Want to bet on this week's NFL game between Chicago and Dallas? I do. Newspapers and websites all over America tell their readers that Dallas is favored by three points. That's the "spread" posted by bookies. Millions will be bet on that game, and billions will be bet on other games this weekend—college football, NBA games, NHL matches, UFC events…
Most of these bets are illegal. This is not a good thing.
Recently, National Basketball Association commissioner Adam Silver became the first major professional sports commissioner to endorse legalizing sports betting. In The New York Times, he wrote, "Gambling has increasingly become a popular and accepted form of entertainment in the United States. Most states offer lotteries."
They do, and states give worse odds than bookies. Silver writes, "There is an obvious appetite among sports fans for a safe and legal way to wager."
But bills to legalize betting go nowhere in Congress. Casinos oppose them because they don't want competition. They are joined by people who consider gambling immoral. "Bootleggers and Baptists" is what economist Bruce Yandle called these coalitions. Bootleggers got rich off Prohibition.
Just as Prohibition created Al Capone, bans on betting create crime. They also deprive Americans of useful information, such as who is likely to be the next president.
The pundits don't know. In 2012, conservative pundits confidently predicted a Romney victory. This year, Democrats predicted they'd keep the Senate. We in the media try to rely on "scientific" polls. Except they aren't so great either. In Maryland, most polls had the Democratic candidate for governor up by double digits, but the Republican won. On average, polls underestimated Republican performance by 4 percent.
Pollsters and pundits rarely suffer much penalty for being wrong. People figure these expert guesses are the best anyone can do. But they aren't. When politicians allow people to put their money where their mouths are, bettors do a better job predicting future events. Bettors are better.
Last month, I wrote about how U.S. regulators shut down Intrade, a site that allowed people to bet on all sorts of things. Before elections, Intrade's bettors consistently out-predicted the pundits. In 2012, Intrade gave Obama a 90 percent chance of winning, while pundits still said the race was "too close to call." Gallup predicted a Romney win.
Although American regulators killed Intrade, the British online prediction market Betfair still operates. It gave 89 percent odds that Republicans would win the Senate.
By the way, Betfair now gives Hillary Clinton a 40 percent chance of being the next president. Prediction markets like Betfair, PredictIt.com and Predictious.com allow bettors to predict everything from the gender of England's next royal baby to the winner of the next Nobel Peace Prize.
The Iowa Electronic Markets has outperformed political polls 74 percent of the time since 1988. Why?
First, although individual bettors are no more enlightened than any one pundit, a large and diverse group of bettors usually is. Second, people are more realistic when betting than when answering a survey. Polls suffer from a "self-reporting bias," where participants say what they think they should rather than what they actually feel. With money on the line, forecasts are more accurate.
So allowing betting helps us make better predictions about the future.
Luckily, the U.S. Commodity Futures Trading Commission recently gave New Zealand's University of Wellington permission to run a prediction market in the U.S. The site, PredictIt.com, allows users to bet on elections, court cases, regulatory decisions and more.
Unfortunately, regulators will allow no more than 5,000 traders to make bets on a given contract (that is, a predicted outcome), and each trader can bet no more than $850. That will limit the site's prediction ability, but at least America will allow one site that will generate real predictions instead of just hot air.
Legalization efforts might get farther if we stopped thinking of betting as a vice and instead recognized that it's a useful part of rational decision-making. There's knowledge to be tapped in people's heads about what will happen next, and markets, as usual, are the best way to unleash that wisdom.