They're betting their futures on politics

WASHINGTON -- Polls show the race for the White House is a dead heat, but among speculators willing to back up their predictions with cash, President Bush is down 20 points since December.

That's the trend line on Intrade.com, an Internet political futures market that thousands of traders are logging on to every day to bet real money on the outcome of the presidential race, the vice presidential sweepstakes and other future political events.

The wagering may seem to belong to the world of bookies and gamblers. But economists and other experts say futures markets are more reliable than polls at predicting the future by drawing together the intelligence, information and intuition of thousands of people willing to place a value on the outcome of a future event.

"The thing about these prediction markets is that they develop a price to tell us about the future," said Justin Wolfers, an economics professor at Stanford University. "Ultimately, the price reflects your information about the candidates as much as it aggregates all of the other traders' information. It produces numbers that can be more accurate than any poll."

The Irish-based market, the only commercial forum trading in political futures, opened for business two and a half years ago and says it has 32,000 traders from around the world. More than $500 million has changed hands, the company says.

Another online market run by the University of Iowa since 1988 pioneered the idea of applying futures trading to politics. The not-for-profit Iowa Electronic Markets, designed as a research tool for students and professors, has been more reliable at predicting presidential voting then most polls, particularly in the final weeks.

The maximum trade on the Iowa market is $500, but is unlimited on Intrade.com.

Mike Knesevitch, a partner in Intrade.com and former hedge fund manager and trader, said futures trading takes the passion and partisanship out of the calculus. Traders are not asked who they want to win or who they'll vote for, but who they think will win the election. They're required to back up their predictions with cash.

"Our data have been much more valuable in predicting outcomes of events like this than any poll in which people are simply asked their opinions on the telephone," he said.

Cliff Zukin, director of The Star-Ledger/Eagleton-Rutgers Poll and the incoming president of the American Association for Public Opinion Research, said using futures markets to predict election outcomes can be legitimate, thanks to the polls.

"Remember, a market is driven in large measure by public opinion data, so polling is certainly a big part of what moves a market like that," Zukin said.

The idea of using markets to predict the future caused controversy last year when the Pentagon's Defense Advanced Research Projects Agency, under the leadership of former Admiral John Poindexter, suggested establishing a market to allow people to wager on geo-political events.

The point was to use the collected data as a means of predicting future events, including terrorist attacks. The project was killed when outraged lawmakers got wind of it, calling the idea of government-sanctioned betting on such propositions as the assassination of Palestinian leader Yasser Arafat ghoulish and a waste of money.

Robin Hanson, a professor of economics at George Mason University who helped to design the Pentagon's market, said the idea was to tap the predictive properties of futures trading, not to make book on the potential for terror attacks.

"Most markets are intended to hedge risk or to entertain ordinary people who want to bet on events. A side effect is this information. There are topics we'd like more information on, (so why not) create a market that does this," Hanson said.

Intrade.com's data is being put to use by investors in other markets, too. If Bush is re-elected, for example, his victory will have predictable impacts on a range of economic factors, from the direction of the stock market to interest rates.

"The financial community wants information like this, more and more. It's another piece of the puzzle for people who are devising investment strategies," said Intrade.com's Knesevitch.

On Intrade.com, traders buy contracts valued in points on the outcome of a future event that will have a definitive result. Each point is worth 10 cents; each contract is worth 100 points. The company charges a commission of 4 cents per contract.

Here's how it works: Say you believe President Bush will win re-election and his re-election contract is trading at 55. The price means traders are giving him a 55 percent chance of winning again. If he does, the contract will close at the maximum value of 100, for a profit of 45 points, or $4.50. If he loses, the contract would close at 0, for a loss of 55 points, or $5.50.

One way futures trading differs from making a bet with a casino or bookie is that traders can sell their positions at any time as if they were stocks.

There already have been plenty of winners and losers on the 2004 election.

Last fall, as former Vermont Gov. Howard Dean's candidacy for the Democratic Party's nomination was cresting, shares in the likelihood that he would be the nominee were selling at 70. They dropped drastically as he lost in Iowa and New Hampshire and are now virtually worthless. Shares for Massachusetts Sen. John Kerry, selling at 2 last fall, are almost certain to pay out at 100.

As an Irish company, Intrade is not subject to U.S. law. The federal government has no regulation against such markets, though the Commodities Futures Trading Commission is looking at them.

Is it gambling? Well, yes, Knesevitch said, just as speculators in any commodities or stock market are gambling.

As a commodities trader, he said, "not one day went by when I didn't know I was betting, that I was gambling. This is no different."