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On the Threshold of Elections Comments

Kelly Summers   |   February 26, 2008
Today, everybody�s attention is directed at both the ill economy and political events. As the presidential elections are approaching, we discuss possible winners. Being politically intelligent is quite worthy especially when debaters are able to make money on their beliefs.

It was the year of 1880 when the first political prediction market was launched. Participants could make bets and make money if their candidate won the election. Today, there is only one place for political predictions. It is located in the United States and called The Iowa Electronic Markets (IEM). IEM is a real-money futures market in which contract payoffs depend on world economic and political events. It is operated by the University of Iowa Tippie College of Business as an educational and research project.

The IEM operates 24-hours a day using a double-auction trading mechanism. Traders invest their own money, make trades and conduct their own research. You may wonder how it is possible to trade predictions. Well, it is. You can offer for sale an obligation which pays out $1 in case if let�s say the Democrats win the presidential election. Suppose, the ask price of the obligation is $0.43, the seller then estimates the odds of outcome of the upcoming event. In this case, it is estimated at 43%. Those who think this assessment is too low will want to buy the obligation. Accordingly, the probability of them getting $1 is 57 percent, i.e. estimated profit from owning this obligation is $0.57. Now look at the chart. Investors believe that a Democratic candidate is more likely to win the 2008 presidential election.

Political prediction traders have equal opportunities with the stock market traders. They can place market orders (immediate execution of the transaction at the current market price) and limit orders (a buy or sale of specified quantities at specified prices within specified periods). The market information available to traders includes the best bid and ask price, as well as last trade price.

The figure illustrates a IEM trading screen. The top table shows the current market, contracts, bids, asks, last trade prices and number of outstanding stock. The intermediate menu allows a trader to place orders and execute transactions. The bottom menu gives a trader access to other menus.

IEM is operated from the college computers. However, it can be accessed from any computer via any web browser (Netscape, Internet Explorer or AOL). However, you need to create a personal account and pay commission to your market-maker before you start trading.
IEM is not limited to political predictions only. There are also economical markets and classroom markets, designed specifically for academic traders only.
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