I haven’t turned up the latest edition of Science magazine mentioned yesterday by Chris F. Masse, but a version of the Science article “The Promise of Prediction Markets“, is available from the AEI Center for Regulatory and Market Studies (find link to article on this page).

The first thing of note is that the extensive list of authors overlaps that of the “Statement on Prediction Markets” of a year ago (but lacking Statement signers Daniel Kahneman, Charles R. Plott, and Shyam Sunder). A quick scan of the piece reveals it pursues that same controversial strategy as the earlier statement – seeking CFTC safe harbor protection for a limited set of small stakes, non-profit prediction market exchanges.

We would therefore urge the CFTC to explore other approaches to ensuring safe harbors, for example, formal rules or guidance approved by the commission.

We suggest that three types of entities be eligible for safe harbor treatment. The first would be not-for-profit research institutions, including universities, colleges and think tanks wishing to operate exchanges similar to the Iowa Electronic Markets. The second would be government agencies seeking to do research similar to that of nongovernmental research institutions. The third group would consist of private businesses and not-for-profits that are not primarily engaged in research, which would only be allowed to operate internal prediction markets with their employees or contractors.

In all cases, markets would be limited to small-stakes contracts. Although the definition of small stakes is somewhat arbitrary, we use the term to mean an exchange in which the total amount of capital deposited by any one participant may not exceed some modest sum, perhaps something like $2,000 per year.

The exchanges themselves would be not-for-profit but would be allowed to charge modest fees to recoup administrative and regulatory costs. Brokers and paid advisers would be barred, reducing the risks that contracts would be sold to inappropriate or vulnerable customers or that customers would be charged fees above the amounts needed to maintain the markets. Exchanges would be self-regulated, leaving them with the responsibility to make reasonable efforts to keep markets free from fraud and manipulation.

For its part, the CFTC should allow contracts that price any economically meaningful event. This definition could allow for contracts on political events, environmental risks, or economic indicators, such as those offered by the Iowa Electronic Markets, but would presumably not include contracts on the outcomes of sports events.

… Congress should support the CFTC’s efforts to develop prediction markets.

And so on.

Maybe this is the best strategy for gaining political protection for progress, it is a difficult judgment to make. But the Science magazine placement is high profile and will certainly help raise the issue among folks who might otherwise be unaware of the need for progress on this front.

Perhaps more comments after I’ve had a change to read the piece more carefully. No doubt by then Chris F. Masse and the hard-core PM crowd will have, in their wisdom, torn this timid suggestion to shreds.