Futarchy vs. Predictocracy

In 2000 I proposed “futarchy“, a government by prediction markets where we would “vote on values but bet on beliefs.”  In his 2008 book, Michael Abramowicz summarizes:

At the heart of Hanson’s proposal is the use of conditional markets to estimate the effect of proposed policies on a measure of national welfare. … The existing legislature … could pass legislation to change the welfare measure, producing what he calls GDP+ … Any policy that, according to a prediction market, would clearly improve GDP+ would be automatically adopted.

In contrast, Abramowicz prefers “predictocracy”:

The essence of predictocracy is that decisions are made on the basis of the market’s anticipation of whether they will … be approved of later. … Individuals in this legislature might be asked to vote not on values that others would then seek to achieve but instead on concrete statutory proposals, as existing legislatures do today. These legislators’ decisions, however, would have no immediate effect but would serve only to discipline the text-authoring market, whose decisions would determine whether particular amendments were allowed and particular bills were enacted.

Why is this better?

[Predictocracy] can evaluate small as well as large decisions. Perhaps the most important legislative changes would be those that would have a large anticipatable impact on the measure of national welfare, but a legislature ought to be able to make smaller changes as well. At the same time, the market-based legislature would not need to rely on proxies for the national welfare but could directly forecast ex post decision makers’ assessments of whether particular proposals would increase or reduce welfare. Those decision makers … would apply their own intuitions and judgment about issues that elude easy measurement.

The issue here is how to make our most basic decisions; we agree that each approach, as a basic rule, could authorize the other approach to make many other decisions.  If we can estimate costs and error rates for different decision rules, then for the biggest decisions we should prefer the least error-prone rules, even if they have high costs, such as being slow or troublesome.  For smaller decisions, we may prefer “fast and frugal,” even if less accurate, rules.  So I am not very concerned about futarchy giving unclear answers to small questions, but I am very concerned about futarchy having higher decision errors.

So let us catalog the errors, starting with common ones.  Futarchy, predictocracy, and standard legislative democracy today all suffer from misjudgments and fluctuations in who is allowed to vote at what cost, who votes in what district, who runs for office, who is how informed about candidate inclinations, and so on.  All these systems all also suffer from errors in whatever agenda process suggests bills for consideration, and errors in the court and police processes that enforce provisions of approved bills.

Democracy today suffers from enormous errors regarding estimates of policy consequences, i.e., of passing particular bills.  Voters have serious illusions and misconceptions that sway their minds on election day, when they have little expertise and only mild motivations to attend to their task.  Candidates have strong expertise and incentives to attend to their task, but that task is largely to pander to voter illusions.  Under futarchy, the task of estimating policy consequences would be transferred to self-selected market speculators, with very strong incentives to make accurate estimates on very large decisions. Large decisions give large manipulation incentives which give large market subsidies.

Futarchy would require legislators to explicitly define national welfare, and definition errors would arise for the same reasons ordinary legislatures today make errors in all bills.  In addition, the very process of trying to define an explicit measure would introduce deviations from the values that would otherwise have been expressed regarding case-specific decisions.  Whether these deviations increase errors via neglect of detail or reduce errors via “smoothing” mistakes depends on how errors in value judgments are distributed.

Predictocracy would instead replace legislative votes with market predictions about the verdicts of random individual legislators at some future date.  Large decisions would again give large incentives to speculators to estimate well, but what they would be estimating would be the decision of a legislator trying to pander to voter illusions. Yes, those illusions would be expressed later in time after nature has revealed some info, and speculators would have strong incentives to persuade voters.  But I can’t be very optimistic that this will give large accuracy gains in estimating policy consequences.  Illusions and misconceptions of weakly motivated amateur voters can plague retrospective evaluations of the effectiveness of past policies nearly as easily as prospective evaluations of future policies.

Given all the other errors we expect in values expressed by legislatures, and since it is not clear if smoothing values via an explicit welfare function increases or decreases errors in values expressed in case-specific decisions, it seems to me that, relative to predictocracy, futarchy risks only a small increase in value errors, and offers an enormous decrease in policy consequence errors.  Seems an easy choice to me.

