Chapter 1: What are prediction markets and how do they work?
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$400,000. Hundreds of thousands. Half a million dollars. $400,000 in profits.
Half a million dollars. That's how much money someone made a couple months ago on a risky bet.
The answer, of course, was yes. The United States and Israel are carrying out major attacks against Iran today. Huge explosions rang out in the capital Tehran.
Iran has retaliated by striking back at Israel and at U.S. military targets across the Gulf in several Arab states.
And if that person's bet was a lucky guess, it was very lucky. Because the odds the U.S. was going to strike Iran that day hovered between 7 and 26 percent. And the better doubled down in the hours before President Trump announced the strike.
Our objective is to defend the American people.
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Chapter 2: How did betting on elections evolve into prediction markets?
That is, until a huge surprise upset.
The polls had predicted a Dukakis victory, but it didn't happen. It was the day after the Michigan caucus, which, as you may recall, Jesse Jackson won.
Jesse Jackson. He scored a stunning win yesterday in Michigan's Democratic caucuses, defeating Michael Dukakis by a margin of nearly two to one in the popular vote.
And that was a big surprise. The polls missed it altogether.
Going in, political polls had shown Jackson and Dukakis running neck and neck. But what happened was a blowout. Jackson won the Michigan caucus with 53 percent of the vote. And Dukakis only got 29 percent.
And that's where it came from. We said, well, gee, you know, as economists, what would we do if we were going to try to predict the outcome of something? And what's natural for a bunch of economists is that, well, let's run a market on it.
run a financial market, like a stock or commodities market. So Robert and his colleagues got together a couple hundred people, students and faculty at the University of Iowa. They set up an online interface where those people could buy stock in political candidates. And just like on Wall Street, these political stocks could be traded. So, for example, when George H.W.
Bush and Michael Dukakis ultimately went up against each other in the general election, if you didn't like Dukakis' chances, you could sell your shares in him. The overarching idea here? The market might show what people were actually thinking, even better than polls could. The wisdom of the crowd.
And lo and behold, at midnight the night before Election Day, we ended up predicting the outcome of the popular vote within two-tenths of one percent.
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Chapter 3: What historical events influenced the rise of prediction markets?
And it turns out, pretty much as long as there have been elections, people have been betting on them.
Back to the 16th century. There's betting on who would become the pope. Elections in city-states in Venice and Genoa. And in the U.S. You can, like, find markets going back to George Washington. How long the Stamp Act would be in place before the American Revolution.
Paul and Coleman say for centuries, these markets stayed relatively small. There wasn't a ton of money on the line. Sometimes the bets didn't involve money at all.
If the candidate I support doesn't win, I'm going to cut my beard or I'm going to walk from New York to Boston. Or you have to eat a crow if I'm right. You have to push me in a wheelbarrow down Main Street.
But around the turn of the 20th century, election markets in the United States really started to gain steam.
The main place that people would trade on elections was something called the Curb Exchange, which literally, as the name suggests, was the curb outside the New York Stock Exchange.
They'd be sitting on the curb and they'd be trading stocks and signaling to people in the offices about them.
Stocks, to be clear, in political candidates, people running for office.
Reporters for the Wall Street Journal and New York Times could go down to this pit and not only tell us what the overall price was, but the names of the people trading. And if you look, the people who were trading, these were like the elite of the city. These were people from Tammany Hall, these were bankers, Wall Street folks, people who owned hotels. People would be doing this very publicly.
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Chapter 4: How did the Iowa Electronic Markets change political forecasting?
Well, you know, there are days that I'm sort of jealous of Koshi and the Polymarket. I mean, they've really taken the same idea. I mean, they're running basically the same prediction markets we did, but on a much bigger scale. In fact, they basically use the same rules for trading and issuing contracts that we used back in 1988. But they certainly have expanded it vastly.
And so you can just about trade on anything there.
the Iowa electronic market established something important. It demonstrated to modern economists that prediction markets worked. And that sparked a chain reaction, says economist Coleman Strumpf.
Once we see, oh, look, these markets kind of work in the modern period, could we use these markets to forecast other things? So could we look at other elections? Could we look at current events? And I think it kind of showed to the world that these things could work, but maybe it was only in this one specific domain.
And we didn't yet know, would that same kind of forecasting savvy translate into other situations? So that was for other markets to help point out.
Coming up, another economist gets close to answering that question. But then his experiment goes off the rails.
They called it terrorism futures, I think. Well, the accusation was we were having markets betting on death.
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Chapter 5: What was the impact of the Policy Analysis Market proposal?
For each nation in each quarter of a year, we plan to have traders predict military activity, political instability, economic growth, U.S. military activity, and U.S. financial involvement.
