Hedging Your Bets on Current Events

The chance Vice President Dick Cheney resigns during his second term? Three percent. The chance Democrats retain control of the Senate after this year's elections? Ninety-one percent. The chance gas prices hit $4 per gallon before July 1? Thirty-three percent. Or so the traders at NewsFutures think.

NewsFutures.com is an Internet-based news prediction market that operates much like the stock market. Using a fake currency called X$, participants buy and sell shares at prices ranging from X$1 to X$100 in events like "the Dow will rise on 4/2" or "the Boston Celtics will win the Eastern Conference title." These contracts are sold alongside shares for the opposite outcomes. If the event occurs, the shareholder receives X$100 for each share.

The trading price of each share represents the probability traders collectively assign to the event occurring. If "President Bush will pardon Scooter Libby" is trading at X$73, for instance, it means participants believe there is a 73 percent chance the president will pardon Cheney's former chief of staff for his perjury conviction.

NewsFutures creator Emile Servan-Schreiber believes that prediction markets like his are the "future of journalism."

"It gives people the news of today and lets them give you the news of tomorrow in a probabilistic fashion by asking them to take bets on what is going to happen," Servan-Schreiber said.

Servan-Schreiber founded News Futures Inc. — the parent company of the NewsFutures exchange — in 2000. The site now operates in the United States, France and Hungary. Its several thousand active traders generate millions of hits each month.

Servan-Schreiber believes his Web site fills a void in online media. Before NewsFutures was founded, "the media Web sites were just dumping their regular content on the Web in a non-interactive way," he said.

Servan-Schreiber thinks that NewsFutures provides this interaction, although it's not the first to utilize idea markets.

The Birth of Idea Markets

Robin Hanson, a George Mason University assistant professor of economics, is largely credited with pioneering the concept of "idea markets." Hanson envisioned them as exchanges where scientists staked money on the validity of new theories. He hoped the markets would help scientists build a consensus around new theories based on their merits, rather than whether the ideas were trendy.

Hanson first publicized idea markets in the 1990s and, since then, a number of groups have integrated them into their operations. Many businesses use prediction markets to forecast the price of raw materials or gauge their employees' expectations of product delays.

In fact, NewsFutures sells forecasting market technology to companies such as Pfizer, Frito Lay, Renault, Arcelor and Siemens. According to Business Week, Yahoo also used an internal prediction market in 2006 to assess the worthiness of new products and services that employees suggested.

Prediction markets have also been applied outside the business world. In 2003, the U.S. government even launched its own abortive market, the Policy Analysis Market (PAM).

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