Ban Election Arguments?

While Intrade has betting markets on the US presidential election, they are unregulated and of questionable US legality. Nadex went through the expensive legal hoops to apply for permission to run a regulated market. Last week:

The CFTC determined that the contracts involve gaming and are contrary to the public interest. (more)


It could unduly influence election results. … the contracts could run afoul of the election process if traders had financial incentives to vote for particular candidates. (more)

They still allow election betting at the Iowa Electronic Markets, where stakes are limited to $500. They still let people work for campaigns and administrations, which gives them financial incentives to vote for certain candidates. And they let candidates take positions favoring some industries, occupations, and locations, over others, which gives people financial incentives to vote for and against candidates.

We also let people tell other people which candidates they favor, which gives people non-financial incentives to vote for those candidates later. And since every bet for a candidate is matched with a bet against that candidate, whenever a betting market gives anyone a financial incentive to vote for a candidate, it at the same time gives someone else a financial incentive to vote against that candidate. Why are all the rest of these “due” influences, while bets are “undue” influences?

Paula Dwyer argues:

Naked credit default swaps on Greek sovereign debt (buying a CDS without owning the underlying debt) are no more than a bet on a Greek default. Will the CFTC be barring them, too? (more)

Law and Economics professors Eric Posner and Glen Weyl support the CFTC:

Financial instruments that serve primarily as a means of speculation rather than hedging should be banned … Suppose that two individuals, neither of whom uses or produces oil, harbor different opinions about the future price of oil and decide to wager on it. Both parties willingly participate, because they think they’re each getting the best of their confused counterparty. Clearly, both of them cannot gain from this transaction, and the wager itself creates rather than reduces risk. While each party thinks it is getting the better of the other, both agree that on average both of them will be worse off because on average they will win and lose on the same number of bets, and both of their incomes will be less smooth and predictable on account of their wagering. As a consequence, this sort of speculation is socially harmful. …

In controlled and appropriate contexts, [gambling] can be a source of entertainment for people who are aware of and willing to accept the potential losses. But participants in financial markets are usually seeking financial security rather than entertainment, and they typically have little sense of the risks they are taking on. … A second potential benefit of allowing trading in derivatives is the information that they provide to market participants. The knowledge of the likely outcome of the presidential election provided by the wisdom of the crowds is useful for planning by businesses, individuals, and governments. But that information is only valuable to the extent that it enables real economic decisions to be made more effectively.

Consider: why should we let people argue on elections? Similar to the above, one could say:

People mainly argue in the hope of winning arguments, thinking that they are taking advantage of confused opponents. While each side hopes that further events and discussions will reveal them to have been more in the right, both sides understand that this can’t happen for both of them. Yes, people might argue just to have fun, but election pundits seem serious – wanting more to prove the other side wrong. And most people who argue politics seem to have little understanding of what they are talking about. Yes, arguments can produce useful info for others, but the value of the info produced in election arguments is small compared to the time lost arguing. Thus we should ban arguments on elections.

Election arguers and bettors both seem motivated by a similar mix of enjoying the process and hoping to win. But the info produced by bettors is far more persuasive, reliable, and useful – you have far better reasons to believe betting market odds than whatever the apparent winner of a political argument has claimed.

You might counter that people sometimes argue about who should win an election, rather than who will win. But betting markets can collect info on that topic as well – we can bet on outcomes after the election conditional on who wins the election. These sort of markets would be enormously helpful to tell voters about which candidate will best promote health, peace, or prosperity. Yet such markets are now banned because they might “unduly” influence elections, or let people “waste” their time “arguing” about elections. Heaven forbid we should waste time figuring out which candidate would actually help us more.

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  • Don Geddis

    Posner and Weyl sound like paternalistic elites that believe themselves much smarter than the rest of the citizens. They would be wise to re-read John Stuart Mill’s “On Liberty”: The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant.”

    Unfortunately, that principle is absent from the US Constitution…

    • Ari

      Maybe you should read Hanson’s Why I’m not a Libertarian.

      Deontological ethics appeal to some people. Evolutionary psychology probably explains why.

      • Jayson Virissimo

        Are you implying that Mill’s ethics are deontological?

      • Tyrrell McAllister

        Are you implying that Mill’s ethics are deontological?

