Gambling on where hurricanes will hit

Letson lives in Key Biscayne, which has had many uncomfortably close encounters with hurricanes, including four in 2004. While trying to decide whether to evacuate his family, including two small children, Amelia and Zachary, during one turbulent period, he happened to read a report on the accuracy of the University of Iowa's futures-based presidential election forecasting, and the hurricane market idea dawned.

"It's worth a try if we can learn something," he said. "The University of Miami and University of Iowa are not making money. I'm not making money. My colleagues are not making money" on the nonprofit venture. Traders are limited to a $500 spending cap per hurricane season, which runs from June through November.

The Commodity Futures Trading Commission, the federal agency that would oversee such markets, said it won't take action against the university's futures market projects as long as the organizers follow certain guidelines.

Using financial trades to encourage experts to sharpen their skills as they develop predictions isn't new. The Iowa Electronic Markets (IEM) of the University of Iowa has used the tactic to inspire health professionals to forecast where influenza might strike, said Forrest Nelson, an economist and one of IEM's founding directors. Unlike the hurricane market, which is open to anyone, the flu market was open only to health professionals, from doctors and nurses to epidemiologists.

Iowa is exploring a market based on President Bush's prospective Supreme Court candidate, Nelson said. "We're thinking of opening a market as soon as a nominee is named, it'll be a confirmation market. I don't think we've ever run a confirmation market — certainly not for the Supreme Court."

Nelson, who is involved in the MAHEM project, expects most hurricane traders to be meteorologists and hurricane experts. But other contributions can be valuable, he said. "Animals act strangely when an earthquake is approaching. Maybe someone who watches animals," has a valuable insight. TV forecasters, atmospheric scientists at universities, and longtime residents of hurricane districts might be good traders, too, he said.

While federal meteorologists may be prohibited from making a profit, Nelson added, they may be able to participate if their winnings go to charity. "This is not a market people are going to get rich on."

University of Louisville finance professor Russ Ray, a former economist with the State Department, says the hurricane project is the kind of "decision market" that has burgeoned in popularity recently because scientists, politicians and business people have found the markets strikingly accurate. Since its start in 1988, he said, Iowa's futures market has accurately predicted the popular vote outcome of every presidential election.

Futures markets have also predicted Academy Award winners and film box office receipts with uncanny accuracy. Companies like Hewlett Packard and Eli Lilly have based corporate decision-making exercises on the futures market concept, Ray said.

A predictive market like MAHEM reflects a consensus of expert and intuitive opinion.

"It's a flushing out tool that enables everyone to put their two cents' worth in."

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