Stock market game may predict eco disasters 
by Rachel Nowak, Melbourne 
New Scientist issue 2686. 
10 December 2008 

STOCK markets could forecast the availability of water more accurately than the best computer models used by environmental scientists. That's the idea behind the launch of an online market which invites "traders" to gamble on future water levels in dams in Australia.

The Australian Knowledge Exchange works by giving traders A$100,000 (US$65,000) play money and 1000 stocks in each of five reservoirs in New South Wales. The stocks pay out each month according to the level of the dam. If the dam is full, they are worth $100. Traders can profit by buying stocks for less than their final value, or by selling them for more.

The online market is the brainchild of a team from the government agency CSIRO Sustainable Ecosystems in Canberra, Australia, and the University of Karlsruhe, Germany.

If the market proves to be a better predictor of water levels than existing computer models, says CSIRO's Stuart Whitten, it could help manage other environmental issues such as animal extinctions and bushfires. Their ultimate goal is ambitious: for online markets to influence the government's environmental policy.

"This approach has huge potential in the environmental sector where there is a lot of uncertainty," says Josh Donlan of Cornell University in Ithaca, New York, and Advanced Conservation Strategies, a Utah-based NGO.

The incentives are clearly not monetary - the trader who does best wins a paltry A$50 - but Whitten hopes people will be drawn to take part in what is a "public good" enterprise, much like Wikipedia. Although anyone can become a trader, the team's ideal players would be farmers, weather forecasters, people who live close to reservoirs, and computer modellers. The market currently has about 50 traders, and the team hope at least 50 more will join.

Donlan says the market's real value will come from the wide-ranging knowledge of investors. For example, when it comes to biodiversity, rather than rely solely on the IUCN Red List of Threatened Species, which may not account for all regional variations, markets that capture local knowledge could give a more accurate prediction of the size of bird populations, say.

But economist Robin Hanson of George Mason University in Virginia cautions that while predictive markets can be more precise than other methods: "Ultimately, it's not about accuracy, it's about public acceptance."