Predictocracy: Market Mechanisms for Public and Private Decision Making

Copyright Date: 2007
Published by: Yale University Press
Pages: 368
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  • Book Info
    Book Description:

    Predicting the future is serious business for virtually all public and private institutions, for they must often make important decisions based on such predictions. This visionary book explores how institutions from legislatures to corporations might improve their predictions and arrive at better decisions by means of prediction markets, a promising new tool with virtually unlimited potential applications.

    Michael Abramowicz explains how prediction markets work; why they accurately forecast elections, sports contests, and other events; and how they may even advance the ideals of our system of republican government. He also explores the ways in which prediction markets address common problems related to institutional decision making. Throughout the book the author extends current thinking about prediction markets and offers imaginative proposals for their use in an array of settings and situations.

    eISBN: 978-0-300-14495-6
    Subjects: Business

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Preface
    (pp. ix-xvi)
  4. Acknowledgments
    (pp. xvii-xviii)
  5. Chapter 1 The Media
    (pp. 1-33)

    If democratic institutions are tools for translating public opinion into public policy, then the most important institution might be the one that contributes most to forming public opinion in the first place: the media.¹ Constitutional protections for free speech and a free press such as the First Amendment to the U.S. Constitution seem to reflect a view that allowing uncensored speech will promote truth and, indirectly, good governance.² Perhaps the most articulate expression of this view is Oliver Wendell Holmes’s famous statement, “The best test of truth is the power of the thought to get itself accepted in the competition...

  6. Chapter 2 Policy Analysts
    (pp. 34-64)

    The number of prediction markets that media organizations can be expected to sponsor in the future will in all likelihood be limited. Although it is possible to imagine a great number of topics regarding which prediction market predictions might be of interest to readers, a limited number of individuals may wish to bet on prediction markets. This is especially so if prediction markets are zero-sum games, in which sophisticated players systematically earn profits from those who are less sophisticated. At some point, one might expect the latter to wise up, though the number of sports gamblers in this country might...

  7. Chapter 3 Businesses
    (pp. 65-99)

    In most of the examples discussed so far, the sponsors of prediction markets have been public-spirited, though perhaps animated by private concerns as well. The media might wish to attract readers and viewers, and policy analysis organizations might hope that markets will make predictions that support policies that they independently favor. In all of these cases, however, the organizations produce prediction markets for consumption primarily by the public at large and by policy makers. Nonetheless, we should expect that the number of such markets will, from the perspective of social welfare, be so low as to be inefficient. It will...

  8. Chapter 4 Committees
    (pp. 100-136)

    Because prediction markets provide consensus forecasts, their predictions might carry more weight than the assessment of any given individual. A reader of a newspaper who is educated about prediction markets might weight more heavily a prediction of the result of an election than an analysis by an expert, because that expert might be an outlier. A member of a legislative body would do well to be suspicious of the prognostications of a single policy analyst because of the possibility that the analyst might have a policy agenda; rather, the legislator might privilege a prediction market forecast that reflects a consensus...

  9. Chapter 5 Regulatory Bodies
    (pp. 137-161)

    We have seen how private entities can use prediction markets to produce information and predictions that can help them or others make decisions. The media, for example, can use prediction markets to inform their readers, and policy analysts may be able to use prediction markets to separate forecasts that are backed by evidence from unsubstantiated spin. Businesses can use internal or external prediction markets to gather information that might affect their decision making, and deliberative prediction markets might substitute for committees in gathering information for some ultimate decision maker.

    In all of these contexts, a prediction market provides one piece...

  10. Chapter 6 Administrative Agencies
    (pp. 162-193)

    Predictive decision making offers the promise of saving the government from the need to issue detailed statutes or regulations in areas such as safety and utility regulation. The government’s role is limited to establishing goals, running the prediction markets, and enforcing compliance. Though substantial, they are far simpler than tasks such as specifying particular technological requirements and then determining (and litigating) whether those requirements have been met. Prediction markets, however, also might be useful when an administrative agency continues to supervise an administrative regime. The markets might help assess potential decisions about particular issues such as regulations that the agency...

  11. Chapter 7 Public Corporations
    (pp. 194-226)

    The approaches developed in Chapters 5 and 6 allow the government to make decisions based on private parties’ predictions about the effects of both private and potential governmental actions. Nongovernmental decision makers, however, also might be interested in harnessing the power of prediction markets to assess the effects of their decisions. We have seen that businesses might use prediction markets to gather specific information that might be relevant to their work. A more intensive use of prediction markets would generate conditional predictions about the effects of particular decisions on the business.

    It is useful for a company to be able...

  12. Chapter 8 Courts
    (pp. 227-254)

    We have already considered several proposals for providing information and predictions to judges to help them improve their decision making. In Chapter 4, for example, we saw that subsidized deliberative prediction markets might be used to give participants incentives to offer legal arguments that are relevant to particular cases. These prediction markets would both predict judicial decisions and provide analysis that judges deciding particular cases might wish to take into account. In Chapter 5 I suggested that to the extent that federal judges are making predictions when deciding questions of state law or when resolving ambiguities in statutory interpretation, prediction...

  13. Chapter 9 Legislative Bodies
    (pp. 255-281)

    The preceding few chapters have shown that prediction markets can substitute for voting regimes of many kinds. Instead of using a vote of administrative agency commissioners to decide whether to enact particular regulations, we could use predictive cost-benefit analysis, according to Chapter 6. Instead of relying on a board to defend the interests of shareholders or on shareholders to defend their own interests, we could use self-deciding conditional prediction markets that would force corporations to adopt policies that would maximize share price, according to Chapter 7. And instead of having appellate judges vote in reviewing the decisions of trial judges...

  14. Chapter 10 Predictocracy
    (pp. 282-310)

    The first nine chapters of this book have developed two arguments: first, that prediction markets can serve as a general-purpose tool for prediction, and second, that prediction in turn can serve as a general-purpose tool for aggregation of information, beliefs, and preferences. Underlying both arguments is the observation that prediction markets give incentives to be honest in making evaluations and to take into account all possible information. This observation explains why election markets should provide more accurate forecasts on average than polling data, why markets projecting long-term economic trends should be more objective than official prognosticators, why predictive peer review...

  15. Afterword
    (pp. 311-314)

    Suppose that someone were to invent a magic crystal ball in which a user could see a provisional future. Someone who did not like that future could decide to make small or large changes in conditions and behavior that would elicit a different vision presented in the crystal ball. As a society, we might want to prevent use of the crystal ball to foresee our individual destinies. Surely, however, we would decide to use it at least for some limited purposes. The crystal ball could tell voters what the world would look like if different candidates for office were elected....

  16. Notes
    (pp. 315-342)
  17. Index
    (pp. 343-346)