Statement on Prediction Markets – (Click here to read the abstract and download the petition from the SSRN site) – by Kenneth J. Arrow, Robert Forsythe, Michael Gorham, Robert Hahn, Robin Hanson, Daniel Kahneman, John O. Ledyard, Saul Levmore, Robert Litan, Paul Milgrom, Forrest D. Nelson, George R. Neumann, Charles R. Plott, Thomas C. Schelling, Robert J. Shiller, Vernon L. Smith, Erik Snowberg, Cass R. Sunstein, Paul C. Tetlock, Philip E. Tetlock, Hal R. Varian, Marco Ottaviani, Justin Wolfers, and Eric Zitzewitz – 2007-05-XX
—-
Executive Summary
Prediction markets are markets for contracts that yield payments based on the outcome of an uncertain future event, such as a presidential election. Using these markets as forecasting tools could substantially improve decision making in the private and public sectors. We argue that U.S. regulators should lower barriers to the creation and design of prediction markets by creating a safe harbor for certain types of small stakes markets. We believe our proposed change has the potential to stimulate innovation in the design and use of prediction markets throughout the economy, and in the process to provide information that will benefit the private sector and government alike.
Introduction
Prediction markets are markets for contracts that yield payments based on the outcome of an uncertain future event, such as a presidential election, the release date for new software, or the action taken by the Federal Reserve on short-term interest rates. A key benefit is that the market price of these contracts can potentially provide more accurate forecasts of future events than other methods. Using these markets as forecasting tools could substantially improve decision making in the private and public sectors. They also can help manage risk more efficiently. It is precisely because prediction markets have great potential that we think the government should facilitate rather than hinder the introduction of these markets.
There are significant regulatory barriers to establishing prediction markets in the United States, in part because they are potentially subject to gambling laws. We argue that U.S. regulators should lower barriers to the creation and design of prediction markets by creating a safe harbor for certain types of small stakes markets. We believe our proposed change has the potential to stimulate innovation in the design and use of prediction markets throughout the economy, and in the process to provide information that will benefit the private sector and government alike.
[…]
Conclusion
We believe prediction markets can significantly improve decision making in both the private and public sectors. One of the clear benefits of allowing small stakes, non-profit markets to operate would be the greater use of prediction markets to inform both public and private decision making. A second benefit would be that access to better information could promote greater transparency and accountability in decision making. A third benefit might be that other countries and regions would promote prediction markets with more sensible regulation. Finally, we think there would be benefits from the development of new knowledge on how to design prediction markets.
We are aware that Congress did not intend the CFTC to regulate gambling and we believe that it is important to design this safe harbor in such a fashion that socially valuable prediction markets can get in, but gambling markets cannot.
Prediction markets have great potential for improving economic welfare and the decisions of private and public institutions alike. To help achieve that potential, the regulatory impediments to the use of prediction markets in the U.S. should be lowered. Here, we have suggested one approach for reducing those regulatory barriers.
AEI-Brookings Joint Center – The views in this paper represent those of the authors and do not necessarily represent the views of the institutions with which they are affiliated.
Kenneth J. Arrow – Stanford University
Robert Forsythe – University of South Florida
Michael Gorham – Illinois Institute of Technology
Robert Hahn – AEI-Brookings Joint Center
Robin Hanson – George Mason University
Daniel Kahneman – Princeton University
John O. Ledyard – California Institute of Technology
Saul Levmore – University of Chicago
Robert Litan – AEI-Brookings Joint Center
Paul Milgrom – Stanford University
Forrest D. Nelson – University of Iowa
George R. Neumann – University of Iowa
Charles R. Plott – California Institute of Technology
Thomas C. Schelling – University of Maryland
Robert J. Shiller – Yale University
Vernon L. Smith – George Mason University
Erik Snowberg – Stanford University
Cass R. Sunstein – University of Chicago
Paul C. Tetlock – University of Texas at Austin
Philip E. Tetlock – University of California at Berkeley
Hal R. Varian – University of California at Berkeley
Marco Ottaviani – London Business School
Justin Wolfers – University of Pennsylvania
Eric Zitzewitz – Stanford University
–-
Previous: Statement on Prediction Markets – by Robert Hahn – 2007-05-07
