September 26, 2005
Markets as Forecasters
I have always been a big fan of the Iowa Electronic Markets, trading markets that predict the outcomes of major elections in the United States. Traders buy and sell futures in various candidates for real returns and the market prices predict the eventual outcome. The past presidential markets started with the primaries and ended with the final election; it was more accurate at any given time than the many political polls. It is one thing to play games with pollsters; it is quite another to bet your money on your beliefs. Between elections, Iowa offers markets in other things. At present there is a market predicting the moves of the Fed (even money on whether the Fed target rate goes up or stays the same next month).
Google has created a similar market in house, with its employees. The system accepts bets in 10 cent increments up to a dollar in "parlor money." Something priced at 50 cent reflects a 50 percent likelihood that an event will happen. The Iowa market is more sophisticated, using true market futures with real money (you pay for getting $1.00 if you projection is correct). The Google market is broader the the Iowa market, including the weather, and narrower, including projections on Google specific events (office openings and product introductions). They are having a great time with their market and it is useful for making internal company decisions.
Will all large companies soon have one??
Postscript: John Roberts McDonald writes to remind me that there is a book on markets as forecasters: James Surowiecki, "The Wisdom of Crowds"
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