Political Prediction Markets: A Better Way to Conduct Campaigns and Run Government

Andrew S. Goldberg*

INTRODUCTION

It was the worst week in Wall Street history,1 and panicked politicians, themselves near

collapse from weeks without sleep, faced the Herculean task of halting the cascade and calming

terrified traders.2 Meanwhile, on Main Street, the extent of the financial fiasco was difficult to

fathom. Innocent investors had lost more than $2 trillion of wealth in ten days, even as Congress

passed an unprecedented bailout package making taxpayers part owners in failed banks and

insurance companies.3 Still, even with every traditional financial institution seemingly poised to

fail, and many frantic investors wondering whether it was time to stuff their savings under their

mattresses, some traders managed to find a different kind of financial cushion. At a growing

number of popular online prediction markets, where political investors wager on presidential

prospects the same way buyers and sellers at the Chicago Mercantile Exchange trade oil and

soybean futures, bullish traders thrive while their bearish brethren suffer on Wall Street. 4 But

there is one crucial problem with this new stock market: the federal government is standing in its

way.5

1*
J.D. Candidate, Benjamin N. Cardozo School of Law, 2010. Columbia University, M.S. in journalism, 2007. Yale
University, B.A. in political science, 2004. I dedicate this Note in loving memory of my mother, the strongest and
bravest person I’ve ever known, who will always be my inspiration.
1
E.S. Browning, Diya Gullapalli & Craig Karmin, Wild Day Caps Worst Week Ever for Stocks, WALL ST. J., Oct. 11,
2008, at A1, available at http://online.wsj.com/article/SB122368071064524779.html.
2
See Vikas Bajaj, Whiplash Ends a Roller Coaster Week, N.Y. TIMES, Oct. 10, 2008, at B1, available at
http://www.nytimes.com/2008/10/11/business/11markets.html.
3
See generally Bill Saporito, The Big Bank Bailout: Are You Next?, TIME, Oct. 27, 2008, at 30, available at
http://www.time.com/time/magazine/article/0,9171,1851140,00.html.
4
See, e.g., ABC News: Foretelling the Future: Online Prediction Markets (ABC television broadcast May 9, 2008),
available at http://abcnews.go.com/Business/Stossel/story?id=4813558&page=1. For one trader’s account of how
he turned $200 into more than $25,000 in one year on Intrade, see Wiser than the Crowd,
http://www.wiserthanthecrowd.com/2008/12/beating-hell-out-of-prediction-markets.html (Dec. 18, 2008, 13:00
EST).
5
For details on how the government is standing in the way, see infra Part II.

1
 As the presidential press corps crisscrossed the country to watch candidates compete in

early primary states, woo high-profile supporters and vie for fat-cat donors, its members were not

the only ones speculating on whose political stock would soar. A new breed of political traders

was also hoping to strike it big by betting their money, not just their reputations, on everything

from which candidates would be nominated to which party would win. Many pundits and

academics correctly predicted that 2008 would be their breakout year.6

While the wording of contracts varies slightly at different online prediction market

exchanges, the basic rules remain largely the same: political stocks, also known as event

derivatives, typically trade between $0 and $10 per share, with the price at any point considered

to be the percentage probability that the predicted event will occur.7 For example, traders bullish

about Barack Obama’s chances of winning the presidential election could have purchased his

contract at $7.50 (a 75% chance of victory) on October 9, 2008 at Intrade.com.8 When he won

the election, each share closed at $10. If he had lost, each share would have dropped to $0.9

Unlike pure gamblers, however, anxious armchair investors need not wait for all the

votes to be counted before cashing out. Political contracts operate in the same way as traditional

stocks, varying in price in response to negative advertisements, speeches, gaffes, political

conventions, debates, polls, endorsements, and any other news events likely to affect a

6
Telephone Interview with Dave Perry, Founder, The Washington Stock Exchange (Mar. 12, 2007). Perry
predicted: “I think you’ll see some pundits really default more to markets instead of polls. I expect you’ll see a lot
more of that in [20]08 because we’re talking to several pundits and political consultants who are starting to put more
reliance on the market data versus the polling data.” Id.
7
See Intrade Fees, http://www.intrade.com (follow “Fees” hyperlink) (last visited Nov. 17, 2009); Trader’s Manual:
Executing Trades, Iowa Electronic Markets, http://www.biz.uiowa.edu/iem/trmanual/IEMManual_3.html#WebEx
(last visited Mar. 18, 2010). For a comprehensive list of trading exchanges and other prediction market resources,
see generally MidasOracle.org, Prediction Exchanges, http://www.midasoracle.org/predictions/exchanges (last
visited Feb. 28, 2010).
8
See Ben Smith: A Running Conversation About Politics,
http://www.politico.com/blogs/bensmith/1008/President_Obama.html (Oct. 9, 2008, 15:09 EST).
9
See Intrade Contract Rules, https://www.intrade.com/jsp/intrade/help/index.jsp?page=rules.html (last visited Nov.
18, 2009).

2
candidate’s chances of winning.10 Whereas some traders play their political hunches and hold

them all the way through November, others are content to sell their shares at a gain long before

they settle at the maximum $10 mark.11

A growing number of experts argue that political prediction markets have the potential to

transform the way analysts take the pulse of the American electorate. 12 These markets, which

have so far proven to be at least as accurate as polls, 13 not only have the potential to replace

polls; they could also change the way candidates think about fundraising, the way campaigns are

conducted, and the way policy is made in Washington.14

Still, not everyone is so sanguine. The legality of political prediction markets remains

murky and untested.15 Opponents argue that investing in the outcome of a campaign is just

another form of gambling,16 and is therefore prohibited under the 2006 Unlawful Internet

10
See Justin Wolfers, Best Bet for Next President: Prediction Markets, WALL ST. J. (Online Edition), Dec. 31, 2007,
http://online.wsj.com/article/SB119902559340658043.html.
11
See Intrade Contract Rules, supra note 9.
12
See David Leonhardt, Odds Are, They’ll Know ’08 Winner, N.Y. TIMES, Feb. 14, 2007, at C1, available at
http://www.nytimes.com/2007/02/14/business/14leonhardt.html. See also Kenneth J. Arrow et al., The Promise of
Prediction Markets, 320 SCI. 877 (2008); see generally Justin Wolfers & Eric Zitzewitz, Prediction Markets, J.
ECON. PERSP., Spring 2004, at 107.
13
Joyce Berg, Forrest Nelson & Thomas Rietz, Accuracy and Forecast Standard Error of Prediction Markets 12
(Tippie College of Business, Working Paper, 2003), available at
http://www.biz.uiowa.edu/iem/archive/forecasting.pdf; see also Joyce E. Berg & Thomas A. Rietz, The Iowa
Electronic Markets: Stylized Facts and Open Issues, in INFORMATION MARKETS: A NEW WAY OF MAKING DECISIONS 142
(Robert W. Hahn & Paul C. Tetlock eds., AEI 2006). But see Robert S. Erikson & Christopher Wlezien, Are
Political Markets Really Superior to Polls as Election Predictors?, 72 PUB. OPINION Q. 190 (2008), available at
http://poq.oxfordjournals.org/cgi/reprint/72/2/190.pdf.
14
See infra Parts III and IV.
15
Kenneth J. Arrow et al., Statement on Prediction Markets, AEI-Brookings Joint Center for Regulatory Studies
(May 2007), at 2, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=984584; see Tom W. Bell,
Prediction Markets for Promoting the Progress of Science and the Useful Arts, 14 GEO. MASON L. REV. 37, 66-75
(2006) [hereinafter Bell, Prediction Markets].
16
Even some prediction market proponents, such as economist Steven D. Levitt, have argued that there is “no
difference between a ‘prediction’ market and a ‘gambling’ market.” Posting of Steven D. Levitt to Freakonomics:
The Hidden Side of Everything, http://freakonomics.blogs.nytimes.com/2007/05/08/economists-speak-out-on-
prediction-markets/ (May 8, 2007, 11:03 EST). For a thorough analysis of the legal risks facing private prediction
markets, see generally Tom W. Bell, Private Prediction Markets and the Law, 3 J. PREDICTION MARKETS 89 (2009),
available at http://www.tomwbell.com/writings/PrivatePMs&theLaw.pdf.

3
Gambling Enforcement Act (“UIGEA”)17 and proscribed by various state laws.18 Proponents

maintain that because skill so predominates over chance in prediction markets, they should be

treated like any other kind of stock.19 On May 7, 2008, the Commodity Futures Trading

Commission (“CFTC”) requested comments on this issue, taking up for the first time the

question of whether prediction markets are in the public interest and fall within the jurisdiction

of the CFTC.20

This paper argues that the federal government should carve out an exception to the

UIGEA for political prediction markets, and that the CFTC should regulate them accordingly.

These markets not only serve an invaluable information aggregation function; they also enable

traders to hedge on policy positions,21 provide campaigns with a vehicle for political risk

management,22 and serve the social interest in ways that will continue to grow in years to come.23

Previous commentators, who have sought to differentiate investing in prediction markets

from pure gambling, have argued that prediction markets should be treated like forward contracts

for tax purposes.24 They have discussed their application to corporate decision making, and even

to forecasting Supreme Court decisions.25 This paper, which focuses primarily on political

17
31 U.S.C. §§ 5361-67 (2006).
18
See, e.g., KY. REV. STAT. ANN. § 372.010 (LexisNexis 2009); WASH. REV. CODE ANN. § 9.46.240 (LexisNexis 2009)
(making internet gambling a class C felony).
19
See Tom W. Bell, Gambling for the Good, Trading for the Future: The Legality of Markets in Science Claims, 5
CHAP. L. REV. 159, 166-70 (2002) [hereinafter Bell, Gambling for the Good] (discussing the legality of markets in
science claims); see also Tom W. Bell, Do Gambling Laws Threaten Prediction Markets? (Mar. 5, 2007),
http://www.midasoracle.org/2007/03/05/do-gambling-laws-threaten-prediction-markets; see generally Robert W.
Hahn & Paul C. Tetlock, A New Approach for Regulating Information Markets, 29 J. REG. ECON. 265 (2006),
available at http://springerlink.metapress.com/content/c3382w2542292832/fulltext.pdf.
20
Concept Release on the Appropriate Regulatory Treatment of Event Contracts, 73 Fed. Reg. 25669, 25674 (May
7, 2008).
21
See infra Part III.
22
See id.
23
See infra Part IV.
24
See generally Philip Robin Cleary, Predicting the Taxation of Prediction Markets, 27 VA. TAX REV. 953 (2008)
(discussing the tax treatment of event contracts).
25
Michael Abramowicz & M. Todd Henderson, Prediction Markets for Corporate Governance, 82 NOTRE DAME L.
REV. 1343 (2007) (arguing for the use of prediction markets in corporate decision making); Miriam A. Cherry &
Robert L. Rogers, Tiresias and the Justices: Using Information Markets to Predict Supreme Court Decisions, 100
NW. U. L. REV. 1141 (2006).

