As everyone who has read The Wisdom of the Crowds knows, prediction markets are excellent predictors of future events like elections. In fact, prediction markets routinely do better than polls and than expert opinions. We all remember the controversy surrounding DARPA‘s prediction markets, which were to be used to enhance accuracy in predicting geopolitical events but were killed before implemented.
But now, Northwestern Law Professor John McGinnis reports, the Commodity Futures Trading Commission is recognizing the benefits of prediction markets. The CFTC may create a safe harbor in the US for prediction markets, exempting them from cumbersome financial trading laws.
As McGinnis argues, creating such an exception would be a good move. Prediction markets in conditional events (like the amount of economic growth we’ll have if McCain is elected) can “aid democratic deliberation, by being used to test politicians’ constant but contestable claims that their policies will have beneficial effects.” Let’s hope that the CFTC carves out an exception for prediction markets – and that Congress also exempts them from online gambling laws.