Are "predictions markets" more effective than other mechanisms at making forecasts and decisions?
This issue has been given a lot of publicity, starting with a now-scotched proposal to set up a terrorism futures market. Professor Bainbridge weighs in.
As for whether such markets will "revolutionize corporate forecasting and decision making," as GMU economist Robin Hanson claimed in the Time article, remains to be seen. I remember when quality circles were going to revolutionize the world. And I remember when self-directed work teams were going to revolutionize the world. I also remember that some of the people who predicted that self-directed work teams would revolutionize the world were some of the same people who had said precisely the same thing about quality circles a few years earlier.
Bainbridge offers a Hayekian view of how prediction markets might work better than bureaucratic decisions.
I find this more plausible than the "wisdom of crowds" argument, although I have not read James Surowiecki's book yet. I have strong memories of being against the crowd (when I wrote about the Internet Bubble, for example), with subsequent vindication.
I may be suffering from selective memory--a tendency to remember when I outsmarted the crowd, and vice-versa. But I think that the success stories for predictions markets may suffer from selective memory as well. Up to now, we've been hearing the best stories from the most enthusiastic supporters. As more efforts are made to establish and debunk predictions markets, my prediction is that the reputation of predictions markets will suffer. It's a bet I'd be willing to make.