Legalizing Online Futures Betting

Bennett Haselton writes: "Online political futures betting is in a legal limbo in the United States. But with the lifting of legal sanctions, and with the addition of one simple new feature, online futures betting could not only provide more accurate forecasts of the merits of different candidates, but also provide a tool for quieting partisan blowhards who think the opposing party's candidate is going to drag the country to hell. Let the blowhards bet!" You'll find the rest of Bennett's story below.

Did you have a strongly felt prediction about the 2012 elections that went against the conventional wisdom? Then you could have placed a bet at the Iowa Electronic Markets website (with real money); yet most people don't know the website exists. Indeed, it's only able to exist at all because of an exemption from U.S. laws that make other political betting websites illegal. The Irish-based online political betting site Intrade doesn't even accept American customers (you can't wire money to them from a U.S. based account), and their late CEO reportedly told John Stossel he was afraid of being arrested if he set foot in the U.S.

That's too bad, because I think that legalized Web-based betting on political outcomes could serve two valuable purposes in American politics: to provide forecasts of the relative merits of living under either of two candidates, and to force partisan blowhards to seriously consider whether they actually mean what they say. But in order to make this happen, in addition to the government lifting any legal restrictions on the ability of such sites to operate, I think a valuable additional feature would be the ability to place "if-bets", betting on particular events (the level of unemployment, for example) if a particular candidate were elected.

In September I happened to stop by the King County Republicans booth at the Puyallup Fair, and asked one volunteer, just for the sake of argument, what he thought was the best case against re-electing President Obama. (I'm a liberal, but I spend more time reading conservative blogs and opinion pieces than liberal ones, partly just to see what pieces I might agree with.) He said flatly that if President Obama were re-elected, unemployment could rise as high as 20 percent, and listed some other dire figures.

Well, I didn't consider that an "argument", but I asked him, "Would you be willing to bet on it?" -- not proposing that we actually wager, but asking him to think seriously about whether he would be willing to wager, if it were an option. In other words, if Obama is re-elected, and employment rises to 20 percent some time in the next four years (or perhaps if average employment over 4 years is above some designated threshold), then I pay my new Republican friend $100. If Obama is re-elected and no such thing happens, then the Republican pays me $100. If Obama is not re-elected, then the whole wager is void. After I spelled this out, the volunteer got a thoughtful look -- as if he were thinking, for perhaps the first time, whether he really believed what he had been saying. (Of course I've probably made similarly ill-thought-out predictions about politicians that I disliked, where the offer of a wager would have made me stop and think harder about what I actually believed.)

It would be easy for Intrade and similar companies to support these kinds of conditional "if-bets". Then their website could list data on, for example, what the bettors currently think are the odds of unemployment reaching 20% (or 15%, or 25%) if Obama were re-elected, or if Romney were elected. Ideally there would be a different betting market for each percentage point -- and you could aggregate all the market odds for those percentages into one simple graph, with a bell curve showing what the market thinks are the odds of employment hitting 10%, 11%, 12%, etc. under either Obama or Romney.

The first benefit of such a system would be obvious: to the extent that betting markets are an accurate predictor of political outcomes, this would be an easy way to see what conventional wisdom projected for unemployment, inflation, infant morality rates, or any other statistic that Intrade accepted bets on, if either candidate were elected. As long as either candidate had a realistic chance of winning, the people wagering on the "if-bets" would have to take them seriously. (If one candidate had virtually no chance of winning, then the "if-bets" conditional on that candidate's victory might not show anything useful, since everyone expects the bets will be declared void. So it wouldn't work for evaluating the merits of a long-shot candidate like Jill Stein - who might have some good ideas, but the "if-bet" betting markets wouldn't be able to tell us that.)

The second benefit would be that whenever anyone claimed projections that departed radically from the market odds, you could simply ask them, "Why not go to Intrade and bet on it?" If a person really believed that their dire predictions were more likely than the market seemed to think, then they could wager accordingly. Even if they don't think their prediction is likely to come true, as long as they think an event is more likely than the market seems to think, they should still believe that they could make money in the long run by betting accordingly. (For example, if you think there's only a 1-in-3 chance that Romney will win, but the market says 1-in-5, you should bet that Romney will win, at the 4-to-1 odds offered by the market. If you bet on lots of separate events where you think the probability of event occurring is 1/3 but the market says 1/5, then if you're right and the probabilities really are about 1/3, you'll lose 2 out of 3 times, but every 3rd time you'll make back 5 times the amount of your wager, and come out ahead. Assuming that you really are smarter than the market, of course.)

