Center Square | Here's $5; pick the winner

20070401_inq_cu-satullo01-a
Chaka Fattah

So you think you know which guy is going to win the topsy-turvy Philadelphia mayor's race.

Wanna bet?

Now you have a chance. Legally. For the cause of research.

The Great Expectations project, cosponsored by The Inquirer and the University of Pennsylvania, has arranged what is called an "electronic prediction market" on the mayoral election.

And we're willing to spot the first 200 participants in this market their opening stake of $5. More on that in a moment. First, some explanation:

Electronic prediction markets are a lot like Wall Street, a little like Vegas - and, in elections, a bit more accurate than traditional political polls.

This project will be run through the Iowa Electronic Markets, one of the oldest and most successful. IEM is a nonprofit research enterprise run by the Tippie College of Business at the University of Iowa.

Electronic markets have gained increasing notice because of their success at predicting election outcomes.

How do these markets work? Like a commodities futures exchange. Or, to cite a more common experience, a little like sports betting. (Billy Ray Valentine, the Eddie Murphy character in Trading Places, listens to two futures traders explain their jobs, and he famously responds: "Sounds to me like you guys are a couple of bookies.")

At IEM, traders use real money (up to a limit of $500; no one loses his shirt) to buy or sell "contracts" that reflect predictions on how an election will turn out. (IEM has also run markets on box-office openings and Federal Reserve Board decisions.)

Unlike in a traditional poll, you don't respond based on whom you want to win. You buy and sell based on who you think will win. (That's one way it's like betting on sports.)

The trader's combination of financial stake and pride in acumen may help account for the relative accuracy of electronic markets.

In 2004, IEM traders never bought the idea of a John Kerry bounce after the Democratic convention and consistently favored George W. Bush. Last year, they moved dramatically for the Democrats after the congressional page scandal.

In the Philadelphia mayoral race, IEM will offer two markets, using different propositions.

In the "winner-take-all" market, you'll have a choice of six propositions in which to invest: a victory by any one of the five main candidates, Chaka Fattah, Dwight Evans, Bob Brady, Michael Nutter, Tom Knox - or by "Other," which covers minor candidates and write-ins. (If Bob Brady gets knocked off the ballot in the pending court challenge, he would drop into the "Other" grouping.)

Each victorious contract you buy on a candidate in a winner-take-all market pays out a dollar; your gain is the difference between $1 and the price you paid for the contract. (In other words, if you were to buy one Chaka Fattah contract at 43 cents and he won, you'd make 57 cents on it.)

In the vote share market, you try to predict what share of the final vote each candidate will get. In vote share markets, each contract pays out based on the percentage the candidate got. For example, if you pay 43 cents for contracts on a candidate who ends up with 52 percent of the vote, you'd net 9 cents per contract.

Here's a key difference between electronic markets and polls: You can buy or sell contracts for multiple candidates, or vote share predictions. Just like share prices on Wall Street, the price of a contract moves up or down depending on how many buyers it attracts.

A key difference from sports betting is that IEM, unlike a bookie, isn't looking to make money. But the analogy to sports betting isn't entirely whimsical.

Serious analysts have taken notice of how sports betting pools reflect a phenomenon noted by author James Surowiecki in his superb 2004 book The Wisdom of Crowds. The betting lines on, say, NFL games will change to reflect how the mass of bettors are wagering, with the goal of dividing wagers evenly between favorite and underdog. Over time, underdogs and favorites beat the final spread equally often. In other words, an enormous number of idiosyncratic, self-interested decisions by individuals turn out to predict outcomes pretty accurately.

Electronic markets tap into the same notion, that self-interested choices, aggregated properly, can produce solid predictions.

Why not seek the wisdom of crowds in Philadelphia? You couldn't find a weirder or harder-to-predict political contest than this mayoral election.

How can you take part in the Great Expectations electronic market?

Beginning Tuesday, you can sign up for the Iowa Electronic Markets through a link on the Great Expectations project Web site: http://go.philly.com/greatexpectations.

You'll be directed to a registration screen; the opening investment is $5.

As noted above, to encourage participation, the project will underwrite the opening stake for the first 200 traders to sign up. Later on, you may be able to increase your stake by sending checks to IEM. IEM's normal investment limit is $500.

The IEM site will offer prospectuses explaining the two Philadelphia mayoral markets: winner-take-all and vote share. There's a manual explaining how to trade, and a practice market to get the hang of it. But remember: Once you trade in the real market, you can lose real money. The market will pay off winning contracts once the city election commissioners certify vote totals (probably in early June).

We'll provide updates on how the trading is going in the paper, on the project Web site and on Philly.com.

Employees of Philadelphia Media Holdings are not eligible for the free $5 stake.

I love this idea. Unlike traditional political polls, it is transparent, continuous, and not subject to the vagaries of how a question is worded or the biases of the poll sponsor.

Help make it work. Have some fun. And maybe, just maybe, predict a winner and reap a small reward.


Chris Satullo (215-854-5943; csatullo@phillynews.com) is editorial page editor.