June 14, 2007 | Popular ScienceA prediction market is like a stock exchange, except people trade not stocks but predictions. The first and most famous prediction market, established at the UNIVERSITY OF IOWA business school in 1988, was designed to forecast the outcome of that year's presidential election -- which it did, with remarkable precision. Anyone could join the market and buy or sell propositions such as "What percent of the popular vote will George H.W. Bush receive in the presidential election?" Traders who thought Bush would get 60 percent or more of the vote would buy the shares if they were less than $60. Traders who disagreed would sell. The market price reflected the consensus view, which turned out to be more accurate than any of the six polls released in the week before the election. But if predicting a landslide Bush I victory over Michael Dukakis seems like fish-in-a-barrel stuff, consider that the Iowa Electronic Markets have correctly predicted the winner of the popular vote in every national election since then, and with greater accuracy than the Gallup poll in all but one of those years.
Contact: Forrest Nelson