        I have a great deal of affinity for On Liberty on an emotional level. But I find it very hard to figure out how Mill can make a rigorous consequentialist distinction between harming and allowing to be harmed. Yet this alleged distinction lies at the core of how he identifies permissible actions in his ethics.

    • Aaa

      Posner and Weyl sound like paternalistic elites that believe themselves much smarter than the rest of the citizens.

      So what? Possibly they are.

      Unfortunately, that principle is absent from the US Constitution

      You might also want to add to the US Constitution a ban on limited liability companies and government bailout of private companies.

    • Poelmo

      @Don Geddis

      You think speculation, and speculation with elections doesn’t harm others? What planet have you been living on for the past 4 years? Maybe you should have a talk with the 27 million people in the Western world (and god knows how many more elsewhwere) who lost their job because of the current FINANCIAL crisis…

      • El

        Do you have any evidence this was directly caused by speculation?

      • Poelmo

        Are you kidding me? CDSs (which were so complex people are getting away with not paying their mortgage because the bank can’t figure out which bank owns the house anymore) are a form of speculation. On a global scale a lot of the real estate market is based on speculation, it’s the one bubble (driving up prices by keeping buildings empty is the oldest speculation trick in the book) that has always come back after a burst and it has been that way for centuries.

  • Khoth

    Let people “waste” time “arguing”

    I agree with you that the markets should be allowed, but that bit you criticise was said by nobody but you. Criticise the arguments people make, not the arguments you imagine them making, especially when you use quotes, which imply, well, quotation.

  • Swimmy

    I would take issue with Posner and Weyl’s betting analogy. Yes, if there are only two parties and they’re making bets between themselves, it is probably socially wasteful. But that’s not how oil speculation works and it’s not how political prediction markets work. If five people bet about oil prices one way and only one person bets about them another, that gives oil companies more information about which way oil prices will go so they can make more informed decisions (even if it is only weak information). Likewise for prediction markets: If all of the markets say Romney’s going to win, Santorum could take that information and stop wasting money. When it comes to the effects of policy the extra info is even more useful.

    The bit about influencing how people vote doesn’t deserve a word of counterargument, since the answer is so obvious, but here it is anyway: People have a near-zero chance of influencing any sufficiently large election. The expected value of betting for someone you don’t like and changing your vote to favor her will be difficult to get as high as a few cents. We allow people to vote money into their pockets on far larger scales than that.

    • Poelmo

      You’re contradicting yourself. You said elections cannot be influenced but before that you said Santorum would withdraw if too many people betted against him. So obviously it’s possible to influence elections: just have people bet against the electorate and you can get a candidate to quit even though that candidate would otherwise have won the election. You could ask why anyone would do that, why waste betting $10 million on someone who will probably lose? Well, a billionaire could order 100 of his employees to each bet $10 million against the electorate, forcing a popular candidate out of the race and increasing the chances of the billionaire’s preferred candidate. The billionaire will then proceed to make back his $1 billion and then some because of policies enacted when his preferred candidate wins the election (of course in the US billionaires are already culling the candidate field before the first primary vote is cast…)

      There’s a reason every democratic country has elections countrywide as quickly as possible: they don’t want voters to be inlfuenced by results from other regions, as this would give the regions voting first more of a say in government.

      • Swimmy

        My wording was poor. I intended to say that no individual vote can influence an election. Hence, it would be very silly to change your one negligible vote in hopes of winning some money. Obviously masses of people can influence elections.

      • Swimmy

        I should also add that it’s unlikely for any individual bet to change the outcome of an election, even if it’s very large. Such bets create arbitrage opportunities.

  • TGGP

    “gambling and wagers are heavily regulated or banned outright in nearly every country”
    There is of course lots of gambling in the U.S though it is heavily regulated in most places. Vegas & Atlantic City are big, along with indian casinos, but then the state governments also rely heavily on revenue from lotteries. Are these all “controlled and appropriate contexts”? No more so than any professional financial exchange market, I’d say.

    I’m surprised Posner & Weyl didn’t mention an important reason for banning life insurance contracts on people you don’t know: it can create an incentive to murder (and there have been cases of people repeatedly comitting murder to collect life insurance, although in some old cases it was a spouse which is a legit claimant).

