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Can prediction markets really run the world? A new book wonders if they could, and the possibility is fascinating to consider, particularly if such markets might transform the agencies and courts with which D.C. lawyers interact. Prediction markets aggregate information from participants into a collective judgment, frequently involving financial rewards for correct predictions. Participants can win money by predicting events such as whether Barack Obama will become the Democratic presidential nominee, whether the U.S. economy will go into recession in 2008, or whether the Supreme Court will strike down the D.C. handgun ban. These prediction markets have already shown substantial promise at predicting everything from presidential elections to a movie’s success at the box office. Now, Predictocracy: Market Mechanisms for Public and Private Decision Making, published on Jan. 28, suggests that such predictive technologies may radically transform courts, legislatures, administrative agencies, business, and journalism. The book’s author is Michael Abramowicz, a law professor at George Washington University and one of the academic experts in this emerging field. WANNA BET? “Wanna bet on that?” Abramowicz asks in his book’s first sentence. The suggestion implicit in this playground challenge is that the willingness to place money on a prediction attests to a predictor’s sincerity. Prediction markets, by insisting that individuals back their views with money, “eliminate cheap talk” and identify the most committed predictors. Prediction markets force someone to suffer financially from bad predictions, and they exclude predictions that no one appears willing to back with money. Predictocracy concludes that both public and private organizations ought to use prediction markets because they “generally will be superior” to alternatives without direct financial incentives. Abramowicz sums up the potential: Prediction markets can serve as a “general-purpose tool” for prediction, and prediction can aggregate information, beliefs, and preferences. Of specific relevance to D.C. lawyers, Abramowicz contends that prediction markets can play a significant role in a variety of governmental bodies such as administrative agencies and courts. At administrative agencies, regulators can gain guidance from a prediction market. For example, the Bureau of Prisons might predict the effect of a new prison on crime, unemployment, and housing values. The Environmental Protection Agency might predict the effect of a nuclear storage facility on water contamination. Or the Securities and Exchange Commission could assess how possible regulations might affect corporations. Prediction markets also offer the promise of saving the government from “the need to issue detailed statutes or regulations in areas such as safety and utility regulation.” And if agencies rely on prediction markets, it could constrain ideologically motivated decision-making, Abramowicz argues. JUSTICE TO MARKET Courts also could benefit from prediction markets, Abramowicz contends. Among the possibilities are markets predicting the outcomes of cases, providing estimates regarding questions of state law or ambiguities in statutory interpretation, and helping courts make interim decisions such as imposing temporary restraining orders. Even further, Abramowicz suggests that prediction markets could replace courts by producing a legal analysis and anticipating how judges would resolve a case. “The civil trial is an anachronism,” he maintains, and a “single, randomly selected judge or jury adds randomness to the judicial process. Why not instead use a prediction market to anticipate what decision-makers on average would decide if a case were taken to trial?” This idea sounds provocative enough, but Abramowicz presents far more possibilities of markets taking over tasks now performed in corporations, media organizations, and legislatures. He ultimately concludes that prediction markets could essentially become the machinery of government. He labels this new kind of government a “predictocracy” and argues that it might be more attractive than existing alternatives. PREDICTORS WANTED I leave to readers the political and perhaps inherently subjective question of if they might prefer market-based government to our current institutions. But it is fascinating to start to think through the challenges if predictocracy does arrive even in part and citizens could influence court and agency proceedings through a market. For instance, how might a prediction market find enough participants to make decent legal predictions about how courts would rule on a particular matter? Consider, for example, a case on administrative law, such as how much deference courts should give to the EPA’s interpretation of what a particular environmental statute requires. Many legal predictions would be greatly helped by a forecaster having knowledge of the relevant legal issues. If random people on the street were polled about a Supreme Court case resting upon Chevron deference, it is not at all clear that such a prediction would be reliable. As a result, the number of qualified participants for legal markets seems limited, and the time of these individuals will be valuable (and often billable at high hourly rates). This limited pool of knowledgeable predictors might have to cover a lot of cases to truly bring about predictocracy. For some context, in just a one-year period from September 2006 to 2007, federal district courts saw 335,655 filings, and the U.S. Courts of Appeal had 58,410 filings. Even the expert decision-makers (called “judges”) can get overwhelmed by all these cases, and finding an additional qualified pool to assess evidence and reach conclusions may not be easy. Of course, some court cases are recognizably more important than others, and more people will participate in prediction markets as they become more familiar. But, for better or worse, prediction markets probably won’t be replacing civil trials anytime soon. UNPOPULAR PROPHETS Will politicians welcome prediction markets as a new tool of human knowledge, perhaps viewing them as a better form of polling? One might hope so because of the proven predictive accuracy, but if prediction markets start to encroach significantly upon the power of current decision-makers, the answer will probably be more complex. In his chapter on administrative agencies, Abramowicz acknowledges, “Agency officials generally do not want their decision-making constrained” and this presents a “barrier” to his proposals. Similar barriers might also exist with legislators, judges, and every other interest group that might lose political power with shifts toward predictocracy. Sometimes, one might even wonder, perhaps overly cynically, how much officials would really want to know the truth from a prediction market if the results conflict with their policy desires. To partisans on either side, predictions contrary to one’s political leanings can seem to be obstacles to overcome, not truths to be accepted. The history of prophets, stretching back to Cassandra and Jeremiah, has not been a pleasant one, and moves toward predictocracy may not be simple, easy, or conflict-free. Nevertheless, whether a complete predictocracy ever appears, prediction markets still will have significant consequences. The possibility of glimpses into our future is just too compelling to ignore. Prediction markets will be worth learning about — and that’s a very safe bet.
Robert L. Rogers is associate opinion editor of Legal Times . With professor Miriam Cherry of McGeorge School of Law in Sacramento, Calif., he has written three law review articles about prediction markets.

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