Prediction Markets

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Topic Owners: Matthew, Elisabeth

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The most high-profile examples of prediction marketsthe Iowa Electronic Markets and Intradestarted by focusing primarily on predicting election outcomes and related political and financial events. Now they have expanded to cultural (Oscars) and technological (X Prize) events as well. The status of the commercial prediction markets is uncertain; for example, Tradesports announced recently that it is closing. And questions remain about the legal status of prediction markets, whether the CTFC will regulate them, and whether they will be taxed.

Rather than focusing on the traditional markets, however, we want to focus on future applications of prediction markets, particularly their possible use by government or by government-industry collaboration. We'd like to explore in particular applications that are likely to be controversial.

The focus will be three cases that we think raise interesting legal and ethical questions.

  • Google's flu-tracking application (where, as Professor Zittrain noted, the predictors aren't even aware that their knowledge is being harvested)


Justin Wolfers, Economist (confirmed)

Hal Varian, Google (possibly, on videoconference)

Concrete Questions

  • Which of these applications are most likely and desirable?
  • Should the government be involved in administering prediction markets at all? Should it regulate them?
  • What ethical concerns do we have about prediction markets of the future, and how might we address them? Can design of the markets help mitigate concerns? Are some more fundamental?

Tech Tweak/Experiment

Everyone will create their own prediction market contract via Once you set up an account there, you can then create you own contract at Your contract can be about anything you like (doesn't have to be legal), but it should conclude before our class date, April 27, 2009. The idea is (1) for everyone to get a feel for how prediction markets operate; (2) to see what kinds of contracts get enough volume to be successful and what kinds don't; (3) to see how accurate the predictions are, how they change over time, etc.

Once you've signed up and created a contract -- please do so by Friday, March 20 -- you can invite other people in the class to bet on your contract to give it some initial starting volume. ( gives everyone $10k in play money upon signing up, so obviously if people want to bet on the wider world's contracts, that's great too). Everyone should list the contracts they've created below to facilitate class participation on intrade (and so that we can generate a variety of different kinds of contracts). At the actual class session on April 27, everyone should come in prepared to briefly discuss what happened with their contract (feel free to create more than one).


Justin Wolfers and Eric Zitzewitz | 18 Journal of Economic Perspectives 107 (2004) | (19 pages, essential background--only one equation for the math-phobic)

Miguel Helft | New York Times | November 11, 2008 | (1 page, useful diagram)

M. Todd Henderson, Justin Wolfers, and Eric Zitzewitz | Olin Working Paper No. 402 | April 2008 | (5 pages, just read abstract and introduction)

Carl Hulse of the NYT and Wire Services | July 2003 | (~6 pages)

Discussion of the DARPA Markets in the Senate | July 28 and 29, 2003 | (2 short comments, mostly for humor value)

Student Note | 122 Harvard Law Review 1217 (2009) | (21 pages, actually good critical arguments)

Optional Readings

  • Professor Sunstein's Infotopia
  • Cass R. Sunstein, Group Judgments: Statistical Means, Deliberation, and Information Markets, 80 N.Y.U. L. Rev. 962 (2005)

Class-Constructed Markets

Andrew: Will General Motors file for Chapter 11 by April 20, 2009?

  • Gwen: I'm having trouble getting an account set up. Do you have to mail in a check? I get this error message when I try to use credit cards: "Unfortunately your bank has refused to authorise your deposit. Most US-based members are no longer able to fund their accounts by credit card due to the passage of recent legislation through the US Congress. Many non-US banks have also adopted a similar policy and will no longer authorise credit card transactions with certain classes of merchants. For more information about your attempted deposit please contact your bank. If you require assistance with funding your account by another method please e-mail us at . We are happy to accept deposits by check, money order or bank transfer. Please see your My Account screen for more details." What law is this, and how recently did it change? [Elisabeth: is a free site -- you shouldn't have to use your credit card! You might be at the wrong site?]