The Signal

Gambling on war: The dark side of prediction markets

David Rothschild, Yahoo! News
The Signal

Over and over, we've found that the political prediction markets offer accurate, real-time information on the odds of a politician's victory in any major contest. But there's a darker, less tested corner to some of the sites that allow people to wager real money on the outcome of world events. The gambling site Intrade, for example, is currently taking action on whether the regime of Syria's authoritarian president, Bashar Assad, will crumble before the end of the year. If that doesn't suit you, you can also gamble on whether the United States or Israel will bomb Iran in the same time frame.

The reason the political markets are so useful for predicting election outcomes is that the people with money on the line have an incentive to gather as much information as possible about the odds of a politician's victory. In addition to polls, they can consult fundraising figures, news stories and a wealth of other data. When it comes to the fate of Syria or Iran, on the other hand, the universe of data is far less defined. But let's have a look and see how the market odds react to world events.

Prediction market-based forecasts place the likelihood of a strike on Iran's nuclear facilities in 2012 by the United States or Israel at 33 percent. This likelihood of conflict in Iran is down in the last three months, which we expect to see as the number of days left in the year dwindles and the expiration of the contract approaches. The number should trend toward zero every day there is no airstrike and no new development in the conflict. The main jump in the odds appeared in early March, coinciding with information that Iran had increased its production of higher-grade enriched uranium. Those odds came down quickly as stalled talks with Iran resumed within days.

In addition to contemporary events, there's a historical precedent here that could inform the odds. In 1981, when Saddam Hussein was building a nuclear facility that Israel thought could help Iraq create nuclear weapons, Israel bombed the reactor. It is still unclear whether Iraq was actually trying to develop nuclear weapons and, if it was, whether the attack slowed it down. Similar questions arise with regard to Iran, where there is disagreement over what it is attempting and to what degree an attack would deter it if it is pursuing a weapon.

In Syria, meanwhile, the brutal massacre of more than 100 Syrian civilians last week has led to a 10-point jump in the odds of regime change, which now stands at 43 percent. President Bashar Assad has been leading a violent crackdown of his people since the uprising began in the spring of 2011.

As with Iran, the longer Assad stays in power, the less likely it is that he will be ousted this year. Second, there has been a notable lack of direction and options from world leaders on how to aid those attempting to remove Assad from power. As Russia finally shows signs of concern over the situation, however, we may see that change.

Follow along to questions of war and peace in real time at PredictWise.

David Rothschild is an economist. He has a Ph.D. in applied economics from the Wharton School of Business at the University of Pennsylvania. Follow him on Twitter @DavMicRot.

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