Robin and his team got the green light from the Department of Defense shortly after September 11, 2001. The project wasn't a direct response to 9-11. But as the U.S. ramped up its war on terrorism, the work Robin was doing took on a new context. The team decided to call its project the Policy Analysis Market. It was set to launch in summer of 2003.
And when it did, members of the public would be invited to trade on it. Each person could invest a maximum of $100. The policy analysis market did not have permission from the CFTC to do this, but it didn't need approval because it was an agent of the U.S. government.
And then we made a call for proposals for testers. We said, who wants to come be early users of this website? And we will pay you to sort of test it out and help us work it out till it's ready for the big leagues. We made a public website where we showed the idea, And a sample screen of what the thing might look like. And then we said, please come join our project.
That sample screen showed the sample markets organized in buckets by topic. So there was a section for military activity, one for economic growth and so on. But there was an extra section, miscellaneous, for bets that didn't fall neatly under any of the other categories.
And I think in the sample, miscellaneous section had two miscellaneous events. One was, what if North Korea sent off a missile somewhere? And another was, what if Arafat, who at the time was an important politician, was assassinated? How would that change events?
Yazid Arafat wasn't just an important politician. He was the longtime leader of the Palestine Liberation Organization, and president of the Palestinian Authority, placing him at the center of one of the most protracted and high-stakes conflicts in the world.
Things that we thought might be relevant for the events we were talking about.
I mean, that's going to attract controversy.
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Chapter 6: How did public backlash affect government prediction markets?
That's one of these things. The economists see this ickiness thing all the time when we go, why? Why? Why is this icky? But yes, people have ickiness.
So you don't see it at all.
Which is like, look, if you see a room in surgery and you see them cutting open with a scalpel, it's just icky, right? But you go, I need to suppress that reaction because I do think surgery is legitimate. And I don't want to yell and make them all stop the surgery just because I'm having an icky reaction to seeing somebody get cut with a knife, right?
I've learned that I have all sorts of maybe immediate reactions that I need to hold back and to restrain because first I need to think about, does the reaction make sense and is it appropriate?
Yeah.
Tom, that last idea to create a futures market on terrorist incidents was about as badly received on Capitol Hill as anything I can remember. Democrats said that market could actually give terrorist groups a way to profit from attacks they carry out.
And some Republican leaders made it clear right from the start that not only would the program have to be canceled, they wanted someone to take responsibility for it, which was taken to mean at least one head would probably have to roll.
On July 29th, 2003, just 24 hours after the media firestorm ignited, the policy analysis market went dark. The head of DARPA resigned. And the promise Robin Hansen had seen in the growing world of prediction markets came to a screeching halt. But prediction markets were not gone forever. Outside DARPA, outside universities, a seed had been planted and started to take root.
Private industry was poised to capitalize on these theoretical ideas to make very real money. Hello and welcome. My name is John Delaney and I'm the CEO of Intrade. Let me tell you a little about what we do. That's coming up.
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Chapter 7: What are the modern implications of prediction markets today?
A lawsuit.
They were perpetually trying to get InTrade shut down.
This week, the website Intrade, based in Ireland, said all American users must shut down their accounts by the end of the year.
Little is known about what happened to Intrade. A statement on its website says it stopped trading due to, quote, circumstances recently uncovered. I think everyone's surprised. The biggest part of the surprise is we don't yet know why it is that Intrade is shut down. Eventually, a series of things happened at InTrade that led to the company's demise.
The CEO died climbing Mount Everest, and that was a big issue. And then it also turned out that the company was not following standard accounting practices for keeping the money available for people who wanted to cash out. And when that became public, that was kind of the beginning of the end of this company.
But the CFTC did not stop going after Intrade, even after the company had gone out of business.
Spring of 2013, InTrade is basically non-existent. The CFTC fined InTrade, a company that basically doesn't exist anymore, a few million dollars. There's an expression apparently in the financial world called fining a corpse. So InTrade being the financial corpse in this case. And I guess the idea is to just say, look, if somebody else tries to do what InTrade did, we're going to come after you.
They're sending a message.
Exactly, 100%. And so clearly around, you know, through 2013, the federal regulatory agency in the U.S. is in no way interested in having these markets.
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Chapter 8: How might prediction markets shape the future of decision-making?
Fact-checking for this episode was done by Kevin Volkl. This episode was mixed by Maggie Luthar. Music for this episode was composed by Ramtin and his band, Drop Electric, which includes... Anya Mizani. And finally, if you have an idea or liked something you heard on the show, please write us at ThruLine at NPR.org. And if you're open to us giving you a call back, leave your number too.
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Since the Supreme Court weakened the Voting Rights Act of 1965, Southern states are redistricting. Tennessee was the first state to make it happen. The Republican supermajority there broke up the state's only Black-majority district. Two years ago, we embedded with the Tennessee legislature to understand what one-party power looks like. Listen to Supermajority from NPR's Embedded, Season 19.