On Aug. 4, the US Commodity Futures Trading Commission (CFTC) told PredictIt, one of the most widely used political forecasting markets, with little explanation that it had to close after US regulators revoked the betting service’s license to operate . The move turned the political gambling industry on its head.
Political futures are markets where investors buy candidate stocks and make profits by correctly picking a future election outcome.
Is the collective knowledge of people around the world better suited to predicting political outcomes than polls? You bet. In addition to providing real-time forecasts, academic research has shown that political futures markets are more accurate.
Wake Forest economics professor Koleman Strumpf has 25 years’ experience studying political futures markets — where investors try to anticipate trends and long-term changes. In this Q&A he explains the political future and why closing PredictIt could be problematic.
How do political futures work?
For example, a person could buy a share of Florida Gov. Ron DeSantis and this will pay off when he is elected president in 2024. These markets have been around since the founding of the United States and have an enviable forecasting record. Even non-dealers benefit from the wisdom of these markets as it is easy to watch their prices which serve as forecasts.
How useful are political futures?
Political Future can be viewed as an alternative news source that provides the best predictions for future election outcomes. While these forecasts are not perfect (there are still surprises to be found), knowledge of these probabilities is of interest to both the general public and more specialized audiences such as financial traders who need to assess future policy frameworks when investing.
Why did the CFTC order the shutdown of PredictIt?
PredictIt, a project of Victoria University of Wellington, New Zealand, and operated by Aristotle International Inc., is the largest legal political futures market in the US. No reason was given for the withdrawal, only that the market had violated their regulatory clearance (a so-called no-action letter from the CFTC in 2014). Some reports have found that the CFTC focuses on excessive market size, profits for the operator, in this case the private operator of the site, and ignores the academic use of these markets.
Was the closure justified?
It is difficult to say whether the CFTC action was well reasoned without a more explicit justification from the Commission. However, one of the CFTC’s concerns related to the prediction market ignoring its education requirements. PredictIt is very supportive of academics. For example, I teach a course on Prediction Markets at Wake Forest, and for several years my students have been using PredictIt data as part of the course. Last spring semester, students were provided with special trading accounts on the website for their research work.
What’s worrying about PredicIt having to close?
PredictIt’s information helps people better understand which competitions to focus on and can benefit investors in more traditional financial markets. Perhaps most worryingly, the pullback came as a result of pressure from the CFTC from politicians or companies who might want to set up their own markets.
Does this mean the end of the political future?
For now, in the US, the answer is yes. PredictIt is one of only two locations to have received regulatory approval from the CFTC, and the other location is essentially closed. Political futures will continue to exist elsewhere. There are many such sites in other countries like the UK or through unregulated cryptocurrencies. These sites are more difficult to access for less savvy traders and will affect far fewer markets, particularly those focused on US elections.
Are there negative effects beyond the specific location?
Any future political futures operator will be constantly looking over the shoulder of the CFTC at their opaque PredictIt withdrawal letter. This uncertainty will limit the possibility of additional market entry and innovation.
What does that mean for the future?
Whatever political futures markets exist, they will be both less useful and less accurate than PredictIt. And for academics, the loss of US markets will hamper future research opportunities.
Economics professor Koleman Sstocking is available for media interviews. Contact [email protected]zerowfu.edu to schedule a phone or Zoom call.
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