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[Michael Abramowicz, guest-blogging, February 1, 2008 at 4:32pm] Trackbacks
Why Normative Markets?

In my last post, I described and gave a general argument for normative prediction markets. If a prediction market forecasts an evaluation by someone to be selected randomly from a body of very educated people (somewhat analogous to the federal judiciary, though perhaps selected in a way that makes it more representative), it will be an informed forecast of an informed decision, and the uncertainty about who the eventual decision maker will be provides for a kind of virtual representativeness.

Now, I'll describe several advantages of normative markets that follow:

(1) More consistent, predictable decision making. The virtual representativeness reduces the danger of idiosyncratic decision making. Of course, there will be some decisions that fall close to the line, but we avoid some situations where it's clear that 2/3 of decision makers would make one decision, but it happens to be someone in the 1/3 of decision makers who gets the final call.

If we can have more consistent, predictable decision making, we also may see a general shift from legal rules to standards. A powerful argument for rules over standards is that only rules can produce consistent and predictable decision making. With normative markets deciding whether legal provisions are followed, standards become relatively more attractive.

(2) More principled decisions. Suppose there is some higher order principle X that the group has precommitted to in advance. Now, we have to make a decision about whether something that the group has decided to do, Y, would be consistent with that high-level principle.

With conventional decision making, the decision maker may well sacrifice X for Y. X may be more important to a decision maker than Y, but a disingenuous argument that Y is consistent with X makes it only slightly less likely that X will be followed in the future. Those who have read Mistretta v. United States should understand what I am talking about.

This is less likely with normative markets, because the evaluation of whether Y is consistent with X will not actually affect whether the group can do Y. That decision has already been made. So, a precommitment to using normative markets can help improve the chance that the group will follow through on its substantive precommitments.

(3) More insulated decisions. It should be harder for a special interest group to influence decision making with normative markets. (Assume for the sake of argument that special interests make decision making worse rather than better.) The judiciary is relatively immune from special interests, and so too could be the pool of ex post evaluators.

A special interest group could try to affect the pool of ex post evaluators, but with many evaluators, each making only a small number of randomly selected decisions on a large number of potential topics, this won't be easy. Moreover, bribing the ex post evaluator would not be enough; the special interest group would have to commit credibly to bribing the evaluator, because the actual ex post decision would not matter.

(4) More scalable decisions. We can easily change the probability that a case is submitted to an ex post evaluator. More decisions would require more subsidies, but we don't have to hire and select more decision makers. Market participation should grow in proportion to subsidies.

Consider, for example, immigration review. From one perspective, this might seem to be one of the worst contexts for prediction markets, because they seem impersonal. But our current system of immigration may be inhumane and capricious. Normative markets could at least eliminate backlogs, in addition to providing more consistent decision making.

Robin Hanson (mail) (www):
You are on much stronger grounds emphasizing consistency and lower cost and delay, such as in the immigration review example. These advantages seem quite enough to justify its use there.
2.1.2008 6:35pm
Michael Abramowicz (mail):
Robin -- Thank you. In my judgment, consistency is a large problem in law, and we often design legal institutions with overinclusive and underinclusive rules because we fear ex post inconsistency. But I agree that other prediction market mechanisms and approaches, such as those you've suggested, may share some of the other virtues of normative markets.
2.1.2008 6:56pm