The presidential sex scandal brings new interest to political wagering

FUTURE BETS

September 14, 1998|By GEOFFREY C. UPTON | GEOFFREY C. UPTON,SUN NATIONAL STAFF

WASHINGTON -- Still think the Democrats will pull off a miracle and win back control of Congress this November? You can bet on it.

For a decade, the University of Iowa's business school has operated a set of online futures markets that ignore the traditional lumber, orange juice and pork bellies in favor of politicians.

The markets, which exist solely on the World Wide Web (www.biz.uiowa.edu/ iem) are played with real money, real elections and real investors. You can put your political forecasting acumen on the line and back it with cold cash.

Thanks to President Clinton's sex scandal, the market has been unusually active in recent weeks, with GOP contracts spiking. The release of special prosecutor Kenneth Starr's report should make the action even hotter.

"We've been seeing the Republicans' chances improve over the last 10 days. Right now we're saying there's an 80 percent chance the Republicans will increase their [Congressional] seats November," said Bob Forsythe, an Iowa business professor and one of the market's founders.

Here's how it works: Traders buy and sell contracts that predict a political outcome - say, a candidate winning his party's presidential nomination. Each contract costs anywhere from a fraction of a penny to a dollar. Contracts widely considered to be winners - for example, Republicans keeping control of the Senate - are in high demand and thus expensive.

But the lower you buy, the more you stand to gain if the improbable happens. A contract on Democrats taking control of the Senate this fall would run, maybe, 1] cents. You can sell that contract for a profit if its price rises - that is, if more people begin predicting a Democratic takeover. Or you can hold the contract till Election Day. If the Democrats do seize the Senate, you'd get $1 back - like hitting a long shot at the track.

Better yet, if you were to buy 500 of those contracts, at a total cost of $7.50, your return would soar to $500. Invest $500 in the Democrats and your payback would be $35,700. But that's a big "if."

That's how it appeared to trader Peter Bereolos of Knoxville, Tenn., who said the odds are tempting, but conceded that a Democratic contract "would be a long shot at best."

To initiate a transaction, investors like Bereolos just log on and punch a few keys. Bids and asking prices are updated instantaneously and reported on the Web every 15 seconds. There is no middleman to take a commission, and payments are handled by the university.

"It's just like a little trip to Vegas," said William Hodes, a professor at the Indiana University School of Law. "It's just sort of fun."

Still, the markets are fully legal, run as a nonprofit enterprise authorized by the Commodity Futures Trading Commission.

The markets were launched in 1988 by four Iowa professors to test a hypothesis: that the free market could pick a winner more accurately than opinion polls. They turned out to be right: in 1988 and 1992 presidential contests, the markets beat every major national poll, predicting the winner's margin within 2/10 of a percentage point.

Jack Wright, one of the founders, says the markets' ability to pick winners is no surprise.

"The market requires people to put their money where their mouth is," says Wright, a professor of political science at George Washington University. In polls, Wright says, people often feel pressured to utter an opinion that may not be fully formed. "Either advertently or inadvertently, they're not always providing truthful responses," he says.

In the market, by way of contrast, investors are judging how everyone else is likely to vote. Cold calculation crowds out emotion. "In a market, your preferences should not weigh in at all," Wright explains. "You should be trading with your head instead of your heart."

In 1996, more than 7,000 traders took part and $200,000 changed hands, all legally, thanks to a 1993 ruling by the CFTC granting Iowa a standing "letter of no-action." That means the government waives its right to regulate on the grounds that "the operation of these markets is limited to academic research and experimental purposes" and that the directors "do not receive any profit or compensation for its operation."

Forsythe, senior associate dean at Iowa's College of Business Administration, argues that wagering on political futures is no different from betting on the price of wheat in four months on a futures exchange in Chicago.

Noting that researchers have cited data from the markets in nearly a dozen academic papers, Forsythe defends his creation as a "great pedagogical product" increasingly used by other schools to stimulate interest in finance. In fact, the federal Education Department has awarded the University of Iowa $443,000 to help bring the markets to minority colleges.

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