Chapter twelve; Iowa Electronic Markets- A case study (Author: Naseem Saeed Sherwani)

In the last two decades, the interest in gathering, analyzing and forecasting of information with an objective to gain market efficiency and to perform well has become a hot topic of discussion (Bean 2005). The blessings of technology have geared towards aggregate knowledge by people, businesses and institutions. The author explains that free markets of all types are a good source to get market predictions through disclosed prices. The first information market was first established by a group of University of Iowa in 1988. The objective was to predict the outcome of 1988 American presidential election. Bean defines that prediction market is forum for exchanging contracts whose payoffs are tied to unknown future events (2005).

The need of information markets as compared to the traditional markets has become more challenging. The participation of a group can provide an accurate estimate and to come up some meaningful results. Research shows that group of experts had 12.5% fewer errors on forecasting tasks such as company earnings, cattle and chicken prices, real and nominal Gross National Product (GNP), survival of patients and housing starts (Armstrong, 2001).

It is important to understand the basics of IEMs, such as

The Iowa Electronic Markets are operated by the faculty at University of Iowa Henry .B. College of Business as part of research and teaching mission. These markets are small-scale, real-money futures markets where contract payoffs depend on economic and political events such as elections. Other IEM markets are the Federal Reserve Monetary Policy Market (Futures based on the Fed’s interest rate), The Computer Industry Return Market (Apple Computer, IBM, and Microsoft stock prices, as well as the S & P 500), and the MSFT Price Level Market (stock price of Microsoft). The last two Markets are available to academic traders only. The IEM is not regulated by the CFTC (Commodity Futures Trading Commission) or any other agency; it has received two no-action letters that extend no-action relief to the IEM.

The faculty at university of Iowa and others institutions use the markets in classes as pedagogical tool. This tool is used to focus attention and give hands-on experience with the real world markets. They argue to use markets as a tool to study individual behaviors as well as market level performance. The quality of data is improved by the interested traders who participate in these markets.

The University of Iowa ’s Iowa electronic market has gained a name in the field of prediction market. It has been predicting the results of American presidential elections since 1988 with greater accuracy than polling companies. It has been evidenced by James Surowiecki in his book The Wisdom of Crowds that the Prediction markets are speculated to be a useful decision support tools for corporations (2004). However, in the knowledge-based economies, companies are using the prediction markets with a broad objective of taping internal resources. The most popular among these are Microsoft. Google, Yahoo, Ely Lily, HP and other companies have record of achievement of knowledge management with potent market technologies (http://www.kmcluster.com/nyc/PM/PM.htm).

The Iowa Electronic Markets are real-money future markets in which contract payoffs depend on economic and political events such as elections. These markets are operated by faculty at the University of Iowa Tippie , College of Business to fulfill their research and teaching mission.

They have the following kinds of markets

· Political Markets

· Economic Indicator Markets

· Classroom Markets

· Related Markets such as Influenza Prediction

Key Informants of Iowa Electronic Market (http://biz.uiowa.edu/iem/join.html

It is important to note about the key informants and functioning of the IE markets. Following are the key informants

Traders as a research and teaching tool play important role to the success of these markets. Many of these markets are open to the general public. All of these markets are open to those with academic affiliation. There is currently a one-time $5.00 accounts set-up fee for joining the IEMs. Additional information about Iowa Electronic markets (IEMs) how it works is usually available on their websites http://www.iem.com. The visitor on their web site can login to learn more about trading.

Teachers have integrated these markets into their course work. They have found it an excellent way to engage their student interests such as accounting, economics, finance, political science, and related disciplines. To incorporate these markets in class settings, sample assignments submitted by faculty who have used the IEM as a part of their course are also archived at their website.

Researchers can join in developing these markets for research. The IEM Administrator can put in the researcher with an appropriate IEM faculty. There are also past data available for academic research.

Sponsors can provide resources to support the IEM in its teaching and research mission. These markets function as a not-for-profit research and teaching project. There is currently a one time $5.00 registration fee to join these markets.