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Managerial Application 6.2 Prediction Markets: The IEM Prediction markets are speculative exchanges created for the next World Series Champion in baseball, Super Bowl the purpose of making accurate forecasts. Tradable assets winner in football, or NCAA champion in basketball. are created whose final cash value is tied to a particular One of the oldest and most famous prediction markets is political event, such as whether the next U.S. president be a the University of lowa's IEM. The IEM is a group of real-money Republican or a Democrat, or a specific economic event, such futures markets operated by the University of lowa Tippie as a change in monetary policy by the Board of Governors of College of Business. Unlike normal futures markets, the IEM the Federal Reserve System. is not-for-profit. The IEM's low-stakes markets are run for Speculators who buy low and sell high are rewarded educational and research purposes. The IEM allows traders to for improving the market prediction; those who buy buy and sell contracts based on, among other things, election high and sell low are punished for degrading the market results and economic indicators. In the fall of 2007, for example, prediction. Evidence suggests that prediction markets speculators paid 59.9c for a contract that would pay $1 if the are often more accurate than the experts. Examples Democratic candidate won the 2008 presidential election, and of prediction markets open to the public include zero otherwise. This means that the market prediction was the Hollywood Stock Exchange, the lowa Electronic a 59.9 percent probability of a Democratic victory, versus a Markets (IEM), and TradeSports, among others. The 40.1 percent probability of a Democratic defeat. Hollywood Stock Exchange (http://www.hsx.com) is the In late-2007, the Republicans had good reason to worry. entertainment prediction market, and in 2006 correctly The IEM's free-market approach has been highly accurate, predicted 32 of 39 (82 percent) of the "big-category" especially when compared with traditional polling techniques. Oscar nominees and 7 out of 8 (87.5 percent) top category winners. At tradesports.com, players predict who will be See: The lowa Electronic markets, http://www.biz.uiowa.edu/iem/