Risk Markets And Politics

Sunday, June 05, 2005

Risk Markets and Prediction Markets

I use the term "risk markets" instead of "prediction markets", not as a result of Manski's paper, but because I think the risk-sharing capacities of markets are at least as important as any predictive properties they may have. I'm thinking of markets formally resembling the current online prediction markets, but with more substantially useful content, specifically, forms of insurance, risk-sharing, and hedging, much along the lines of Robert Shiller's work. Hedgestreet definitely has the right idea, offering contracts on market-specific real-estate prices, and gasoline, but I'm most intrigued right now by Tradesport's Social Security contract:

Passage of US law that allows taxpayers to divert SS taxes to managed private accounts by Jun 30, 06

This is where the "politics" really starts to come-in. Of course, the critical problem faced by any new market is attracting enough participants and liquidity, but I think this is where things are going.


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