Crowd wisdom
Groups of people can be wildly irrational, but there is wisdom in crowds if we know how to distill it. In his 2004 book, The Wisdom of Crowds, former New Yorker staff writer James Surowiecki describes a county fair in 1906 in which visitors were invited to wager on the weight of an ox.
Some 800 people shared estimates, which averaged 1,197 pounds. The correct answer? 1,198 pounds. Any individual may have been way off, but the crowd got it right. Other examples of the wisdom of crowds include the stock market, which is famously hard to beat. People with real money at stake have incentives to gather enough information to make informed bets, and on average the market can be wiser than its individual participants.
What if you could harness this wisdom for events in the world, like elections, natural disasters, or invasions? This is the premise of prediction markets, online platforms that enable users to buy and sell contracts on the outcome of future events, for example, “Will the US announce the end of the Iranian blockade of the Strait of Hormuz by 31 December?” or, “Will the highest temperature in Paris be above 40°C tomorrow?”
There are a growing number of prediction markets. Just as a crowd betting on the weight of an ox can average to the correct number, proponents of prediction markets believe that trading event contracts can yield accurate probabilities – a contract priced at $0.65 implies that the event has a 65% probability of happening. Shayne Coplan, the founder of Polymarket, a cryptocurrency-based prediction market, describes them as a “global truth machine” capable of informing government policy.
Prediction markets offer opportunities to gamble on a wide array of outcomes, from sports contests to wildfires and wars. Of course, allowing people to bet on events that they can influence creates some unfortunate incentives, such as starting wildfires or wars, or meddling in midterm elections. US officials are amending polling employee oaths to safeguard the integrity of the first full election cycle in the presence of mainstream prediction markets.
The life insurance industry long ago recognized that it should sell contracts only to people who do not wish to see the insured die (known as an insurable interest). It’s the reason why you can’t buy insurance for strangers or enemies. But prediction markets are still at an awkward stage, protected by powerful friends like the American president’s son. The early returns range from hilarious to terrifying.
