Wednesday, July 27, 2005

Betting On The Weather

Have you always wanted to bet on the location and timing of the next hurricane, but couldn't afford real estate in Florida? Now you don't have to. You just need to play the futures game being started by some University of Miami professors.

Three professors at the University of Miami are launching an electronic futures market to forecast where a hurricane will make landfall in the United States.Traders who buy or sell the right spot at the right time can cash in, maybe clearing enough profit to buy a small generator.

Aptly called MAHEM, the Miami Hurricane Event Market isn't open for trading yet. Organizers are still refining the prospectus and plugging holes in their Web site,, but MAHEM is slated to debut any day now, all in the name of research and education.

"We are not gamblers. We are scientists," said David Kelly, an economics professor and one of MAHEM's co-founders, who acknowledges some people will consider the market tasteless."But if you go down that road, you could say buying stock in a pharmaceutical company is hoping people get cancer. I choose to look at this as a benefit to society by helping research on how to make a better forecast."

I have no real problem with the concept. In fact, I applaud it. Although I believe in the rights and wisdom of the individual over the group in making individual choices, being a predictor is a great role for markets.

I have heard about research that suggests that a "group of people" might be a better predictor than any individual expert. A simple example that I won't look up right now relies on the game of guessing the number of objects in a jar. The study suggests that the actual number of jelly beans (or other objects) in the jar is likely to be very near the mean (or average) of a large number of all guesses. This proved to be the case even though the range of guesses was high and no single guess may have been close at all.

This project sounds extremely similar to the Terrorist futures market that Homeland Security suggested shortly after 9/11. That project, sadly, was ridiculed in the press and the Bush administration scrapped it to the idea dump. The links of this paragraph suggest why that was a bad idea. This summarizes the idea:
"While the Pentagon program may sound outlandish, there is strong evidence that futures exchanges can predict events better than other forms of analysis. Betting pools on election results have proven more accurate than polls, and options markets are better predictors of future stock prices than the price targets set by individual equity research analysts. The reason, economists say, is that markets are extremely efficient at aggregating information from all investors—including inside information."
The idea behind these projects is that the price of the "prediction" will reflect the number of investors buying it. If this project proves to be a good predictor of the hurricanes, maybe the terrorist futures idea will make a comeback.


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