The Ethics of Derivative Markets

Huub Brouwer (Tilburg University )

Wedding. Nick and Simone are getting married. To entertain the guests, the best (wo)men of the couple organize a wedding prediction market. Wedding guests can buy a stake in the length of the kiss after the exchange of rings (2 seconds, 4 seconds, and so on) and in the moment at which the groom will first shed a tear (when seeing the bride, when making vows, and so on). 

Foreign Invasion. The President of Dorne, a country with a strong army, has been threatening to invade a foreign country and eliminate its ruler for several months. The President enjoys a significant degree of discretion regarding foreign military policy, and can decide himself whether to order the army to invade. A prediction market emerges in when an invasion will occur. 

Philosophical debates on moral limits to markets tend to focus on markets in goods and services that involve violations of human autonomy and dignity (Anderson 1993; Satz 2010; Sandel 2012). Common examples include markets in child labor, human organs, lifeboat access, sexual services (prostitution), and reproductive services (surrogacy pregnancy). Although it is certainly important that philosophers study the moral limits to such markets, we think that frameworks developed for analyzing them may miss morally relevant considerations that could apply in the evaluation of other markets. In particular, we believe that current frameworks are not sufficient for evaluating derivative markets: markets in which the good that is traded is the contract itself, and the value of this contract is tied to another good or service, or the occurrence of an event. Examples of derivative markets include prediction markets (such as Wedding and Foreign Invasion), life insurance markets, and livestock futures markets. This paper is the first to offer a general framework for the ethics of derivative markets. Our main claim is that capturing moral limits to derivative markets requires (i) reinterpreting existing considerations in the moral limits to markets debates (in particular of the corruption objection) and (ii) adding the undermining of ‘political community’ and threatening of fundamental well-being interests as separate considerations.