Arguably there are few methods of aggregating data that are as effective as using Prediction Markets. Prediction Markets are exchanged markets where speculators purchase “… that yield payment based on the outcome of uncertain events..” (p.877). One of the biggest misconceptions regarding this method of forming consensus on the accuracy of future events is that experts will be supplanted by amateurs. However, this concern is unfounded because of the knowledge necessary to succeed in such a speculative market. The experts would tend to dominate these markets (p.85). Separating Prediction Markets from gambling in a legal context. Dumb luck is not rewarded, but the diligent and concentrated study is. The legal lecture identifies gambling as having an element of chance (p.102). The intention of opening the trading pool to laypeople is not to give them to trade based on arbitrary “hunches”. Rather, to supplement the data pool by contributing the “on-the-ground” information absent in academic analysis (p.82).
Even though the work of legal scholar Tom W. Bell (p.102-104) demonstrates that Prediction Markets are distinct from games of chance. If a Prediction market is poorly designed, it has the potential to be subjected to anti-gambling laws (p.419). Although Prediction markets reflect the features of a decentralized form of “consulting “services than a sports betting pool (p.419). Many privately hosted sports beating pools escape prosecution due to their discrete manner. Even an in-house prediction market hosted by a corporation may raise the attention of prosecutors (p.102). It should be noted that prediction markets also face potentially regulated by the SEC and CTFC. Unfortunately, placing great barriers to entry for institutions looking to host such data aggregation markets. Prediction markets are being stifled by massive layers of red tape.
Although, it is possible under certain circumstances to be granted exemptions by regulatory agencies.
For example, one of the best-known legal prediction markets in the United States is the Iowa Electronic Markets (IEM). In the early 1990s, the CTFC issued two no action letters granting the IEM immunity from the commission’s regulatory authority (p.25). Essentially, all federal agencies are immune from anti-gambling laws (p.419). A fact confirmed by Robin Hanson by describing the immunity enjoyed by the DARPA’s PAM project (p.77). Why not grant regulatory exemptions to all purposed prediction markets? Certainly, a novel solution. There are those voicing moral concerns and those who can prosper from prediction markets remaining heavily regulated. Presenting the classic features of any Bootlegger and Baptists coalition (1983).
One of the most evident examples of a Baptist would have to be the regulators. Despite the numerous examples of employees of regulator agencies engaging in rent-seeking and other pursuits of aggrandizement, there is still a concern for the rules being enforced. This does not mean that the rules are necessarily rational or even moral, but there is an ethical commitment to duty. Unfettered access to trading or gambling markets can result in adverse consequences for participants and the economy. If prediction markets were erroneously designed, they could operate similarly to securities and futures markets. Making prediction markets susceptible to dishonest practices such as insider trading leading to disparate effects for less privileged participants. Also, keeping prediction markets within the bounds of gaming regulations could help reduce the externalities of problematic gambling. In most jurisdictions domestically, as a condition of being granted a gaming license establishments are required to have their staff trained on awareness programs. Even requiring signage offering resources for those suffering from gambling addiction to seek treatment. If prediction markets are in theory like other forms of gambling, it could be a welcomed substitute for individuals with gambling problems. Casinos are often encouraged by state governments to implement exclusion programs for problematic patrons. The trading of cryptocurrencies, precious metals, stocks, etc. is free from the reach of gaming regulations. Potentially providing problem gamblers with a slightly different type of impulsive thrill. Prediction markets could fall into this category even if they are regulated as securities or futures commodities. If prediction markets lack age restrictions barring minors from participating. It may operate as a backdoor form of underage gambling.
- Casinos, lotteries, bingo-halls, dog/horse tracks, and other gaming venues either online or brick-and-mortar. None of these establishments are going to take the time to research whether prediction markets are the same as gambling. Perceiving prediction markets as an alternative to gambling with potentially fewer regulations. Incentivizing vendors providing gambling services to favor any restrictions that can be placed on this potential competing form of “entertainment”. Prediction markets are a hyper-competitive form of consulting service.
- Foreign-based prediction markets. Overseas prediction markets in countries such as Ireland provide real monetary compensation to users with leading regulatory interference (p.414). If America’s regulatory system became more friendly towards prediction markets, these existing prediction markets would lose participants.
- Experts and professional consulting firms. Prediction markets place professional consulting firms and other subcategories of experts in direct competition with other participants. Consequently, disrupting the current status-quo of the consulting services market. Traditionally, a firm will hire a firm, freelancer, or agent of a firm to provide consulting services. Irrespective of whether the consultant is providing flawed advice, they still receive their whole salary. This is analogous to paying full price for a defective product. Even in the service industry patrons receive refunds for a lousy meal. Prediction markets resolve this issue by rewarding the consultants providing correct information. The hosting institution benefits from receiving a large pool of data for a low cost. This practice is more cost-effective than purchasing traditional consulting services. However, concurrently threatening the bottom line of consultants operating within the framework of the original model.