    They argue that people in financial markets are “usually seeking financial security”, but I don’t know if that’s the case in these more speculative kinds of markets. They might propose betting limits, as with Iowa, rather than a complete ban. And if they “typically have little sense of the risks they are taking on”, that’s an argument for better informing people (perhaps requiring an autority to judge whether a participant is properly informed) rather than a complete ban. People gambling with the money of others happens in many parts of finance, not just these speculative contracts. And again a more limited regulation like only allowing particular institutions (hedge funds but not mutual funds) to participate seems sensible.

    Regarding “systemic risk”, an argument I’ve heard recently is that what happened recently was a “common shock”: there were lots of bets on high real estate values and everyone who bet that way lost. I’m not competent to evaluate the argument, but it does sound a lot like what happened. In that case allowing people to bet on more different things rather than crowding onto one factor could actually REDUCE systemic risk.

    Don Geddis, are you just making an argument from authority? I haven’t read the book myself, but the quoted passage sounds like an assertion which would need some backing to convince a paternalist. And the reason the principle is absent from the Constitution is that when written it granted so little power to the central government that there wasn’t thought to be that much need to add additional restrictions.

    Khoth, I halfway agree. Posner & Weyl refer to “wasteful expenditures as to supply valuable information to markets in a timely fashion”. It is a waste in their perspective, but not necessarily Hanson. In contrast, argument is something just Hanson is talking about and by postulate it is argument we are talking about rather than some other label, so I have no idea why he scare-quoted it.

    I would like Hanson to give his perspective on the DOJ and FTC deciding whether to permit mergers to proceed. A general skepticism of government would way against, but he alread has indicated he believes mergers generally destroy wealth in the process of demonstrating a CEO’s power.

  • mjgeddes

    You Americains need to hop over to Betfair, you can bet millions on the prediction markets over there, the skys the limit (you can log in via an Off-Shore VPS – Virtual Private Server).

    Latest Betfair US election odds (Next President Market):

    Obama: 1.49
    Romney: 3.25

    Note that there is nearly 2 million pounds in liquidity in this market alone so far. You can play with the big boys on UK Betfair without restriction, put literally millions on if you want, no bans or regulations on gambling in England my friend.

  • Leo

    Would Robin like to have a legal regime in which betting on real world events would be seen as speech and thus be covered by some sort of freedom of expression jurisprudence?

    Obviously there would be limits as there are with speech (yelling “fire” in a crowded theater, incitement to commit crimes, fraud or defamation). As there are rules that we might agree on for gambling i.e. date of death contracts.

    • El

      The whole “fire in a crowded theatre” argument was used to justify jailing people who protested against WW1.

  • Lord

    I would be concerned that it could be used to buy votes, but that seems not too difficult prohibit.

  • Poelmo

    Robin, I think you’re stretching out an argument to absurd lengths. To say that the common man voting in his best interest is the same as billionaires and banks betting on election results is completely ridiculous.

    It’s a shame the CFTC didn’t delve deeper in its verdict. It should have elaborated on how gambling of this kind adds no value to the economy while it does create risk and volatility, it may even cause inflation and loss of purchasing power for those who are not playing when banks start betting with money from the FED (or its foreign equivalents).

    The banks are already playing with fire (or should I say, prying a ticking time bomb with a stick). Goldman Sachs alone manages over $44 trillion in derivative funds (3 times US GDP, 75% of global GDP, yet it’s still peanuts compared to the global derivatives market). That’s so much money that a rounding error could cause entire countries to go bankrupt (which would drive millions of people into poverty and kill thousands). Of course a bank like that, which pays almost no taxes, expects the taxpayer to bail it out when it gets into trouble and governments around the world still allow it, having learned nothing of the last “too big to fail” fiasco. And now that the CFTC finally draws a half-assed line in the sand it gets attacked with the argument that gambling equals free-speech, because for some it’s just never enough. Some men just want to watch the world burn and apparently Robin Hanson is one of them…

    If you want to equate this stuff with free speech then speculation is the equivalent of shouting “fire”, in every theater on the planet, threatening every person on Earth and flooding every server in the world with child pornography, all at the same time.

    What ever happened to the freedom of speech of the 6.99 billion of us who are not filthy rich to say we’d rather not have to wonder every night whether there’ll be a tomorrow? To say we’re fine with people gambling, as long as it’s their own money, not ours, they’re gambling with?

