Futarchy (Prediction Market)

A governance system using prediction markets to decide policies based on their predicted impact on a predefined metric.

What is Futarchy (Prediction Market)?

Futarchy, proposed by economist Robin Hanson, is a governance model that uses prediction markets to make policy decisions by forecasting their impact on a chosen metric, such as GDP adjusted for inequality or environmental factors (“GDP+”). As Alex Tabarrok explains in the transcript, in futarchy, voters select the success metric, and prediction markets then estimate whether proposed policies (e.g., healthcare or immigration reforms) will increase or decrease this metric. Policies with higher predicted positive impacts are adopted, leveraging market-driven information aggregation to guide decisions.

Unlike traditional governance systems like democracy, futarchy relies on the collective wisdom of market participants trading digital assets to predict outcomes, theoretically reducing bias and improving decision quality. For example, a market could predict whether a new science policy would boost GDP+, as Hanson suggests. The transcript notes that futarchy addresses manipulation concerns by proposing secondary markets to predict reversals, ensuring robustness. While not yet widely implemented, futarchy could be applied incrementally, such as predicting the impact of firing a CEO on a company’s stock price, as Alex proposes.

Futarchy’s strength lies in its ability to harness dispersed information for objective decision-making, but it requires thick markets and reliable oracles to function effectively. Its futuristic nature, as Scott Kominers likens to a Borges story, highlights its potential to transform governance, particularly in decentralized systems like DAOs, where blockchain enables transparent, auditable predictions.