Category Archives: Prediction Markets

Stock Prices, School Letter Grades, Prediction Markets. Oh my.

stock

Well, here’s a post that should bump up my corporate reformer ranking.

Yesterday, I read an article in the NYT titled: “Wall Street Might Know Something the Rest of Us Don’t.”

The point of the headline is that stock prices are information signals, and if stock prices are moving we should try and figure out why.

What makes stock prices particularly useful signals is that: (1) they are signals that incorporate predictions about future performance and (2) they are backed by money.

Prediction markets share these same two qualities, but are different in that (amongst other things) they don’t involve shareholder ownership of companies. You can read more about why some support the expansion of prediction markets here.

Currently, my preferred education information signal is school letter grades, which, when done well, I find to be useful in informing parents about school quality.

The weakness in letter grades, however, is that they are (1) backwards looking and (2) are not backed by money.

So here’s the question: would the existence of public school prediction markets increase student achievement in the United States of America?

You could imagine prediction markets being used in multiple ways.

1. Superintendent selection: prediction markets could be set-up where people get make bets on whether a given superintendent candidate would increase a metric such as ACT scores. If the superintendent was hired, the market would go live. This could give school boards, which far too often make overly political decisions, both information and cover when making superintendent hires.

2. Charter school authorization: same idea, but with approving charter schools – predictions would be on school performance.

3. Policy proposals: same idea, but with policy proposals (iPad rollouts, for example).

One could go on.

Some reflections:

1. Clearly, prediction market proposals would face brutal political battles. With this post, the probability that I will ever be a superintendent likely just dropped from .4% to .1%. But, whatever, ideas have to start somewhere.

2. When I led NSNO, which allocated to start-up funding to charter schools, I would have found prediction markets on charter authorization to be very, very useful. Instead of having to rely solely on on our internal diligence, we could have had access to the aggregated diligence of many others. Some schools that NSNO launched ended up failing, to the detriment of thousands of children. Prediction markets could have helped prevent this.

3. If someone vocally opposes prediction markets in any area, it’s worth asking: why? Sometimes it’s because of an emotional reaction against markets. Sometimes it’s because they really don’t care about making optimal decisions.

4. Sometimes it’s because prediction markets won’t work for practical reasons: market manipulation, lack of liquidity, and other real threats exist – though I generally think these reasons are overblown.

5. Lastly, it’s worth noting that an economics blogger is in the process of setting up a NGDP prediction market that, if successful, could change the future behavior of the Federal Reserve. So one prediction market has been launched from a blog – why not another?

At best, I think prediction markets would be of great benefit to students in our country. At worst, I doubt they’d do much harm.

Someone should try to set one up. I’d be happy to help.

HT to Robin Hanson for informing my thinking on much of this issue.