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Last Updated: Tuesday, 19 April, 2005, 17:23 GMT 18:23 UK
Futures market right on new Pope
Stephen Evans
By Stephen Evans
BBC North America business correspondent

Two cardinals
Contracts on who would be next Pope were traded online

If you had wanted to know who was the most likely cardinal to be promoted to Pope you shouldn't have relied on the pundits.

Nor should you have taken any notice of the Vatican watchers who studied the arcane politics of the Catholic Church.

Your best bet would have been, well, a bet - or, rather, an investment in an online futures market.

They got it spot on.

The Intrade futures market had Cardinal Ratzinger as well ahead of the field.

On top of that, it - or rather the tens of thousands of traders collectively - reckoned there was a 60% chance of there being a European pope.

The way it worked on the Irish-based website was that a contract for Cardinal Ratzinger to be chosen would pay out $10 once he was elected.

Such a contract could be bought or sold and so the price would rise or fall between $0 and $10 according to how the market viewed the likelihood. And it viewed him as more likely than any other cardinal.

US elections

It is another triumph for these markets. They are very good at predicting what will happen.

Lots of ordinary people putting their heads together do better than small groups of experts

When the punditocracy were opining that Senator John Kerry might well win the election against President Bush, the people investing their real money in the electronic futures market were having none of it.

The markets got it right, down to the share of the vote of each candidate.

In presidential elections since 1988, for example, the Iowa Electronic Markets organised by the College of Business at the University of Iowa has out-performed the polls consistently.

Intrade didn't just get the winner right in the 2004 contest, it got it right in every state.

The Hollywood Stock Exchange HSX picks Oscar winners as well as film critics manage.

Which is refreshing. Lots of ordinary people putting their heads together do better than small groups of experts.

Ghoulish wagers

The reasoning can be applied way beyond politics and movies or even the papacy.

HP printer
A market was even set up to predict future sales on printers

It lay behind the Pentagon's Policy Analysis Market which would have traded contracts in the likelihood of various events such as terrorist attacks.

The idea was dropped after widespread ridicule (might not terrorists place ghoulish wagers knowing what was about to happen?) But the idea might not have been as daft as it seemed.

Hewlett-Packard set up an internal market to predict the sales of its printers.

Siemens established one to work out whether a deadline would be met. In each case, the created market got it right when managers got it wrong.

There are some conditions when a market works better than in others.

If a question is specific like who will win a sports event or an election, the market performs much better than with more complex questions with combinations and many possibilities.

And the markets don't work if insiders can use privileged information.

So, it's a good thing that cardinals probably weren't investing in the market in contracts for the next Pope.

Apart from the difficulty of using a mobile phone to place bets from a conclave, a bet would have been to disobey a papal instruction of 1591 forbidding Catholics from betting on a conclave.

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