–

THE MIDAS ORACLE TAKES:

– CALL TO ACTION: Let&#8217-s fight so that the CFTC allows the FOR-PROFIT prediction exchanges to deal with &#8220-event markets&#8221-.

– In the for-profit vs not-for-profit debate, our prediction market luminaries, doctored by Bob, are on the wrong side of the issue.

– The definitive proof that FOR-PROFIT prediction exchanges (like BetFair and InTrade) are the best organizers of socially valuable prediction markets (like those on global warming and climate change).

– COMMENTS TO THE CFTC: What to expect from Tom W. Bell and Jason Ruspini

–

BACKGROUND INFO:

– CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts&#8230- notably how they define &#8220-event markets&#8221-, how they are going to extend their &#8220-exemption&#8221- to other IEM-like prediction exchanges, and how they framed their questions to the public. Here are the comments sent to the CFTC.

– The Arnold &amp- Porter lawyer&#8217-s take. &#8212- (PDF file)

– The Schulte, Roth &amp- Zabel lawyers&#8217- take. &#8212- (PDF file)

– The Sullivan &amp- Cromwell lawyers&#8217- take. &#8212- (PDF file)

– What Vernon Smith told the CFTC. &#8212- (PDF file)

– This week, 4 prediction market organizations and VIPs will submit their comment to the CFTC.

– Michael Giberson&#8217-s economic take.

– Chris Hibbert&#8217-s libertarian take.

– Tom W. Bell&#8217-s libertarian take.

– Jed Christiansen&#8217-s pragmatic take.

– A young economist rebuts the American Enterprise Institute. &#8212- (MO mirror)

– The American Enterprise Institute’s proposals to legalize the real-money prediction markets in the United States of America

–

APPENDIX:

Paul Wolfowitz&#8217-s profile at the American Enterprise Institute

– How the neo-cons drove the United States of America into the unecessary Iraq war

–

–

THE MIDAS ORACLE TAKES:

– CALL TO ACTION: Let&#8217-s fight so that the CFTC allows the FOR-PROFIT prediction exchanges to deal with &#8220-event markets&#8221-.

– In the for-profit vs not-for-profit debate, our prediction market luminaries, doctored by Bob, are on the wrong side of the issue.

– The definitive proof that FOR-PROFIT prediction exchanges (like BetFair and InTrade) are the best organizers of socially valuable prediction markets (like those on global warming and climate change).

– COMMENTS TO THE CFTC: What to expect from Tom W. Bell and Jason Ruspini

–

BACKGROUND INFO:

– CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts&#8230- notably how they define &#8220-event markets&#8221-, how they are going to extend their &#8220-exemption&#8221- to other IEM-like prediction exchanges, and how they framed their questions to the public. Here are the comments sent to the CFTC.

– The Arnold &amp- Porter lawyer&#8217-s take. &#8212- (PDF file)

– The Schulte, Roth &amp- Zabel lawyers&#8217- take. &#8212- (PDF file)

– The Sullivan &amp- Cromwell lawyers&#8217- take. &#8212- (PDF file)

– What Vernon Smith told the CFTC. &#8212- (PDF file)

– Michael Giberson&#8217-s economic take.

– Chris Hibbert&#8217-s libertarian take.

– Tom W. Bell&#8217-s libertarian take.

– Jed Christiansen&#8217-s pragmatic take.

– A young economist rebuts the American Enterprise Institute. &#8212- (MO mirror)

– The American Enterprise Institute’s proposals to legalize the real-money prediction markets in the United States of America

–

APPENDIX:

Paul Wolfowitz&#8217-s profile at the American Enterprise Institute

– How the neo-cons drove the United States of America into the unecessary Iraq war

–

I submitted a comment to the CFTC about their &#8220-Concept Release on the Appropriate Regulatory Treatment of Event Contracts.&#8221- Specifically, I addressed the American Enterprise Institute&#8217-s call for a ban on for-profit prediction market exchanges as well as restricting fees charged by such exchanges to &#8220-modest&#8221- ones (link). This is what I said:

Recently, the American Enterprise Institute and others have asked the Commodities and Futures Trading Commission to prohibit for-profit prediction market exchanges, and only allow prediction markets to charge “modest fees”. I will make the case here that both for-profit exchanges and more than “modest” may both be important for getting the most benefits from prediction markets.

One of the major benefits of prediction is that people and companies can use prediction markets’ relatively accurate and well-calibrated predictions to improve their planning. Market predictions reduce the calculation work that people and companies have to do in order to come up with predictions because they can outsource the work to prediction markets.

It would be a mistake to unnecessarily limit the areas which prediction markets are used to predict, because it is difficult to predict what areas may help people and companies improve their planning. For profit exchanges will have incentives to find as many places where such more accurate and better calibrated predictions are useful, especially in industry. Thus it would be a mistake to prohibit either for-profit exchanges or limit the fees that exchanges can charge.

Consider the following scenario:
A number of companies in some industry are interested in the information about the future price of certain products, the future of industry relevant technologies or in future demand for certain products or any number of things of that might be predicted using prediction markets.

In response to this interest, a for-profit company creates a prediction market exchange for contracts about the information that those companies are interested in, and then sells access to the exchange to companies in relevant industries. The exchange company uses the revenue generated from exchange subscriptions to subsidize contracts in order to generate more accurate predictions. Employees from the companies who subscribe to the exchanges would be the market participants.

Such exchanges would be even more attractive to companies than internal prediction market exchanges because contract subsidies and the pooling of market participants in multiple companies into one market would improve the usefulness of prices significantly.

Allowing a for profit company to create such exchanges means that it will have strong incentives to make its exchange contracts the more useful to its subscribers, whereas non-profit companies will have weaker incentives to do so. Now, perhaps someone would step up and create a non-profit exchange to fill this role, but perhaps none would. This is especially likely in markets where there is little camaraderie and collusion. Non-profit exchanges will probably also get created and develop slower than for-profit exchanges. This would very bad in cases where subscriber needs change frequently, because non-profits would have trouble keeping up.

Limiting the fees that exchanges can charge is also a bad idea, because the amount by which the exchange company would need to subsidize a contract in order to achieve the desired accuracy could be large in some cases. When developing models, and collecting an analyzing data is costly, large subsidies would be needed to get people to make accurate predictions.

I do not doubt that non-profit prediction market exchanges are likely to be very valuable, especially in public policy arenas, but it would be a serious mistake limit prediction market exchanges to non-profits.

[cross-posted at Good Morning, Economics]