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Friday, May 18, 2007

Unfettered Research on Prediction Markets

The Wall Street Journal recently published an important column that provides a useful reminder of how prediction markets can assist with decision making. In a nutshell:
These markets often predict more accurately than experts. Why? They draw on the knowledge of people who might otherwise be ignored. Their anonymity frees participants from pressures to agree with opinion leaders. And they create straightforward profit incentives that encourage participants to search for better information.
Robert Hahn, executive director of the AEI-Brookings Joint Center, and Paul Tetlock, a finance professor at the University of Texas at Austin, wrote this column in the context of concern over how regulatory restrictions on Internet gambling may inhibit use of prediction markets for research purposes. (The Iowa Electronic Markets are spared because they qualify as an educational tool.)

Hahn and Tetlock explain that the AEI-Brookings Joint Center has published a plan, "endorsed by more than 20 leading researchers" that "suggests the creation of a safe harbor for small-stakes, not-for-profit prediction markets to encourage experimentation." The sort of research contemplated includes investigating
how to increase the depth of the markets and make them less susceptible to manipulation. It could also address politically contentious questions, such as how to prevent criminals from benefiting from the use of these markets ...
One can only hope that this highly visible advocacy for freedom to research the ins and outs of prediction markets will bear fruit.