Nelson: Markets Good at Aggregating Information
September 8, 2003 | Chicago BusinessA story about terrorism futures markets says the general public has shown some interest in applying futures-trading concepts to non-financial markets like sports and elections. TradeSports.com, an Irish exchange, allows visitors to place contracts on sporting events. The 15,000 traders registered with the Iowa Electronic Markets, run by the University of Iowa's Tippie College of Business, trade positions on national political races and high-profile local elections, like the California recall vote. (Actor Arnold Schwarzenegger is the early favorite, in light trading.) Iowa's political exchange consistently outperforms public opinion polls in predicting election outcomes, including those in 2000. The system's average margin of error is a slim 1.5 percent, vs. the 2.25 percent-to-2.5 percent margin that's typical for polled results. "Markets aggregate information; they're really good at that," says FORREST NELSON, a professor of economics at the University of Iowa. "Different people have different beliefs. Let them trade away, and what emerges is a single price, which is the average aggregated belief of all traders."
Contact: Forrest Nelson