Why Does Government Suppress Information?
The case for legalizing prediction markets
Sunday night is Oscar night! Think you know who's going to win? Want to make a bet?
The Hollywood Stock Exchange allows people to bet on which movies, actors, directors, etc. will take home Academy Awards. You can also bet on how much money a movie might make. It's called a prediction market … except unlike other prediction markets, bettors can't use real money.
What fun is that? It's not only less fun, it's also makes the prediction market less accurate. People are more careful when they have real money on the line, and the chance of losing money weeds out the frivolous guessers. Prediction markets are valuable for predicting all kinds of things because the prospect of making money attracts people with knowledge, judgment, and a good sense of the future. More information is better than less. The people most confident in their information bet the most. That's why speculation is a sound market institution.
The promoters of the Hollywood Stock Exchange would have preferred the use of real money but—surprise!—government forbids it. The Frank-Dodd financial regulation law killed the real market at the behest of some in the movie industry.
Rich Jacobs, president of the Hollywood Stock Exchange, says that some studios wanted it killed because they didn't want public discussion of their plans.
"I think they were just concerned about bringing financial market transparency to an industry that hasn't had any transparency about finances," he said.
Why would people want a prediction market for movies?
"Thousands of users out there follow movies very closely," Jacobs said. "They have an opinion on how well those films will do, and they'd like to put some of their money (to) work."
And through the betting, knowledge would be revealed. Films more likely to succeed would probably get funded.
Not every studio opposed the prediction market. Lionsgate defended it. Good for them.
"It would give an opportunity for those trying to produce (small) films and get distribution … by showing that the market thinks those films can make $10 or $20 million," Jacobs said.
The betting would start at the very beginning of the process.
"First, it's a script, an idea. Then, an actor or director signs on, and the value goes up. And by the time the trailer comes out, there's a very good sense of the valuation of the property."
But politicians called that "speculation" and "gambling." Can't have that!
"The Commodity Futures Trading Commission did a three-year review and concluded that there was legitimate economic purpose behind this market," Jacobs added.
But last year, then-Sen. Chris Dodd and Rep. Barney Frank said no.
Now I hear Dodd might be appointed head of the movie studios' lobby. Cozy. Maybe sleazy. But that's how politics and regulation work.
Meanwhile, the Hollywood Stock Exchange continues to operate. But with bettors using fake money, it's less accurate.
"It's certainly not as accurate as it would be with the real money market," Jacobs said. "(But the) track record of the Hollywood Stock Exchange in forecasting how well a film will do at the box office has been extraordinary."
That's because prediction markets predict better than pundits and polls. An even better one is Intrade.com—it uses real money. One study found it has just half the margin of error of national polls. Intrade is based in Ireland because cloddish busybodies like Dodd and Sen. Jon Kyl won't allow such gambling sites to operate in the United States. Nevertheless, Americans bet on Intrade anyway, so that prediction market is still a way for Americans to demonstrate their predictive talents.
So let's have fun with the information that the bettors bring us. What does Intrade predict for the Oscars? As of Tuesday, The King's Speech had an 81 percent chance to win best picture. Its star, Colin Firth, was a 95.5 percent favorite to win best actor. Natalie Portman had a 90 percent chance of winning best actress for Black Swan. The best director race was closer. David Fincher was the favorite at 60 percent for The Social Network.
I dare you to bet against the prediction market.
John Stossel is host of Stossel on the Fox Business Network. He's the author of Give Me a Break and of Myth, Lies, and Downright Stupidity. To find out more about John Stossel, visit his site at johnstossel.com.
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