Summary:
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John Aristotle Phillips announced his candidacy for the US Congress in a Connecticut district in 1980.
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It commanded PredictIt to shut down any remaining markets by the middle of February 2019.
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In the meantime, merchants, including Boeckmann, and academics have joined Aristotle in a lawsuit against the C.F.T.C. over the shutdown of PredictIt, which supports Kalshi’s request.
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Trevor Boeckmann, a PredictIt hobbyist, purchased almost 26,000 “yes” shares earlier this year at a cost of six cents apiece.
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Using as many credit cards as he can open, Boeckmann has deposited about $79,000 on the exchange over the course of his PredictIt career.
John Aristotle Phillips announced his candidacy for the US Congress in a Connecticut district in 1980. A few months before the election, he would turn 25, the required age to hold the position. The son of a Yale engineering professor, Phillips had made headlines four years previously as a student at Princeton for a thesis he had written on how to construct an atomic bomb. The F.B.I. seized it, and after a Pakistani official requested a copy, Phillips informed Wisconsin senator William Proxmire of the incident. Proxmire later brought up the issue in a speech. After John Phillips declared his candidacy, Proxmire remarked, “John Phillips is an outstanding young guy.” Carter’s Democratic primary opponent Senator Ted Kennedy and President Jimmy Carter reportedly sought Phillips’ support. Phillips was defeated by a four-term Republican incumbent in November by a margin of 25 points. Two years later, he ran again and once again came up short by double digits.
Phillips had overestimated his chances. However, that failure assisted him in identifying an unmet demand for political prediction data. He and his M.I.T. graduate brother, Dean, formed Aristotle Industries in 1983, which aided in the political introduction of computer software. Their first programme, Campaign Manager, examined public opinion surveys, political donations, and fund-raising tactics. Within a year, approximately 200 members of Congress—including the Republican who had twice touched Phillips—had become clients. Aristotle relocated from South Norwalk, Connecticut, to an area near the Capitol building. The company’s CEO declared, “Democracy is a growth business.”
Aristotle was hired thirty years later to assist with “the most exciting thing I’ve ever been associated with,” according to Phillips. In order to examine marketplaces where traders might buy and sell futures contracts linked to political events, economists at Victoria University of Wellington in New Zealand established an experimental exchange called iPredict. However, because there weren’t many traders interested in New Zealand politics, they asked the Commodity Futures Trading Commission in the U.S. for authorization to run markets for American elections and economic indicators in 2014. The C.F.T.C. had rejected a request from a registered U.S. exchange called Nadex a few years prior because it found that such contracts fell under the federal definition of gambling, which is defined as “the staking or risking by any person of something of value upon the outcome of a contest of others.” The C.F.T.C. effectively shut down Ireland-based exchange Intrade in 2013 after it had accepted millions of dollars in bets on American elections.
However, there was a minor, noncommercial exception to this rule: since 1993, the University of Iowa has managed the Iowa Electronic Markets, which accept trades from students and teachers on participating campuses, with approval from the C.F.T.C. Victoria University proposed building on the Iowa model by making its new exchange accessible to the general public, engaging in little advertising, and raising the maximum bet amount from the Iowa project’s five hundred dollars to eight hundred and fifty dollars. A so-called no-action letter from the C.F.T.C. in response to the request stated that Victoria wasn’t authorised to profit from “an academic exercise showcasing the information gathering and predicting capacities of markets.” Victoria hired Aristotle to oversee the new online exchange. PredictIt was the company’s moniker for it.
Currently, PredictIt has about 80,000 active users. Nearly $150 million changed hands in its marketplaces in advance of the 2020 elections. Numerous academics from all around the world have benefited from its market data sharing, and on occasion, markets have even been formed at their request. Aristotle has been at conflict with regulators behind the scenes because it wants to keep growing. Election markets have been ruled by the C.F.T.C. to be illegal because traders may be enticed to base their voting choices on who will give them the best financial return. (Some could counter that voters already do this.) Insisting that the trade has beneficial civic benefits, Phillips uses the compulsive involvement of sports gamblers, who, according to one research, watch roughly twice as many games than non-bettors do, as a point of contrast. He told me, “It’s terrific if it takes individuals having a little bit of skin in the game who don’t ordinarily pay attention to anything and now they’re reading the newspaper more, or focusing more on absorbing and critically analysing what they’re watching on TV. Of course, detractors claim that doing this equates to treating politics like a game. A devoted PredictIt user named Trevor Boeckmann, a public defender in New York who is 34 years old, told me that his hobby had helped him become “a better-informed citizen.” Boeckmann, who was raised in Iowa, has always been interested in politics, but he claims that his work studying trading has given him a thorough understanding of Senate cloture procedures and other political intricacies.
