Foretelling the Future: Online Prediction Markets

May 9, 2008 — -- Who will win the Democratic nomination? Who will be the next president? When might Britney Spears go back to rehab? And who will be the next "American Idol"?

Don't look for guidance from TV pundits or gossip magazines. Instead, go to the Web site where people are putting their money where their mouths are: Intrade.com.

Intrade is a futures market, just like commodities markets where people make trades betting on the future prices of things like oil, gold and pork bellies. On Intrade, thousands of people bet on the outcomes of current events.

Here's how it works: If you're convinced that Hillary Clinton is headed for the White House, you can log onto Intrade.com and buy shares betting that she'll get the Democratic nomination. Right now, her share price is low, around 10 cents, because many think it's unlikely she'll be nominated. But if things start looking up for Clinton, more people will buy her shares, and the price of each share will rise. If she actually gets the nomination, each share will be worth a dollar and you will have made a hefty return on your investment.

Bethan and her husband, Jonathan, are political junkies. They talk about politics day in and day out, so when they heard about Intrade, they figured that their political knowledge must be worth something.

"When I found out that we could actually trade on politics, it was like 'What? Why have we been investing in stocks all along?'" Bethan said. "I said to my husband, 'We spend three hours a day talking about politics, we should be able to use this to our advantage.'"

In the fall, John McCain's presidential campaign was running out of money and pundits were saying he'd drop out of the race. His share price on Intrade plummeted to less than 5 cents. If McCain somehow got the nomination, those same McCain shares would be worth a dollar. As Bethan and Jonathan watched a Republican debate in September, they saw a "new confidence" in McCain, and an opportunity to make money.

"Everyone was unloading their shares of McCain on Intrade. But we saw something else in the debate," said Bethan.