Today is Ayn Rand Day. If you haven’t read Atlas Shrugged or The Fountainhead, you should. Ayn Rand loved free-market capitalism. Democratic socialists who read Atlas Shrugged are using it as a how-to manual.

Humans don’t like markets. Markets transmit information, and humans think they are smarter than the market. Today, free-market capitalism is under direct assault from not only socialists who populate the Democratic Party, but also from Republicans who constantly rejigger policy and government instead of erasing everything and letting the free market decide.

However, as I wrote yesterday, the free-market arm's-length transaction where I give up something to get something I want or need is hard-wired into human existence.

Because humans do not like markets, socialists are able to leverage their feelings. “Let us appoint our panel of experts to guide policy so you make better decisions.” “Let’s put that policy in front of a committee, have a hearing so we get a safe outcome.” Meanwhile, before any of that happens, the decisions have been made.

By definition, a good marketplace is decentralized. Socialists and government policy people like to centralize because it means more power for them.

When I ran for Nevada State Treasurer, I saw things that just didn’t work or were broke. The Millennium Scholarship is a perfect example. No current candidate will cancel the bankrupt and unnecessary program. How many government programs can you think of that are constantly tinkered with and never go away? There are thousands of them. If people believed in free market capitalism, they’d end them.

Conservative think tank policy people burnish their “conservative” credentials but never actually use them once in power. They just come up with conservative-sounding policies that centralize power. Liberal think tank policy people simply advocate for more government control and intervention, centralizing power.

Letting go and letting a market decide is truly a very difficult thing. It means embracing some risk, and tolerating failure. I remember doing all kinds of analysis, cogitating, and then doing a trade. Once the trade was made, I had no control over the outcome. I only controlled the process of entering and exiting.

Classical economic theory postulates the “rational” investor. Behavioral economic theory postulates that most investors are irrational, which is why a lot of people latch on to it. “I am smart and educated.”, they say. “I know better.”

Humans use the psychological halo effect and look at the world, saying that very few people are actually rational. Social media allows a lot of crazy people to have a megaphone that they never had before, and so it’s easier for humans to say people are irrational.

That’s why this tweet totally amused me. It shows the person totally misunderstands markets and what market mechanisms do. If you go read the entire tweetstorm, you will learn some more about a certain Nevada political candidate. More fraud from him!

Think to yourself when you see a poll on a political candidate or topic. You come into it with your own bias. If you see a poll that confronts or contradicts that bias, the first thing you will do is dismiss it. The second thing is to argue about how they took the poll and the assumptions they made. People will work extremely hard to avoid the data that contradicts their own opinions or confirmation biases.

My friend Stuart Loren tweeted out some data, and I replied:

One of the reasons it is so hard to make money trading stocks, commodities, options, and other financial instruments is because you are forced to set aside all of your own biases and opinions to try and listen to the market. That’s why great investors are people who have “strong opinions loosely held”.

Getting back to prediction markets, they are, in fact, a free market. What does the price in a prediction market or any market tell you? It’s a signal. It is pricing in every single piece of public information and speculation about the future.

Prediction markets are a reflection of all of the above. The market price reflects it all: polling, sentiment, statistics, traditional and non-traditional forecasting.

Same with a stock price. You might think a stock is undervalued or overvalued, but the market is pricing in all available information and speculation. You might not agree, and that’s why there is a bid/ask spread.

In today’s markets, the big players no longer go with their gut. They are hyper-analytical, and their trading is all automated. This is true in prediction markets as well.

I think sports prediction markets are not a good use of prediction markets. Not only because they offer zero gain to society at large, but they can be manipulated by one bad actor.

Political prediction markets are a GREAT use of prediction markets. That is, provided no one in government is making trades in them because they can influence and manipulate the market.

Look at the Nevada governor’s race. In February, a poll came out that showed the race dead even. There was very little polling on the race at all. No one was paying attention. Now as we approach Labor Day, attention is being paid. Some new polls are out, and internal polls have been released. People are releasing their models. The race has changed. Today, even the left-wing and liberal pollster Nate Silver has Joe Lombardo winning.

Prediction markets have flipped. What was 60-40 Aaron Ford is now 60-40 Joe Lombardo.

The prediction market is a better indicator than any poll. Why? Because it’s real money being put up for risk for a particular outcome, similar to investing. It’s NOT investing, just similar. Polls have samples, oversamples, constraints, and other artificial rules that pollsters use to take the poll and produce data. Polls are an input, but the market filters out the bias.

Prediction markets have none of the constraints a poll has.

Are prediction markets positive or normative(not good or bad)? Positive. Why? Because they will guide a lot of decision-making. Money the Democratic Party might have spent on the Nevada race can be diverted to other races. Same with the Republicans! The prediction market is unbiased, and it makes political money more efficient.

If you are a business and doing some planning, it probably makes a difference if you can pencil in an expectation of who will be Governor. If you are a person and are looking to move from a blue state, peeking at the prediction market with a Republican ahead might make you consider Nevada.

Prediction markets are a powerful tool. They can help businesses and individuals hedge and manage risk. They can be an unbiased barometer of sentiment. Traditional insiders hate them because they take the power away from centralized insiders and give it to the market.

There is no need to have Mr Respected Pollster on television doing analysis when a prediction market does it for everyone. It also makes Mr Respected Pollster less valuable to a campaign.

All you have to do is listen and let go of your own personal biases to try to figure things out.