Monday, February 4, 2008

The Iowa Electronic Markets

The Iowa Electronic Markets are the granddaddy of political futures markets. A "futures market" is "an auction market in which participants buy and sell commodity/future contracts for delivery on a specified future date. Trading is carried on through open yelling and hand signals in a trading pit." For the IEM, trades are done electronically instead of in a live pit. The commodity for sale are the political candidates. And the market is the race for the democratic nomination.

For IEM, the future's market is "winner take all." So, if you bet the winning candidate, you win $1 per share (you can't purchase a share for over $1 as, logically, it would make the investment an automatic loser). If you lose, you get nothing. So, if some one were to purchase a share of John Edwards for $0.10, and Edwards to end up the nominee, they would get $1.00, thus netting a handsome $.90 per share. If you had bet against Edwards, no matter what you originally bet, you wouldn't get nothing, thus losing your entire investment.

The IEM is an important tool at measuring the nominee race because it is fairly accurate at predicting outcomes. has a pretty good explanation, but the general idea is also described by Russ Ray, Ph. D., of Risk Management magazine. He explains that "predication markets are able to flush out information that otherwise would not be available. Individuals around the world have different tidbits of inside information, and they know that using such information can enable them to earn a profit. Prediction markets are able to quickly and and successfully aggregate such information as no other mechanism can.

Through out the course of the next few months, Citizen Kendrick will be giving you updates not only on the democratic nominee markets, but eventually the presidential markets. So, stay tuned, and happy trading!

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