The moral economics of prediction markets, in the NYT

 As part of it's Dealbook feature, the NYT yesterday included this conversation about The moral economics of prediction markets

"The economist Al Roth, a professor at Stanford University, shared a 2012 Nobel Prize for his work in market design and matching theory. He spoke with Sarah Kessler about his latest book, “Moral Economics,” which offers a framework for understanding controversial markets, and how it applies to prediction markets. The conversation has been edited and condensed.

Your book explores what you call repugnant markets — meaning some people don’t think they should exist — like prostitution, surrogacy and drugs. How do prediction markets fit in?

When I think about repugnance and prediction markets, I think back to when Darpa proposed a policy prediction market that became characterized as a terrorist prediction market, and people really objected to that.

That objection was sort of misplaced. It would be great if terrorists who were planning attacks wanted to tip their hand by betting on them in advance. But also, if you were a terrorist who knew about the 9/11 attacks in 2001, and you wanted to make money, you wouldn’t bet on a prediction market. You would short United Airlines and American Airlines.

What do you make of all the reports of insider trading on prediction markets?

The reason we forbid insider trading in securities markets is to give people confidence in them. Securities markets have an important financial function that is threatened by insider trading, and I’m not sure that prediction markets necessarily do.

What worries me about the current state of prediction markets and Washington insiders is more the blurring of private and public functions. I don’t think that being an associate of the president should allow you to bet on a Truth Social post by President Trump. That is very bad public policy, but not necessarily an indictment of prediction markets per se.

Do you have an opinion on whether prediction markets should be regulated by the C.F.T.C. or state gambling authorities?

Futures markets, like securities markets in general, play other roles in society. If you’re a farmer who’s growing wheat, a futures market allows you to sell your wheat before you’ve planted it, which allows you to buy the fertilizer and make plans. That’s one role for federal regulators.

The contract has a delivery date. It says on a certain day a freight car is going to deliver potatoes to me. If, for example, someone tried to corner the potato market by reserving all the freight cars so that you wouldn’t be able to deliver on the contract, the regulator could intervene.
With prediction markets, there’s nothing that has to be delivered. It’s just that someone has to adjudicate whether the bet was a yes or a no. That requires maybe some kind of regulation, but that seems more like a customer relations thing.

Is there anything that you would change about the design of prediction markets?

I have some ideas about what we can do about gambling and addiction. An appropriate regulator or consumer protection agency could start to require that apps allow you to put a limit on your betting.

Before the game starts, you can say to the app: When I’ve lost a hundred dollars, shut down. Don’t let me make any more bets.

And that might help some people just the way bartenders are supposed to stop serving you if you’ve had too much to drink. "