4
prediction markets, seeks to advance the argument in favor of their legality on several new

grounds. Part I explains the history and development of the nascent prediction market industry.

Part II makes the case for CFTC regulation and traces the recent effort by the House Financial

Services Committee and its Chairman, Barney Frank, to prevent enforcement of the UIGEA by

blocking federal officials from writing rules to implement it. Part III discusses how political

prediction markets, which are now inextricably intertwined with the media’s campaign coverage,

advance the public interest, as defined by the Commodity Exchange Act. This section explores

new uses for political markets and explains how prediction markets could increase campaign

efficiency and improve the political process. Part IV assesses the policy implications of political

prediction markets and considers how their implementation could improve the way decisions are

made within government. Finally, the conclusion discusses the implications of granting full

legal status to prediction markets in the United States.

I. BACKGROUND AND HISTORY OF PREDICTION MARKETS

Starting a portfolio at an online prediction market is as simple as logging on and creating

an account. The three leading real-money prediction-market exchanges currently accepting U.S.

traders include “Intrade,” the “Iowa Electronic Markets,” and “HedgeStreet.”26

26
See generally Intrade Prediction Markets, http://www.intrade.com (last visited Feb. 28, 2010); Iowa Electronic
Markets, http://www.biz.uiowa.edu/iem (last visited Feb. 28, 2010); HedgeStreet Exchange,
http://www.hedgestreet.com (last visited Feb. 28, 2010). While HedgeStreet accepts U.S. customers, its contracts do
not include political or current events. Thus, this exchange will not be included in this discussion. Other prediction
exchanges work on fake money for purely recreational purposes. They include: Hubdub, http://www.hubdub.com
(last visited Feb. 28, 2010); NewsFutures, http://www.newsfutures.com (last visited Feb. 28, 2010); and Hollywood
Stock Exchange, http://www.hsx.com (last visited Feb. 28, 2010).

5
 At Intrade.com, the most popular market,27 a colorful ticker crawls across the top of the

screen, alerting investors to the latest ups and downs in stocks, like whether Scooter Libby 28

would be pardoned before President Bush left office, or whether Barack Obama would win

North Carolina in the 2008 presidential election. Registered users can then fund their accounts29

to buy and sell shares in future political events, with the market making its money by taking a

few cents out of every transaction.30

Long before any votes were cast in the 2008 primaries, more than 2.1 million shares had

been traded in presidential primary contracts on Intrade.31 At the time, Intrade CEO John

Delaney said:

Our [20]08 volumes are already approaching the total for [20]04 volumes—and
we are still twenty-one months away. Our own internal prediction market states
that 2008 is going to be amazing, with trading volumes on the Intrade presidential
futures markets set to exceed by several hundred percent over 2004 volumes.32

The close 2004 campaign produced a record year for the company, which has grown

exponentially since it started selling political futures in 2001.33 With 82,000 registered traders,

Intrade had raked in more than $100 million in trades on presidential contracts by the summer

before the 2008 election—a six-fold increase over 2004.34 Three weeks before the election,

27
For a chart comparing page views received by Intrade and other prediction exchanges, see MidasOracle.org,
Intrade is in red. The two other lines are HubDub and BetFair, http://www.midasoracle.org/2008/10/15/compete
(last visited Feb. 28, 2010). For an intriguing interview of Intrade’s CEO, see Posting of Stephen J. Dubner to
Freakonomics: The Hidden Side of Everything,
http://freakonomics.blogs.nytimes.com/2007/07/05/a-qa-with-intrades-john-delaney (July 5, 2007, 12:20 EST).
28
For more information about the Scooter Libby trial, see Amy Goldstein, Libby Trial Offered Glimpses of Way
White House Worked, WASH. POST, Mar. 8, 2007, at A4, available at http://www.washingtonpost.com/wp-
dyn/content/article/2007/03/07/AR2007030702424.html.
29
U.S. credit cards are not currently accepted due to compliance with the UIGEA. For more details, see infra Part
II. Intrade.com accepts payment by check or wire transfer.
30
See Intrade.com, Help, http://www.intrade.com (follow “Help and FAQs” hyperlink) (last visited Feb. 8, 2010).
31
Email from John Delaney, CEO, Intrade, to Andrew S. Goldberg, Student, Benjamin N. Cardozo School of Law
(Mar. 13, 2007, 01:28:00 EST) (on file with author).
32
Id.
33
Id.
34
Betting on Barack, FIN. TIMES (Online Edition), Aug. 29, 2008, http://www.ft.com/cms/s/2/354d74b0-75a9-11dd-
99ce-0000779fd18c.html.

6
Intrade announced that it had reached another milestone: for the first time, more than 100 million

shares had been traded in a single political stock.35

Whereas Intrade is one of the most prominent political prediction markets,36 it certainly

was not the first. Since 1988, the College of Business at the University of Iowa has run a

political prediction market called the Iowa Electronic Markets (“IEM”), which allows traders to

buy up to $500 in election-related contracts.37 George Neumann, an Iowa economist and one of

the IEM founders, said the project was born out of an election-night surprise: 38 “In 1988, I was

sitting in this bar with two colleagues when Jesse Jackson won the Michigan primary. We said,

‘Who predicted that?’ None of the public opinion polls had.”39 Convinced they could do better,

they decided to create their own electronic prediction market. “We got it up and running by

June, and it ran through the election and correctly predicted Michael Dukakis would lose and

George Bush would win, and it did so very accurately compared to public-opinion polls.”40

Since that first year, the IEM has proven just as reliable. In every presidential race since its

creation, it has outperformed the best professional public-opinion polls and come within

approximately one point of guessing the total percentage of votes received by the winner.41

But long before the IEM took political trading online, and even before the advent of

scientific polls, Wall Street brokers could be found on the steps of the New York Stock

Exchange hawking the equivalent of today’s political securities.42 Political junkies could track

price quotes by thumbing through the New York Times, which published the latest odds in run-
35
Posting of John Delaney to Intrade Forum: Announcements,
http://bb.intrade.com/intradeForum/posts/list/2784.page (Oct. 16, 2008, 2:41:38 GMT).
36
See Posting of David Leonhardt to The Caucus, http://thecaucus.blogs.nytimes.com/2008/11/03/internet-market-
predictions/#more-7145 (Nov. 3, 2008, 17:36 EST) (noting that Intrade is “one of the best-known prediction
markets”).
37
For a good grounding in the Iowa Electronic Markets, see JAMES SUROWIECKI, THE WISDOM OF CROWDS 17-20 (2005).
38
Telephone Interview with George Neumann, Co-Founder, IEM (Mar. 12, 2007).
39
Id.
40
Id.
41
See SUROWIECKI, supra note 37, at 18-19.
42
Jack Shafer, When Wall Street Bet on Elections, SLATE, Sept. 26, 2008, http://www.slate.com/id/2200931.

7
ups to elections.43 According to a study of newspaper articles by Paul Rhode and Koleman

Strumpf, betting on election outcomes was a big business in the pre-WWII era.44 “The scattered

available evidence suggests that the New York market accounted for over one-half of the total

election betting.”45 Investors on Wall Street, for example, wagered $165 million on the 1916

election (in 2002 dollars), which was more than twice the total amount spent on the election

itself by the campaigns.46 Even then, such predictions proved remarkably prescient. “In only

one case did the candidate clearly favored in the betting a month before Election Day lose, and

even state-specific forecasts were quite accurate.”47

Intrade’s track record, though shorter, has been just as impressive. Despite polls

indicating that the 2004 presidential race between John Kerry and George W. Bush was a virtual

toss-up going into Election Day, Intrade accurately predicted that President Bush would prevail

and also proved accurate in all but one Senate race.48 In addition, the trading exchange correctly

forecasted thirty-three of the thirty-four Senate races in 200449 and all the Senate races in 2006,

even though it failed to predict that the Democrats would take control of the Senate.50 In 2008,

Intrade correctly predicted a big win for Barack Obama and even came within one vote of

predicting the exact number of electoral votes he won.51

43
Id.
44
Paul W. Rhode & Koleman S. Strumpf, Historical Presidential Betting Markets, J. ECON. PERSP., Spring 2004, at
127, 128.
45
Id. at 128.
46
Id. at 128-29.
47
Id. at 127.
48
Andy Serwer, Making a Market in (Almost) Anything, FORTUNE, Aug. 8, 2005, at 103-05, available at
http://money.cnn.com/magazines/fortune/fortune_archive/2005/08/08/8267667/index.htm.
49
Id.
50
Posting by Lance to Computational Complexity, http://blog.computationalcomplexity.org/2006/11/prediction-
map-post-mortem.html (Nov. 9, 2006, 10:56 CST).
51
Bettors Beat Pundits, http://tierneylab.blogs.nytimes.com/2008/11/24/bettors-beat-pundits (Nov. 24, 2008, 13:23
EST) (noting also that the IEM came within .1 percent of predicting the total share of the popular vote won by
Barack Obama).

