Futarchy is a decision making framework that I first came across, while reading a post on the Ethereum Blog. It is a futuristic form of government proposed by Robin Hanson. Vitalik here outlines the general principle of furatchy: using two prediction markets “for” and “against” a written proposal to make decisions.

Vote values, bet beliefs

After x amount of time, the markets are closed, and the market with the higher price is implemented (ie if the “for” market has a higher price, the proposal is passed). All trades on the unimplemented market is returned. On maturity, the success metric for the proposal is measured and rewards are allocated.

Arguments for futarchy:

1. Fixing voter apathy (through incentives for correct votes)
2. Fixing rational irrationality (focus more on proposals rather than politics/personalities)
3. Market pressure to improve outcomes

Arguments against futarchy:

1. Manipulation by rich actors/stakeholders
2. Volatility and self-referential (ponzi) pricing
3. Zero-sum, might lead to low participation
4. Hard to encapsulate human values into success metrics

Scott Alexander wrote a nice FAQ on prediction markets countering some of the arguments against.

Counter-counter (1):

Is there any amount of money that could successfully manipulate a market? I think the answer is that you need to have more money than the sum total owned by everybody else in the world who wants to make $1 million quick. And at the limit, there’s always Goldman Sachs - who watch financial markets very closely, definitely want to make$1 million quick, and have a lot of money.

Counter-counter (3):

The futures and commodities markets are also zero-sum, but attract billions of dollars by giving companies an opportunity to hedge risk.

Whatever the theoretical answer to this question, lots of people do invest in prediction markets instead of stocks sometimes; several existing prediction markets have questions with hundreds of thousands of dollars in trading volume.