Added 2Feb: Michael responds over at Volokh Conspiracy.

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  • sa

    Can you translate this post so that a layman can understand it? I didn’t very little of it.

  • http://drzeuss.blogspot.com dr. zeuss

    The main difference between predictocracy and futarchy is the welfare function. Futarchy forces the welfare function to be well-defined and objectively measurable; predictocracy leaves it muddy and open to interpretation. So the fundamental question is whether to trust voters to pick the right formula or to pick the right legislators.

    Personally, I would rather have voters pick legislators, for look-what-happens-with-all-the-crazy-propositions-in-California related reasons.

  • http://drzeuss.blogspot.com dr. zeuss

    Semiserious: how about a metafutarchy? Markets on whether or not future societies will judge us to have picked the right welfare function.

  • http://tech.groups.yahoo.com/group/futarchy_discuss Tom Breton

    I actually don’t think either procedure is likely to select a good utility function. That said, ISTM it’s clearly better ceteris paribus to stipulate the utility function beforehand.

    One alternative, in an attempt to privatize the utility function selection process, is to measure GDP+ by polling everyone at the end of the relevant interval, asking “Are you better off than you were [at the start of the interval]?”

    It’s far from perfect. ISTM it would result in a blocky sort of utility function whose aim is to make as many people as possible just a little better off.

    What about people that died in the interim? One could penalize GDP+ in proportion to the number of citizens who died.

  • http://hanson.gmu.edu Robin Hanson

    Dr, I argued that while there are differences in values, the main difference is that futarchy does extremely well at estimating policy consequences.

    Tom, yes satisfaction survey results are a reasonable component of welfare.

  • Grant

    One thing I’ve always wondered about prediction markets is, how do we prevent people from manipulating the predicted outcome of a contract when that outcome will influence real events (such as government policy)? If it costs X to change a prediction market-based decision, and an actor stands to profit Y if the decision goes his way, he’ll spend X to change the outcome as long as Y > X.

    Of course, even if something like this would happen, a futarchy still seems to come far ahead of democracy (where Y almost always seems to be greater than X).

    I’m very skeptical that voters or legislators could pick a decent utility function. As society’s complexity increases, I believe doing so will only get more difficult.

  • http://volokh.com/archives/archive_2008_01_27-2008_02_02.shtml#1201909754 The Volokh Conspiracy

    Predictocracy vs. Futarchy:

    In describing normative markets in my book, I outline the possibility of prediction market-based legislative,

  • Michael Abramowicz

    Dr – I don’t suggest that we resolve markets in predictocracy by surveying a random man off the street. I don’t think legislators will do a good job of creating the welfare function (they don’t do a good job of much else), but a body similar to a judiciary could do a sufficiently good job ex post that the ex ante expectation of the ex post judgment will be of high quality. There will be many ex post errors, but many of these won’t systematically bias the ex ante forecast.

    Grant — I have a related post on Volokh Conspiracy about manipulation. Robin has written detailed articles on the topic.

  • http://hanson.gmu.edu Robin Hanson

    Michael, it has not been clear to me who you prefer to be the ex post evaluators in predictocracy. Your comment above makes it even less clear to me.

  • http://tech.groups.yahoo.com/group/futarchy_discuss Tom Breton

    how do we prevent people from manipulating the predicted outcome of a contract …

    Grant, the problem is not so much when investors try to influence the outcome. (The short answer is that you can profit from their folly).

    The problem is when the same person both proposes an issue and can invest in it. (More generally, when there’s any mixing of these two roles through collusion or whatever, which seems to me impossible to prevent). A proposer could create proposals that only he understands. Then as an investor, he could exploit this situation of asymmetric information for profit or to enact bad measures. He doesn’t control which one happens but could profit from either.

    I’ve written a bit on this problem and how it might be addressed at
    http://tech.groups.yahoo.com/group/futarchy_discuss

  • http://hanson.gmu.edu Robin Hanson

    Tom, I’m surprised that this is the first I’ve heard of your futarchy discussion group. I applaud all the effort you’ve put in, but I would have thought I’d have been invited to participate.

