The Politics of Information Markets, and Information Markets in Politics

1
The Politics of Information Markets, and
Information Markets in Politics

• Adam Meirowitz
• Joshua Tucker
• Princeton University

2
Politics of Information Markets

• The Legacy of PAM
• Political Reaction
• Media Reaction
• Result for Program
• Lessons from PAM for future political information
  markets

3
The Legacy of PAM

• Summer of 2003 Defense Advanced Research
  Projects Agency (DARPA) funds development of a
  Policy Analysis Market for futures on political
  events in the Middle East
• Robin Hanson knows far more about the project.

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What was DARPAs proposed informaton market
called?

• Unbelievably stupid - Sen. Dorgan
• A futures market in death - Hillary Clinton
• make believe markets trading impossibilities
  that turn the stomach - Sen. Wyden
• Dr. Strangelove caught in bizarre betting
  parlor

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What happened?

• July 28, Sens. Wyden and Dorgan (D) press
  conference
• Morning of July 29, NYT and major press sources
  cover
• Afternoon of July 29, the program is cancelled
• Deputy Defense Secretary Wolfowitz I share your
  shock at this kind of program. Well find out
  about it but its being terminated.

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Postscript

• Admiral Poindexter eventually retires in
  embarrassment
• Bipartisan criticism
• All this over a market that never opened

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Number of Newspaper articles on PAM (July-August
2003) Lexis-Nexis search
Opposed Neutral In favor Total
News 7 39 2 48
Opinion 49 4 14 67
Total 56 43 16 115
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Media issues

• Majority of coverage was superficial dealing with
  morality
• A few stories speculate about
• Inducement of terrorism-profit motive
• Terrorists getting rich (External)
• Manipulation of market by terrorist (Internal)
• Primacy of Iowa as reference point

9
Packaging

• Problem Profit as inherently dangerous concept
  politically
• Solution Frame markets comparatively

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Profit as inherently dangerous concept
politically

• Immoral to profit on bad events
• Threat to manipulation when profit is at stake
  seems more consequential in a political context
• Throwing a basketball game vs throwing an
  election.
• Manipulating a stock price vs. a terrorist attack

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Packaging suggestions

• Frame market as improvement over other
  aggregation institutions
• Organizations already exist for these purposes,
  so question is not about topic
• Question is are markets better at aggregating
  information?
• Do the actual welfare comparison so politicians
  see the trade offs
• Provide this information as part of introduction
  so politicians, press can reference it in initial
  evaluations

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Information Markets in Politics

• Incentives when information market is imbedded in
  a policy making setting
• Information from market prices can effect beliefs
  about states which effect preferences about
  policies
• But this may lead to an incentive
  problem-Manipulate beliefs to influence policy
  selection

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Simple informational environment

• Two states x ea,b, two policies p ea,b.
• Some agents (?1) want px some (?-1) want p?x.
• Agents know which preference type they are and
  learn a signal s that is informative about x.
• Mechanism aggregates information and preferences
  and selects p
• Question Can we get the full information
  majority rule core policy?

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Communication and voting

• Without transfers communication will not work.
• Some type (?-1) is likely to be in minority
• They want to influence beliefs about x
• So lying about s is a desirable deviation

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State contingent transfers

• With transfers that depend on message and state
  truthful implementation is possible.
• Transfer to i needs to compensate for probability
  that is information moves posteriors about x in
  a meaningful manner.

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Message contingent transfers

• With transfers that depend on just other messages
  truthful implementation is possible.
• Incentive to be truthful as best predictor of
  other messages is your own message.

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Decentralizing transfer schemes

• Give agents choice of Arrow Securities on state
  or on majority message.
• Prices are selected to satisfy IC conditions and
  budget balance.

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How about endogenous prices

• Markets as games (Shapely and Shubik, 1977
  Jackson and Peck, 1999)
• Endow traders with risk free asset and Arrow
  security that pays off if xa.
• Allow trader to decide if she wants to sell B
  units of the risk free (action 1) or sell Q units
  of the risky asset (action 0).
• Set price of PBn1/Qn0

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Positive result

• We can fix values of B and Q to achieve the full
  information majority rule core.

20
But.

• Letting participants determine how much they want
  to trade, can be problematic.
• Finite populations full aggregation fails
  (Dubey, Geanakopolis and Shubik 1987)
• Failure of efficient markets hypothesis in these
  games without politics (Peck and Jackson)
• Open question when imbedded in political problem.