People used to predict a great future for prediction markets. In 2008, 22 economists, including the Nobel laureates Kenneth Arrow, Paul Milgrom, Thomas Schelling, Robert Shiller and Vernon Smith, wrote a two-page manifesto in the journal Science calling them a “potent research tool” that must be freed from “unnecessary government restrictions.”
They cited “mounting evidence” that such markets could produce more accurate forecasts than conventional methods:
“Prediction market prices can be used to increase the accuracy of poll-based forecasts of election outcomes, official corporate experts’ forecasts of printer sales, and statistical weather forecasts used by the National Weather Service.”
In 2004, the University of Michigan’s Justin Wolfers, one of the signatories, co-wrote what is still the most widely cited paper in the field, showing that betting markets persistently forecast presidential elections more accurately than pre-election polls.
