How predictive markets can be applied to democracy
The stock market is an exchange in which investors will gamble on the likeliness of a company’s value increasing or decreasing, depending on the potential usefulness of a product or service. Investors devise various methods to predict the trends of these markets.
For example, if you wish to invest in orange juice, it would be in your best interest to pay attention to the weather trends in Florida to gauge the likelihood of a successful yield for orange farmers that year. It is upon this secondary factor of investing that predictive markets and the concept of Futarchy have arisen out of this sort of inductive reasoning.
Speculators of the stock market, gamble on prices to determine which goods and services have high or low values. Investing in the stock market is like gambling upon which products or companies are believed to increase in value. The way in which the stock market differs from predictive markets is when the participants gamble on variables that affect stock prices as opposed to the stocks themselves. This form of gambling then became an entire market in and of itself.
The usefulness of predictive markets
Prediction markets are used to formulate answers to questions, find solutions to problems and to settle disputes. There is an entire marketplace in which people gamble upon cultural events, patterns in nature, likely outcomes for particular situations and almost any other event imaginable.
Participants in predictive markets will even gamble on which candidate is most likely to become the next President of a nation. In the most recent US and Canadian federal elections, there was a direct correlation between Google trends and the election results; the most googled candidate ended up winning the electoral race.
Studies have shown that when there is an immediate cost-benefit or direct consequence of a bet, it will lead a decision maker to use a higher threshold of critical thinking skills when playing their hand. A prediction market speculates on prices produced by crowdsourcing so that a price representing an outcome is used as probability to make a prediction on a future event. Prediction markets can be used to determine whether or not a company’s stock will increase or decrease if a particular candidate is appointed CEO.
Ethereum is a company which uses predictive markets to run its entire organization. The shareholders of Ethereum purchase a crypto-currency called “Ether,” which is used to vote on key decisions made within the organization.
The shareholders can also make proposals for decentralized applications which could potentially run on top of Ethereum’s platform. The other shareholders will then gamble their stock in favor of, or against a proposal, judging by its usefulness and potential for success.
Futarchy: predictive markets applied to democracy
The economist Robin Hanson coined the term “Futarchy” in which the usefulness of predictive markets could be applied to govern a society. A Futarchy is a society in which predictive markets would be used to elect officials and determine which policies and measures of national welfare are likely to have the most positive outcome.
Futarchy is a society based upon a ‘put your money where your mouth is’ philosophy. A predictive market would be used to approximate whether or not a proposed policy would be beneficial or detrimental to a nation’s welfare. The market would then determine by this process which proposals become enacted.
The concept of a Futarchy has yet to be implemented in the real world. I believe that the value of its usefulness has been demonstrated in companies like Ethereum and is a valid proposal for the way societies could be governed in the future. It is my prediction that Democracy 2.0 will be decentralized, and predictive markets behold the potential to steer our culture more in this direction.