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In the end, the regulatory process proved too slow, so Congress took matters in its own hands. Hidden among the massive raft of new financial regulations passed just a few months later in July 2010 as a response to the financial crisis was a blanket ban on the trading of box-office futures. This kind of highly specific ban is very unusual: Onions are the only other commodity specifically excluded from futures trading. (Onion futures became verboten in the late 1950s, when then-congressman Gerald Ford introduced the Onion Futures Act in response to a market crash that followed a couple of enterprising Chicagoans cornering the market.)
In addition to squelching two promising ventures that could have allowed armchair speculators to put real money on their preferred bankable stars, the crony capitalists of Big Hollywood wound up depriving themselves of a powerful tool to hedge their own risks and operate more efficiently. The move also served as notice to the CFTC and other regulators: You'd better step up (and step on) prediction markets that threaten established industries-including the industry located on Capitol Hill-or else we'll do it for you.
More Bettors, Less Problems
Prediction markets are a really good, useful idea, which makes them hard to snuff out entirely. Many Intrade competitors continue to operate overseas, including a Gibraltar-based firm called BetFair and a New Zealand-based outfit called iPredict. The more innovative Bets on Bitcoin has managed to evade regulation so far through the simple but clever expedient of operating entirely without employing U.S. currency. (For more on the potential of Bitcoin technology to circumvent regulation, see Jerry Brito, "Bitcoin: More than Money," page 34.)
But those markets lack the volume and prominence that made Intrade so attractive-and accurate. Large, diverse pools of traders help balance out each other's biases and blind spots. And large, accessible pools of money incentivize people to jump into the fray. Lots of folks are willing to spitball with their buddies about how the latest Marvel movie will do, but they'll only bother to share those speculations with the markets if the mechanism to do so is easy and the prospect for profit is real.
Regulators and politicians tend to find prediction markets less threatening when they are deployed in the service of academic inquiry rather than electoral handicapping or plain old moneymaking. The Robert Wood Johnson Foundation has used prediction markets to aid decision-making about where to move medical personnel and supplies in preparation for flu season, for instance. The Iowa Electronic Markets, founded at the University of Iowa in 1988, continue to operate with impunity, despite facilitating betting on political elections as well as the behavior of the Federal Reserve. Their immunity is due in large part to the fact nobody can really make much money on them. Accounts are capped at $500, which keeps the markets genteel and inoffensive but also robs them of much of their information-generating power.
In 2007, 25 economists signed a letter asking that small-stakes prediction markets be exempt from anti-gambling laws, in order to broaden and deepen the pools of people who could contribute information (in the form of cash) to their academic endeavors. The signatories included four Nobel Prize winners, but not Steven Levitt of Freakonomics fame, who thought that the statement actually didn't go far enough.
"To me, there is no difference between a 'prediction' market and a 'gambling' market," Levitt wrote on his blog. "If there is demand for people who either want financial risk surrounding an event or want to hedge risk, why should the government get in the way? It doesn't matter whether it's the value of a bond, a share of stock, a presidential election, a firm's likelihood of hitting its quarterly numbers, or the chances that the White Sox will win the pennant. In general I am not much of a libertarian, but our government's policy towards gambling is completely idiotic and rife with internal contradictions."
Markets need sheep and wolves to function properly, and they need enough diversity to escape the trap of conventional wisdom. (One of the criticisms of Intrade's political markets was that they were dominated by insiders who were overly swayed by poll results and cable news chatter.)
For now, prediction markets thrive in areas outside the reach of regulators. Google uses internal prediction markets to aggregate information on whether projects will be completed on deadline or on budget. The U.S. government itself has experimented with prediction markets, most famously as part of the Defense Department's Total Information Awareness project, which was formally shuttered in 2003 after a public outcry. One component of that project was the FutureMAP effort, which created markets designed to help predict events of geopolitical significance. Then-Senate Minority Leader Tom Daschle (D-S.D.) said on the floor of the Senate: "I couldn't believe that we would actually commit $8 million to create a Web site that would encourage investors to bet on futures involving terrorist attacks and public assassinations.â€¦I can't believe that anybody would seriously propose that we trade in death."
Overcoming our collective squeamishness about betting on events as important as the use of nuclear weapons or as insignificant as the fate of Miley Cyrus' career is an ongoing process. As usual, politicians are lagging behind the masses who flocked to sites like Intrade for the fun, money, and information on offer. Intrade offered a breath of fresh air in the stale echo chamber of political prediction, one that will not be so easily replaced. The Washington Post's Wonkblog published a lament the day after the shutdown notice: "RIP Intrade: The last, best hope for pundit accountability." In September, Wikipedia founder Jimmy Wales posted on Facebook: "I miss intradeâ€¦is there alternative for market-like odds for things like US Syria vote?" The answer, for now, is not really.
But Hanson remains hopeful even in the post-Intrade era. "It took a long time for stock to become accepted and for people to see it as a useful thing to do," he says. "The same with life insurance. That leaves you some hope that new areas could eventually be carved out, that we aren't at the end of that trail."