I agree with most of your comments, Robin, particularly as they relate to financial markets. However, the types of markets contemplated under futarchy differ from financial markets in terms of their informational efficiency (at least that’s my opinion).

I’m not saying that the information accuracy drops to zero, but I am saying that it drops to a very low, or at least an unreliable level. Consequently, for the long-term markets, the market aggregates a lot of guesses, as opposed to reasoned opinions.

Perhaps we differ in our beliefs about market efficiency of decision markets.

In terms of distinguishing between innovative ideas worth trying and others, I draw the line with a reasonable cost-benefit analysis. Rather than have faith that a market will “work”, even when logic tells you it won’t (a la Miracle on 34th Street), I need to know there is a logical reason why it should (or at least could) work. Then, if the potential benefits are likely to exceed the cost of trying, give it a try.

Maybe, we need to take a closer look at prediction market efficiency.

http://torontopm.wordpress.com/2010/01/04/the-future-of-futarchy/#comment-148

Robin, thank you for continuing the discussion. Good luck in The Debate!

Imagine that we had the usual futarchy rules that clearly superior policies are implemented automatically (ie policies where the expected improvement exceeds some noise threshold). But, in addition a legislature would be permitted to enact policies which made things no worse, again to within a noise delta. If it does turn out that in some policy areas, the market ends up scratching its collective head when it tries to predict the future, the legislature would then be able to take action.

Isn’t the point that a robust prediction market would incorporate “alternative forecasting methods”? To me, the point of a market price is that it incorporates “everything”. Prediction markets share/uncover information quite well, don’t they?

If you think company XYZ is worth $20/share and the market value is $10 or $30, doesn’t that give you pause to think maybe you’ve missed something? If nothing else, is this not a major benefit of any type of market…you are forced to view a reality you may not see otherwise given your biases?

Isn’t the hedging benefit of markets worth something too? Unless hedging is not important to you at all. If it is, how could it be done easily outside of a market?

If it turns out that the distribution of forecasts is too flat, it may be that it is not possible to forecast that particular metric (perhaps by any known method). Maybe the only alternative is to abandon that metric and choose another (or others) that can be measured and forecast to some reasonable level of accuracy.

Related to the issue of accuracy, how does futarchy handle the case where the decision markets “clearly” indicate a positive policy effect, but the prediction market distributions are very flat?

If the manipulators look like you and me (and all of the other traders), I’ll bet the farm they’ll be able to get away with it. Traders in these markets will have a tough enough time trying to forecast a very complex number. On top of that, you think they will have the uncanny abilities to identify manipulators, figure out approximately how manipulative they are, and calculate the corrective bets? Oh yeah, and do so confidently. I would prefer to confidently bet against such abilities.