Thursday, July 05, 2007

Putting Money on It

Do you value your opinions enough to bet your own money on it?

If you do, then you might want to check out something that I discovered today called prediction markets.

A prediction market is a lot like the stock market except instead of putting your money on which stocks will perform the best, you can put your money where your mouth is and help predict who will win the 2008 Presidential Election.

It is an exiting idea that, frankly, has majorly distracted me from making a Photo Story CD for my parents' fiftieth anniversary--sorry Mom, Dad, I will get it done, I promise.

Not only can you invest in the future as it pertains to elections, but you can wager on whether Osama Bin Laden will be captured, speculate on how many Atlantic hurricanes their will be this season, put money on who will win the World Series, or cast your vote on whether we will see a recession before 2007 is out.

Not only do prediction markets afford you the opportunity to make money off the accuracy of your convictions, but they are also very good sources for predicting actual future events. It doesn't take much of a web search to find out that prediction markets are no worse (and often better) than polls in picking winners in elections.

Right now I am playing with fake money on TradeSports which allows you to put your wisdom and the wisdom of the masses to the test in predicting the outcome of sporting events. I "bought" 10 contracts at a price of 69 before the Florida/San Diego MLB game started today.

What that means is that at that point in time, 69 percent of the speculators thought the Padres would win. As the game went on, the number fluctuated just like in the stock market. I could have sold my contract for 71 at one point and earned a profit. As the Padres fell behind, the going rate was 17 and I could have bought at that price if I was convinced that it would later rise with a Padre comeback.

If the Padres had won the game (they didn't), the price would have been 100. At the price I purchased (69), I would have made 31 points, with each point being worth 10 cents. I would have won $3.10 times the number of contracts (like shares) I had purchased. Since the Padres lost, I lost $6.90 times the number of contracts I purchased.

Whatever prediction one puts one's money on--what level the Dow Jones hits this year, who will be the first Republican to drop out of the race, etc.--the contract has a time when it is over. If the prediction comes true, the final price is 100. If it doesn't come true, the price is 0.

I don't know that I will ever do this for real money (it's highly doubtful), but the sheer predictive power of these markets makes me want to watch. Right now Hilary Clinton is trading at 24 and Rudy Guiliani is second, trading at 18. This means that the market feels the chances are 24 percent that Hilary will be president in 2008.

If you have never heard of TradeSports or InTrade (which accepts contracts for non-sporting predictions), I suggest you check it out.

I bet you find it interesting.

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