In late March 1988 three economists from the University of Iowa were nursing beers at a local hangout in Iowa City, when conversation turned to the news of the day. Jesse Jackson had captured 55 percent of the votes in the Michigan Democratic caucuses, an outcome that the polls had failed to intimate. The ensuing grumbling about the unreliability of polls sparked the germ of an idea. At the time, experimental economics—in which economic theory is tested by observing the behavior of groups, usually in a classroom setting—had just come into vogue, which prompted the three drinking partners to deliberate about whether a market might do better than the polls.

A market in political candidates would serve as a novel way to test an economic theory asserting that all information about a security is reflected in its price. For a stock or other financial security, the price summarizes, among other things, what traders know about the factors influencing whether a company will achieve its profit goals in the coming quarter or whether sales may plummet. Instead of recruiting students to imitate “buyers” or “sellers” of goods and services, as in other economics experiments, participants in this election market would trade contracts that would provide payoffs depending on what percentage of the vote George H. W. Bush, Michael Dukakis or other candidates received.

4 Comments

1. 1. John_Toradze 11:38 PM 2/4/08

   Killing the Darpa project was just stupid. Sorry, Barbara, I like you, but that was equivalent to saying that study of human disease is sick.

   Reply | Report Abuse | Link to this

2. 2. loafer 01:32 AM 2/6/08

   The true horror of DARPA is as follows: Those who are ill informed would loss money. This would likely inspire them to seek more accurate information in order to recoup their losses; by seek more factual news sources they would acquire a more realistic world view. Receiving financial rewards for being well versed in world affairs would lead to a politically active citizenry who would hold their representatives accountable for their in/actions. Cable news networks would be bankrupted, politicians would live to serve their constituents, and pigs would grow wings. Luckily those in office killed DARPA thus preventing a repeat of the Swine Flu Massacre of the 70s.

   Reply | Report Abuse | Link to this

3. 3. mikeplacona 02:58 PM 2/7/08

   One question come to mind: what would be the outcome of predictions from polls if polling samples were representative of market traders?

   Reply | Report Abuse | Link to this

4. 4. johnsorflaten 09:36 PM 3/4/08

   I visited the IEM offices at the U of Iowa soon after the DARPA hullabaloo. The professor there (who I don't remember) made an important point. Namely, that the members of the market join the market based on their specialized knowledge of that market. For the DARPA scenario, then, people making the market would have some knowledge about the terrorist detection process. (Obviously, terrorists would probably not join for fear of giving away their identities--even though they would be excellent candidates. However, recall that *someone* shorted stocks on the afflicted 9/11 airlines--we still haven't heard *who*. Why? THAT was a market move!)
   
   The whole point, I heard in that IEM office, was to tap into knowledge that might give one person special insight into "the system"--such that the special knowledge would be reflected in "the market". It's simple. It makes sense. But the press totally failed to report that members of the market must have knowledge of the market. Pot shot plays on the market mean zilch, thus, exclude them. The press failed us all on this one. The 4th estate needs help not only on this issue, but on a lot of topics.
   
   --
   Edited by johnsorflaten at 03/04/2008 1:58 PM
   
   --
   Edited by johnsorflaten at 03/04/2008 2:05 PM

   Reply | Report Abuse | Link to this