“The off-again, on-again recall election in California hasn’t been easy on politicians and voters in that state. It hasn’t been too easy on Gavin Peters, either, even though he lives 2,500 miles away in Toronto,” writes Peter Wayner in today’s New York Times.

“When the news came in mid-September that a panel of judges had delayed the vote, Mr. Peters, a computer programmer, rushed to his PC. He had been betting that Gov. Gray Davis would be gone by November, but now he desperately wanted to close out those bets and make new ones that Mr. Davis would still be around.”

“Mr. Peters succeeded and watched his account grow as the confusion nurtured Mr. Davis’s long-term chances. But his bets were still in place a week later when the panel’s decision was overturned and the vote was reinstated.”

” ‘I lost a ton,’ he said. ‘I’m down to half of my original money.’ “

“Fortunately for Mr. Peters, he is not playing for real dollars. He is trading play money on the Foresight Exchange (www .ideosphere.com), one of several Web sites that let people speculate on world events by imitating the futures and options trading pits. Instead of investing in the price of hog bellies or the S.& P. 500, the almost 2,000 members of the Foresight Exchange gamble on such questions as whether a space elevator will be built, whether the European Union will expand, or whether a certain cardinal will be the next pope.”

“Sites like the Foresight Exchange captured the headlines last summer when Congress discovered that a Pentagon office under the direction of Adm. John M. Poindexter was planning a similar system in which anonymous players could bet on the likelihood of events like acts of terrorism. The Defense Advanced Research Projects Agency, which financed the project in the belief that it might help predict the probability of future terrorist attacks, retreated rapidly as congressmen started calling it ghoulish. The Pentagon office, the Information Awareness Office, has since been shut down.”

“But in fact, marketplaces like the Foresight Exchange and the one envisioned by Admiral Poindexter are darlings of economists, who describe their workings with sophisticated terms like “price discovery,” “opinion aggregation” or “risk analysis.” They argue that the constant betting is an efficient way for distilling the opinions of many people into one number.”

“In the simplest systems, players buy and sell contracts to pay 100 units of fake or real money at some future point – like the end of a game or an election. In Mr. Peters’s case, he was buying and selling the right to get 100 points if, ‘by Nov. 16, the Secretary of State has certified elections results in which a majority of voters elect to remove Gray Davis from office.’ “

“These marketplaces synthesize a prediction for the future by letting the price fluctuate as everyone chooses how much to pay for the contracts. Someone who spends 50 points to buy a Davis contract is effectively betting with 1-to-1 odds that Governor Davis will be recalled by the voters. Paying 50 points will yield a profit of 50 points if he is voted out. Someone who paid 33 points would be getting 2-to-1 odds and someone who paid 10 points would be getting 9 to 1 odds.”

“Robin Hanson, an assistant professor of economics at George Mason University and an organizer of both the Foresight Exchange and the Pentagon project, said: ‘What’s nice about these institutions is they always come up with a number. When you talk to academics, they might say, “That’s not possible. We don’t have the right data. We don’t have the right insight.” These markets cough up a number. There may be a lot of error, but at least you get something.’ “

“Markets like these are most accurate when the players have a stake in the question at hand and the result is determined by a large number of people. The Iowa Electronic Markets, for instance, collect small bets made with real money on the outcome of elections. They report that the prices of futures contracts pegged to the results of elections are often better predictors than most polls. (Data from the Iowa markets, run by the faculty of the University of Iowa’s business school, are used to study trading behavior and as a teaching tool to introduce students to real-world markets.)”

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