The US government, under the chameleonic excuse of the “public interest,” forbids prediction markets about federal politics except under special permissions and restricted conditions. A bureau, manned by bureaucrats and run by Democratic and Republican appointees, the Commodity Futures Trading Commission (CFTC), is tasked with that. A Financial Times article presents an interesting overview of the situation (Oliver Roeder, “Prediction Markets Can Tell the Future. Why Is the US So Afraid of Them?” November 10, 2023). Illustrating with the case of PredictIt, the only political prediction market currently allowed in America but with severe restrictions, the journalist explains how it works:

A share on PredictIt settles at $1 if the listed event comes to pass and $0 if it doesn’t, and its price fluctuates somewhere in the middle meanwhile. Shares can be bought and sold at any time, as a candidate’s fortunes wax and wane before election night, say. The price, therefore, can be read as a probability. A share of Joe Biden winning re-election, for example, is trading at 43 cents, implying a 43 percent chance of him winning a second term. … Donald Trump trails at 37 cents, and anyone else is a long shot.

The standard argument for prediction markets is that, similarly to standard financial markets do, they generate prices that incorporate the knowledge of insiders and anybody who chooses to participate. Political prediction markets also motivate participating citizens to acquire relevant information—although it is presumably more about what the other voters will do with their own (meager) information than about substantive issues. Some academic research suggests that the electoral forecasts of prediction markets have been more accurate than opinion polls.

Such markets can be useful for more practical purposes. The Financial Times quotes an executive of KalshiEX, a prediction market that allows trading on the probability of events such as government shutdowns but is prohibited by the CFTC from intermediating trading bets on which party will control Congress:

“There’s no greater risk that Americans face nowadays than election risk,” Luana Lopes Lara, Kalshi’s CTO, said in an interview with Bloomberg in October. While large investors and institutions can access financial products with exposure to this risk, she said, it’s “a little crazy” to think that everyday Americans shouldn’t also be able to.

Interesting argument. But to the extent that political prediction markets would be used as insurance against political risk, which involves betting in favor of the most harmful party or candidate, would dilute these markets’ predictive power. Of course, the bet limit per trader would need to be much higher than the current $850 imposed on PredictIt. At any rate, we can understand why politicians wouldn’t like people being able to partly insure against them.

The reasons given last Summer by a group of Democratic senators, including Dianne Feinstein and Elizabeth Warren, to oppose political prediction markets betray their strange democratic mystique. They fear that the bad superrich would wage “extraordinary bets” on the same party to which they contribute (presumably through Political Action Committees). It’s not clear what exactly this would change, but the letter seems to assume that voters are so clueless enough about politics as to be influenced by mere electoral predictions. This last possibility is not incompatible with the individual voter’s well-known rational ignorance of politics (because he has practically zero influence on election results), but it does not exactly glorify democratic politics.

The angelic conception of democracy that the senators try to project is not consistent with their poor opinion of voters. They speak about “the sanctity and democratic value of elections,” as if a prediction market was blasphemy. They claim that “introducing financial incentives into the elections process fundamentally changes the motivations behind each vote, potentially replacing political convictions with financial calculations.” As if politicians did not introduce “financial calculations” in their electoral promises and their trillion-dollar deficits. As if they did not buy votes with taxpayers’ money.

As I have argued elsewhere, less muddled and more realistic theories of democracy can be found in the works of such theorists as Friedrich Hayek and William Riker (who argues that politics is a quasi-random game) or in the economic school of constitutional political economy that developed around James Buchanan.

Note also that, in the UK, political betting is allowed through bookies and the democratic sky hasn’t fallen yet.

The politicians’ opposition to political prediction markets may simply reflect the sanctity of their power. This transpires in what Oregon senator Jeff Merkley, the lead author of the letter, told the Financial Times:

But he wishes that PredictIt had come to him and his legislative colleagues for authorisation. “They should have come to Congress and said, ‘Well, we’d like to allow very limited gaming for research purposes.’” Under strict conditions—low ceilings on position sizes, transparency and checks for any corrupting influence—“I could see an argument for it,” Merkley said.