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From: Smith, Vernon [vsmith@chapman.edu] 0 -:-~ ....... :::::a 

Sent: Friday, May 02, 2008 8:06 PM Received CFTC 

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To: secretary 

Cc: rhahn@communityprep.org 

Subject: Response to CFTC Request on Event Contracts 

Release: 5493-08 

For Release: May 1, 2008 

CFTC Requests Public Input on Possible 

Regulation of "Event Contracts'' 

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What public purpose is served in the oversight of these markets and what differentiates 

these markets from pure gambling outside the CFTC's jurisdiction?" said CFTC Acting 

chairman Walt Lukken. 

Responder: 

Vernon L. Smith, 

George L. Argyros Chair in Finance & Economics 

Professor of Economics & Law 

Chapman University 

One University Drive 

Orange, CA 92866 

2002 Nobel Laureate, Economics 

Response: 

1. On oversight: I suggest that initially this function be entirely limited to a 

monitoring and data archive function. Such information should be available 

for experimental, econometric, finance and other research scholars to 

study. If new regulatory rules governing rights to take action ("property 

rights") are needed beyond those that emerge in the ordinary course of 

private institutional design for trading, let them evolve out of these research 

studies including examination by controlled testing in the laboratory. 

(Regulations controlling fraud, theft, deception, and so on already exist and 

would apply). It was from experimental economics (in Iowa) that event 

contract trading first blossomed, and many ongoing research questions 

arise in dealing with contract design, event measurement feasibility, etc. 

These are primarily empirical issues and the combination of field and 

5/7/2008 

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experimental data made possible by the CFTC initiatives are of great 

importance. 

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2. Event markets do not constitute gambling. Gambling involves the 

deliberate creation of artificial zero-sum opportunities to engage in risk 

taking decisions that redistribute existing resources. Event contract markets 

are in the class of variable-sum stock and derivatives' markets in which 

information on the future outcome of productive and technological activities 

is dispersed, uncertain, and rendered valuable to society when aggregated 

into prices. The information priced in these markets enables actions to be 

taken that create wealth. Similarly in event markets, better information 

made possible by trading event contracts produces social gains that make 

such activity wealth enhancing. Thus if a futures market in Florida orange 

juice enables improved predictions of frost, better crop decisions enhance 

wealth creation and potential improvements in technology. Moreover, all 

these issues are important generators of testable hypotheses, which can 

help to inform both the extent to which they create social and economic 

value and whether new regulations are desirable. 

3. Bear in mind that any limitation on the emergence of new market forms 

must necessarily run the risk of also limiting new forms of specialization 

and wealth creation. We need always to be open to such new possibilities.· 

5/7/2008