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.

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.

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.

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

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

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