Fire the Politicians: Why We Should Let Markets Decide Our Laws
Forget Experts: Why Gamblers Are Better at Predicting the Future
Note : This article is the 6th in a series on how the internet and globalization are disrupting nation-states—and what new governance models may emerge. Here are the first articles in the series:
Prediction markets could solve one of the biggest problems facing democracies.
But what on earth are prediction markets ?
They allow individuals to speculate on future events using their knowledge and intuition to predict the most likely outcome... basically, participants bet on the probability of an event occurring or not occurring before a given date.
For example, they might predict the winner of an election, the outcome of a sports match, or even the economic impact of a government policy.
These markets are powerful tools for predicting the future and aligning the incentives of individuals and communities for several reasons:
Aggregation of collective intelligence: these markets combine the knowledge and insights of many participants, whose collective wisdom often surpasses that of individual experts.
Aligned financial incentives: Participants are motivated by financial gains, encouraging them to use accurate information and avoid cognitive biases.
Responsiveness: they quickly adjust predictions based on new information, offering real-time predictions.
Reduction of bias: participants avoid bias so as not to lose money, leading to more objective assessments.
Incorporation of private information: markets incorporate private information, making predictions more complete.
Talent detection: Participants win or lose money based on the accuracy of their predictions, which allows for precise measurement of their ability to successfully predict situations. Those with a proven track record of accurate predictions are called “superforecasters1 ,” and it is possible to follow them on several platforms to view their predictions2. Think you’re good at predicting the future? You can easily make money with prediction markets!
Transparency: prices and their evolution are visible, reinforcing confidence in predictions.
Versatility: these markets work for a wide range of predictions, from elections to the impact of public policy.
Feedback and correction: incorrect predictions are quickly adjusted, improving overall accuracy.
Numerous3studies4 show5 that prediction markets generally make more accurate and fairer projections than polls or experts, even if they are not infallible and can also be wrong6 .
Despite their great advantages in anticipating certain events and identifying the best predictors, prediction markets are often considered to be betting operators, an extremely regulated activity. These regulations sometimes stifle these markets, depending on the country.
DeFi7 was therefore a perfect platform to host these markets without having to ask anyone’s permission. This is because blockchains, which are virtual computers, or “Turing complete8 ,” such as Ethereum, have all the technology necessary to run these markets easily.
Today, the most popular decentralized prediction markets are Polymarket on the Polygon blockchain, which operates in parallel with Ethereum and is directly linked to it, and Augur, built directly on Ethereum.
You can visit their websites to see the current predictions and participate without needing anyone’s permission to place crypto bets.
So how are they going to save democracy?
Let me introduce futarchy
Futarchy, a term popularized by economist Robin Hanson, proposes transforming these prediction markets into a mechanism of governance.
In this model, public policy would not be decided by elected officials or bureaucrats, but by prediction markets designed to maximize general welfare.
The basic principle of futarchy is simple: “Vote on values, bet on beliefs.”
This means that society continues to vote on its fundamental values and goals—for example, maximizing economic well-being, reducing crime, or improving public health.
However, instead of debating specific policies to achieve these goals, prediction markets are used to determine which policies are most likely to achieve them.
Here’s how it works in practice:
1. Defining well-being metrics
Society democratically decides on the criteria that will be used to assess overall well-being. These metrics may include economic indicators such as GDP, public health measures such as life expectancy, or happiness indices.
2. Creation of prediction markets
For each proposed policy, prediction markets are created to bet on the impact of that policy on the defined well-being metrics.
For example, a market could bet on the effect of a new tax law on GDP or on the quality of life in a given country.
3. Implementation of the winning policy
The policy that gets the best predictions on the markets—that is, the one that bettors think is most likely to improve well-being based on the chosen indicators—is adopted and implemented by the government.
This model has several potential advantages.
First, it uses collective intelligence to make more informed decisions. Once again, prediction markets have proven their effectiveness in various fields in accurately predicting outcomes, often outperforming individual experts.
Second, futarchy reduces the influence of special interests and lobbyists, as decisions are based on market data rather than political pressure.
However, futarchy is not without its challenges. Defining metrics of well-being is a complex and debatable task. In addition, manipulation of prediction markets and unequal access to information pose significant risks.
But futarchy, by combining democracy to establish values and markets to bet on beliefs, offers a possible synthesis of two often opposing approaches.
It could offer a path to more effective policy decisions based on informed collective predictions rather than partisan struggles.
It also has the huge advantage of being able to take full advantage of cryptocurrencies: it is entirely conceivable that Network States could use it, either completely or partially, to implement various policies. Ethereum co-creator Vitalik Buterin, to name but one, is a big fan of this idea9 .
We could also go further by imagining that if you want to vote for a political program, you would have to bet some of your money—a given percentage of your income, for example, which would count as a tax—on the effects that the policies you vote for will have. You would then have a financial interest in the policies you vote for.
You could also delegate this task by entrusting your tokens to “superforecasters“ who share your ideas.
Stay tuned! In the meantime, feel free to follow Disruptive Horizons on X/Twitter & LinkedIn, and join the tribe of Intelligent Rebels by subscribing to the newsletter:
Coming soon
The next article will explore how seemingly futuristic governance models already have historical precedents from medieval leagues to sovereign orders without territory.
And here are the first articles of this series :
Superforecasting: The Art and Science of Prediction, Philip Tetlock, 2016.
Don’t forget to mention this to the next astrologer or fortune teller you come across! :)
“The Accuracy of Prediction Markets,” Thomas Friedrich Wolfram, The International Journal of Applied Forecasting, 2024.
“Prediction Markets versus Alternative Methods Empirical Tests of Accuracy and Acceptability,” Andreas Graefe, University of Karlsruhe, 2009.
“Prediction Markets: Does Money Matter?”, Emile Servan-Schreiber, Electronic Markets, 2004.
“How Accurate Are Prediction Markets?”, James Tapper, JSTOR Daily, 2020.
Decentralized finance, which we discussed in previous articles.
That is, on which all mathematical operations that can be performed by a computer are feasible. Bitcoin is not Turing complete. Having a blockchain that is Turing complete was a major motivation for the creation of Ethereum in 2014.
He discusses this in his book Proof of Stake, 2022.
Brilliant piece on futarchy! The insight about using collective intelligence through prediction markets rather than relying on expert opinions is spot on. I've been watching Polymarket's accuracy during recent elections and the results are frankly impressive compared to traditional polling. The key challenge though is the well-being metrics defintion since what gets measured inevitabley becomes the goal. Any throughts on how to prevent gaming of tehse metrics?