May 17, 2008

How anti-gambling laws stifle science

Make moneyScience has an interesting policy forum article: The Promise of Prediction Markets -- Arrow et al. 320 (5878): 877 -- Science. It deals with prediction markets, the use of markets to forecast future events. Prediction markets have shown great promise, both for predicting elections (c.f. Iowa Electronic Markets) and for internal use in companies to predict sales revenues, product launch timing and software quality. However, the article notes that current US laws against gambling, especially internet gambling, seriously limits the possibility of setting up prediction markets.

The authors argue that there is a need to clarify the circumstances where prediction markets are legal. In particular the Commodity Futures Trading Commission (CFTC) should establish safe-harbor rules for at least some small-stakes markets such as those run by research institutions, government agencies and internal prediction markets of private businesses and non-profit organisations.

It is a bit ironic that the current rules block the only kind of gambling that actually has positive externalities.

Posted by Anders3 at May 17, 2008 06:46 PM