    I mean, can humanity really afford to be so arrogant as to think that there will never ever be a small spike in the volatility of Goldman Sachs’ derivative portfolio that causes the bank to go broke and hence $44 trillion to go up in smoke? How can bankers sleep at night knowing they’re taking such huge risks with the future of humanity, only for a quick buck that most of humanity will never get a share of.

  • daedalus2u

    My concern is that the amount of disinformation in politics would increase (I know, that is hard to believe).

    If When politicians lie (and are caught), they can be not re-elected. We already have anonymous donors funding Superpacs and pouring many millions to influence elections. What do we do if when Superpacs lie?

    Why wouldn’t gamblers fund disinformation to try and skew the odds? Disinformation is highly effective. Bush won the nomination in 2000 over McCain because of the push-poll declaring that McCain was the father of a non-white child. In 2004, Bush won in part because of the Swift-boating of Kerry. Obama won despite the lies that he is a Muslim and a non-citizen.

  • Wonks Anonymous

    Poelmo, FED is not properly written capitalized, because it is not an acronym. I think you should ask an economist how inflation (which does not necessarily cause a loss of purchasing power) works. The central bank has a lot of control over broad aggregates, the introduction of this particular market doesn’t seem that relevant. And how does any entity, even one with a lot of wealth, cause a loss of speech for others merely from gambling on an outcome? dadalus2u below attempts to given an argument from altered incentives.

    daedalus2u, what is the evidence that “disinformation is effective”? Compare how incumbents are expected to do based on the “bread & peace” poli-sci model to the actual result. Is it really so different? I don’t think that model applies to open primaries, but you could also look at things like endorsements there.

    • Poelmo

      When a bank gets money from a central bank they are supposed to use it to invest in something useful, like a business building cars or solar panels or an airline. But, they can choose to use the money for speculation in oil, real estate, or betting on who the next US president will be. When they do so they inject money into the economy without increasing the number (or quality) of goods and services in the economy, hence they cause inflation. Now, of course this inflation may be reduced if the banks put a lot of their revenue into stuff ordinary citizens don’t buy (like yachts), but then the rest of scoiety is at the mercy of bankers, the second the bankers start pouring the money into consumer goods or affordable homes ordinary citizens will be hit by inflation. If central banks have the ability to tell banks what they can spend money on then they certainly are not using that ability and haven’t been for quite a while now.

      On influencing election results through betting, I wrote my explanation in a reaction to Swimmy, above.

      Also, you must be kidding when you suggest disinformation might not be effective in American elections… I mean, swiftboating, calling Obama a foreign muslim, fascist and communism at the samw time, inventing the stories about death panels, energy corporations that “donate” learning kits critical of climate change to schools, saying that the world will come to an end if America’s poor get health insurance, saying that people in Britain and Canada have to wait years for surgery, having a “debate” about evolution and contraception in the 21st century, saying that drilling for oil in the US will noticeably affect the global price, saying that corporations are cash-strapped because of crushing taxes while effective taxes are at a historic low and corporate reserves and profits are at a historic high, saying that due process doesn’t mean judicial process, saying that teacher’s unions, not wars, tax cuts, ridiculous budgets for “homeland defense”, getting 40% of Americans to mistakenly believe that Saddam was after 9/11, saying tax cuts for the rich and a dysfunctional healthcare system are the cause of the huge deficit, saying that elderly Dutch have to wear “do not euthanize me” bracelets, saying that Iran is capable of posing a threat to the United States military, saying that we don’t have to be stewards for the Earth because the end times are near, saying that gay people and atheists belong in mental instutitions/prisons/graves…

      These are just some of the horrifying acts of disinformation in American politics that have proven very successful over the years.

      • Wonks Anonymous

        The whole reason for the Federal Reserve to lend money to banks is to cause “inflation” (Scott Sumner would say increase nominal GDP by increasing AD). It can be useful or not. And if the inputs to yachts are expensive, then building lots of yachts could bid up the prices of those inputs. Telling banks where the money should go is not really the job of the C.B, the whole point is to control aggregates. The standard way to do that is through open-market operations, though nowadays we are (stupidly) paying interest on excess reserves which makes the story a bit more complicated. Either way, gambling on elections doesn’t seem significant for inflation, which the C.B will manage through its standard mechanisms.

