Many people have money riding on the Supreme Court's verdict on the Affordable Care Act, which is expected Thursday, from health care executives to 24-year-olds hoping to stay on their parents' insurance a few more years. But none has a more direct financial interest in the decision than those who have gambled on the outcome on Intrade.com. The price on the site currently rests at a 75 percent chance that the court will overturn the individual mandate provision at the center of the case. When the court issues its decision, those who placed bets will find out if they won or lost—probably.
Situations like this test the strength of the online prediction markets in two ways. First, it can be tricky to define court decisions in a way that's precise enough to make it clear who won, particularly if the court takes a surgical approach to the law. Second, the crowd is less precise when it assesses the judgments of nine secretive people, compared to predicting the outcome of a popular election.
First, there's the difficulty in deciding what to bet on. The Affordable Care Act consists of many different initiatives packed into one large law. At the core is the individual mandate, which requires that all Americans have health care or pay a tax. Several additional provisions stand out. The law requires that insurers make insurance available to people with preexisting conditions, expands Medicaid eligibility, sets up health insurance exchanges and allows dependents to stay on their family's health insurance through their 26th birthday, to name a few. It would be interesting to see how the wonkiest gamblers predict the fate of any of these provisions. But it would be a nightmare to write a legal contract in a way that would make it clear who won and who lost under the almost infinite possibilities available to the court.
Intrade encountered a similar quandary recently with its book on the control of the Senate. What everyone wants to know is which party will control the Senate after the upcoming election. But there is a non-negligible possibility that this won't be clear even after every election is decided, thanks to the role of independent senators. If, for example, Maine's Angus King is the swing vote in the Senate, how would one clearly define the outcome? What if he waffles on which party he will caucus with or refuses to state his choice officially until Jan. 2? Even if there's a general political consensus, it may not satisfy the language of the contract on which people placed money. In this case, prediction markets have three objective outcomes: Democratic control, Republican control, and neither, even though "neither" is very likely Democratic.Read More »from Supreme Court could disrupt prediction markets with nuanced decision on health care