Dangers of political betting markets
I’m a big fan of prediction markets, and I think that in most cases, they do good by creating more accurate estimates. But for the positive outcome of allowing hedges and funding research, I wonder if there is a problem for markets on political races.
For example, wouldn’t large, liquid betting markets allow candidates to fund races more easily? A candidate who wins can cash in by selling their political influence. So rather than spending their own money, a moderately wealthy candidate might borrow $10M (using personal collateral, perhaps), and bet $5M against themselves on the markets. They spend the other $5M on their race. If they win the election, they lose the bet, and pay back the $10M with funds raised from special interests. If they lose the election, they’ll win the bet, and pay back the loan with the proceeds.
Things are similar from the standpoint of a campaign contributor, attempting to buy political favors. Many of them simply donate to both sides. But another option is to hedge your donation by using some of it to bet against your favored candidate. That way you guarantee either getting favors or winning some money. Reducing the risk of investing in candidates should increase the amount spent.
So while being able to hedge risk is normally considered a good thing, in the coercive business of politics, it’s not so clear. Isn’t it better for political favor to be expensive and risky to purchase? Are there some markets that are better if inefficient, like the market for political favors?
You're assuming a candidate wants to win. But what would happen if a successful candidate decides he wanted to cash in rather than win his election? For a candidate to lose his election is very easy - the odd racist or pro-pedophile comment "accidentally" slipped into a speech.
That's a very good point. Consider the history of sports betting. Now imagine if it were okay for a professional sports player to bet against himself. It's easy to throw a game, or just not score enough points to beat the spread.
Second, markets are subject to their own irrationalities; just consider the various stock market bubbles that sometimes occur. For that matter, why was there EVER a market for Beanie Babies as high-priced collectibles? When the "greater fool theory" becomes the primary justification for buying something, and there really are plenty of greater fools around, then individually rational behavior can become collectively ridiculous.
You're assuming a candidate wants to win. But what would happen if a successful candidate decides he wanted to cash in rather than win his election? For a candidate to lose his election is very easy - the odd racist or pro-pedophile comment "accidentally" slipped into a speech.
If the betting markets allow bets on percentage of the vote, not only on result, then even losing candidates may be more tempted to destroy their campaign for cash.
This could hugely undermine the effectiveness of betting markets, even with disclosure and insider trading sorted. A candidate bet against himself may be a hedge, a preparation for the self-imollation of his campaign, an attempt at publicity, or maybe a superstitious gesture. Each carries very different meanings, and interpreting them depends on knowing the inner mentality of the candidate, something that is practically impossible. This would dilute the reliability of the betting market, especially if the bet is large.