        You have a long list of complaints but provide little evidence that they are successful. People have attacked Obama, but he’s still president and InTrade expects him to be re-elected. Corporate tax RATES in the U.S are highest in the world according to Greg Mankiw, revenue is paltry because the code is riddled with exemptions and credits. John Kerry did lose, but I think that could have been predicted by the economy alone. Eric Holder only discussed judicial vs “due” process recently so it’s too soon to tell the effect, but all I heard about it was mockery.
        Funny anecdote about Iraq & 9/11: I remember the first thing I heard about it that very morning was a kid in my school talking about going to war with Iraq. That was before any organization even had time to respond to start pushing any narrative. Iraq was just the last major war we had and Saddam an easily remembered bad guy. I remember subsequently reading complaints about the Bush admin had tricked large numbers of poll-answerers into believing various things, even when nobody in the Bush admin had said such things. People will believe a lot of nonsense on their own. The children of atheists naturally assume animals come in platonic types which were presumably created for some teleological reason.

        I would actually like to hear debate “about” evolution, contraception & every other interesting topic.

      • Poelmo

        @Wonks Anonymous

        Yes, central banks are supposed to cause inflation, but not loss of purchasing power. When shareholders, executives and captains of industry accumulate more and more money the central bank is there infuse more moeny into the system so that the aforementioned groups can keep their accumulated money while the workers get a pay raise. When banks use central bank money on speculation they are keeping money away from the workers.

        If you want evidence that misinformation is effective in American politics I could give you a list of states that have enacted legislation based solely on righ-wing talk radio points, (this is an entirely new, entirely manufactured issue with no grassroots involvement whatsoever, nobody cared about contraception a year ago). I can even proof these talking made their way to the supreme court. No, the Bush admin. never said Saddam caused 9/11, but they did say he funded Al-Qaeda (which was never proven) and forged evidence of a Iraqi nuclear programme, in addition there were a lot of think tanks and defense contractors who did get their people on tv to espouse all kinds of lies about Iraq (they’re doing the same thing with Iran now, only difference is the current admin. doesn’t agree with them). And no, it’s not a good thing to have politicians who’ve never seen a science faculty up close, to make it look like evolution and climate change are just opinion.

        Speaking about climate change, while the scientific evidence is getting stronger with the day, less Americans believe it’s happening (the US are the only country on Earth where this happened). The US are also the only developed nation without single payer healthcare, this is the result of a hefty dose of propaganda. In any other country advocating against singlepayer healthcare means political suicide, but not in the US where people are indoctrinated against it by telling them that no matter how bad things are in the US, they’re worse in other countries (the same way North Korea keeps its population from revolting over food shortages).

      • TGGP

        People in North Korea do not have access to information from outside and are not allowed to leave. In the U.S people are free to leave, you can access BBC or al Jazeera if you choose, and many people actually come from other countries to the U.S. So I don’t think that’s a good analogy at all.

  • Mark M

    I don’t understand the controversy. Per the second source Robin cites above: “The Dodd-Frank Act mandates that the agency ban event contracts tied to terrorism, war, gambling and other matters contrary to the public interest.” Per the 1st source: “The CFTC determined that the contracts involve gaming .”

    It’s not about good or bad or right or wrong – it’s about compliance with the existing law. I think in the end the CFTC is trying to stick with their mandate a lot more than they are trying to decide whether trading election futures is “good” or “bad.”

    Personally, I’d go further and say elections meet every one of the Frank-Dodd criteria. What is tied to terrorism, war, gambling and other matters contrary to the public interest more than politics?

  • PrometheeFeu

    And since every bet for a candidate is matched with a bet against that candidate, whenever a betting market gives anyone a financial incentive to vote for a candidate, it at the same time gives someone else a financial incentive to vote against that candidate.

    That’s not really true. I could bet $1,000 on Romney while 2 people bet $500 each against Romney. But they each get 1 vote and I get 2 so assuming none of use would have cared earlier on, (I mean, the people most likely to find election betting markets interesting are those who have no idea who will win) that’s 2 votes against Romney and 1 vote for Romney.

    • PrometheeFeu

      Hm… I get 1 vote of course, not 2. (well, as a foreigner, I get none, but you get the point…) Also, I don’t see how my bet would influence my incentives. Let’s say I have $100,000 riding on the election. Compare that to my influence on the election: nothing. The money in and of itself does not affect my voting incentives.