We Don’t Want What We Need

1. We Don’t Want What We Need Robin Hanson George Mason University

2. Democracy Passed Bills => Laws

3. Prediction In Politics • Candidates, press ask: who will win? • Academics ask about general patterns: • Winning candidates: height, tenure, ads • Party-outcome correlations: war, GDP, etc. • Most need: non-partisan voter-salient specific-winner-contingent outcomes • GDP, unemployment, lifespan, war deaths

4. Prediction Market Track Record • Vs. Public Opinion • I.E.M. beat presidential election polls 709/964 (Berg et al ‘08) • Re NFL, beat ave., rank 7 vs. 39 of 1947 (Pennock et al ’04) • Vs. Public Experts • Racetrack odds beat weighed track experts (Figlewski ‘79) • If anything, track odds weigh experts too much! • OJ futures improve weather forecast (Roll ‘84) • Stocks beat Challenger panel (Maloney & Mulherin ‘03) • Gas demand markets beat experts (Spencer ‘04) • Econ stat markets beat experts 2/3 (Wolfers & Zitzewitz ‘04) • Vs. Private Experts • HP market beat official forecast 6/8 (Plott ‘00) • Eli Lily markets beat official 6/9 (Servan-Schreiber ’05) • Microsoft project markets beat managers (Proebsting ’05) • XPree beat corp error, 3.5 vs 6.6%

5. US President Primary Sample From InTrade.com past

6. Politimetrics.com US President Decision Markets

7. Political Applications E[ Lifespan | ObamaCare repealed?] E[ f(inflation,unemploy) | Fed raise rates? ] E[ Student test scores | School voucher? ] E[ Red team gets in | New building security? ] E[ US terror deaths | Halve DHS budget? ] E[ Unemployment | Republican Pres. ’12? ] E[ National Welfare| Republican Pres. ’12? ] Put market estimates directly in control!?

8. We Have The Technology … Problems: • Unrealized Outcomes • Correlation vs. cause • Disinterest in trading • Long term incentives • Many policy combos • Manipulative traders • Low influence policies • Sabotage Solutions: • Called-off bets • Bet given close election • Market maker subsidy • Bet a stock index fund • Combo mechanisms • Allow deep pockets • Aggregate similar ones • Limit dangerous stake

9. Interesting Claims • Prediction markets are robust accurate neutral bias-and-manipulation-resistant forums where forecasters dispute abilities • An institution, not a calculating “method” • Basis: empirics, finance theory • Accuracy depends on problem difficulty and resources used. • We already know enough to make lack of outcomes-given-winner use a puzzle

10. Manager As Politician • General disinterest in forecast info • Forecasting orgs poorly funded, little noticed • Most reject suggestions to run randomized trials • Most accept accuracy claims, yet reject prediction markets • Bad: visible track record of failure warnings • Bad: not seem to be key info clearinghouse • Bad: hard to manipulate perceptions to motivate effort • The myth: manager as scientific decider • The reality: politician builds, maintains coalitions

11. Useful Conditional Estimates E[ Revenue | Switch ad agency? ] E[ Revenue | Raise price 10%? ] E[ Project done date | Drop feature? ] E[ Project done date | Add personnel? ] E[ Stock price | Fire CEO? ] E[ Stock price | Acquire firm X? ]

12. A Catechism “X is not for Y” = “Y is not the main function of X.” Food isn’t for Nutrition Clothes aren’t for Comfort Marriage isn’t for Romance Talk isn’t to Gain Info Laughter isn’t about Jokes Charity isn’t about Helping Sports aren’t for Exercise Church isn’t about God Art isn’t about Insight Medicine isn’t for Health Consulting isn’t for Advice Investing isn’t for Returns School isn’t for Learning Research isn’t for Progress Leading isn’t about deciding Politics isn’t about policy

13. Politics Isn’t About Policy • No-outcome high school votes engage • Winner raises the status of affiliates • Students signal loyalties, concerns, personality • Chance of tied election only weakly influence if vote • People care about associates’ politics • Most efforts to push a side, not to get more info no matter which side it supports

14. Three Premises and a Conclusion • It is not too hard to tell rich happy nations from poor miserable ones long after the fact. • Governments largely fail by not aggregating available information. • Speculative markets are our best known institution for aggregating information. • Try to vote on values, but bet on beliefs.

15. Democracy Passed Bills => Laws

16. Vote On Values But Bet On Beliefs E[ National Welfare | Alternative ] >? E[ National Welfare | Status Quo ]

17. Futarchy’s One Rule When a market estimates currently-defined National Welfare to be higher given some proposed alternative policy, that policy is law. • Unless market on future-defined NW vetoes it • Start with existing policies, fee to propose change • Like contract, proposal says how handle conflicts • High standards at base, recurse to relax standards • Treaties could agree to include other nation’s NW. http://hanson.gmu.edu/futarchy.html

18. Issues In Defining National Welfare Claim: GDP futarchy beats current democracy. (Few-% time-discounted average of log GDP) • Risk aversion, time discounting • Leisure, environment, art, lifespan • Inequality, population, foreigners • Counting moral outrages

19. Issues In Defining Official Prices • Valid “banks” issue contingent assets • Valid “cash” contingent assets pay off in • Valid “marketplace” guarantees offer • “Enough” difference: size, duration, breadth • Valid judges of whether alternative tried

20. Intuitive, Common Rich get more “votes” Buy policy via market Market bubbles More lies, secrecy Do harm to win bets Forgo popular illusions Regarding Natl. Welfare Policy in NW defn. Max NW meas. errors Slow catch NW bugs Corrupt NW measure More when more care Concerns about Futarchy

21. Same As Democracy Guarantee rights Time-inconsistency Induce policy cycling Expressive voting Too many policies Military needs secrecy Losers fight transition Economics, Technical Markets too thin Most policy too small When “clear” diff. What if destroy Earth Infinity never comes Risk premia distortion Decision selection bias More Concerns