In a letter to the C.F.T.C. in 2019, Phillips argued that electoral markets gather data “for the advantage of both participants and non-participants” and urged authorities to establish “rules of the road” as well as to permit more than “small-scale, academic efforts.” He never heard back from anyone. Instead, the C.F.T.C. abruptly revoked its no-action letter this past August, declaring that Victoria had broken the conditions of the agreement. According to Bloomberg, who cited numerous unnamed sources, the C.F.T.C. staff believed that the organisation “had allowed PredictIt to stray too far from the original remit of being a small-scale market designed to facilitate academic research.” The commission did not specify which terms had been violated. (For this story, the C.T.F.C. refused a number of requests for comment.) It commanded PredictIt to shut down any remaining markets by the middle of February 2019. Aristotle’s advisor Richard Shilts, a former director of the C.F.T.C.’s Division of Market Oversight, told me he was taken aback by the extreme action and by the lack of a clearly articulated justification. If they felt it needed to be reviewed, “they might have altered the no-action letter in some way,” he said. Phillips described that day in August as “one of the saddest days of my life,” claiming that the C.F.T.C.’s decision caught him off guard. Approximately fifty million shares have already been exchanged on those exchanges, he claimed, and his company begged the C.F.T.C. for advice on how to close them.
A startup called Kalshi asked the C.F.T.C. to solicit public comments on a proposal to provide contracts on which party would dominate the House and Senate following the midterm elections. Three weeks later, the C.F.T.C. issued another unexpected announcement. Tarek Mansour, the chief executive of Kalshi, referred to the possibility as “the holy grail of events trading.” Kalshi allows traders to stake up to $25,000 on a specific contract, which is significantly more than PredictIt is permitted to accept. If Kalshi’s request were granted, it would be the first regulated U.S. exchange to ever host election markets. Kalshi has had thirty-two meetings with regulators to discuss, among other things, whether “trading” is just another word for gambling and whether election markets are democratically redeeming.
In the meantime, merchants, including Boeckmann, and academics have joined Aristotle in a lawsuit against the C.F.T.C. over the shutdown of PredictIt, which supports Kalshi’s request. The lawsuit claims that the Commission took this action “without providing any justification for its decision, without providing any explication of facts that would support its decision, without providing any transition plan for dealing with the scores of existing contracts held by more than ten thousand traders, and without considering any alternatives to the chaotic, disruptive, and economically damaging wind-down of the Market its decision forces.” Aristotle has requested a preliminary injunction and anticipates a decision on that motion in the upcoming weeks; the C.F.T.C. has not yet responded to the particular charges. The outcome of the lawsuit might influence how political betting develops in the US.
The fact that there is a lengthy history of wagering on American politics may not come as a surprise. What could surprise people is how much room was originally allocated to that hobby in conventional political reporting. American newspapers began reporting the betting markets for presidential elections in the 1860s, almost daily as elections got closer. In New York, outside Wall Street offices or on the steps of stock exchanges, around half of the trading took place. According to research by economists Paul Rhode and Koleman Strumpf, election-related trading reached its peak in 1916, when President Woodrow Wilson defeated former Supreme Court Justice Charles Evans Hughes. That year, about $270 million was wagered on the election in organised New York markets, which is more than twice what was spent on the actual presidential campaigns. Investors once risked more money on politics than they did on equities and bonds (on some days). The Times stated on Election Day that “the Wall Street betting favourite has always won a Presidential election” after Hughes closed in the New York markets as a 10-8 favourite despite a surge of late money for Wilson. According to reports, the oil mogul Edward Doheny profited up to $500,000 by betting on Wilson’s victory.
According to Strumpf, these betting markets “vanished out of existence shortly around World War Two.” The disappearance occurred at the same time when scientific polling began to acquire popularity. In 1936, George Gallup correctly predicted Franklin Roosevelt’s reelection, contrary to the influential Literary Digest reader poll, which had Alf Landon as the winner. It wasn’t that the markets, which also preferred Roosevelt, performed better than the polls. However, a significant portion of Americans opposed gambling in any form, and surveys now seemed to provide a different predictive metric. Political betting markets may have gone underground due to restrictions on sports betting as well as the 1936 passage of the Commodity Exchange Act, which set rules for futures trading.