There could be rules and safeguards to prevent abuses of the system (rules that could be imposed by U.S. law, even if they're not enforced by overseas betting markets), such as not allowing individuals to bet more than $500. (This is already enforced by the Iowa Electronic Markets.) That's small enough to stop individual bettors from trying to manipulate the market through enormous wagers (although they might find ways to do that anyway). It's also small enough that it wouldn't be worth it for any one individual to try and influence a political outcome just to win a bet. You could try to enlist your friends to help you place a collective $10,000 bet on a single outcome, but the more people you rope into your coalition, the greater the chances of someone (a) turning you in for violating the betting laws, or (b) taking the $500 you lent them, and then refusing to pay it back if they win their portion of the wager.

At the same time, the $500 limit is large enough that anyone who makes a bold claim about the future, could not plausibly claim that it's not worth their time to go over to Intrade and make a wager. (Well, billionaires could claim it's not worth their time. We could have a higher limit for higher-income individuals, but the problem is that for someone like Donald Trump, any betting limit large enough to get him to take the wager seriously, would also be large enough to allow him to manipulate the market. So we might just have to get by on ignoring Trump the old-fashioned way.)

However, even if Intrade implemented "if-bets", and even if futures betting were made unambiguously legal under U.S. law, we'd have to overcome a certain amount of cultural taboo against betting on politics, especially for members of certain professions. When Joe Scarborough called Nate Silver a "joke" for saying that Obama had a 75% chance of winning, Nate Silver gave exactly the right response: "Wanna bet?" (for charity). However, the New York Times Public Editor (an office that I've dealt with in the past) rebuked Nate Silver for offering the wager, although in a 600-word essay, the Public Editor wrote only one sentence saying why she thought it was a bad idea: because it "[gives] ammunition to the critics who want to paint Mr. Silver as a partisan who is trying to sway the outcome". This doesn't make much sense, since Nate Silver had already staked his reputation on the outcome, which was worth astronomically more to him than the $1,000 (so to the extent that he had any conflict of interest, it would have already been in place anyway). Still, for anyone in a profession that placed a high value on "perceived objectivity", they might be able to use that as an excuse for not placing a wager.

Even for the rest of us not in danger of finger-wagging from the Times Public Editor, I think there would be one big obstacle to using the markets to tell blowhards to "place your bets or shut up": people would come up with dumbass excuses not to do it. I can't even anticipate the kinds of excuses that people might make, because I think I just think too rationally (at least by my own definition), so I tend to anticipate semi-logical objections like, "I think Romney will win, so I don't want to support a system that says he will lose." To that I would say: If you think the market odds are wrong, you should place the bet anyway, and if you win, you'll be taking money from the people who bet that Romney would lose, not "supporting" them. And in fact by placing the bet, you will slightly increase the market-reported odds of Romney winning. So you'll be taking money from the people who bet against your guy, and shifting the reported odds in favor of a Romney victory, which ought to be a win-win. Even better, if you're sure he'll win, you'll have winnings afterward that you can donate to the Republican Party.

So while I don't think that's a valid objection, it at least has the form of a logical argument, which is what makes it possible to answer it. The excuses that I think people would actually give, would be along the lines of, "I don't do that." Well, if you want to support your candidate and you're confident in your predictions, why not? Or, "I think it's wrong to bet against the future of our country." Hey, if you place a bet that unemployment will go up under Obama, then that will be reported in the aggregate forecasts of what the market thinks will happen under the two candidates -- which will actually slightly increase the chance of a Romney win (which is presumably what you want), right? Besides, you realize that if you have life insurance on your spouse, you're "betting" every month that they will die? How much more ethical is that?

But for everyone else who wouldn't come up with excuses not to bet on the outcomes, I wonder, in what might be hopeful naivete, if the available of online political "if-betting" might bring our partisan extremes closer together. When my Republican counterpart and I were discussing the future of the nation under Obama or Romney, if we were forced to confront the possibility of betting on the result (not betting on who would win, but betting on what would happen if a particular candidate won), I think several things would have gone through my mind. First, I might realize that despite any stridently partisan statements I had made, I didn't really know with much confidence what would happen. Second, the humility of realizing that I would want to check the online prediction markets, because I think the rest of the world collectively has more wisdom on the matter than I do. And third, if the online prediction markets showed projected similar outcomes (for unemployment, for example) no matter who is elected, then we could calmly accept the fact that neither candidate is going to be able to perform miracles, but neither candidate is going to destroy the country either, so we can accept the fact that the country will probably do OK no matter who wins, and go have a beer.

Assuming, of course, the other guy felt the same way. I can get along fine with people who don't agree with me, but I don't think I'd get along with someone who didn't even want to seriously consider whether he really believed the things he was saying. However, if the various competing futures markets would implement "if-bets", and if the U.S. government would just give the OK to online futures betting generally, I'd be perfectly happy to take the guy's money.