Gambling on where hurricanes will hit

updated 5:01 p.m. ET July 19, 2005

MIAMI - A trio of University of Miami professors are betting on a new way to predict where a hurricane will hit, an unorthodox approach they believe could help people living along the storm's path decide whether to evacuate.

The three have founded an electronic futures market that allows the public, students and trained forecasters to invest in shares representing selected coastline spots where they think the hurricane will strike. Those who forecast most accurately will get a payout.

The hope is that investors, because they have a financial stake, will draw an accurate consensus on the storm's path — much like bettors predicting which horse will win a race. Upsets happen, but betting favorites win most often.

But the project, expected to open next week, could put the professors in the path of a different storm: criticism from some top meteorologists, who feel forecasts should come from a source the public has come to trust, the National Hurricane Center.

"I don't view it as a game," said David Kelly, a Miami associate professor and economist. Along with David Letson, a fellow economist and associate professor, and David Nolan, assistant professor of meteorology, he developed MAHEM, Miami Hurricane Event Market, with help from trading specialists at the University of Iowa.

"The point is to use markets as a way of collecting and processing information," about where a dangerous storm will strike, Kelly said. "The National Hurricane Center bases their prediction on just three or four models." With the futures market, "information from many, many models is brought in to help figure out where the hurricane is going to land," he continued. "The hope is that this will be much more accurate."

But, Kelly said, "It may be the case that the National Hurricane Center will be more accurate and nothing's better. But there's only one way of finding out. Try it."

At the National Hurricane Center, Director Max Mayfield wasn't amused.

"If they think they're going to help us forecast hurricanes, I don't see how." And the idea that the center uses only three or four models "may be based on misinformation," Mayfield said. "We use at least a dozen sophisticated models" to forecast a storm's intensity, the radius of hurricane-force winds, and other data.

For years, the center's array of storm-related information has been "vitally important" to emergency response centers along the coastline, Mayfield said.

"You'd think if they're serious, they would have contacted the director of the National Hurricane Center, but nobody's called me," he said.

Mayfield had another observation, before turning his attention back to Hurricane Emily, which was barreling toward Texas. "One thing I want to be very clear about," he said. "Forecasters are not allowed to dabble in this sort of thing."

The idea behind MAHEM, said Letson, is to involve individuals with "a wider array of expertise," than the hurricane uses, such as reinsurers. "Obviously, the National Hurricane Center is the biggest, most trusted source," able to simulate the physics of hurricanes and deploy statistical models. "We're just asking people where they think it's going to go, and if the respondents happen to be architects of forecasting models, that'd be great."

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