Political wagering persisted in many other nations; economist and Australian Parliament member Andrew Leigh told me, “I always look to prediction markets instead of polls.” But until 1993, when the University of Iowa started its small-scale experiment, such marketplaces did not return to the United States in any official capacity. Journalists today still remain distrustful of the markets, despite PredictIt’s popularity and its successful track record (predicted predicts election results better than polls, according to many studies). One Capitol Hill reporter I spoke with asserted that he is unaware of any other reporters who cover them, and other journalists I spoke with expressed a view that was consistent with his. According to David Weigel, a former political reporter for the Washington Post who now contributes to the news startup Semafor, “the markets are more vibe-based.” “They are susceptible to change in conventional wisdom.”
According to Justin Wolfers, an economist at the University of Michigan who worked for horse racing bookmakers while a student in Australia to support himself, news organisations like polls in part because their oscillations keep viewers interested. The influence of FiveThirtyEight’s Nate Silver, who was lauded as “America’s secular god of forecasts” after his poll-based forecasting method correctly predicted forty-nine states in the 2008 Presidential election, was cited angrily by Wolfers and other market enthusiasts I spoke with. In his book “The Signal and the Noise,” Silver writes of a meeting with Wolfers and David Rothschild, a Wolfer’s protege who had matched Intrade pricing to Silver’s 2008 forecasts. Intrade prevailed after accounting for market prices’ recognised inefficiencies, such as the longshot bias, in the same manner, that polls correctly for imbalances in the sample process. Wolfers questioned him, “Why to bother with publishing models if markets are better?” In his book, Silver responds that they are “intellectually intriguing” and “help to increase traffic for my site.”
Since independent traders are purportedly necessary for efficient markets but modern traders are constantly communicating, Silver, who did not reply to several requests for comment, has written that he is “increasingly suspicious about the wisdom of crowds.” This is mostly because of this. Although oddsmakers are renowned for being difficult to beat, the same characteristics apply to sports betting. (Research indicates that betting markets are more accurate in predicting N.F.L. outcomes than are, on average, roughly 91% of individual handicappers.) According to Wolfers, “The same overconfidence that makes people bet on football also makes people ignore the counsel provided by prediction markets.” He continued, “it’s really hard” to admit that you can’t forecast the future as consistently as “a figure on a Web page” for people whose livelihood depends on their apparent knowledge.
Trevor Boeckmann, a PredictIt hobbyist, purchased almost 26,000 “yes” shares earlier this year at a cost of six cents apiece. He did so because he believed the Republicans would control 39 Senate seats following the November midterm elections. Boeckmann invested at a time when Republicans were given a mere 6% probability of losing a seat, according to the share values on PredictIt, which range from a penny to $99 and can be read as chances. However, according to Boeckmann, the 2020 midterm elections may follow a pattern similar to that of 2018, when “there was a massive tsunami against Trump, but Republicans managed to hold on to the Senate because they were running in strong positions against not-great candidates.” He predicted that Democrats would need to win in Arizona, Georgia, Nevada, Pennsylvania, and possibly Wisconsin.
After Roe v. Wade was reversed by the Supreme Court in June, the Democrats’ chances improved, and Boeckmann’s “yes” price increased to thirteen cents. A few weeks following the abortion crisis, he checked FiveThirtyEight’s prediction and noticed that Democrats had an 11% probability of winning a seat, indicating that PredictIt traders may have been somewhat overestimating Democrats’ chances at this point. Boeckmann made a profit when he sold, bringing his total revenue from the site for the year to around $3,000. (He earned a little under $15,000 on the website last year.) He was shrewd in how he timed his trading on the Senate markets, and PredictIt traders are once more positive on the Republicans taking back the majority.
The meagre payout from betting on shoo-ins isn’t worth the bother for many traders due to PredictIt’s investment cap, five percent withdrawal fee, and ten percent fee on earnings. Because of this, “yes” bets on candidates that are a sure thing are frequently discounted. For instance, J. B. Pritzker is given a 94% chance of getting re-elected as governor of Illinois, but most observers think it’s even less of a tossup than that. (According to FiveThirtyEight, he has a chance of victory of more than 99%.) Using as many credit cards as he can open, Boeckmann has deposited about $79,000 on the exchange over the course of his PredictIt career. He then uses the small profits from his bets on sure things to pay off his debts on his credit cards in time to meet signup-bonus requirements, all the while racking up staggering credit card points. Boeckmann spent a week in Berlin after our conversation this summer, he claimed, with hotel and travel expenses all covered by his PredictIt credit card usage.
Analysis by: Advocacy Unified Network