8
 What explains the markets’ apparent clairvoyance? Prediction-market enthusiasts insist

that the same collective wisdom used to weed out dull videos on YouTube52 and highlight

noteworthy articles on Digg53 can be applied to everything from predicting the next president to

forecasting which movie will score big at the box office next weekend. 54 The theory is that the

aggregated prognostications of a diverse group of independent investors are almost always more

accurate than opinion polls because they are being made, at least in part, by people who have a

stake in the outcome.55 On this point, traders see James Surowiecki’s best-selling book, the

Wisdom of Crowds, as their bible, and see Robin Hanson, a George Mason University economist

and prediction-market pioneer who first began writing about prediction markets more than

twenty years ago, as their revered spiritual leader.56 Both men argue that what makes markets

work so well is their ability to aggregate information and tap into collective wisdom. 57

Individual traders, for instance, may not know much about Hillary Clinton’s chances of winning

the Democratic nomination, but when the views of thousands of traders are averaged, the

prediction is almost always closer to the truth than the guesses of even the smartest people in the

market.58

But bullish traders, like practiced politicians, remain wary of promising too much.

Prediction markets are meaningful only if they can attract a large number of participants,59 and

reaching that threshold first requires explaining the mechanics in a way the average investor can

52
YouTube, http://www.youtube.com (last visited Feb. 28, 2010).
53
Digg, http://digg.com (last visited Feb. 28, 2010).
54
See SUROWIECKI, supra note 37, at 11.
55
See id. at 10.
56
For a variety of papers on this topic by Robin Hanson, see generally Idea Futures Publications,
http://hanson.gmu.edu/ifpubs.html#Hanson (last visited Feb. 28, 2010).
57
See SUROWIECKI, supra note 37, at 10.
58
See id. at 5 (“The simplest way to get reliably good answers is just to ask the group each time.”).
59
Today in Prediction Markets,
http://www.economist.com/blogs/freeexchange/2007/12/today_in_prediction_markets.cfm (Dec. 12, 2007, 15:46
GMT).

9
understand.60 It also involves outlining the theory behind markets and the science that suggests

their superiority to polls,61 detailing the differences between stock trading and gambling,62 and

ultimately avoiding the legal pitfalls that threaten to doom the industry before it gets off the

ground.63

There is no consensus yet in the industry about whether the term “prediction market” is

even the best label for what they do. Everything from “gut markets” to “hunch markets” to

“acumen markets” to “idea markets” and “event contracts” has been suggested.64 But industry

insiders predict the community will remain divided well beyond the 2008 election, and that the

market on what to call markets will likely continue to trade in heavy volatility for the foreseeable

future.65

While prediction markets provide amateur pundits with a platform for their political

predictions, their influence has also extended far beyond politics and current events. The

Hollywood Stock Exchange (HSX), which allows traders to bet play money on movie box-office

returns and other Hollywood outcomes, correctly predicted thirty-five of forty nominees for

major Oscar categories in 2002.66 Weather Bill, a weather-prediction site launched in January

2007, enables investors to forecast major meteorological events,67 and the Influenza Market,

designed by the developers of the IEM, allows medical professionals to predict the severity of
60
For a good explanation of the mechanics, see SUROWIECKI, supra note 37, at 9-11.
61
See Joyce Berg, Robert Forsythe, Forrest Nelson & Thomas Rietz, Results from a Dozen Years of Election
Futures Market Research 4-6 (University of Iowa, Working Paper, 2000), available at
http://www.biz.uiowa.edu/iem/archive/BFNR_2000.pdf.
62
See Bell, Gambling for the Good, supra note 19, at 166-68.
63
See Bell, Prediction Markets, supra note 15, at 65 (noting that “even if courts would in all likelihood not classify
trading on scientific prediction exchanges as gaming, judicial exoneration might come only after a bruising legal
battle”).
64
For a far-from-exhaustive list of proposed names, see Posting of Bala Pillai,
http://groups.google.com/group/Prediction-Markets/browse_thread/thread/241814711695c46f/706e9a93015fc7c9?
lnk=gst&q=names+information+markets#706e9a93015fc7c9 (Nov. 21, 2006, 17:47 EST).
65
See id.
66
See SUROWIECKI, supra note 37, at 20.
67
WeatherBill, http://www.weatherbill.com (last visited Mar. 31, 2010). For another weather market designed to
allow Penn State students to trade on the daily temperature, see Auctions, http://lema.smeal.psu.edu/auctiongame
(last visited mar. 31, 2010).

10
the flu season.68 According to a study in a scientific journal, the market predicted a major

outbreak of the flu in Iowa more than two weeks before its arrival.69 MediaPredict, another play

money prediction market, allows traders to wager on how well new movies, television shows,

music albums, and books will fare.70 Just as PicksPal provides a similar service for sports fans,

the SimExchange serves as a play money prediction exchange for the video game industry.71

Even the corporate crowd has been catching on. Adam Siegel, the co-founder of Inkling,

a prediction market site that provides businesses with the software to conduct their own internal

markets,72 reported that companies from Microsoft to Eli Lilly are using markets to set prices and

predict profits.73 In one pilot project at Hewlett Packard, employees bought and sold shares

based on their expectations for sales in a particular quarter. While the market was only in

operation for a matter of months, it outperformed the company’s official forecasts more than 75

percent of the time.74 Similar experiments underway at Electronic Arts, Google, General Mills,

and Best Buy also appear to be yielding encouraging results.75

II. BARNEY FRANK AND THE FIGHT AGAINST THE UIGEA

On October 13, 2006, President Bush signed the UIGEA into law.76 This new, far-

reaching online gambling ban, which immediately sent casino stocks sputtering and drove the

68
Influenza Prediction Market, http://iehm.uiowa.edu/iehm/index.html.
69
Philip M. Polgreen, Forrest D. Nelson, & George R. Neumann, Use of Prediction Markets to Forecast Infectious
Disease Activity, 44 HEALTHCARE EPIDEMIOLOGY 272, 277-78 (2006).
70
See Media Predict, http://mediapredict.com (last visited Mar. 23, 2010); see also Cantor Exchange,
http://www.cantorexchange.com (last visited Mar. 23, 2010), (anticipating final regulatory approval to allow trading
on movie box office returns).
71
See PicksPal, http://www.pickspal.com (last visited Mar. 23, 2010); The SimExchange,
http://www.thesimexchange.com/frontpage.php (last visited Mar. 23, 2010).
72
See Inkling, http://www.inklingmarkets.com (last visited Mar. 23, 2010).
73
Telephone Interview with Adam Siegel, Co-Founder, Inkling (Mar. 13, 2007).
74
See Abramowicz & Henderson, supra note 25, at 1349-50.
75
See Steve Lohr, Betting to Improve the Odds, N.Y. TIMES, Apr. 9, 2008, at H1-7, available at
http://www.nytimes.com/2008/04/09/technology/techspecial/09predict.html?ref=techspecial.
76
31 U.S.C. §§ 5361-67 (2006); see Newshour: President Bush Signs Law Banning Internet Gambling (PBS
television broadcast Oct. 16, 2006) (transcript available at http://www.pbs.org/newshour/bb/business/july-
dec06/gambling_10-16.html).

11
biggest online players from the United States market,77 also effectively crippled the burgeoning

prediction market industry.78 The bill stated, “[n]o person engaged in the business of betting or

wagering may knowingly accept, in connection with the participation of another person in

unlawful Internet gambling—(1) . . . credit extended through the use of a credit card . . . (2) an

electronic fund transfer . . . (3) any check . . . .”79

Still, anti-gambling advocates convinced Congress to go even further. Since sites like

Intrade, which are based abroad and not within the purview of U.S. law, could continue to

operate with relative impunity under section 5363, legislators added even more bite to the Act.80

Under section 5364, Congress gave the Treasury Department the authority to promulgate rules

blocking American banks and credit card companies from engaging in financial transactions with

these “gambling” sites.81 While the prediction market industry obviously hoped that Congress

would grant it an exemption before the new rules went into effect, 82 many American banks were

not willing to wait around and take that gamble. As a result, American investors eager to use

77
See Gerd Alexander, The U.S. on Tilt: Why the Unlawful Internet Gambling Enforcement Act is a Bad Bet, 6 DUKE
L. & TECH. REV. 1, 2 (2008).
78
See, e.g., Chris Masse, CEO John Delaney Finally Admits that the New Law Will Cut Off Tradesports-Intrade’s
Revenues (Nov. 5, 2006), http://www.midasoracle.org/2006/11/05/ten-ceo-john-delaney-finally-admits-that-the-
new-law-will-cut-off-tradesports-intrades-revenues.
79
31 U.S.C. § 5363 (2006).
80
See Frist Issues Statement on Internet Gambling Legislation, CHATTANOOGAN.COM, Sept. 29, 2006,
http://www.chattanoogan.com/articles/article_93794.asp. After the legislation passed, Republican Majoriy Leader
Bill Frist explained:
Congress has grappled with this issue for 10 years, and during that time we’ve watched this
shadow industry explode. For me as majority leader, the bottom line is simple: Internet gambling
is illegal. Although we can’t monitor every online gambler or regulate offshore gambling, we can
police the financial institutions that disregard our laws.
Id.
81
31 U.S.C. § 5364 (2006).
Before the end of the 270-day period beginning on the date of the enactment of this subchapter,
the Secretary and the Board of Governors of the Federal Reserve System, in consultation with the
Attorney General, shall prescribe regulations (which the Secretary and the Board jointly determine
to be appropriate) requiring each designated payment system, and all participants therein, to
identify and block or otherwise prevent or prohibit restricted transactions through the
establishment of policies and procedures reasonably designed to identify and block or otherwise
prevent or prohibit the acceptance of restricted transactions . . . .
Id.
82
Lotteries, horse racing, and fantasy sports are exempt under 31 U.S.C. § 5362 (2006).

