Nick Bostrom, Director of The Future of Humanity Institute at Oxford University, considers the impact that prediction markets could have on the creation of government policy in the UK.
Rebooting Britain: Make policy using prediction markets
By Nick Bostrom | 01 December 2009
This article was published in the January issue of Wired UK magazine.
How do we know what to think about the future? Politicians make confident predictions. If we elect them, unemployment will allegedly go down, the economy will grow, crime will be reduced, and terrorist attacks will be prevented. If we elect their opponents, the opposite will happen. These opponents, of course, disagree. Whom should we trust?
We could listen to the media pundits, but pundits are usually given a platform because they are articulate and entertaining, not because they have a track record of being right. We could listen to academic experts, but both sides of a political dispute can usually point to some experts who support their view. Or we could try to form our own opinions; but we may not know very much about the issue at hand, and at any rate, it is unclear why we should believe that our opinions would be any more reliable than the opinions of all those millions of people who have considered the issue and embraced the opposite view.
One way of generating predictions is betting markets. If people are allowed to buy and sell bets that some hypothesis is true, then the fluctuating price of those bets can be interpreted as a probability estimate of that hypothesis. The hypothesis could be that some particular horse will win a race, or it could be that weapons of mass destruction will be found if our forces invade some particular country. The principle is the same in both cases but, as pointed out by the economist Robin Hanson, the information that could be revealed is much more valuable in the second case.
In every known head-to-head field comparison between speculative markets and other forward-looking institutions, the speculative markets have been at least as accurate. More often than not, they prevail. Orange-juice futures improve on National Weather Service forecasts, horse race markets beat horse race experts, Oscar markets beat columnists’ tips, gas demand markets beat gas demand experts, stock markets beat the official NASA panel at identifying the company responsible for the Challenger accident, election markets beat national opinion polls, and corporate sales markets beat official corporate forecasts.
Prediction markets can aggregate many small pieces of information held by large numbers of people from diverse backgrounds. Prediction markets seem to work well because they reward accuracy (rather than the ability to tell a convincing story) and punish error (rather than the voicing of politically inconvenient opinions).
No system for making predictions is going to be perfect, but so far the empirical evidence seems to quite strongly favour prediction markets compared to alternative ways of generating forecasts. Therefore, the traditional ways of forecasting uncertain political futures – pundits, academic experts, debates between leading politicians, and personal gut feelings – should be supplemented by the creation of prediction markets wherever possible. When the issue at hand is sufficiently important, such markets should be subsidised by the state as a relatively inexpensive form of intelligence gathering.
Horse-betting is selfish, but betting on policy-relevant outcomes would be public service. Pundits should be expected to put their money where their mouths are, and everybody who can afford to lose £10 or £20 should be encouraged to participate. Journalists should be asked to include information about prediction market estimates in their coverage of controversial topics. Schoolchildren should be taught applied probability theory in the classroom and given the opportunity to practice their skills in real-world settings.
This way, I think, Britain would make shrewder policy decisions. Moreover, its population would learn to think about uncertainty in a sophisticated and mature manner. In our complex modern world, that would be a winner.
Nick Bostrom is director of the Future of Humanity Institute at Oxford University.
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