The devastation wrought by hurricanes Helene and Milton has refocused many Americans’ attention on climate change. However, a contingent of the electorate remains divided on the issue. A 2024 Monmouth University poll found that while 92% of Democrats believed climate change was occurring, only 51% of Republicans agreed.
Climate skepticism hasn’t deterred financial firms from helping clients hedge their portfolios against climate risk. Interactive Brokers, through ForecastEx, offers environmental markets that allow investors ways to hedge against long-term climate risk, with contracts available from late 2024 to as far out as 2036.
Offering financial hedging and instilling long-term thinking aren’t the only benefits of event contracts on climate change milestones. Climate markets may also change traders’ minds about the reality of climate change.
A study published in Nature found that participating in climate-related prediction markets influenced traders’ opinions about climate science, including those who were previously skeptical. One of the study’s authors, Dr. Moran Cerf, sat for an interview with PredictionNews to discuss how prediction markets change traders’ minds.
How prediction markets nudge climate beliefs
According to Cerf, about “80% of [participants] actually make a shift towards climate support.” However, that’s not the same thing as switching positions altogether.
“We call ‘mind change’ any movement in a direction,” Cerf explained. “That’s a small number of people who actually flip across the 50% line.”
The incremental shifts in attitudes were driven by three key factors related to prediction market trading:
- Potential monetary loss
- Separation of beliefs from identity
- Removal of partisan filters
The common thread connecting these factors was changes in incentives. While changing opinions can have non-monetary costs in everyday life, it can be expensive not to change them while participating in prediction markets.
Financial risk vs. social rewards
Monetary loss is a clear incentive for traders to align their bets with evidence and market trenders rather than previously held personal beliefs and biases. Interactive Brokers offers environmental markets because of the risk climate change poses to financial firms. Food supply disruptions, property losses from rising sea levels, and migration away from climate-ravaged areas are new and growing risks that portfolio managers must confront.
But the separation of belief from identity is a rarer achievement. One of the reasons political polarization is so intense is that ordinary Americans have fused their political beliefs with who they are. Americans make their political choices based on party loyalties rather than impartial evaluations of issues.
“You can say ‘I’m a Democrat and I can vote Democrat,’ but in a game that no one cares about, [you] actually behave like a Republican,” Cerf said. “And in that sense, this kind of detachment from identity by moving into a game [of] betting with money allows people to kind of manifest a difference.”
Cerf explained that people normally receive social rewards for upholding their beliefs in public. He offered the example of a group of lifelong Republicans. Publicly flipping beliefs on a partisan issue like climate change could mean “you lose a lot of equity in the real world.”
“So it’s easier to…make bets that make you money and in the bar, still stay where you are [ideologically],” Cerf said.
Prediction markets are insular spaces with their own settlement rules. Freedom from social pressure lets traders be more flexible in their beliefs than they can be in polarized social settings.
Learning from the ground up
One of the other reasons prediction markets can alter traders’ beliefs is the process of deciding which contract to buy and at which price. Prediction markets encourage traders to look at issues with fresh eyes. That doesn’t mean people leave their worldviews behind.
In prediction markets, traders are penalized for trading on incorrect beliefs. Settlement terms – written properly – offer specific outcomes that will decide which contracts pay out. Even if traders don’t venture far outside of their media ecosystems, additional research may occur anyway. When Cerf interviewed prediction market participants in the middle of trading, some of them explained this process:
They said, ‘I still am a Republican, and I’m still a 10, but I know more things now. I never knew about the number of earthquakes in Türkiye. Like, it wasn’t on my radar. Now because you asked me to put a bet on that, I put a bet that it’s going to be a small number and compared it to what it actually was.’
Türkiye’s earthquakes aren’t caused by climate change, but they’re natural disasters that can hit harder from other climate-related events. That new data point could make a small impact on a trader’s worldview. Even more importantly, the research into new facts was voluntary. Prediction markets gave traders reasons to change their information diets, a remarkable feat in a polarized environment.
Changed minds aren’t changed behaviors
Traders’ minds were usually changed one or two points at a time. They weren’t making large ideological changes, and Cerf was circumspect about the traders who seemed ideologically transformed:
I think there’s a handful of cases, and even those, if you ask me whether it changes their real behavior outside [the prediction market], probably not. I think that it’s like, in this environment, they were exposed to a little new fact that they kind of let…in. Will they vote differently in the election? I doubt so.
However, time could make an important difference. Repeatedly being rewarded for trading in ways that contradict one’s existing beliefs might have a larger long-term effect than the small adjustments over short-term experiments. Cerf considered how the mindset of an extreme climate denier might evolve in real life as they win money by taking positions aligned with climate science:
You get the positive feedback…I think this is a moment where your brain says, ‘huh, I still am a 10 in my mind, but it pays off to be a seven in a game. So let’s play a seven.' And you do it like three times, and it keeps paying off. And then you might say, ‘Okay, you know what? Three times being a seven is good for me. I’m going to move from 10 to 9.8.'
Real-world behaviors may change only slightly, even as beliefs in prediction markets shift more dramatically. But in close presidential elections and media environments with fewer and fewer shared facts, those small changes over many participants may be enough.