12
their credit cards to fund their political portfolios for the 2006 midterm elections on Intrade

found themselves out of luck.83

Even as the legislative landscape looked bleak, political traders still pinned their hopes on

their ace in the hole: Barney Frank, a powerful Democrat from Massachusetts who railed against

the creation of the new gambling rules.84 Frank, who has served in the House since 1981 and as

chairman of the House Financial Services Committee since 2007,85 has long championed the

cause of card sharks.86 Only months after taking the helm of his influential House committee,

Frank introduced a bill to repeal the 2006 ban on online gambling, arguing that instead the

industry should be regulated and taxed.87 “The fundamental issue here is a matter of individual

freedom…. No member of Congress ought to arrogate to himself or herself the right to censure

the leisure time activities of other people.”88

Frank, however, had been dealt a difficult hand by the House. After all, the 2006

UIGEA, which was attached to a port security measure, had passed by a 313-93 vote.89 While he

was able to attract forty-eight co-sponsors on April 26, 2007 when he introduced H.R. 2046,

83
Intrade members who tried to fund their accounts saw the following message: (“Most US-based members will find
it difficult to fund their accounts by credit card. It is very likely that any attempted credit card transfer will not be
authorised by your bank. Please note that this is the policy of the bank and not that of the Exchange.”); see Intrade
Deposit, http://www.intrade.com (follow “My Account” hyperlink) (last visited Nov. 17, 2009).
84
See Jonathan E. Kaplan & Jessica Holzer, Frank Bill Would Repeal ’06 Gaming Crackdown, THE HILL, Apr. 25,
2007, http://thehill.com/leading-the-news/frank-bill-would-repeal-06-internet-gaming-crackdown-2007-04-25.html.
It is important that people be able to do what the Republican Party wants them to do on the
Internet. If the Republican Party has no objection, then they can do it . . . but if the Republican
Party thinks there are pictures they should not look at, or perhaps booze they should not buy, or
bets they should not make, then freedom for the Internet goes away.
Id.
85
Biographical Directory of the United States Congress, Barney Frank,
http://bioguide.congress.gov/scripts/biodisplay.pl?index=f000339 (last visited Mar. 21, 2010).
86
See Matt Viser, Unlikely Ace for Online Gambling, BOSTON GLOBE, July 13, 2008, at A1, available at
http://www.boston.com/news/local/massachusetts/articles/2008/07/13/unlikely_ace_for_online_gambling.
87
Posting of The Hill to The Hill’s Congress Blog, http://thehill.com/blogs/congress-blog/politics/28473-frank-
introduces-repeal-of-gambling-ban (Apr. 27, 2007, 07:39 EST).
88
Id.
89
H.R. 2046, 109th Cong. (2005). For the final results of Roll Call 363, see United States Congress, U.S. Senate
Roll Call Votes 109th Congress – 1st Session,
http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?
congress=109&session=1&vote=00363 (last visited Mar. 31, 2010).

13
“The Internet Gambling Regulation and Enforcement Act,”90 the bill was left to languish in the

House Energy and Commerce Committee.91 Undaunted, Frank held a committee hearing two

months later to examine whether regulation was feasible, and to voice his outrage about the

UIGEA.92 A year later, he tried a different approach, introducing a bill that would have

prevented the Treasury Secretary from writing the rules necessary to enforce the online gambling

ban.93 Persuaded that the new regulations presented a plethora of practical problems in addition

to philosophical ones, Frank said that the rules were “impossible to implement without placing a

significant burden on the payments system and financial institutions.”94 His fellow committee

members, however, were not convinced. In a 32-32 vote, the committee deadlocked on the

measure, which meant that the bill failed under parliamentary rules.95
90
H.R. 2046, 110th Cong. 1 (2007) (“Provides that activities involving investment banking, payment and transaction
processing, and financial transactions are shielded from liability if they are conducted in compliance with this Act
and specified law.”).
91
See Thomas (Library of Congress), http://thomas.loc.gov/cgi-bin/bdquery/z?
d110:HR02046:@@@D&summ2=m& (last visited Mar. 23, 2010) (indicating that no action has been taken on H.R.
2046 since it was referred to the Subcommittee on Commerce, Trade and Consumer Protection on Apr. 30, 2007).
92
Can Internet Gambling be Effectively Regulated to Protect Consumers and the Payments System: Hearing on
H.R. 2046 Before the H. Comm. on Financial Services, 110th Cong. 1 (2007). Frank argued that the legislative
purpose offered for the 2006 ban was pretextual. He said:
The bill was justified in part by people who said that we must prevent money laundering for the
purposes of either terrorism or drugs, and that we must prevent young people from doing things
that they shouldn’t do. But my own conviction, having talked to a lot of members, and listening to
the debate, is that the primary motivation came from people who think gambling is wrong. Now, I
have no quarrel with people who think that gambling is wrong. My quarrel is with people who,
thinking that gambling is wrong, want to prevent other people from doing it.
Id. at 1.
93
H.R. 5767, 110th Cong. § 1 (2008), (providing, in its introductory summary, that the Bill, “propos[es],
prescribe[s], or implement[s] any regulation pursuant to the prohibition against acceptance of a financial instrument
for unlawful internet gambling, including certain proposed regulations published in the Federal Register on October
4, 2007”).
94
Jessica Holzer, Bankers Cheer Frank-Paul Approach to Web Gambling, THE HILL, Apr. 14, 2008,
http://theppa.org/federal/2008/04/15/uigea-bankers-cheer-frank-paul-approach-to-web-gambling; see also Proposed
UIGEA Regulations: Burden Without Benefit: Before the Subcomm. on Domestic and International Monetary
Policy, Trade, and Technology of the H. Comm. on Financial Services, 110th Congress (2008) [hereinafter
Proposed UIGEA Regulations]. Federal officials discussed the difficulty of defining online gambling without
adequate guidance from Congress and banking representatives talked about the trouble of being forced to police
online payments. Echoing those concerns, Chairman Luis Gutierrez said, “[f]or example, the regulation fails to
adequately define what constitutes ‘unlawful Internet gambling’ or ‘restricted transaction,’ yet requires the financial
institutions to make a determination on their own about what is lawful or unlawful.” Id. at 2.
95
Erica Werner, Lawmakers Fail on Defining Online Gambling: House Panel Can’t Muster the Votes to Write
Clear Definition, S.F. CHRON., June 26, 2008, at C-4, available at http://imgs.sfgate.com/cgi-bin/article.cgi?
f=/c/a/2008/06/26/BU9A11F6NP.DTL.

14
 Still unwilling to fold, Frank introduced H.R. 6870, “The Payments System Protection

Act,” which was also aimed at preventing the implementation of the UIGEA. 96 Frank’s bill

cleared its first hurdle when the Financial Services Committee approved it by a vote of 30-19,

but it failed to make it to the House floor because of the 2008 financial crisis.97 At a time when

Congress was busy bailing out banks and facing criticism for supporting deregulation in the

financial sector, lawmakers likely calculated that supporting financial services against further

regulation would have been unseemly. As a result, Frank was powerless to prevent the Treasury

Department and the Federal Reserve Bank from ultimately issuing regulations in the waning

hours of the Bush administration to block online gambling transactions.98

While politically unpalatable at the time it was introduced, Frank’s bill was smart public

policy. Banks teetering on the edge of collapse lack the resources and institutional capacity to

determine which online transactions should be classified as “gambling.”99 Furthermore, with the

federal government mired in debt and doling out hundreds of billions of dollars to bail out the

financial sector, Congress could have recouped at least some of that money by legalizing,

regulating, and taxing the gambling industry.100

Still, prediction market proponents vigorously maintain that these businesses are not

covered by the UIGEA. They argue that, unlike traditional gambling operations, prediction

96
H.R. 6870, 110th Cong. (2008).
97
See Cassimir Medford, Bailout Kills Online Gambling Bill, RED HERRING, Oct. 3, 2008, available at
http://www.redherring.com/Home/25151.
98
See R. Jeffrey Smith, New Rules for Banks Target Online Gambling, WASH. POST, Nov. 13, 2008, at A5, available
at http://www.washingtonpost.com/wp-dyn/content/article/2008/11/12/AR2008111202668.html. The Treasury
Department and the Federal Reserve did later agree, however, to postpone the implementation of the new
regulations until June 1, 2010. Gary Wise, A Positive Delay, ESPN.COM, Dec. 2, 2009, available at
http://sports.espn.go.com/espn/poker/columns/story?columnist=wise_gary&id=4701438.
99
Proposed UIGEA Regulations, supra note 94, at 30 (statement of Wayne A. Abernathy, Executive Vice President,
Financial Institutions Policy and Regulatory Affairs, American Bankers Association) (“The Act and the proposed
rule do not provide a rational path towards halting unlawful internet gambling. Rather, the path leads to an increased
cost and administrative burden for banks, and erosion in the performance of the payment system, without stopping
illegal Internet gambling transactions.”).
100
See generally PriceWaterhouseCoopers, Estimate of Federal Revenue Effect of Proposal to Regulate and Tax
Online Gambling (June 6, 2009), available at http://www.safeandsecureig.org/media/pwc09.pdf.

15
markets serve the public interest by accurately forecasting important event outcomes.101 Not

only do such markets differ from gambling because they are based on skill instead of chance, 102

they are unique because participants can cash out at any point and take their profits the way any

equity trader would on Wall Street.103

Tom Bell, a law professor at Chapman University who specializes in high-tech legal

issues and has written extensively about the legality of prediction markets, argues that political

prediction markets should be treated as a special case: “I think that courts will, if asked to resolve

the question, very likely find them legal. Skill so predominates over chance in determining the

outcome of political prediction that they fall outside most standard definitions of gambling.”104

But it is likely that political prediction market proponents do not want to take their

chances challenging the UIGEA in court. To that end, regulatory developments provide at least

some cause for optimism. On May 7, 2008, the CFTC requested public input on the “propriety”

of regulating political prediction markets under the Commodity Exchange Act (CEA).105 If the

Commission ultimately decides that political prediction markets fall within its regulatory

purview under the CEA, then their legality under the UIGEA could be rendered moot.