  • Grant

    Tom,

    I’ll read through the posts in the link, thanks.

    My first thought on your given scenario is that it is unlikely to be a problem in practice. In my opinion, the prediction markets themselves will have strong incentives to police “predatory betting” practices which would drive away market participants. The largest and most trusted markets are likely to be ones who come down hard on those who exploit asymmetric information in the understanding of the futures contract itself.

    Although it might likely that successful markets would not directly punish fraudsters any more than eBay does. They could take more of a laissez-faire approach, and use trust metrics to rate futures contracts and their creators. In this manner, only the most reputable contracts would be trusted and heavily invested in anyway, so manipulation for fun or profit would be difficult (one would have to find a reputable market or futures contract creator/manager willing to take a blow to their reputation).

    For a while I was considering starting a simple, user-run prediction market. I had planned to use both direct policing (in extreme cases) and trust metrics to prevent the problems you mentioned.

  • http://tech.groups.yahoo.com/group/futarchy_discuss Tom Breton

    Robin, I founded it shortly after you told me that you were disinclined to listen more to the issue.

  • http://hanson.gmu.edu Robin Hanson

    Tom, I said I didn’t want to hear more from you then on a certain sort of argument on a certain issue, not that I never wanted to hear anything from anyone on futarchy.

  • http://tech.groups.yahoo.com/group/futarchy_discuss Tom Breton

    My first thought on your given scenario is that it is unlikely to be a problem in practice. In my opinion, the prediction markets themselves will have strong incentives to police “predatory betting” practices which would drive away market participants.

    You say “prediction markets”, but the issue isn’t about prediction markets. If a market is merely advisory, then there’s no harm in incomprehensible issues. Everyone can safely ignore them. But if it has enactment power, that is if some public resource will be given or withheld by rule according to the market’s results, that’s a whole different ballgame.

    You mention three approaches (One was implied but I want to talk about it anyways) I’m uncertain whether they were all intended to apply to futarchy rather than to prediction markets, but let’s proceed anyways.

    1. direct policing

      The most direct solution. It’s equivalent to vesting complete veto power in the policer. And not just veto power: A policing body could submit its own obscure proposals, under the same scenario as before, and simply fail to veto them.

      The policer could take many forms, but regardless the form, the policer becomes the true decision mechanism.
      It could be a body of rules, but (a) then you need to say which rules, (b) if any loophole is discovered, the effect is as if no policer exists, (c) whoever enforces those rules is the true policer.

      So this in effect reduces futarchy to an advisory mechanism for the policer; a prediction market.

    2. trust metrics.

      Here I’m not at all sure you meant it to apply. Are you saying that otherwise successful proposals should not be enacted if they fail a trust metric? This seems to place the trust metric in the role of policer.

    3. That the proposer must be a reputable market or futures contract creator/manager. (OK, you implied this but I want to discuss it explicitly).

      If you give them alone the power to propose, then they alone enact the self-serving proposals and milk those who bet against them.

      Why would reputable financial players balk at enacting self-serving proposals? A few people might boycott them for it in protest, but compared to the profit from looting the national treasury it’s a small thing.

      Here again, I get the impression this was meant to apply only to prediction markets.

  • Grant

    Tom, you’re right, I’m sorry. I had too many browser windows open at once, and commented on the wrong thing. I was, for some reason, still thinking of prediction markets as advisory bodies, where the reputable ones would be extremely unpopular for legislators to ignore. But even that supposes the voting body knows a thing or two about prediction markets and votes rationally. Given how much they understand about stock or commodity markets, that doesn’t seem too likely.

    My personal belief is that good decisions (for society anyway, not for the ‘decider’) just aren’t made by those in power because the incentives just aren’t there. Thats not to say I wouldn’t welcome improvements over our current system, of course.

    A similar scenario could occur when individuals in a business set up a decision-influencing prediction contract for their own personal gain. The difference seems to be that the owners of the business (and employees seeking their favor) have incentives to oust the fraudsters. I suppose this doesn’t help the problem of a futarchy unless it is an anarcho-capitalist one.