Intrade Prediction Markets

3/13/2013 12:00:00 PM
Now that Intrade has been banned by the CFTC, I've seen a lot of post-mortems about why we should have allowed Intrade to continue. Now, I think that the libertarians are probably right that the burden should be on proving why we should ban Intrade, not on why we shouldn't.

That point aside, a lot of commentators have cited various benefits from having Intrade around: Neil Irwin, argues that Intrade could help keep political pundits accountable, some economists have argued that Intrade provides us with better forecasts by aggregating decentralized sources of data, and others have argued that Intrade provides fertile data for research about betting markets, people's understandings of probabilities, and other behaviors. But for the CFTC to consider any of these factors in their decision would be highly unethical. That's because the alleged benefits of Intrade all acrue to those who aren't incurring any of the risk from trading on Intrade itself. Economists get better research data. Businesses get better forecast data. Newspaper readers get better punditry. But these aren't the groups who have money on the line in bets in Intrade. They get all the benefits but none of the risk.

Many economists live in a bubble with pre-Nuremburg era ethical standards. In a post-Nuremburg world, it is no longer sufficient to claim that an activity is ethical just because people voluntarily agreed to participate in it. There are power-imbalances, comprehension problems, compulsive disorders, and a host of other factors that lead people to volunteer for activities that make them worse off.

Let me put it this way. If there is a clear harm to users of Intrade, but significant benefits to society, then allowing Intrade to exist is every bit as unethical as a medical researcher injecting people with HIV just to see what happens--it does not matter one bit whether those people volunteered to participate, or whether the research benefits society as a whole. The participants must either share in the benefit, or not be exposed to the risk.  That was the judgment at Nuremburg, and we should stick to it.

So the CFTC has two questions to consider:
  1. Do the potential harms to users of Intrade outweigh the benefits to users of Intrade?
  2. Is there more than minimal risk to society?
If the answer is "yes" to either question, then allowing Intrade to operate would not be ethical, all other considerations not withstanding.