A Brief History of Geopolitical Betting Markets

Around 2000, a small group of scientists convinced DARPA, the DoD’s laboratory for long-shot ideas that is famous for having invented the internet, to launch a project that came to be called the Policy Analysis Market. The idea was simple and intriguing: allow all comers to place a bet on the outcome of a particular political event in order to harness the “wisdom of the crowd” to make better-informed policy choices. In the case of the Policy Analysis Market, the focus was on the stability of the Middle East, and participants could purchase futures contracts that were based on whether the Jordanian monarchy would endure for a given period of time or be overthrown. In 2003, as the trading platform was still being optimized in anticipation of wider launch, several Congressmen set off a furor by alleging that the market would allow people to place bets on individual acts of terrorism. While this scenario was far-fetched, it was enough to cause Congress to defund the project. Several more recent efforts have succumb to regulatory concerns, leaving the goal of establishing a market to predict political events unrealized – with a few exceptions.

Markets do exist that allow one to place bets on the outcomes of political elections. The most famous of these is now-defunct Intrade, which was based in Ireland but at its height conducted most of its business in the United States. It gained notoriety for having accurately predicted the outcome of the 2012 presidential election – almost down to the electoral vote. Intrade also allowed bets in other areas related to regulated markets. This gained the attention of regulators, who eventually caused the market to shut down because of concerns that it was operating as an unregulated futures market. The more narrowly focused Iowa Electronic Markets has been operating since 1988 and is run as "a futures market run for research and teaching purposes." And more recently, New Zealand’s Victoria University funded the non-profit platform, PredictIt, which is currently focused on the 2020 elections but has offered bets on non-election-related outcomes such as probability of another North Korean nuclear test.

The idea of a market focusing on geopolitical issues that could help policy makers, investors, and the public make informed decisions has yet to bear fruit. Is this a worthy cause – or merely entertainment for foreign policy wonks? First, it is important to acknowledge that markets already exist that offer clues as to political outcomes – currency markets, oil futures, binary options, and the like – but they tend to be quite general and subject to noise caused by other non-political factors such as market psychology. Sovereign risk ratings provide additional insights, although they do not tap the wisdom of the crowd and as such do not offer much more than another analysis of the future trajectory of world events. Provided policy prediction markets are sufficiently differentiated from what already exists, are able to attract a large number of users, and restrict themselves to events that have a clear outcome, such markets could provide policy makers (and everyone else) with additional insights into future policy challenges.