Government Stifles the Wisdom of Crowds
SEPTEMBER 01, 2008 by JOHN STOSSEL
Who will be our next president? If you want an accurate guess, don’t ask the pundits. Go where people put their money where their mouths are.
Intrade.com, for example.
It’s a prediction market, basically a futures market like those where people bet on the future price of oil, gold, and pork bellies. But at Intrade, people bet mostly on politics.
The prices on Intrade have been highly accurate predictors of the future. On TV, political “experts” make pronouncements on what they think will happen, but crowds of bettors on sites like Intrade are right more often.
In 2004 TV experts like James Carville said John Kerry would win the presidency. In 2006, they said the Republicans would keep control of Congress. But the crowds on Intrade bet against Kerry, and in 2006, “the bettors at Intrade collectively called every single race in the Senate right,” James Surowiecki, author of The Wisdom of Crowds, told me on “20/20.”
Wisdom of Crowds? When I think of crowds, I think of mobs. But, Surowiecki says, “[C]rowds of people can be incredibly intelligent. . . . [I]f the crowd is big enough and diverse enough, you have access to so much more knowledge.”
The first computerized political market was created at the University of Iowa. “That market outperformed polls three-quarters of the time, and its election-eve forecasts were better than any pundit’s and better than any poll,” says Surowiecki.
Intrade takes bets on more than politics. You can bet on global warming—will this year be one of the five hottest on record?—or on whether Eliot Spitzer will be indicted or on whether there will be a massive earthquake before the end of this year.
But most bets concern presidential politics. People have made lots of money predicting unlikely events, such as John McCain’s comeback.
So isn’t this a form of gambling, and isn’t gambling illegal in America? Intrade is located in Ireland, and CEO John Delaney told me he’s afraid to come to America because, “I don’t look good in an orange jumpsuit.”
Prediction or Gambling?
He has reason to worry. Congressional Republicans added a provision cracking down on online gambling to a port-security bill in 2006.
Most banks stopped dealing with sites like Intrade after that, but some continued, including one called Neteller. Its Canadian cofounders were arrested on a trip to the United States in 2007. Now they face up to five years in prison. That seems like an odd way to treat people who make financial activities between consenting adults possible—while providing useful information about the future.
Horse racing, fantasy sports, and online lotteries were given exemptions in the 2006 bill. It’s OK to bet if you have influence in Washington. Ironically, the U.S. Navy and Federal Reserve use Intrade’s data.
That Iowa prediction market begged for special permission from the government and got a waiver that limits bets to $500. “That makes them less accurate,” says Surowiecki. “Real money is what makes it work.”
America’s anti-gambling laws are thoroughly hypocritical. States run lotteries—one of the worst forms of gambling since no skill is involved and the odds are so bad—are allowed, while prediction markets, a powerful forecasting tool, are stifled.
The Department of Defense once considered setting up a market to predict where the next terrorist attack might occur. The idea died when some politicians shouted it down. Senator Byron Dorgan sneered at “this betting parlor on the Internet.” Senator Ron Wyden said a terrorism futures market “is ridiculous. . . grotesque.”
Surowiecki says, “These are potentially tremendously useful tools for improving our national security. It’s much more egregious not to use them than to use them.”
What does Intrade predict now? As I write this, Barack Obama is favored to win the presidency. You can buy McCain for about 37 cents, indicating a 37 percent chance of winning. But Obama is valued at 56 cents (http://tinyurl.com/4npyt).