While sports and financial Prediction Markets are now commonplace, PMs haven’t been as widely adopted in most other areas. Nevertheless, a universal Prediction Market is highly sought after, especially a politics-related one.
In the past, many rather disastrous events took place simply due to the lack of appropriate knowledge of socio-political issues among the general public. Essentially, being able to predict political events is as important as being able to predict people’s behaviour in our everyday lives. Perhaps, if monetary bets on important political events were a common practice, humankind’s history would’ve taken some drastically different turns, as people would’ve had a strong financial incentive to educate themselves on political issues. It is not surprising that Ludwig Mises (“Economic Calculation in the Socialist Commonwealth”) and Friedrich Hayek (“The Use of Knowledge in Society”), well-known economists of the first half of the 20th century, were among the first serious apologists of universal PMs (those allowing questions of any kind, not just financial ones). Their views were largely determined by their frustration with the political events unfolding at the time.
However, the path from theoretical concepts to practical application turned out to be a difficult one. The first major practical experiment took place at the University of Iowa in 1988, during which a market for political predictions was created in anticipation of the U.S. presidential elections. Several similar experiments also took place in the 1990s. The questions ranged from the potential box office revenues of Hollywood films to the possibility of cold fusion taking place spontaneously.
In 2001, intrade.com was launched, which allowed users to bet money on a wide range of issues. In fact, it was the first real exchange with such functionality. In 2008 and 2012, Intrade.com predicted the U.S. election results in various states around 70% more accurate that leading political scientists and polls.
This accuracy showed the potential power of PM, but at the same time threatened the current political system. The collective “serum of truth” that allowed citizens to see so far ahead has a potential of rendering most current political technologies, designed to sway short-sighted voters, obsolete. Moreover, PM could be used by lobbyists to directly influence the election results.
It’s unclear whether big-name politicians had a hand in this, but in 2012 the American Commodity Futures Trading Commission (CFTC) prohibited U.S. citizens from using the website. The official reason was financial, not political. As a result, the website lost a significant amount of users, its profits plummeted and eventually they had to shut down in 2013. Nevertheless, there’s still a lot of scientific and technical interest in the phenomenon of Prediction Markets, and enthusiasts are continuing their experiments.