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A Political Gamble

May 9, 2000

According to the internet-based "futures market" run by the University of Iowa, almost anything can happen in this year's elections.

In the Presidential race, the odds are about as close as possible.

In the Congressional races, the Democrats are slightly favored to gain control of the House of Representatives, and the Republicans are heavily favored to retain control of the Senate.

In the one other election included in this "futures market," the New York Senate race, Rudy Giuliani and Hillary Rodham Clinton are neck-and-neck.

The Iowa Electronic Market has been in operation since 1988. Originally, it was set up for students at University of Iowa to learn about futures markets. Now, through the power of the internet, it is available to just about everybody.

To participate in this futures market, first, you have to set up an account, with an initial deposit, from $5 to $500. Then, you access their website, and acquaint yourself with their rules, including reading the prospectus for any contract in which you want to take a position.

Although people in the futures industry will deny it, what futures trading means is betting. For example, betting that the price of orange juice concentrate will go up, or will go down. If you saw the movie "Trading Places," with Dan Akroyd, Eddie Murphy and Jamie Lee Curtis, you already know this.

Of course, a lot of people are in businesses that are effected by things like the price of orange juice concentrate. For example, if you own a grove of orange trees in central Florida, your profits will be high if the price is high, and you'll suffer a lose is the price is low. Therefore, you'd be interested in taking a "hedge position" in orange juice futures. A hedge position is where your gains and losses in the futures markets off-set gains and losses in your business.

Just as obviously, some people are attracted to the futures market because it is just like gambling. They take what's called "naked positions" (which is sometimes how they wind up).

What about the Iowa Electronic Market, is it legal? They say they have a "no action" letter from the Commodity Futures Trading Commission (CFTC), which they say means it's legal, to which we say, why not?

A warning: If you take this hedging stuff seriously, you'd want to bet against your candidate. For example, let's say you're a Republican, and you think the Democrats, if they win, will raise taxes. Then, you'd bet enough on the Democrats so that the money you win will off-set the higher taxes, or at least pay for a one-way ticket to Switzerland or the Cayman Islands.

Let's say, on the other hand, that you're a Democrat, and fear that the Republicans will open the hole in the ozone layer even wider. Then, you'd want to bet enough on the Republicans so that you'll be able to buy a whole lot of sun block.

A lot of bettors irrationally put their money on their favorite, actually increasing the gains and losses from their real interest. This is especially true in sports betting, where fans (which, after all, is derived from the word fanatic) will bet on the home-team even when the odds are less than a fair assessment of the probabilities.

This is where the speculator is supposed to come in. When the odds are obviously irrational, the speculator is induced into taking the underpriced side. We call that "supplying liquidity" to the market. I did this when I was at Las Vegas, and Michigan State was favored by a mere four points over Florida in the NCAA basketball tournament.

On last thing: Please don't explain this to my wife, whom I told I wasn't gambling when I was in Vegas, just supplying liquidity to the market.

* * * * *

Odds in the Iowa Electronics Market on May 9, 2000

President:Winner-takes-all:
Democrat: 51
Republican: 49
Reform: 0
Recent trend: flat

President:Percent-of-vote:
Republican: 47
Democrats: 47
Reform: 6
Recent trend: Republicans have pulled up to even-steven.

Control of Congress:
Democrat House * Republican Senate: 50
Republican House * Republican Senate: 40
Democrat House * Democrat Senate: 10
Republican House * Democrat Senate: 0
Recent trend: the possibility of total control of the Congress by the Democrats has been slipping, with mixed control picking up.

N.Y. Senate
Giuliani: 50
Clinton: 50
Recent trend: Clinton pulls to even-steven.

* * * * *

Clifford Thies is a professor of economics and finance at Shenandoah University. Send him MAIL.

Read Ludwig von Mises on "Betting, Gambling, and Playing Games" (an excerpt from Human Action).


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