Will Belarusian President Alexander Lukashenko—“Europe’s last dictator,” who ordered the hijacking of a plane to apprehend a dissident journalist—still be in power in 2024?
Nobody knows, of course. But it’s a question that the U.S. government definitely wants the answer to. Lukashenko’s regime is infamously personalistic; Belarus would likely see several changes if he were no longer in charge.
But imagine if Lukashenko’s odds of remaining in the presidency were ascertainable. Would government policymakers plan differently? Would CEOs change investment strategies in eastern Europe? Would military strategists watch the Belarusian-Russian border more warily?
Sure, this situation is entirely hypothetical. But it turns out that the idea of predicting developments in foreign policy is not as far-fetched as it may seem.
Nearly two decades ago, a handful of innovators at the Department of Defense’s research arm, the Defense Advanced Research Projects Agency (DARPA), wanted to see if they could more accurately forecast future geopolitical trends. They could do what the U.S. government had always done to predict overseas developments—throw money at researchers to study a given region, rely on open-source analysis or even deploy covert operators on the ground. But if there was a better, cheaper way to forecast the future, they wanted to find it.
What emerged from this effort was a “futures market” for geopolitical events: a Policy Analysis Market (PAM) designed to help DARPA forecast military and political instability in several countries in the Middle East by aggregating expert knowledge.
It was a fascinating, edgy experiment—and so it immediately flamed out. Two senators got wind of the PAM and blasted it in a press conference, casting it as a “federal betting parlor on atrocities and terrorism.” The program was promptly killed and John Poindexter, the office’s then-leader, suddenly found himself retired.
It was a cautionary tale—one that essentially destroyed the idea of governments using prediction markets as a tool to try to better forecast aspects of the future.
Except, that’s not at all what happened.
Today, if you ask most people around Washington, D.C., about the saga, a handful have heard of the DARPA project. What is less well known is that the prediction market ecosystem is alive and well—and perhaps more popular now than ever before. These markets are deployed by companies, universities, “crypto bros” and, yes, even some parts of government. They’re designed by commercial companies, public interest groups, intelligence agencies and private investors. And they have the potential to become a powerful, useful new tool for policymakers—if they are willing to accept both the rewards and the risks that come with them.
What is a prediction market?
In a prediction market, participants place bets on what they believe the outcome of a particular event will be within a given timeframe.
It may be easier to understand a prediction market when compared to more traditional financial markets. A trader on Wall Street who forecasts that Tesla will rise in value over time should purchase the stock, or futures in the stock, anticipating a profit.
The difference with a prediction market is that instead of buying up a stock that will increase by an unspecified amount—as in the stock market—participants are instead betting that a specified event will occur before a specified end date. Participants then purchase and sell contracts based on their estimates of the likelihood of future events—such as which horse will win the Kentucky Derby or which candidate will win in a political primary. As time goes on, an efficient prediction market will see the price of a contract correlate with the likelihood of a particular outcome.
Let’s say that someone wants to bet that Lukashenko will still hold the Belarusian presidency on Jan. 1, 2024. And let’s say in this market that an…
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