than shutting them down. At a time when the media decry rampant "misinformation" and "disinformation," especially surrounding elections, prediction markets serve a crucial role in the public interest. Unlike pundits and polls, with their quirky methodologies and unspoken partisan biases, prediction markets are much more transparent and accurate.

At the time of this article's writing, the political event "Who will be Speaker of the House of Representatives in the next Congress?" had contracts on Kevin McCarthy selling for $0.64 apiece, Nancy Pelosi for $0.15, Hakeem Jeffries at $0.13 and a host of others at $0.05 or below. After the next House speaker has been decided, each of these contracts will become worth either $1 (if the person in question is chosen as speaker) or nothing. At a high level, this indicates that the traders believe that a Republican House after the midterms is more likely than a Democratic one. But more than that, the precise values assigned to each candidate merely indicate that the most recent trade on McCarthy involved one trader selling a contract to another trader for more than $0.60. No arcane algorithms or political posturing.

While this sounds comparable to what we can learn from polling, political prediction markets are more accurate and always up to date. Research on the 2020 election, by Harry Crane and Darrion Vinson, comparing the reliability of PredictIt's market prices to that of polling analysis conducted by FiveThirtyEight finds that PredictIt's market prices are a more accurate predictor of election outcomes than competing polls and data analysis widely cited in the media. The results for 2020 backed up the same findings from an analysis of the 2018 midterms.

On top of the forecasts, prediction markets make civic engagement educational and fun. They provide a platform in which people from differing ideologies can interact, an increasingly rare venue in an age of growing polarization. Since users focus on the objective outcome of who will win an election, they are more focused on facts and data than emotion and vitriol. The extensive comments section associated with each PredictIt market is a testament to this.

There is little doubt that hard-core PredictIt traders are more knowledgeable about the ins and outs of elections than are many political journalists. Market participants are incentivized to dig into polling methodologies, read between the lines of political announcements, research antiquated election laws and be mindful of their personal biases. Even new traders benefit: There is evidence that trading on PredictIt markets can increase college students' interest in the political process.

Critics point out that if prediction markets were to gain more widespread attention, then the possibility for market manipulation would open up opportunities to manipulate public perception and adversely affect election outcomes. But such criticisms are based on theoretical concerns that have not borne out in practice, and moreover overlook the fact that opportunities for manipulation are already rampant for media and polling outlets.

When prices move for no apparent reason, traders jump in to move them back. While some have argued profiteering will lead to market manipulation, in practice it is undone by the very same motive.

Prediction markets are an important alternative to our degraded public discourse. Anyone who has ever once criticized the "liberal media," "right-wing pollsters" or the "toxicity" of our political climate should hope that the commission reverses its decision as soon as possible.

We need more platforms like PredictIt to operate markets and promote discussion on events of public interest, not fewer.

Harry Crane is a professor of statistics at Rutgers University and co-founder of Researchers.One. Koleman Strumpf is the Burchfield Presidential Chair of Political Economy at Wake Forest University and an associate editor of The Journal of Prediction Markets. This article first appeared in the Chicago Tribune.