As the Commission stated in its Concept Release, “the regulatory purview of the CEA

extends to and includes transactions that are either structured as options or futures when such

transactions involve interests that constitute commodities under the CEA.”106 Under section 1(a)

101
For a good explanation of why prediction markets should be treated as distinct from traditional gambling, see
Ryan P. McCarthy, Information Markets as Games of Chance, 155 U. PA. L. REV. 749, 753-55 (2007) (“As
experiments suggest, the advantages of information markets are not limited to tax revenue and amusement—the
perks that recommend activities that traditionally would be called gambling. Information markets promise second-
order benefits—possibly even new product markets for predictions, as in the case of HSX.”).
102
Id. at 767-69.
103
See Wolfers, supra note 10.
104
Telephone Interview with Tom Bell, law professor, Chapman University (Mar. 12, 2007); see also Bell,
Prediction Markets, supra note 15.
105
Commodity Exchange Act, 7 U.S.C. § 1(a)(4) (2008); see also Concept Release on the Appropriate Regulatory
Treatment of Event Contracts, 73 Fed. Reg. 25669, 25672 (May 7, 2008)Error: Reference source not found.
106
Concept Release on the Appropriate Regulatory Treatment of Event Contracts, 73 Fed. Reg. at 25671.

16
(4) of the CEA, a “commodity” is broadly defined as “all services, rights and interests in which

contracts for future delivery are presently or in the future dealt in.”107 The wide latitude that

Congress afforded the CFTC in the text of the Act to regulate nontraditional futures contracts is

bolstered by the legislative history, which indicates that Congress envisioned a regulatory regime

that would extend even to such non-traditional futures contracts as mortgages and ocean-freight

rates.108 Thus, it is consistent with Congressional intent that the CEA is expansive enough to

encompass political prediction market contracts.

When Congress amended the CEA by passing the Commodity Futures Modernization

Act (CFMA) in 2000,109 it further divided the broad set of commodities regulated under the CEA

into three subsets: agricultural, excluded, and exempt commodities.110 Under Section 1a(13) (iii)

and (iv), an excluded commodity includes:

(iii) any economic or commercial index based on prices, rates, values, or levels
that are not within the control of any party to the relevant contract, agreement, or
transaction; or
(iv) an occurrence, extent of an occurrence, or contingency (other than a change
in the price, rate, value, or level of a commodity not described in clause (i)
that is—
(I) beyond the control of the parties to the relevant contract, agreement, or
transaction and
(II) associated with a financial, commercial, or economic consequence.111

A political prediction market contract arguably fits squarely within this definition of an excluded

commodity. After all, a political prediction contract, such as whether Sarah Palin will be the

Republican nominee for President in 2012, is precisely an investment in a future “occurrence”

107
Commodity Exchange Act, 7 U.S.C. § 1(a)(4) (2008).
108
See, e.g., H.R. REP. NO. 93-975, at 76 (1974); see also Letter from Coalition for Internal Markets to David A.
Stawick, Secretary, Commodity Futures Trading Commission 1-9 (Sep. 2, 2008),
http://bocowgill.com/CFTCLetter.pdf (arguing that event markets fall within the CEA, and that the CFTC should
use its authority to permit the operation of such innovative markets).
109
Pub. L. 106-554, § 1(a)(5) (codified as 7 U.S.C. § 1 (2000)).
110
Michael Philipp, Excluded Commodities: What’s Included?, WINSTON & STRAWN LLP 1-3 (2007),
http://www.winston.com/siteFiles/publications/ExcludedCommodities_WhatsIncluded.pdf.
111
7 U.S.C. § 1(a)(13)(2008).

17
that is “beyond the control of the parties” involved. Indeed, in its comment on the CFTC’s

Concept Release, the Coalition for Internal Markets, a group that sponsors internal prediction

markets at companies like Google and Yahoo,112 wrote that “[o]ptions or futures contracts on

weather, climatic conditions, bankruptcies, or crop yields all can be described in [an expansive]

this manner.”113 Along the same lines, there is no reason why a futures contract based on the

unknown outcome of an election should be treated any differently.

Even if the CFTC fails to classify political prediction markets as excluded commodities,

it could exercise its authority under section 4(c) of the CEA to “promote responsible economic or

financial innovation and fair competition by exempting any transaction or class of transactions

from any of the provisions of the Act, including the requirement that they trade on Commission-

regulated markets, where the Commission determines that such action would be consistent with

the public interest.”114 As the CFTC points out in the Concept Release, “the Commission has the

discretion to grant an exemption to certain classes of transactions without having to make a

determination that such transactions are subject to the Act in the first instance.” 115 Thus, in order

to obtain a safe-harbor exemption from the CFTC, political prediction markets only need to

demonstrate that their existence is in the “public[’s] interest.”116 The information aggregation

function of these markets, along with their reliability in predicting election outcomes even more

accurately than polls, provides sufficient public benefits to meet that burden.117
112
See Letter from Coalition for Internal Markets, supra note 108, at 1 (“The Coalition for Internal Markets
(“CIM”) is a coalition of public companies that sponsor event markets that are open for participation only by their
employees or similar individuals. The Coalition presently is composed of Google, Inc. and Yahoo! Inc.”).
113
Id. at 5.
114
See Concept Release on the Appropriate Regulatory Treatment of Event Contracts, 73 Fed. Reg. 25669, 25672
(May 7, 2008).
115
Id.
116
Id.
117
The IEM has received a no-action-letter from the Division of Trading and Marketing of the CFTC. Letter from
Andrea M. Corcoran, Director, Commodity Futures Trading Commission, to George R. Neumann, Professor of
Economics, University of Iowa (June 18, 1993), http://www.cftc.gov/files/foia/repfoia/foirf0503b004.pdf. Since the
IEM was deemed to be a market operated for academic research and experimental purposes, the CFTC agreed not to
take any regulatory enforcement action against it. Id.

18
 But to win an inevitable court challenge, political prediction markets should also strive to

show more than just their success rate at beating the polls in predicting election results.118 Part of

what makes them worth protecting, after all, are their myriad uses in campaigns and government,

many of which have yet to be explored.119 By considering political prediction markets as mere

gambling operations, the government would effectively derail those efforts. The government,

instead, must recognize that political prediction markets have the potential to do what politicians

have been talking about for generations: change the way campaigns are waged and policy is

crafted in Washington.

III. HOW POLITICAL PREDICTION MARKETS CAN IMPROVE CAMPAIGNS

As the star senator from Illinois strutted to the stage in Springfield, eager to prove himself

as smooth on the stump as he was known to be on the nightly news, Barack Obama did not need

a focus group to tell him that this was his moment. He could have simply checked his stock

price.120 In fact, months before his official announcement, and more than a year before the first

presidential primary, amateur political junkies were already busy investing in Obama and other

candidates on Intrade.121 What had started in the previous presidential primary cycle as little

more than a campaign diversion, a kind of online parlor game for politicos,122 had grown with the

118
For a breakdown of how political prediction markets have performed over time, see MidasOracle.org,
Predictions, http://www.midasoracle.org/predictions (last visited Feb. 9, 2010).
119
For more on the potential of political prediction markets to change the way campaigns are conducted, see infra
Part III.
120
Intrade.com began offering shares in “Barack Obama to win the Democratic nomination” as early as 2006,
months before he officially announced his candidacy for the Democratic nomination in February 2007.
121
See Sarah Lovenheim, Betting on the Future of Politics: Prediction Markets Can Be Powerful—and Often
Profitable, WASH. POST, Oct. 2, 2008, http://www.washingtonpost.com/wp-
dyn/content/article/2008/10/02/AR2008100202053.html.
122
Interview with Howard Wolfson, Chief Spokesman and Communications Director, Hillary Clinton’s Campaign
for U.S. Senator, in New York, N.Y. (Mar. 2007). “I spent most of last fall trying to put money into an Irish betting
market, but I couldn’t figure out how to do it,” he said with a laugh. “I would have made a lot of money on House
races in ’06.” Wolfson acknowledged that he didn’t have much time to focus on political prediction markets during
the primaries. “I haven’t paid that much attention lately to our numbers on [Intrade],” he said. Still, Wolfson
couldn’t contain his competitive spirit. “How are we doing?” he asked. “And what about Obama and Edwards?”
Id.

19
Internet and the longest and most heavily covered campaign in history into another way to

analyze the horserace.

For the first time in 2008, the mainstream media often quoted political stock prices

instead of just polls.123 Keith Olbermann reported on rumored market manipulation by a McCain

supporter,124 John Stossel profiled two political day traders on 20/20,125 and CNBC pundits talked

political stocks between updates on the Dow.126 As early as 2006, Real Clear Politics, a political

news and polling website,127 featured Intrade.com price quotes,128 and Google allowed its users to

personalize their homepages with updated prices from the prediction market.129 Websites from

