Iowa Creates a Futures Market in Politics
NEW YORK — BOND managers watch their portfolios sink as Clinton gains. An international stock fund manager is concerned about next year's election in Australia. A political action committee wants to know which candidate to back.
Where can these people turn? Iowa City, Iowa, home of the Political Stock Market. For four years, the University of Iowa has been running an experiment: treating politics as a commodity. You can buy the candidates, you can sell the candidates. "The theory is quite simple: You put your money where your mouth is," says George Neumann, a co-founder and Iowa professor.
Like other commodities, there are futures in politics. In other words, this past January you could have purchased a contract that delivered you another four years of Bush. It would have cost you 42 cents per contract to buy a stake in the Republicans. As of Oct. 27, that contract was worth 15.5 cents. Currently, the Iowa market is predicting a near landslide for Mr. Clinton.
The Iowa experiment is purely a demonstration market with investments limited to no more than $500 per trader. Yet Mr. Neumann says there is a future in political futures. "We can imagine that sometime in the future, you will probably see some version of this offered through a direct exchange such as the Board of Trade or the Amex [American Stock Exchange]," he says.
This concept is not so far fetched. In London, I.G. Index, a stock broker, is selling a contract based on the electoral results. "It started out as a way our clients could have a bit of fun," says James Damario, a trader.
According to Neumann, there is great potential for the market as a mechanism for portfolio managers to hedge their political risk. "It is a fascinating concept," says Clark Anderson, of the Council for International Business Risk Management.
In addition, Neumann says the market is more accurate than polls. He relates a call from a Louisiana bank that was tired of giving political-action money to losers. It hoped Iowa's market would be more accurate. He declined to help them.
Next year, Iowa will give Australians the ability to put money on their next prime minister. The economics department at the Royal Melbourne Institute of Technology will run the market Down Under, though physically the market will be in Iowa City.