---
description: Market accuracy comes from financial penalties for error and specialist arbitrage rather than averaging crowd opinions
type: claim
domain: internet-finance
created: 2026-02-16
source: "Hanson, Shall We Vote on Values But Bet on Beliefs (2013)"
confidence: proven
tradition: "futarchy, prediction markets, efficient market hypothesis"
---

Hanson explicitly rejects the "wisdom of crowds" narrative for why speculative markets work. The best track bettors have no higher IQ than average bettors, yet markets aggregate information effectively through three mechanisms that have nothing to do with crowd intelligence.

First, stronger accuracy incentives reduce cognitive biases - when money is at stake, people think more carefully. Second, those who think they know more trade more, naturally weighting the market toward confident participants. Third, specialists are paid to eliminate any biases they can find through arbitrage, correcting errors left by casual traders.

The key is that markets discriminate between informed and uninformed participants not through explicit credentialing but through profit and loss. Uninformed traders either learn to defer to better information or lose their money and exit. This creates a natural selection mechanism entirely different from democratic voting where uninformed and informed votes count equally.

Empirically, the most accurate speculative markets are those with the most "noise trading" - uninformed participation actually increases accuracy by creating arbitrage opportunities that draw in informed specialists and make price manipulation profitable to correct. This explains why [[futarchy is manipulation-resistant because attack attempts create profitable opportunities for defenders]] - manipulation is just a form of noise trading.

This mechanism is crucial for [[Living Capital vehicles pair Living Agent domain expertise with futarchy-governed investment to direct capital toward crucial innovations]]. Markets don't need every participant to be a domain expert; they need enough noise trading to create liquidity and enough specialists to correct errors.

The selection effect also relates to [[trial and error is the only coordination strategy humanity has ever used]] - markets implement trial and error at the individual level (traders learn or exit) rather than requiring society-wide experimentation.


### Additional Evidence (extend)
*Source: [[2025-06-12-optimism-futarchy-v1-preliminary-findings]] | Added: 2026-03-11 | Extractor: anthropic/claude-sonnet-4.5*

Optimism futarchy experiment reveals the selection effect works for ordinal ranking but fails for cardinal estimation. Markets correctly identified which projects would outperform alternatives (futarchy selections beat Grants Council by $32.5M), but catastrophically failed at magnitude prediction (8x overshoot: $239M predicted vs $31M actual). This suggests the incentive/selection mechanism produces comparative advantage assessment ("this will outperform that") rather than absolute forecasting accuracy. Additionally, Badge Holders (domain experts) had the LOWEST win rates, indicating the selection effect filters for trading skill and calibration ability, not domain knowledge—a different kind of 'information' than typically assumed. The mechanism aggregates trader wisdom (risk management, position sizing, timing) rather than domain wisdom (technical assessment, ecosystem understanding).

---

Relevant Notes:
- [[futarchy is manipulation-resistant because attack attempts create profitable opportunities for defenders]] -- noise trading explanation
- [[Living Capital vehicles pair Living Agent domain expertise with futarchy-governed investment to direct capital toward crucial innovations]] -- relies on specialist correction mechanism
- [[trial and error is the only coordination strategy humanity has ever used]] -- market-based vs society-wide trial and error
- [[called-off bets enable conditional estimates without requiring counterfactual verification]] -- the mechanism that channels speculative incentives into conditional policy evaluation
- [[national welfare functions can be arbitrarily complex and incrementally refined through democratic choice between alternative definitions]] -- noisy welfare signals are fine because risk-neutral speculators handle noise efficiently
- [[futarchy adoption faces friction from token price psychology proposal complexity and liquidity requirements]] -- adoption barriers reduce the noise trading that makes markets accurate
- [[the shape of the prior distribution determines the prediction rule and getting the prior wrong produces worse predictions than having less data with the right prior]] -- market participants implicitly aggregate different prior distributions; market prediction accuracy depends on the meta-prior matching the generative distribution

Topics:
- [[livingip overview]]