Slate to the Huffington Post offered similar widgets to keep track of the political market, and

bloggers-turned-equity-researchers from Talking Points Memo to Daily Kos discussed the best

political stocks to buy and sell.130 CNN, The Financial Times, The National Journal, and

numerous other news organizations even incorporated play-money prediction markets into their

websites, allowing armchair pundits to compete for bragging rights.131 When Intrade introduced
123
See, e.g., David Leonhardt, Better Odds in Politics than Poker, N.Y. TIMES, Feb. 13, 2008, at C1, available at
http://www.nytimes.com/2008/02/13/business/13leonhardt.html; David Saltonstall, You’da Made Bundle Even on
Small 2007 Bet on Barack Obama, N.Y. DAILY NEWS, Nov. 3, 2008, at 28, available at
http://www.nydailynews.com/news/politics/2008/11/02/2008-11-
02_youda_made_bundle_even_on_small_2007_bet.html; Posting by Domenico Montanaro to First Read,
http://firstread.msnbc.msn.com/archive/2007/06/28/247629.aspx (June 28, 2007, 13:49 EST).
124
Countdown with Keith Olbermann: Odds Favor Obama? You Betcha! (MSNBC television broadcast Oct. 17,
2008), available at http://www.youtube.com/watch?v=d1gjjiMMa9k; see also Josh Rogin, Trader Drove Up Price
of McCain ‘Stock’ in Online Market, CQ POL., Oct. 21, 2008, http://www.cqpolitics.com/wmspage.cfm?
docID=news-000002976265.
125
ABC News: Foretelling the Future: Online Prediction Markets, supra note 4.
126
See Cashing In On the Race (CNBC television broadcast Aug. 25, 2008), available at
http://www.cnbc.com/id/15840232?video=831539092&play=1.
127
See Real Clear Politics, http://www.realclearpolitics.com (last visited Mar. 31, 2010).
128
See, e.g., Real Clear Politics, Polls, http://www.realclearpolitics.com/epolls/2006/senate/va/virginia_senate_race-
14.html (last visited on Feb. 9, 2010).
129
Google Personalized Homepage, http://www.google.com/ig/directory?root=/ig&dpos=top (last visited Mar. 23,
2010).
130
See, e.g., Why Vote When You Can Bet? Slate’s Guide to All The Political Markets,
http://specials.slate.com/futures/2008/ (last visited Nov. 19, 2009); see also Intrade.com Daily Presidential Charts –
Updated 24/7, http://www.huffingtonpost.com/2007/12/07/intradecom-daily-presiden_n_75827.html (last visited
Mar. 31, 2010).
131
See CNN Political Market, http://politicalmarket.cnn.com (last visited Mar. 23, 2010); The Financial Times
Prediction Market Trading Game, http://www.ftpredict.com (last visited Mar. 23, 2010); The National Journal
Political Stock Exchange, http://www.nationaljournal.com/njmagazine/index.php (last visited Mar. 23, 2010).

20
a contract about whether Sarah Palin would be dropped from the Republican ticket, The New

York Times, The Wall Street Journal, and Reuters were all over the story.132

That political prediction markets have far greater social value than any traditional Vegas

diversion is apparent in how indispensable they have become to campaign coverage. More than

just an accurate tool of political analysis and a source of income for the politically astute, these

markets have a far greater value that remains untapped. It lies in their potential to make

campaigns more efficient and to transform the way politics is played in Washington.

What if, instead of spending millions of dollars hiring their own pollsters and consultants

and conducting their own internal polls, campaigns decided to run their own prediction markets?

Traditionally, the decision on where to advertise or place other scarce campaign resources has

been made mainly by experienced senior staffers after studying opinion polls from swing states

and developing an Electoral College strategy.133 The problem, however, is that political

operatives stuck inside the campaign bubble too often lose sight of the wisdom of the very crowd

they are ultimately trying to win over. Faced with conflicting polling data, they are prone to

infighting and poor decision-making.134 Confronting similar challenges, many corporate

executives have used prediction markets with positive results.135 There is, therefore, every

reason to believe that campaigns could also use internal political prediction markets to their

advantage in allocating resources.

132
See, e.g., Daniel Trotta, Intrade Market Sees 14.6 Pct Chance Palin Withdrawn, REUTERS, Sep. 2, 2008,
http://www.reuters.com/article/politicsNews/idUSN0240046620080903; see also Posting of Stephen J. Dubner to
Freakonomics: The Hidden Side of Everything, http://freakonomics.blogs.nytimes.com/2008/09/02/the-place-to-
watch-for-palin-news (Sept. 2, 2008, 09:40 EST); Posting of WSJ Staff to WSJ Blog,
http://blogs.wsj.com/washwire/2008/09/02/place-your-bets-intrade-starts-palin-market (Sept. 2, 2008, 10:08 EST).
133
See Daron R. Shaw, The Methods Behind the Madness, Presidential Electoral College Strategies, 1988-1996, 61
J. POL. 893, 898-913 (1999).
134
For an excellent discussion of problems that plague group deliberation and some solutions information markets
offer, see Cass R. Sunstein, Group Judgments: Statistical Means, Deliberation, and Information Markets, 80 N.Y.U.
L. REV. 962, 975-1007 (2005).
135
See Abramowicz & Henderson, supra note 25.

21
 Hillary Clinton’s candidacy provides a good case study of how political prediction

markets could help a candidate run a more efficient and effective campaign. The frontrunner’s

follies, and the recriminations and postmortems that followed her stunning defeat in the

Democratic primary, are familiar. Clinton’s “kitchen sink” strategy—which involved everything

from questioning Obama’s readiness to lead in her famous “3AM telephone call” advertisement,

to attacking her opponent’s associations and his willingness to meet with foreign leaders without

preconditions—was ridiculed for its lack of focus and negativity. 136 Her campaign was similarly

criticized for its own lack of discipline,137 its poor management of vast campaign funds,138 its

failure to find an effective role for Bill Clinton,139 and its limited attention in the early days of the

campaign to the all-important delegate count.140 As the campaign coffers emptied, the super-

delegates fled, and morale went the way of sagging poll numbers, feuding staffers turned against

each other, dooming Clinton’s chances.141

In a revealing series of memos published after the campaign, the deep divisions in Hillary

Clinton’s campaign became clear.142 Mark Penn, Clinton’s much-maligned chief pollster and

strategist, was convinced that the key to victory was showing strength and launching negative

attacks against Obama.143 Other aides emphasized the need for Clinton to show her softer side,

to better connect with her female base, and to woo younger voters.144 When Geoff Garin

136
See Elizabeth Kolbert, No Endgame, THE NEW YORKER, May 12, 2008, at 41, available at
http://www.newyorker.com/talk/comment/2008/05/12/080512taco_talk_kolbert.
137
See Joshua Green, The Front-Runner’s Fall, THE ATLANTIC, Sept. 2008, at 64, available at
http://www.theatlantic.com/doc/200809/hillary-clinton-campaign [hereinafter Green, The Front-Runner’s Fall].
138
Michael Luo et al., Donors Worried by Clinton Campaign Spending, N.Y. TIMES, Feb. 22, 2008, at A1, available
at http://www.nytimes.com/2008/02/22/us/politics/22clinton.html.
139
Mark Leibovich, Vexing Issue for the Clinton Campaign: What to Make of Bill, N.Y. TIMES, Apr. 29, 2008, at A-
15, available at http://www.nytimes.com/2008/04/29/us/politics/29bill.html.
140
See Joshua Green, The Hillary Clinton Memos, THE ATLANTIC, Aug. 11, 2008,
http://www.theatlantic.com/doc/200808u/clinton-memos [hereinafter Green, The Hillary Clinton Memos].
141
Michelle Cottle, Department of Recriminations: The Clinton Camp Turns on Itself, THE NEW REPUBLIC, June 11,
2008, at 14, available at http://www.tnr.com/article/department-recriminations.
142
See Green, The Front-Runner’s Fall, supra note 137.
143
Green, The Hillary Clinton Memos, supra note 140 (citing Penn Strategy Memo, Mar. 19, 2007).
144
See id.

22
replaced Mark Penn as chief strategist in the early spring, the backstabbing dismayed him.145 He

wrote in a memo to his staff:

I don’t want to be an asshole . . . but there is a basic fact of campaign

management that, at the end of the day, someone has to be the decision maker—
input is important and valued, but decision making can’t be a free for all if this
campaign is to function efficiently and coherently.146

As the Clinton lesson illustrates, candidates often find it difficult to channel all the advice

and input they receive during the course of a heated campaign. To that end, a prediction market

might have helped the Clinton team improve its coordination and get an honest sense of its

greatest weaknesses without forcing advisors to waste valuable time playing office politics and

jockeying for influence. Given that diversity and decentralization are important components of

successful prediction markets,147 the Clinton campaign would have been advised to invite

everyone from top advisors to low-level staffers and field organizers to buy into the market.

After all, those leading the get-out-the-vote effort in swing states all too frequently have valuable

information that does not get incorporated into polls or synthesized by top strategists.148 Rather

than floating trial balloons in the press, the campaign could have tested different scenarios

internally through prediction markets. For instance, as her team debated where to advertise in

the run-up to Super Tuesday, Clinton’s fundraisers might have had vastly different views from

her media consultants. As a result, a prediction market on that question would have operated like

a web-based, anonymous focus group, and served as an innovative way to improve efficiency

and get better information at a fraction of the transaction costs.

145
Id. (citing Geoff Garin Memo, Apr. 12, 2008).
146
Id.
147
See Cherry & Rogers, supra note 25, at 1160-61 (discussing how prediction markets could be implemented to
predict Supreme Court decisions).
148
See Joe Trippi, The Last Top Down Campaign, in REBOOTING AMERICA 151 (Allison Fine, Micah L. Sifry, Andrew
Raisej, Josh Levy, eds., 2008), available at http://rebooting.personaldemocracy.com/files/JoeTrippi.pdf.

23
 But there is no reason that political prediction markets should be limited to just the crowd

inside the campaign. People on the periphery also have an important role to play. Just as Wall

Street companies offer stock options to motivate employees, so too could political campaigns

provide their volunteers with political stock options. While pizza may be a good motivator for

overworked volunteers on long nights at campaign headquarters, it cannot compete with holding

a financial stake in the campaign’s future. By putting some of the money spent on food and t-

shirts toward shares in the candidate on Intrade, campaigns could boost morale, assure loyalty,

and improve productivity.

In smaller, local campaigns, where candidates are often unable to afford high-profile

consultants or pollsters, political prediction markets could help opposition researchers decide

where to focus their time and resources. Does it make sense to spend money digging up dirt on a

potential competitor who can't seem to raise money? Is it a good idea to bring up an opponent's

tenuous ties to a 1960s radical at a time when voters in the district are clamoring for change?

Instead of asking focus groups, the campaigns could simply turn to the markets.

