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Friday, March 02, 2007

Using Economics to Predict a Flu Pandemic

Markets have proven their effectiveness in predicting future prices and economic conditions. This is the bedrock on which our stock and futures trading institutions rest on. The Chicago Mercantile Exchange has a weather futures that allows traders to wager on weather conditions using measurements like heating day degrees (HDDs) and cooling day degrees (CDDs). Farmers have long relied on the Merc's ability to predict prices from items like Lean Hogs to Dry Whey.

Iowa Electronic Markets is a futures market operated by the business school at the Univ. of Iowa for research and educational purposes. For a dozen years, they've accurately predicted election results, and have roundly beaten opinion polls at that. In fact today, March 2, 2007, trading began in the markets based on the 2008 U.S. Political Conventions of the Democratic and Republican parties.

Now the IEM takes on the flu pandemic. No, seriously. They have a program where health professionals can participate in a pandemic futures market. However, unlike some of their other prediction markets, this market does not use real money in line with legal constraints and medical ethics. It remains to be seen if real money is the secret sauce behind the wisdom of crowds in the predictions markets. My (Ayn Rand infused capitalist pig) gut says money, the fear of losses and the prospect of gains all have an important role in influencing human behavior. These sentiments either directly influence or at the very least catalyze your decision to buy or sell or hold. When one or more of these aren't involved, the results might be skewed. By how much, it remains to be seen. You can bet I'll be tuned in.

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