Now here's a fascinating gambling experiment: the University of Iowa's political futures trading market, set up just like the big commodity markets. It's for real, too, since you buy real shares for real money. It's obviously set up to skirt around anti-gambling laws, but it's certainly fascinating.
In the 2004 Democratic National Convention market, there are shares in all the major candidates being traded, including the not-even-running Hillary Clinton, whereas the minor candidates are all trading in one lump as "other," unless one of them emergeces from the pack and warrants a split. You can see the current trading quotes here.
There's also a market for the 2004 general election, but here they're being tricky: you can't just buy shares in Bush. You can buy shares in any one Democratic candidate, or, you can buy shares in Bush beating a certain candidate. Thus you either pick Dean to win, or you pick Bush beats Dean, Kerry to win, or Bush beating Kerry. Obviously the market will consolidate after the Democratic nominee is announced, but you can see current quotes here, where Bush beating Dean is currently the most highly-priced share, but not by much ahead of Dean winning.
These folks have obviously been at this for a while, since they've got an academic paper, with figures showing the market's results--and its prediction accuracy--going back for over a dozen years. They claim to outperform the major polling services most of the time.
There was some flap earlier this year when some folks in the Pentagon tried to set up a trading game like this one to predict future terrorist attacks. Theory was that if certain items started trading high, this would be a good indicator of where counterterrorism measures needed to be hardened. Of course, then the press got wind of it, ethical questions were raised, and before it even got off the ground it was quickly canned.
That seems too bad to me. Statistically, this seems like a highly useful predictive tool. You'd have to structure it in such a way as to avoid certain types of conflict of interest, that's for sure.
(Thanks to Ted Armstrong for pointing this out to me.)
TradeSports, at www.tradesports.com, has a similar bookmaking setup, although it seems to be limited to the Democratic Presidential Primary on the politics side at the moment. During the runup to the California Recall election, they had that race going as well.
The morning of the California recall, when the papers were reporting too-close-call, and Davis and Arnold both claimed to have favorable internal polling, Arnold shares at TradeSports.com were going for 94, Davis shares for 7.
The people who risk real money don't fall for the dramatist journalism.
The terror market will come back, because it's needed and it will work.
Speaking of the terror market, I've always wondered why TradeSports or some other gambling site didn't do it. The furor was directed at the Pentagon establishing a market to gamble on American's lives.
If a commercial website ran it, the government could track the market, the website would enjoy the certain publicity. If I had a gambling website -- I'd be top page news tomorrow.
The problem with the pentagon scheme (and the market generally) is that while it tends towards accuracy in the long term, it fluctuates wildly in the long term. In the long term, Enron is being traded at about what it should be for a company that produces nothing and scams its clients. The market utterly failed to predict Enron.
The reason is asymmetric information. Those who knew about the bad business practices of Enron had a vested interest in keeping the rest of us in the dark. In the same way, those who know which buildings are likely terrorist targets (terrorists) have a vested interest in keeping silent. After all, who would have predicted the Okalahoma city bombing before it happened?
The Political market, on the other wrist, is a good idea. People eligible to invest have no better information than the general public. The results, therefore, are likely to be fairly accurate.
Another objection to the "terror market" idea is the unspoken assumption that the participants' main objective is personal profit through trading.
What if one, or more, terror groups decided to do some judicious trading to skew the market? The utility of the market as a predictive tool is shot to hell right there.