Macro Tsimmis

intelligently hedged investment

Wall Street Journal online launches political “Marketocracy”

Posted by intelledgement on Wed, 02 Jan 08

The WSJ has created a political futures contracts trading application. Registration is free and includes $10,000 of play money. You buy and sell contracts tied to binary events (e.g., Clinton-to-win-Iowa). The prices are set by the interactions of the players via bidding on the contracts.

As I write, Obama-to-win-Iowa contracts are going for $57.40 (on a scale of $0.01 to $99.99) and I sold one short (because he and Clinton and Edwards are in a virtual dead heat so the chances he will win are closer to 33% than 57% IMO) and Edwards-to-win-Iowa contracts were going for $16 (I snapped up one of these as I think his chance to win is greater than 16%). I can close these positions out until the caucuses convene tomorrow.

Once the winners are determined, any open contracts expire with a value of either $0 (for most of them) or $100 (for the GOP and Democrat winner contracts). So if Edwards wins, I will get $100 for that contract and get to keep the money I received selling the then worthless Obama contract for a profit of $141.40 ($84 + $57.40). If Obama wins, my Edwards contract expires worthless and I am on the hook to pay $100 for the Obama contract I sold short for a total loss of $58.60 ($16 + $42.60). With any other result, I end up with a profit of $41.40 ($57.40 – $16).

If this sounds like fun, check it out. The website has been up and running for a month so the all-time leader is only up about 17% so far, and the #25 guy—the leaderboard shows the top 25—is up a mere 3%…here is your chance for fame and (virtual) fortune!

It will be interesting to see how successful the system is at predicting winners. (FWIW, right now the system has Huckabee-to-win-Iowa contracts at $52 and Romney-to-win-Iowa contracts at $48…seemed fairly priced to me so I didn’t touch either of those.)

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