From Wednesday’s FT, swine flu contracts are trading on the Iowa Electronic Markets, run by Iowa University’s Henry B. Tippie College of Business.
The IEM has operated flu futures markets since 2004 and ran a bird flu market last year. This year it expanded into H1N1, inviting more than 240 medical professionals and scientists to trade a range of swine flu futures contracts. The aim was to build a practitioner-level prediction of how the virus would spread, its severity and duration.
According to the article, the swine flu market has accurately predicted both mortality rates and how fast the virus would spread since it was set up in May. The market is predicting a 70 per cent probability that there will be insufficient H1N1 vaccine to meet the US government’s target of inoculating 50m Americans until at least December. It also predicts a more than 90 per cent probability that more than half of US flu cases this season will be swine flu.
Two interesting aspects of the swine flu prediction market that go to basic issues of market design: (1) it is invitation-only and limited to experts, rather than open to general trading; and (2) it uses virtual, rather than real, money. [This appears to be the case with all three flu prediction markets: seasonal, avian, and swine. See the Iowa flu prediction markets Q&A here].
One of the topics I typically cover in my Taboo Trades and Forbidden Markets course is prediction markets. Oddly (to me) the reaction from fellow law profs is often, “What’s taboo about prediction markets?”
Aside from the normal associations with gambling, unconventional futures markets (particularly those that involve “betting on death”), such as the new swine flu contract, have been controversial in the past. Many readers will recall, for example, that in 2003 the Pentagon proposed a terrorism futures market, but withdrew the plan after it generated national outrage. Barbara Boxer, for example, said of the program "there is something very sick about it,” while Hillary Rodham Clinton, then a US senator, said it would be “a futures market in death.”
From a 2003 CNN report:
"I couldn't believe that we would actually commit $8 million to create a Web site that would encourage investors to bet on futures involving terrorist attacks and public assassinations," Senate Minority Leader Tom Daschle, D-South Dakota, said on the Senate floor. " ... I can't believe that anybody would seriously propose that we trade in death ... How long would it be before you saw traders investing in a way that would bring about the desired result?"
Monday, Sen. Ron Wyden, D-Oregon, said, "The idea of a federal betting parlor on atrocities and terrorism is ridiculous and it's grotesque."
Sen. Byron Dorgan, D-North Dakota, called the idea "stupid."
The terrorism prediction market raised (largely unfounded) fears regarding the creation of incentives to engage in terrorist activity. But, as evidenced by the above quotes, some of the aversion to terrorism markets stems from a visceral reaction to “betting on death” and disaster.
Thus, according to the above-linked FT article, there was a negative reaction when the SARS outbreak in 2003 prompted academics at Tippie to consider a futures market in collaboration with federal agencies. So IEM set up the market backed by foundation grants instead. As reported in the FT, “US health authorities have so far refused to collaborate on the flu futures market, though the Centers for Disease Control and Prevention helped IEM establish a syphilis futures market last year.”
Readers who want more on prediction markets generally, and infectious disease prediction markets specifically, might see:
Kenneth J. Arrow, et. al., The Promise of Prediction Markets in Science Vol. 320 (MAY 2008)
Justin Wolfers and Eric Zitzewitz, Prediction Markets, The Journal of Economic Perspectives, Vol. 18, No. 2 (Spring, 2004), pp. 107-126
Philip M. Polgreen, et. al., Using Prediction Markets to Forecast Trends in Infectious Diseases, Microbe, Volume 1, Number 10, 2006
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