Robin: Actually, yes. One time I thought of the idea (okay, fantasy) of silently obsoleting government through a massive system of insurance whereby any time legislation is proposed, you make a bet (or equivalently, purchase an insurance policy) such that you become indifferent to the outcome. The result: any legislation will merely make everyone take a monetary hit, but otherwise leave their behavior unchanged. And if that doesn't make everyone cynical about the democracy that results, the fact that politicians will vote in ways that maximize the value of their bets, should do the trick.
I never bothered to look up if anyone actually developed the model more deeply though.
Well, any legislation you like would make you take a hit, and legislation you don't like would pay out.
But it's not a great idea overall without a very canny system in place to regulate what measures are put forward. Suppose EvilCorp puts up $1M in favor of making puppy smashing legal. Opponents then put up $1.1M and the measure is defeated. This pays out to EvilCorp. Then EvilCorp opens a motion to legalize kitten smashing and puts up $2.1M, including what they gained from the puppy smashing result. Now the opponents need to put up $2.2M...
At this point, ...
The Intrade prediction market is giving Hillary a 53% chance and Obama a 47% chance of winning the Democratic presidential nomination. Hillary is down 7.5 percentage points in just the last day. (Note: Between when I wrote the above, and when I posted this, Hillary went up to 54.)
From what I've read on Intrade, you can fund your account with up to $250 using a credit card, and it should land in your account immediately. (More than this takes time.) Also, remember that you can sell contracts at any time afterward - you don't have to wait months to collect your payout.
If you think that Hillary is going to do better than the polls on Super Tuesday, and you're going to sneer afterward and say that Intrade was "just tracking the polls", buy Hillary now.
If you think that Obama is going to do better than the polls on Super Tuesday, and you're going to gloat about how prediction markets didn't call this surprise in advance, buy Obama now.
If you don't do either, then clearly you do not really believe that you know anything the prediction markets don't. (Or you don't understand expected utility, or your utilities over final outcomes drop off improbably fast in the vicinity of your current wealth minus fifty bucks - you don't have to bet the full $250.) It is free money, going now for anyone who genuinely thinks they know better than the prediction markets what will happen next.
Prediction markets do not have supernatural insight. If they give the candidates fifty-fifty odds, it means that the market collectively doesn't know what will happen next. Even if you're well-calibrated, you get surprised on 90% probabilities one time out of ten.
The point is not that prediction markets are a good predictor but that they are the best predictor. If you think you can do better, why ain'cha rich? Any person, group, or method that does better can pump money out of the prediction markets.
If prediction markets react to polls, they're getting new information, that they didn't predict in advance, which happens. Being the best predictor doesn't make you omniscient.
Everyone's going to find it real easy to make a better prediction afterward, but if you think you can call it in advance, there's FREE MONEY GOING NOW.
Buy now, or forever hold your peace.