The Iowa Electronic Markets allow anyone with an Internet connection and $5, even a trader in Dhaka or Novosibirsk, to buy and sell securities in elections. The example here depicts, in simplified form, how a market run during the 2004 presidential election operated.
Credits: SAMUEL VELASCO 5w Infographics, WITH ILLUSTRATION ASSISTANCE BY JOHN O. LEDYARD California Institute of Technology
How to Trade for President
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THE PAYOUT IEM pays $0.98 for Joe's two Kerry contracts ($0.49 * 2). Joe loses money. After subtracting the net cost of $1 from the payout, Joe has a net loss of $0.02. SAMUEL VELASCO 5w Infographics, WITH ILLUSTRATION ASSISTANCE BY JOHN O. LEDYARD California Institute of Technology
THE BIG MOMENT If Kerry did get the expected 60 percent, Joe's holding would be worth $1.20 ($0.60 * 2), netting him $0.20 above the $1 he spent. But tallies (rounded off) show Bush wins. SAMUEL VELASCO 5w Infographics, WITH ILLUSTRATION ASSISTANCE BY JOHN O. LEDYARD California Institute of Technology
JOE'S REASONING Joe looks at the prices on the IEM and decides that they are out of line with what they should be. Kerry's chances of winning mean that his contract should be priced higher than Bush's. SAMUEL VELASCO 5w Infographics, WITH ILLUSTRATION ASSISTANCE BY JOHN O. LEDYARD California Institute of Technology
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BUYING A PORTFOLIO IEM sells an individual portfolio for $1 each, which consists of one contract for both candidates. Joe Citizen decides to buy a portfolio. SAMUEL VELASCO 5w Infographics, WITH ILLUSTRATION ASSISTANCE BY JOHN O. LEDYARD California Institute of Technology
MARKET OPENS Trading has just begun on the Iowa Electronic Markets with futures contracts that will provide payoffs based on a percentage of the vote a candidate receives. SAMUEL VELASCO 5w Infographics, WITH ILLUSTRATION ASSISTANCE BY JOHN O. LEDYARD California Institute of Technology
