Prediction markets are pretty cool, but not uh, technically speaking, legal right now because of similarities to gambling.

Charity prediction markets are a tweak on normal prediction markets which might be able to provide the similar benefits, while sidestepping legality concerns and donating money to charitable causes.

A charity prediction market (CPM) operates exactly like a prediction market, but all of the profits individuals make go to charities of their choice.

It seems to me that since all the proceeds go to charity, these prediction markets might be able to sidestep the legality issues which plague ordinary prediction markets while encouraging charity.

Let’s examine this in a little more detail.

Like a normal prediction market, traders place bets on the outcomes of different events. They can reinvest their winnings as much as they want on future bets within the market. However, when it comes time to cash out, instead of receiving a check, traders choose from a list of charities to donate to, and the CPM simply transfers money from their account directly to a participating charity. Essentially, when someone puts money into the market, they are donating to charity, but can increase the amount of money they give if they make accurate predictions.

At first glance, this might seem like a zero sum game, since every dollar you make takes away from someone else’s preferred charity. However, charity prediction markets can be mutually beneficial despite this. First, people may choose to donate to the prediction market itself, which can be given as a bonus to the best traders, and thus drawing more activity to the market and multiplying the amount individuals donate. Second, charity prediction markets can elicit useful information, a public good in it’s own right. Third, charity prediction markets can act as a sort of donor lottery. Fourth, prediction markets move charitable dollars into the hands of those with more accurate beliefs, which hopefully would mean that the money gets better spent. Finally, by joining a charity prediction market, people send a signal that they are committing to donating to charitable causes, and, as the size of the market grows, it becomes more valuable to trade on, and can induce others to commit funds to the CPM as well.

I think that a prediction market of this sort could attract a significant amount of interest. The opportunity to grow your donation adds to the draw of prediction markets as a form of entertainment, and might induce more overall spending on charity.

But, there is an important objection I want to consider. Prediction markets rely on rewarding those with more accurate beliefs with more buying power in the future, but that’s missing in a CPM. First, though people with more accurate beliefs do get more influence in the market, they may periodically donate their winnings to charity. I am not sure to what degree this will influence the quality of the prediction market results [1]. Second, donating to charity may not offer the incentive to succeed as much as normal prediction markets do, which could affect the quality of the results. One way to sidestep this issue is to hire others to predict on your behalf. You could pay highly accurate forecasters a commission to grow your donation, thus creating direct financial incentive to succeed. I am not sure that this fixes the issue entirely, so the importance of this effect will have to be considered more carefully if charity prediction markets ever become a reality.

There is another detail which seems crucial to get right before a charity prediction market is opened. The same combination of altruism, entertainment, and rewards for accuracy that might draw people to a CPM would also encourage a significant amount of partisan signalling behavior.

To give an example, imagine if hoards of U.S. Democrats placed bets on the outcome of the election, and hoards of U.S. Republicans did as well, with members of both sides pledging to donate to a charity their opponents would hate.

These kind of dynamics would be a problem for several reasons. First, groups may have a strong emotional incentive to influence the outcome of real world events in order to prove their tribe right. Second, partisan signalling could draw money away from other places and into a zero sum game where groups donate to charities which directly oppose one another, cancelling out the value of their donations. Third, when people attach partisan value to the outcomes of market events, they may begin to attack the institution itself when things don’t go their way (sound familiar?).

Normal prediction markets will face some of these problems, but not to the same extent. In normal prediction markets, the ability to siphon away money from groups that are trying to signal partisan loyalty prevents this from being much of a problem. Perhaps this would happen in CPM’s as well, but I am not sure [2].

To mitigate this problem, I believe the charity prediction market should make all betting and donation decisions private so that it is hard for people to publicly demonstrate how they are betting and donating. This way, partisans can publicly root for their tribe while privately betting outside the party line and donating to their preferred charities. Making sure that the set of allowed charities is relatively apolitical will also help reduce strife. To prevent partisans attacking the validity of the market itself, a credibly neutral approach to decide outcomes is crucial. Finally, there must be a way to punish those who contest results in the market frivolously.

I have to think more about these issues, but CPM’s still seem worth trying.

Notes

1. Of course, traditional prediction markets have an analogous situation since traders can always go into cash.

2. In any case, this kind of behavior would likely draw in a lot more activity, which may raise donations to non-partisan charities despite everything.