The Pentagon has scrapped its plans to operate the Policy Analysis Market, which would have allowed online traders to wager on the likelihood of future terrorist attacks. Aside from commodities like pork bellies, what sorts of futures can wannabe brokers buy and sell?
A whole galaxy, thanks to the proliferation of Internet-based prediction markets, also known as decision markets. These online bazaars allow punters to plunk down money, real or imagined, on the potential of films, ideas, or the U.S. military’s success in snagging Saddam Hussein. It may sound like nothing more than glorified sports gambling, but many economists believe that such markets can suss out vital, hidden information about future events—much in the same way that a soaring stock on Wall Street can indicate that good things are afoot for the company in question. That’s why the Defense Advanced Research Projects Agency has been funding so much research on the topic, hoping that prediction markets can assist military planners.
The granddad of online prediction markets is the Iowa Electronic Markets, which was started in 1988 to forecast the fortunes of presidential candidates; the market now covers the Fed’s interest rate decisions as well. IEM participants can use real money, with starting accounts capped at $500. The market is regulated by the Commodity Futures Trading Commission. (Those with more Teutonic tastes may prefer Wahl$treet, a market for futures on German politics.)
Sports fans can take advantage of their nightly SportsCenter viewings on the Athletic Stock Exchange. Not much money to be made here, as the entry fee is $10 and the athletes trade for just a few pennies. But sports aficionados may enjoy grabbing a share of Bobby Labonte (Ticker symbol: LBNT) or Hideki Matsui (MATS) and seeing where fortune takes them. There are also veritable athletic indexes, jock versions of the S&P 500, like the Quarterback Pool, which aggregates the fortunes of all National Football League signal callers.
If news rather than sports is your informational pastime of choice, check out the current-events section at TradeSports.com, an Ireland-based betting service that made a name for itself when its market more or less predicted the date of Saddam Hussein’s ouster. A future on a Saddam arrest this month just went up three points, in light of the capture of one of his chief bodyguards.
Not all prediction markets require that you risk actual cash. By far the most famous is the Hollywood Stock Exchange, which permits trade in both “MovieStocks” (pegged to the box-office success of upcoming releases) and “StarBonds” (tied to the future fabulousness of silver screeners), all in fictional money. Today, for example, the HSX is bearish on the soon-to-be-released S.W.A.T., down $5.67 on a volume of nearly 7 million shares. Angelina Jolie, whose Tomb Raider sequel disappointed over the weekend, is also having a rough Tuesday; her StarBond is down a buck.
The Foresight Exchange Prediction Market allows traders to bet on the likelihood of a range of events, from the resignation of Donald Rumsfeld by October to a devastating earthquake in the western United States by 2010. (A celebrity version of the Foresight Exchange is Long Bets, where pundits are encouraged to lay down a few thousand bucks on such outré prophecies as whether there’ll be a four-day work week in the year 2070.)
If you ever had trouble making sense of the blogosphere, Blogshares may help separate the wheat from the chaff. No money’s exchanged on this market—though there is a $500 contest taking place right now—but it does give bloggers bragging rights as to the popularity of their daily thoughts among Web surfers. Curiously, Slateresident blog “Kausfiles” doesn’t appear to be listed on the exchange. Explainer eagerly awaits the IPO.
Bonus Explainer: At first glance, the trading of weather derivatives on the Chicago Mercantile Exchange may seem like a prediction market of sorts—after all, weather forecasting seems ripe for such wagering. But these investors are using the market to hedge their bets, not to get rich off hunches about upcoming weather. For example, an energy company that craves a long, hot summer in a certain city—the better for folks to run their air conditioners incessantly—will manage risk by purchasing futures that predict a cooler than anticipated summer. That way, they won’t get burned so badly if Mother Nature doesn’t comply. Since these investors are interested parties whose betting strategies are designed solely to manage risk, the weather derivatives market isn’t a classic predictions market.