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