Still, after the costliest campaign in American history, in which Barack Obama and John

McCain raised and spent a combined total of more than $1 billion,149 good government advocates

are sure to argue that pumping more money into politics through prediction markets will only

serve to make the system more corrupt.150 Paradoxically, however, these markets may well be

one of the best ways to drain the political swamp. After all, unlike the traditional campaign

finance system, political prediction markets offer the added element of anonymity. Candidates,

149
Jeanne Cummings, 2008 Costliest Campaign in U.S. History, POLITICO, Nov. 5, 2008,
http://www.politico.com/news/stories/1108/15283.html; see also Jonathan Salant, Spending Doubled as Obama Led
Billion-Dollar Campaign, http://www.bloomberg.com/apps/news?
pid=20601087&sid=anLDS9WWPQW8&refer=home (last visited Mar. 12, 2010) (noting that Barack Obama was
the first candidate from a major party to reject federal funding for the general election).
150
For an excellent overview of the role of money in American political campaigns, see generally The Center for
Public Integrity, The Buying of the President 2008, http://www.buyingofthepresident.org (last visited Mar. 2, 2010).

24
all too accustomed to playing down the political influence of infamous corporate campaign

contributors, remain blissfully unaware of those who “pay to play” at Intrade. Furthermore,

lobbyists who once felt forced to line the pockets of politicians on both sides of the aisle merely

to gain a seat at the table can hedge their political risk without making headlines. Encouraging

interest groups to channel money into a closed political investment system may seem

counterintuitive, and will, of course, do nothing to stop those groups eager to donate to

campaigns out of a sense of duty or a desire to do good. But, for example, liberal-leaning groups

or corporations compelled to contribute to conservative candidates simply to hedge their bets

might turn instead to political prediction markets, which, at the very least, could reduce the

appearance of impropriety in politics by providing a profitable alternative to the current broken

campaign finance system.151

Part of what differentiates prediction markets from mere gambling, after all, is their

important hedging function.152 A wealthy McCain supporter, for instance, convinced that Obama

would follow through on his 2008 campaign pledge to allow George W. Bush’s tax cuts for

upper-income Americans to expire, might have loaded up on Obama’s stock before the

election.153 That way, any potential losses he might have incurred from paying higher taxes

would have been offset by his profits from Obama’s victory. Similarly, a Barack Obama backer

heavily invested in alternative energy technology might have bought McCain shares at Intrade as

151
For an interesting illustration of how corporations spread their campaign contributions, see generally
POLIPOINTPRESS, THE BLUEPAGES: A DIRECTORY OF COMPANIES RATED BY THEIR PRACTICES AND POLITICS (2d ed. 2009).
152
See Matthew Einbinder, Information Markets: Using Market Predictions to Make Administrative Decisions, 92
VA. L. REV. 149, 151 n.7 (2006).
153
For further discussion of hedging at prediction markets on tax increases, see Posting of Susan Lee to
Crankonomics, http://www.forbes.com/2008/11/20/intrade-tax-obama-oped-cx_sl_1121lee.html (Nov. 11, 2009,
12:00 EST).

25
a kind of political insurance against a Republican administration perceived to be friendlier to oil

executives.154

Centrist Messenger, a political advertising startup,155 took advantage of such hedging to

offer its customers a money-back guarantee during the 2008 campaign. 156 The company

encouraged McCain and Obama supporters to buy ads backing their respective candidates by

promising to refund the cost of all commercials purchased on behalf of the loser. 157 In explaining

how its money-back guarantee was possible, the company said it simply hedged its risk by

buying political futures at prediction markets like Intrade.158 For passionate partisans, Centrist

Messenger’s savvy trading strategy yielded a win-win situation: those who put up money to

support the future president could say they helped the winning candidate; those who supported

the loser were no poorer for trying.

Indeed, for political junkies whose mental well being is inextricably intertwined with the

outcome of the election, such hedging provides far more than just a financial safety net. Many

traders and prediction market entrepreneurs tout its psychological benefits. In a recent blog post,

Newsfutures, a fake-money prediction market, suggested that political trading was a good way to

fight campaign-induced stress.159 “Prediction markets finally offer a way to break free of our

‘learned political helplessness.’ Now you can hedge against despair by investing in the election

of candidates you dislike. Your preferred candidate wins: rejoice! The other guy wins: at least

154
See Justin Wolfers & Eric Zitzewitz, Five Open Questions About Prediction Markets 2 (National Bureau of
Economic Research, Working Paper 12060, 2006), available at http://bpp.wharton.upenn.edu/jwolfers/Papers/Five
%20Questions(NBER).pdf.
155
See generally Centrist Messenger, http://www.centristmessenger.com (last visited Mar. 23, 2010).
156
Centrist Messenger, Money Back Policy, http://www.centristmessenger.com/cmmoneyback.asp (last visited Mar.
31, 2010).
157
Id.
158
Id.
159
Posting of Maurice Balick and Emile Servant-Schreiber to The NewsFutures Blog,
http://newsfutures.wordpress.com/2008/02/04/political-prediction-markets-are-good-for-your-health (Feb. 4, 2008,
19:59 EST).

26
you’re compensated for the aggravation.”160 The Economist, in an article on the eve of the 2006

midterm elections, also pointed out the health benefits of trading against one’s political

preferences.161

Whether you are laying in champagne or valium in anticipation of tomorrow’s

results, you can make yourself feel better off by betting against the outcome you
desire. Go to TradeSports . . . and lay a wager against your party. If they lose,
your sorrow will be mitigated by the burst of dopamine which accompanies a
sudden realisation [sic] that you are now several hundred quid to the better.162

Unlike sports gamblers, however, who also sometimes bet against their favorite teams to

hedge against their own misery, political traders must guard against the lasting economic as well

as emotional effects of losing. By analogy, those who hedge on elections are more akin to

farmers at the Chicago Mercantile Exchange than they are to those who bet on baseball.163 Just

as farmers fearing a decline in crop prices from the time they plant their seeds to the date of the

harvest can hedge against their real economic loss, investors heavily impacted in the long run by

policy changes promoted by the new leadership in Washington need a way to hedge against an

election’s outcome.164 By contrast, sports bets settled after the last pitch is thrown have no

obvious long-term economic impact on the gamblers, and serve nothing more than a purely

entertainment function.165 As a result, they should be legally distinguished from political

hedging, which advances the public interest in a far more meaningful way.166
160
Id.
161
Posting by the Economist to Economics Free Exchange,
http://www.economist.com/blogs/freeexchange/2006/11/manufacturing_happiness (Nov. 6, 2008, 21:06 GMT).
162
Id.
163
For a more elaborate comparison between commodity hedging and prediction market trading, see Miriam A.
Cherry, Prediction Markets and the First Amendment, 2008 U. ILL. L. REV. 833, 862-65 (2008).
164
Id.
165
Jed Christiansen, a prediction market consultant and the author of the Mercury Research and Consulting Blog on
Prediction Markets, argues in his post Hedging versus Gambling that the principal difference between sports
gambling and prediction market hedging is that the former involves no inherent risk. For his explanation, see
Mercury Research and Consulting Blog, http://blog.mercury-rac.com/2008/11/26/an-assortment-of-prediction-
market-topics (Nov. 26, 2008, 12:00 EST).
166
But see Christopher T. Pickens, Of Bookies and Brokers: Are Sports Futures Gambling or Investing, and Does It
Even Matter?, 14 GEO. MASON L. REV. 227, 263-67 (2006) (arguing that sports futures and other online investments
should be treated equally under U.S. law).

27
 IV. POLICY IMPLICATIONS OF POLITICAL PREDICTION MARKETS

While some amateur pundits who trade with near religious fervor during the campaign

season are content to take a breather once the results are in, many others have started to see

opportunity in political prediction markets beyond Election Day. Pollsters may only be

interested in how well the markets predict the horserace, but legislators, lobbyists, Congressional

staffers, and consultants have all begun to realize the important role political prediction markets

can play in the policymaking process.167

David Perry, the founder of The Washington Stock Exchange, a fake-money market, said

that political consultants and Congressional staffers are looking to tap into the data generated by

his political prediction market.168 “What the public sees is interesting, but what is truly

interesting is the data we’re able to generate on the back end,” he said.169 “We’re able to actually

provide that data to a whole list of people from policy makers to political consulting firms and

lobbying companies that want . . . a more accurate picture of what the political future might be

on any subject.”170

Rick Hinton, the founder of Casualobserver.net, another fake-money market, said he

started fielding requests from political consultants only months after launching his site.171 In

response to repeated requests from lobbyists for market data related to public-policy issues,

Hinton said he planned to launch a new market called “predictionxchange:”172

I’m going to be launching a separate brand that’s going to be more business to

business. The idea is to bring folks together in markets and then structure the

167
See Robert W. Hahn & Paul C. Tetlock, Using Information Markets to Improve Public Decision Making, 29
HARV. J.L. & PUB. POL’Y REV. 213 (2005) (proposing the implementation of information markets to assess the costs
and benefits of public works projects and to improve the government oversight process) [hereinafter Hahn &
Tetlock, Using Information Markets].
168
Telephone Interview with Dave Perry, supra note 6.
169
Id.
170
Id.
171
Telephone Interview with Rick Hinton, Founder, Casualobserver.net (Feb. 19, 2007).
172
Id.

28
 markets such that you first look at the potential of a piece of legislation passing.
You could also create markets based on if legislation passes what the economic
impact of it on GDP, jobs, and those types of things would be.173

Myriad markets already examine everything from what the highest federal income tax

rate will be next year to how many Republicans will vote for President Obama’s energy plan in

the Senate.174 The wide range of risks assessed by traders at Intrade also includes how long the

recession which started in 2007 will last, when Osama bin Laden will be captured, and what the

chances are that the United States will execute an overt air strike against Iran.175 While much of

the focus surrounding prediction markets has been on their impact in predicting these policy

decisions, not nearly enough attention has been paid to the potential benefits internal prediction

markets could provide in improving the way political decisions are made within government.

