The Potential of Pandemic Prediction Markets

Coronavirus is lucky that it struck humanity before the rise of open prediction markets.

If you’re a virus and you want to spread, one of your biggest assets is not being taken seriously, fast enough. Decentralized prediction markets will soon make this harder by helping surface, signal, and hedge pandemic risk…fast.

In prediction markets, traders buy and sell contracts whose payout depends on real-wold outcomes. Prediction markets produce a price-equals-probability signal, where prices reflect the likelihood that events will occur.

Prediction markets shine in cases where you have disparate information spread among many actors and malincentives to suppress or distort this information.

Ring a bell?

Many governments, public institutions, and media pundits failed to take COVID-19 seriously enough, soon enough, due to a blend of malincentives, incompetence, and information silos.

Prediction markets incentivize the aggregation of diffuse information and create a meritocracy where telling the truth is profitable and lying is costly. They let anyone publicize private information in a secure, pseudonymous fashion.

An article in Science Magazine penned by Nobel Laureates Kenneth Arrow and Robert Shiller and others, argued that that prediction markets can help forecast and manage economic and social risks, such as pandemics, but that current regulation impedes such markets from satisfying this potential.

Centralized prediction markets impose low trading limits, charge high fees, and ban access in many jurisdictions. These factors constrain liquidity and limit predictive powers.

A big problem…until now.

Thanks to decentralized tech, new prediction markets like Augur throw these limitations out the window. These borderless, peer-to-peer markets have the potential to capture deep liquidity and produce more accurate signals.

Open prediction markets replace central operators and middlemen with code, cryptography, and communal incentives. Specifically, they run on “smart contracts,” self-executing and uncensorable agreements written in and enforced by code.

It’s early days for open prediction markets, but I expect that in the next year, we will start to see glimmers of the potential of these markets to forecast and hedge risk around everything from the economy to elections to the spread of infectious disease.

When the next Coronavirus strikes, it may face a fresh and formidable foe: open prediction markets.

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