KOBE TO CORN, MARKETS CAN OFTEN PREDICT FUTURE EVENTS

Rob Reuteman ROCKY MOUNTAIN NEWS

23 August 2003
Rocky Mountain News
2C

As of late Thursday afternoon, 247 futures contracts had been purchased by 
people betting on Kobe Bryant's guilt or innocence. The contracts, which 
expire Feb. 9, were purchased at prices ranging from $33 to $67.

At this point, the possible payoff is anyone's guess, but those betting 
against his guilt slightly outnumber those betting for it.

These contracts were purchased on Tradesports, a Dublin, Ireland- based 
Internet futures market backed by the Allied Irish Bank, that country's 
largest financial institution.

Tradesports also offers contracts on every California recall scenario or 
what month weapons of mass destruction might be found in Iraq. You can put 
your money on which month there might be a "conclusion" with respect to 
Saddam Hussein or Osama Bin Laden.

Several weeks ago, public outrage quashed a Pentagon plan to create an 
online futures market allowing people to place bets on the odds of economic, 
military or terrorist events in eight Middle Eastern countries. The 
Pentagon's rationale was that futures markets have proved to be accurate 
forecasting tools.

Newsweek called the project "politically tone-deaf." The Economist wrote, 
"No matter how good markets are at predicting the future, their sponsors 
have done a lousy job of predicting public distaste for such morbid games."

You may find it morally repugnant for your government to sponsor any of 
these things, but the fact is you already can profit on the probability of 
any of these future events. Such intelligence can already be gleaned.

The two main purveyors of "current events futures contracts" are the 
aforementioned Tradesports.com and NewsFutures.com. Maryland- based 
NewsFutures offers trading on the prospects of Democratic nominees for 
president in 2004, Saddam or bin Laden, or of Sharon outlasting Arafat. You 
can even take out a contract on whether J-Lo and Ben Affleck will marry 
before Demi Moore.

Here's how it works. Most of the contracts are issued on a "0- 100" basis. 
Let's say the current trading price for a contract on Kobe's guilt is $33. 
If your desired outcome occurs, each contract you bought at $33 will have 
earned $67.

While any outcome is undecided, supply and demand determine the contract 
price. When the outcome is known, winning contracts are cashed in and losing 
contracts are worthless. As NewsFutures' Web site explains: "All 
transactions take place directly among traders. When you buy a contract, it 
is because another player has sold it to you. When you sell a contract, it 
is because another player has bought it from you."

The other day I spoke with John Delaney, chief executive of Tradesports.

"Exchanges are the best aggregate of information that exist, better than 
opinion polls," he said. "Too many biases can surface in opinion polling. In 
futures trading, before you place a bet or answer a question, you put your 
money where your mouth is. There is a due diligence process in your own mind 
before you answer. When you've got a financial interest in the outcome, you 
tend to have a slightly different opinion."

Tradesports is 2 years old and growing at about 18 percent a month, Delaney 
said.

"People have been trading on misery and misfortune forever," he said. "Look 
at those buying defense stocks during the Gulf War. Risks come to the fore 
in the economy all the time.

"In 1922, when Congress first regulated the corn exchange, one congressman 
charged, 'We're legalizing corn gambling!' Another said, 'No, farmers will 
starve if we don't allow them to hedge their bets.' "

No one is suggesting that anyone will starve over the outcome of Kobe 
Bryant's trial, or any other of these news events. But the principles remain 
the same, and the "intelligence" quotient remains a byproduct of the 
profiteering.

"There is some amazing evidence to support markets as predictors of future 
events," Vernon Smith, the 2002 winner of the Nobel Memorial Prize in 
Economic Sciences, told Newsweek, adding that it is ridiculous to dismiss 
ideas like terror-futures markets out of hand.

The granddaddy of these is the Iowa Election Markets, conducted by the 
University of Iowa since 1988. IEM has conducted 49 markets covering 41 
elections in 13 countries. By scrutinizing the habits of investors, it 
consistently bested pollsters. Its record initially triggered the interest 
of the Pentagon.

"The Department of Defense was trying to extract information, glean a little 
intelligence to fight against terrorism," said Delaney. "Those are the 
things you need every grain of intelligence about."

I certainly don't care to profit or glean any intelligence on Kobe or J-Lo 
or Arnold or even Saddam. But for those who do, there's a brave new world 
out there, like it or not.

reutemanr@RockyMountainNews.com or 303-892-5177 COLUMN BUSINESS TALK