Presidents throughout American history have decried the insularity of the Beltway

Bubble.176 Just as political candidates find it difficult to receive unfiltered advice from anyone

outside their small circle of top advisors, presidents are particularly prone to losing this

perspective.177 In an early effort to preempt a “groupthink” mentality from taking hold inside his

Cabinet, President Obama proclaimed his desire to recruit a “team of rivals” to advise him.178

173
Id.
174
See, e.g., current contracts at Hubdub, supra note 26; DavinciTrade, http://www.davincitrade.com (last visited
Mar. 23, 2010).
175
See, e.g., current contracts at Intrade, http://www.intrade.com (last visited Mar. 23, 2010).
176
See, e.g., Posting of Carol E. Lee to Politico, Obama Bristles as the Bubble Closes, POLITICO, Dec. 28, 2008,
http://www.politico.com/news/stories/1208/16882.html (Dec. 28, 2008, 07:05 EST); see also Posting of Dan
Froomkin to WashingtonPost.com, http://www.washingtonpost.com/wp-
dyn/content/blog/2005/12/12/BL2005121200655.html (Dec. 12, 2005, 13:00 EST).
177
See Carol E. Lee & Jonathan Martin, Obama Warns Against WH ‘Groupthink,’ POLITICO, Dec. 1, 2008,
http://www.politico.com/news/stories/1208/16076.html. Barack Obama is quoted as saying:
One of the dangers in a White House, based on my reading of history, is that you get wrapped up
in groupthink, and everybody agrees with everything, and there's no discussion and there are not
dissenting views . . . . So I'm going to be welcoming a vigorous debate inside the White House.
But I understand, I will be setting policy as president. I will be responsible for the vision that this
team carries out, and I expect them to implement that vision, once decisions are made. So as
Harry Truman said, the buck will stop with me.
Id.
178
See Joe Klein, Obama’s Team of Rivals, TIME, June 18, 2008, 2-6, available at
http://www.time.com/time/politics/article/0,8599,1815849,00.html.

29
 But what if, instead of just counting on his closest advisors to provide honest answers

about sticky political problems, the President put the question to an internal prediction market?

Indeed, what if, instead of just asking his top experts how many Americans his health care

proposal would cover and whether he had the political capital to push it through the Senate, the

President posed the same question to everyone from the lowest level advisors crafting the plan to

the officials responsible for implementing it?

While several scholars have addressed the potential advantages of employing prediction

markets to tackle tough policy problems, few have focused on the ways these markets could be

used to help presidents push their policy proposals through Congress or communicate their plans

to the public. Hahn and Tetlock examined how information markets could be designed to

estimate the impact of everything from tweaking tax rates to improving standardized test

scores.179 Abramowicz argued that administrative agencies could use information markets to

analyze the costs and benefits of policy changes like reducing the arsenic in the water supply.180

Robin Hanson, who has been studying the potential of markets to resolve public policy questions

for two decades, has proposed something even more revolutionary. “It’s possible to go beyond

creating betting markets that advise people about the consequences of elections and put betting

markets directly in charge of the government,” he said.181

Hanson envisions a whole new world order:

At any time there’s a status quo set of laws. In order to change the laws, you have
a bill and you put it before the Congress and the Congress has to vote on it, and it
has to be vetoed or approved by the executive. The scenario here would be that
there would be some measure of national welfare that the legislature would come
up with—some way to look after the fact of how well off we were. It would be
something like how much money we made, how much free time we had, and how
179
See Hahn & Tetlock, Using Information Markets, supra note 167, at 227-40.
180
Michael Abramowicz, Information Markets, Administrative Decisionmaking, and Predictive Cost-Benefit
Analysis, 71 U. CHI. L. REV. 933, 1000 (2004).
181
Telephone Interview with Robin Hanson, Associate Professor of Economics, George Mason University (Mar. 18,
2008). Robin Hanson is widely viewed as one of the founders of the industry.

30
 many trees there were, or anything else you want to put into the formula. Then,
betting markets could bet on what the national welfare would be in the future, and
they could make those forecasts conditional on various choices. There would be a
forecast of what national welfare would be conditional on not changing any laws,
and then you could ask the betting market what the forecast would be conditional
on making a change. The rule of government could be if betting markets thinks
national welfare would be higher if we pass a certain bill, then the bill is passed.182

Still, Hanson doesn’t advocate doing away with the republic just yet:

We’d still value having representatives . . . . Betting markets would be “open

institutions that anyone could participate in, but, arguably, most people wouldn’t
for good reason. It would be democratic in the sense that everyone could
participate, but it would be undemocratic in the sense that most people
wouldn’t.”183

But before entrusting the markets to decide which policies lawmakers should implement,

politicians should first consider doing what no commentator has yet proposed: relying on internal

political prediction markets to craft a political strategy for navigating the legislative process.

Just as presidential candidates would benefit from calling on the wisdom of the crowd in

deciding where to campaign and how much to advertise, presidents would be able to spend far

more time focused on public policy if only they could outsource their political strategy to the

market. By enabling presidents to avoid the “groupthink” fatal to many administrations and the

in-fighting common to all, political prediction markets could indirectly make the policymaking

process more efficient.

A counterfactual can be instructive with regard to this point. The Clinton administration,

widely criticized for its rocky first hundred days, admittedly fell victim to the desire to do too

much at once.184 Leon Panetta, who served as President Clinton’s first budget director and later

as his Chief of Staff, told reporters at the end of Clinton’s first 100 days in office that the
182
Id.
183
Id. For a more detailed discussion of his proposal, see generally Robin Hanson, Shall We Vote on Values, but
Bet on Beliefs? (Oct. 2007) (unpublished manuscript, on file with the George Mason Univ. Dep’t. of Econ.),
available at http://hanson.gmu.edu/futarchy.pdf.
184
Bill Clinton’s Hundred Days, N.Y. TIMES, Apr. 29, 1993, at A22, available at
http://www.nytimes.com/1993/04/29/opinion/bill-clinton-s-hundred-days.html.

31
President had to do “a better job of picking and choosing the battles he wants to go through.”185

While the new president came to Washington determined to reform the health care system early

on, he was sidetracked by the fight over his stimulus plan and his controversial “don’t ask don’t

tell policy” for gays in the military.186 Perpetually pulled in different directions by advisers,

Congress, interest groups, and his own ambition, Bill Clinton might have benefitted from a

political prediction market contract on the number of major legislative initiatives he could

successfully steer through Congress in his first hundred days. Many Wall Street chief

executives, after all, have been using prediction markets for years now to forecast everything

from total revenue to the quarterly variation in sales volume. 187 There’s no reason to think

America’s chief executive would not have similar success in using prediction markets to plot a

political sales strategy.

But even before political prediction markets become a staple in the West Wing, mayors,

governors, and legislators could use them at the local level. For example, after Mayor Michael

Bloomberg decided to run for a third term in New York City despite term limits that barred him

from serving for more than eight years,188 he might have created an internal prediction market to

examine the best arguments to make for changing the law. Similarly, rather than listening to top

advisors debate ad nauseum the merits of appointing Caroline Kennedy to the Senate seat

formerly occupied by Secretary of State Hillary Clinton, New York Governor David Paterson

185
Id.
186
See Historic Whispers: What Obama Can Learn From Clinton’s First One Hundred Days, U.S. NEWS & WORLD
REP., Feb. 3, 2009, 1-2, available at http://www.usnews.com/articles/news/washington-
whispers/2009/02/03/historic-whispers-what-obama-can-learn-from-clintons-first-100-days-part-2.html.
187
See Rachael King, Workers, Place Your Bets, BUS. WEEK, Aug. 3, 2006, at 1-10, available at
http://www.businessweek.com/technology/content/aug2006/tc20060803_012437.html.
188
See Frank Lombardi and Kathleen Lucadamo, Michael Bloomberg to Run for Third Term as New York City
Mayor, Despite Term Limit Laws, N.Y. DAILY NEWS, Sept. 30, 2008, at 1-4, available at
http://www.nydailynews.com/ny_local/2008/09/30/2008-09-30_michael_bloomberg_to_run_for_third_term_.html.

32
might have avoided much of the backlash he received in the media by raising the question of

Clinton’s replacement in a political prediction market.189

CONCLUSION

While it may not yet be time for political consultants like James Carville and company to

call it quits, change will one day come to Washington in the form of political prediction markets.

Pundits need to be prepared. Savvy strategists, who will someday spin their candidates’ prices in

addition to their poll numbers, should take stock of the many ways in which internal political

prediction markets can improve how campaigns are run and policies are designed and

implemented. By encouraging everyone from top advisors to field operatives and volunteers to

take part in internal prediction markets, campaigns will become more efficient. By

implementing prediction markets once in office, politicians will be better able to craft successful

political strategies to steer their agendas through government.

Politicos would also be wise to consider the slew of cottage industries that will inevitably

accompany the rise of political prediction markets. In addition to the prediction market

consultants hired to run internal prediction markets and keep track of stock options, prediction

market lawyers will be needed to carefully word the contracts. With campaigns keeping a close

eye on the political stock ticker, there will be an obvious need for prediction market journalists to

recap market developments and generate stories about the possible underlying causes of swings

in candidates’ stock prices. Since political day traders are likely to thirst for any information that

impact prices, new equity research firms will undoubtedly be in demand. The growth of political

prediction markets may also spur new markets to help lawyers predict the potential success of

lawsuits, to assist tech companies in designing the next hot gadget, to predict which students will

189
See Nicholas Confessore & David M. Halbfinger, As a Candidate, Kennedy is Forceful but Elusive, N.Y. TIMES,
Dec. 27, 2008, at A1, available at http://www.nytimes.com/2008/12/28/nyregion/28kennedy.html.

33
earn acceptance to certain law schools, to identify which trendy restaurants or nightclubs will

succeed, and even to speculate which actors will make it big.

But this brave new world of prediction markets, while theoretically only limited by the

human imagination, is currently still constrained by U.S. law. As this note argues, the federal

government should carve out an exception to the UIGEA for political prediction markets, and the

CFTC should regulate them just like traditional commodities. After all, political prediction

markets have proven more accurate than polls, and studies suggest they serve an important

information aggregation and hedging function.

Then again, the academics could all be wrong. The promise of political prediction

markets may ultimately prove as illusory as bipartisanship in Congress. But don’t bet on it.

Legalizing political prediction markets is one gamble the government should take.

34