Benefits

Compared to the other ways of making decisions, futarchy has a number of benefits.

Markets provide incentives to correct bad decisions

In an efficient capital market, asset prices reflect all relevant information and thus provide the best prediction of future events given the current information. Paul Rhode and Koleman Strumpf, Historical Presidential Betting Markets

Consider election prediction markets. If Donald Trump has a 50% chance of winning but you can buy ‘Donald Trump win’ contracts at $0.32, you are incentivized to buy. And if they reach $0.65, you are incentivized to sell or short.

In general, when an asset deviates from its intrinsic value - equal to the net present value of its future cash flows - traders are incentivized to buy or sell until the two converge.

What this means in a futarchy is that there's an incentive for traders to correct for bad decisions. For example, if "stock conditional on giving away all of the company's cash to charity" is trading for the same price as normal stock, traders are incentivized to sell the conditional stock, causing its price to decline.

Markets are hard to manipulate

This also makes it hard to manipulate decisions. Any time you manipulate a market, you push it away from intrinsic value and thus create an incentive for someone to correct your manipulations. In fact, there's evidence to indicate that manipulation increases the accuracy of prices.

This is in contrast to voting, where votes and politicians alike can usually be bought.

Over time, markets shift power from bad predictors to good predictors

Markets give more power over time to those who are better predictors. This is because high returns both directly increase a trader’s capital and improve their ability to raise capital from investors.

The evidence supports markets

Markets aren't perfectly efficient. But according to most empirical evidence, markets are better aggregators of information than individual experts:

• Prediction markets outperform professional pollsters in predicting elections.

• Commodities futures markets outperform government forecasts in predicting weather.

• Companies like Google and HP have used prediction markets to successfully forecast things like launch dates, printer sales, and the dates of new office openings.

• Famously, while it took the US government more than 5 months to identify the Morton-Thiakol O-Rings as the root cause of the Challenger crash, the market had priced it into Morton-Thiakol's stock price within 14 minutes.