Mercatus Scholar Adam Ozimek's Paper on "Prediction Markets"
Commentary by Bob Zwirb
The Mercatus Institute, a public policy research center affiliated with George Mason University, released a paper by Dr. Adam Ozimek, Director of Research and Senior Economist at Econsult Solutions, Inc., entitled "The Regulation and Value of Prediction Markets," which examines the role, purpose and performance of "prediction markets" that allow participants to buy and sell contracts on specific events, such as the outcome of presidential elections. The paper finds that such markets are important information-aggregation tools for researchers, businesses, individuals, and governments and have shown promising applications in fields from demand forecasting to public health. In particular, the paper finds that prediction market prices have "informational value because they aggregate the beliefs of market participants and reveal what the market overall forecasts are the odds of the event at hand occurring," and that "[t]heir resurgence in popularity reflects both their good forecasting record and their ability to produce fine-grained data that polls, expert surveys, or other methods of aggregating beliefs cannot replicate."
Notwithstanding these benefits, the author notes that in the U.S., such markets operate in a regulatory environment that is "more skeptical than supportive," pointing to Congressional moves to block contracts on movie box-office receipts and political prediction markets and the CFTC's enforcement actions against Intrade, which caused that popular market to cease operations. This regulatory resistance to such markets, according to Dr. Ozimek, is driven by misunderstanding and moral objections. He concludes by recommending that regulators should allow these markets to grow and evolve.
Click here to view the paper, "The Regulation and Value of Prediction Markets," by Adam Ozimek.
Related news: CFTC Charges "Prediction Market" with Violating the CFTC’s Off-Exchange Options Trading Ban and Filing False Forms (with Robert Zwirb Comment) (November 26, 2012) See also: CFTC Public Meeting to Consider Allowing Trading on Predicted Box Office Receipts.
Commentary
The conclusion of this academic paper, which assembles in a scholarly fashion the important role that prediction markets can play in our economy, contrasts with that of some regulators, such as CFTC Commissioner Bart Chilton who several years ago declared that futures contracts on movie box-office receipts, for example, "serve no national public interest" and that "there is no demonstrated need nor necessity, or even a fabricated chorus call for them." While Congress and some regulators may find no economic utility for such contracts, the author observes that at least one firm currently charges up to $20,000 to predict for movie studios whether a script will be successful. He points out that, compared to polls, "prediction markets are more accurate and have half the forecast error."
Perhaps the author's most incisive finding relates to what such contracts and markets bring to the table, which is unique information untainted by bias, something that Ozimek - citing President Obama's former regulatory czar, Cass Sunstein - suggests might improve the quality of decision making in bureaucratic settings:
"Prediction markets create an incentive for those with information to come forward and participate. This process is similar to the selection of unbiased predictors, but it brings new information to the market rather than just getting better predictions from existing information. Prediction markets not only bring new information to markets, they tend to incorporate this information quickly. . . .
"'Successful intelligence requires not only the collection and interpretation of pieces of information, but also that the information be combined into consensus forecasts and passed up the chain of command.' This kind of consensus forecast may be especially useful in government and business bureaucracies, where group decisions and disagreements might otherwise be adjudicated by deliberation. In contrast to prediction markets, deliberation can be hampered by social sanction for disagreement, which can lead to group biases that exaggerate rather than ameliorate individual cognitive biases."