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In the USA, Predictive Market Pioneer Is More Accurate Than Surveys

The University of Iowa in the United States, pioneered predictive markets, the Iowa Electronic Markets create (Iowa Electronic Markets, or IEM, its acronym in English) in 1988, a presidential election year in that country.

Conceived as a research and teaching tool, the IEM allows students to invest in different markets—especially political markets where you can buy or sell "shares" of candidates or parties, betting on who will win the elections.

"We realized from the beginning that the results were more accurate than those of most research," he told BBC Brazil EMI director, Joyce Berg.

Although the primary focus is academic, the IEM is open to participants from all over the world, not only students, and uses real money, with minimum investment of $5 and maximum of $500.

Berg notes that the mechanism is different from the surveys of voting intentions.

"Research needs to generate a random sample of people who will vote. IEM does not need it, only people who believe they have information and are willing to invest," he says.

The director points out that the public EMI is usually male and is younger, richer, and better educated than the average American electorate.

"The key is the IEM information. Persons who believe they have information on trade and can make money from it. On a small scale, but it's still money," he says.

"In research, you may end up expressing an opinion even if it has not so sure. But the market, you just bet it is believed that actually has information (which may impact the outcome of the election)."

Due to its academic nature, EMI got a special permit from the government and is not regulated by the Commodity Futures Trading Commission (CFTC), the agency that regulates futures and option markets in the United States.

Spending limit

"We keep the volume low individual investment, maximum $500. If an investor loses all their money in one year, it is forbidden to put more money in the market. Therefore, try to keep the small market," says Berg.

These measures prevent the IEM is mistaken for a type of game online gambling, which is forbidden in the United States.

"There is a public interest aspect of the IEM, which does not exist in gambling," said Berg. "We have an educational and research purpose."

For the legislative elections in November this year in the United States, the IEM has three markets in operation: one on the results in the House of Representatives (equivalent to federal deputies), the other on the Senate, and a third in which investors bet on who will control both houses of Congress if Democrats or Republicans.

"It is good to note that a predictive market is not a crystal ball," notes Berg.

She cites the election of a new pope, in which the information is known only to a restricted group (in this case, the cardinals who will vote).

"If no information is available, prices will reflect only speculation, and the market will not predict (outcome) as well."

(Editor's Note: This was originally published in Portuguese. This is a Google translation.)

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