Using Prediction Markets to Guide Government Policy
If you use prediction markets to determine government policy then rational (and irrational) actors will manipulate the prediction markets in order to manipulate government policy. If you use prediction markets to predict government policy then rational (and irrational) actors will manipulate governments in order to create alpha in the prediction markets.
In Your Enemies Can Use Your Prediction Markets Against You I explained how Mars could use a prediction market created by Earth to incentivize space pirates to overthrow the pro-Earth government of Ceres.
Suppose you're the governor of Ceres and you want to protect Ceres from space pirates. One way to protect Ceres from space pirates is to buy a laser defense array, but lasers are expensive and weapons are negative sum. Is there cheaper alternative?
Yes. You can manipulate market prices.
Mars is not acting against you directly. They are buying insurance in a market that pays anyone who can turn the Ceres government into a pro-Mars regime. Space pirates can profit by buying shares in the prediction market that pay money if Ceres shifts to a pro-Mars stance and then invading Ceres.
The prediction market has limited liquidity. If you use taxpayer dollars to buy those shares first then space pirates won't be incentivized to invade Ceres. (This strategy works (albeit more expensively) if you buy the shares second too, because space pirates could just sell their shares to you at a profit without having to bother actually assaulting Ceres.)
You win because you don't have to fight the pirates. The pirates win because they don't have to fight you. Ceres taxpayers lose because they have to pay the Dogecoin which goes (indirectly) into the pockets of space pirates—but that might be better than being raided, pillaged and plundered. Is there a way to buy up all the shares while earning lots of money instead of losing lots of money?
Yes. You can manipulate government policy.
Step 1: Buy all the shares that pay money if the Ceres government turns pro-Mars because otherwise space pirates would invade Ceres.
Step 2: Now that you're bought all those shares, you can profit by pivoting your foreign policy to be pro-Mars.
Taxpayers win. All they had to do was sell their government to the highest bidder.