By Rick Montgomery

KANSAS CITY, Mo. – Know-it-all bets once confined to barrooms – “Joe, 10 bucks says Al Gore wins the Nobel Peace Prize” – are gaining respectability in boardrooms, classrooms and political chat rooms.

It isn’t that Joe or his buddies know so much about world affairs. But multiply Joe by tens of thousands of people willing to wager on the future and you’ve got the stuff that drives stoc k exchanges.

Online trading on “futures contracts” for Gore to win the prize climbed all last week. He was the odds-on favorite by Friday, when armchair investors cashed in on news that the former vice president was, in fact, chosen.

Call it crowd wisdom bundled on the Internet, spawning a futures market – or an electronic craps table – for news junkies.

Web operations such as Intrade, HedgeStreet and the university-run, U.S.-approved Iowa Electronic Markets allow traders to invest real money in hopes of divining the outcomes of elections, international conflicts, flu scares and even weather patterns.

These predictions can be stunningly accurate.

The weekend before Attorney General Alberto Gonzales announced his resignation, bizarre trading struck Ireland-based Intrade.com, the Wall Street of prediction markets.

Though Gonzales’ plans were kept secret from the public, bids that he would resign before October mysteriously tripled in value.

“I’m looking at it thinking, “What’s going on with Gonzales?”‘ said John Delaney, Intrade’s chief executive officer. “No news was out, but somebody had information.”

By the time Gonzales made it official Aug. 27, the futures contract on his quitting reached $9.99. (Each contract paid $10 to those predicting his exit; the holder of 50 contracts collected $500.)

“Sometimes,” said Delaney, “the markets can suck out information that may not be in the public domain” except for an obscure blog or rumors blabbed at a diner.

In the case of Gonzales, a small item on U.S. News and World Report’s Web site blabbed that “the buzz among top Bushies” was that the attorney general was going.

The concept of futures contracts is hardly new. Commodities brokers have long bet on the future prices of crude and pork bellies.

But the science of predicting important events gained traction with James Surowiecki’s 2004 best-seller “The Wisdom of Crowds,” to wit: A large group of people – especially those who are willing to put up or shut up – does a better job sizing up situations than any one person.

Unlike casinos that function as “the house” getting rich off your losses, companies such as Intrade and HedgeStreet Inc. profit by charging a percentage fee for each transaction.

California-based HedgeStreet allows traders to buy and sell “event derivatives” on future gasoline prices and home values. The practice won the approval of the Commodity Futures Trading Commission for providing a modest but useful hedge against economic risks that people face in their everyday lives.

On the other hand, U.S. regulators in 2005 fined Intrade $150,000 for trading on events that were too close to the real world of futures markets – like predicting the price of light sweet crude oil at year’s end.

With 72,000 enrolled traders worldwide, Intrade offers thousands of contracts each week:

For about $1.70, you can buy one contract that will pay $10 if the United States or Israel executes an air strike on Iran before April 2008.

You can wager that Hillary Clinton wins the presidency for a current price of $4.70 per contract – the market’s way of saying she has a 47 percent chance of reaching the White House.

Mitt Romney winning the GOP nomination – $2.45. John McCain dropping out – $1.50.

“Right now, I’m selling Hillary because it’s moved up to what I think is a high value,” Intrade trader John Murray, a self-employed commodities broker in New Jersey, said when the contract price for Clinton taking the Democratic nomination reached $6.60.

How does all this trading benefit the rest of us?

To advocates such as business professor Justin Wolfers, people can better plan their lives, their purchases and their businesses by knowing how much investors are willing to wager that, for example, mortgage rates drop.

“It’s an empirical question, not a theoretical one: Does the market do better than polls or pundits in predicting outcomes? The short answer is yes,” said Wolfers, of the University of Pennsylvania’s Wharton School.

Federal rules on commodities trading, plus laws on Internet gambling, prevent most U.S.-based prediction markets from dealing in real money.

So the bidding is free at NewsFutures.com, where traders can “channel your gambling instinct without losing your shirt,” the site teases.

Traders on MediaPredict.com, also using play money, invest in the success or failure of entertainment offerings. For the recent opening weekend of the film “Halloween,” participants who acquired shares at a pretend $15 each, for example, stood to collect a pretend $39 per share if the movie grossed a real $39 million.

Or lose the investment if the movie bombs. They play for pride: Top traders get listed on the site.

Corporations are testing the predictive waters even at the risk of compromising the decisions of their staffs. The publisher Simon & Schuster recently said it was teaming with Media Predict to float book proposals online.

Critics called it a putting a fancy form of focus-grouping above professional literary judgment.

For 15 years the Commodity Futures Trading Commission has allowed a real-money exchange to operate out of the University of Iowa. The government regards the nonprofit Iowa Electronic Markets as a research and teaching tool.

An investor’s opening account can’t exceed $500, but the Iowa markets director, Joyce Berg, said that “we’ve had people triple their money” through timely trades. The project has correctly picked presidential nominees and winners since 1988.

The Hurricane Futures Market at the University of Miami allows weather researchers and students to invest up to $500 on predicting where and when a storm hits land.

University of Kansas political science professor Burdett Loomis encourages students to trade in the prediction markets to learn the ebb and flow of campaigns and public policy.

“There’s insider information everywhere,” Loomis said. “And if you’re in it for a couple hundred dollars, you play to win. You pay attention.”

While prediction markets like to claim they are more reliable than public opinion polls, Frank Newport of the Gallup Poll noted that many traders rely on polls to place their bets.

“I see no reason why these markets would supplant the polling industry,” which recently has struggled to reach respondents on landline phones, Newport said.

Intrade trader Murray sees a day when people could make a living off news futures.

“I used to trade in cotton futures without even laying eyes on a bale of cotton,” he said. “Whether it’s commodities or politics, it’s all risk/reward in the end.”

(c) 2007, The Kansas City Star.

Visit The Star Web edition on the World Wide Web at http://www.kansascity.com.

Distributed by McClatchy-Tribune Information Services.

AP-NY-10-17-07 0618EDT


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