Original URL: http://www.theregister.co.uk/2007/05/25/ucr_gambling_prediction_markets/

Attack of the terror casinos, volume 2

Please step away from the slides

By Burke Hansen

Posted in Financial News, 25th May 2007 10:23 GMT

House of Cards The second and final day of The Growth of Gambling and Prediction Markets: Economic and Financial Implications began with a very interesting session led by Ricardo Siu of of the University of Macau about whether or not gaming markets are a productive economic sector in the purely economic sense of that word: namely, are they capable of indefinite and sustainable growth?

The gaming sector is notoriously difficult to analyze due to the fact that casino gaming is typically bundled with a suite of related hospitality services and prices, and costs of the games themselves are uncertain: under a basic profitability formula, a player who gambles $100 for an hour and loses would be treated the same as a player who gambles $100 for 10 hours and loses, although the economic effect on the house is very different.

In short, gambling is not a static product to be sold, but rather an elastic service whose profit margin – the house edge – can only be evaluated in a long term context. Ultimately, the productivity of casino gaming is inseparable from the development that surrounds it, although the casino itself benefits from the technological advances of the world outside.

The gaming sector, which most people consider unproductive or even undesirable, is generally attacked in the press as a drag on local economies, and another paper covered the impact on housing prices of casino development in America since the 1990 census. Somewhat surprisingly, at least to this author, when compared with non-casino jurisdictions casino development has actually raised area housing prices.

Plenary session - when markets attack

The day concluded with three papers covering prediction markets, the first by Robin Hanson, the world's leading proponent of prediction markets and former head of DARPA's notorious "terror casino".

Robin Hanson - futarchist, cryogenic enthusiast, and all around Kool Aid-chugger - is the son of Baptist preacher, and he brings to the cause an eerie religiosity. A former physics student, Hanson admits that he got a PhD in economics so people would take his ideas seriously: truly a cart-before-the-horse moment. One of the original attacks on the "terror casino" was that the market was too thin not to be manipulated, and could steer policy in the wrong direction.

So what would a true believer do? Of course, Hanson's paper claimed that market manipulation actually makes markets more accurate, not less, by increasing the so-called "noise" of the market. Of course, like virtually all the presentations at the conference, this was concocted as nothing more than a laboratory experiment. Real statistics from futures exchange Intrade, for example - a conference sponsor, no less - were few and far between.

Of course, this is from a man who believes in the abstract market as a form of intelligence even beyond its role as information aggregator, to the point that our political decisions themselves should be chosen purely by market forces: futarchism.

Would some other form of government more consistently listen to relevant experts? Even if we could identify the current experts, we could not just put them in charge. They might then do what is good for them rather than what is good for the rest of us, and soon after they came to power they would no longer be the relevant experts. Similar problems result from giving them an official advisory role.

"Futarchy" is an as yet untried form of government intended to address such problems. In futarchy, democracy would continue to say what we want, but betting markets would now say how to get it. That is, elected representatives would formally define and manage an after-the-fact measurement of national welfare, while market speculators would say which policies they expect to raise national welfare. The basic rule of government would be: when a betting market clearly estimates that a proposed policy would increase expected national welfare, that proposal becomes law.

Of course, what do real markets really think of the prediction market concept? Not much, apparently. The largest of all, Intrade, is a relatively small company and the overall volume of prediction market trades, when compared to that of the world's commodities futures markets, is miniscule to the point of irrelevance.

There just aren't that many people interested in trading on current events, which is why so many of the papers were little more than laboratory experiments, and why so many advocates spend so much time defending the lack of liquidity in the prediction markets. Apparently, that does not affect their accuracy - though that, of course, runs counter to experience in other markets, where liquidity is everything.

It's an idea that is not ready for prime time, and may never be.

Fear and loathing at the TSA

The prediction markets are about as enlightening as the Transportation Safety Administration's (TSA) color-coded threat levels, which were at "orange" during a typically shitty airport experience. I was one of the chosen few, shunted for reasons unknown into a strange chamber where they blast you with high pressure air from all sides to test you for the presence of suspicious chemicals.

I passed that test, and then was handed over to a guy with latex gloves who looked like he had been grabbed out of the cafeteria at the local community college.

"This isn't even a real computer, is it?" the TSA nimrod said accusingly. What are they smoking at the TSA?

I thought about that for a moment.

Could it be true? Could he, too, have bought an Acer 5600 from TigerDirect.com, been screwed out of his rebates and left with a barely functional machine, unable to read its own optical drive?

He furiously brushed the handicapped notebook with a chemical-sensitive pad, glaring.

"Uh... it should start up...," I said, unsure if it really would.

He declined to power it up - clearly, if he believed it was ready to blow he preferred the plane go down to blowing himself up. Orange it is. ®

Burke Hansen, attorney at large, heads a San Francisco law office