Could gambling destroy democracy?

Yesterday (10/30), the Amazing Tyler Cowen linked to this 10/27 report in the Financial Times (FT): Gambling on democracy: US regulators weigh election futures market — calling it “the best article I’ve seen on prediction market issues in DC.” (He also linked to this 10/28 ungated article in Politico.) Given my previous two blog posts on the overall theme of gambling and democracy (see here and here), and given Professor Cowen’s high praise of the FT article, I want to say a few words about that item before I press on.

In summary, both the FT report that Cowen liked so much as well as the ungated Politico article note that the Commodity Futures Trading Commission (CFTC) is scheduled to decide by this Friday, November 4, if the prediction market Kalshi can allow investors to place bets on U.S. election results. (Among other things, the CFTC regulates futures exchanges and prediction markets that operate inside the U.S.) This is (potentially) big news because real-money political prediction markets have thus far not been allowed to do business in the United States.

By way of background, although one special exchange–the Iowa Electronic Market, which somehow received a exemption from the CFTC in the early 1990s in the form of two no-action letters–allows users to place bets on specific election races, individuals and business firms are not allowed to bet on the overall results of nationwide elections, e.g. will Republicans win back control of the Senate in 2022? In 2012, for example, the CFTC rejected a proposal from a company called Nadex for “political event” futures (see here), arguing it was against the public interest. (Aside: I call bullshit! See below.)

For its part, the FT article mentioned above surveys two flimsy arguments against political prediction markets. One is that PACs (political action committees) and other large donors would be able to place bets on elections; the other is that such markets would lead to the “gamification” of politics. My reply to both concerns is, SO WHAT? Ultimately, the main argument against political prediction markets boils down to this two-part objection: (i) such markets are the same as legalized gambling, and (ii) gambling would be bad for democracy. While I readily concede part (i) of the argument, since all trades are gambles, I am skeptical about part (ii). Why exactly is gambling bad for democracy?

Kalshi Raises $30 Million in Series A Funding Led by Sequoia | Business Wire
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About F. E. Guerra-Pujol

When I’m not blogging, I am a business law professor at the University of Central Florida.
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7 Responses to Could gambling destroy democracy?

  1. Prediction markets could in theory generate some perverse incentives; but the standard political process does that alone even in the absence of betting markets.
    The belief that they will only further corrupt politics is a joke.

    But I think betting markets could make political participants more rational. I have been reviewing the literature of Rational Irrationality, basically Caplan surmises that irrationality decreases as personal costs increase. Voters waging money on policy, election outcomes, etc. increases the personal costs of political participation. If people have more skin in the game, the might be less apt to dismiss information that invalidates their current policy preferences.

    Sure not every gambler is rational ( I use to work at a casino, I have first hand anecdotal accounts of this). Some gamblers favor unlikely outcomes due to the fact, the greater the odds the larger the payout. But most people (including gamblers) carry a much lower risk tolerance, favor safer wagers.

    Granted, I have no data or peer-reviewed evidence in front of me, from an a priori standpoint; I think the behavior on the casino floor could be extrapolated to political markets.

    • excellent observations! I like the analogy to sports betting: I could see how legalized gambling creates incentives for refs to make bad calls (or no-calls) or for athletes to engage in “point shaving”; but we could address these dangers by prohibiting candidates and election officials from placing bets

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