How To Turn Political Markets From A Novelty Into A Business

As the election nears, we've been obsessively watching the trading on sites like Intrade, where users bet on candidates in an exchange-like manner. The odds provide a useful alternative to traditional polling for guaging the state of the race, and it's a place where an amateur pundit can put their money where their mouth is.

But like other futures exchanges, the service offers value beyond simply the ability to bet -- it can create derivative markets as well. Check out Centrist Messenger: The site allows supporters of either John McCain or Barack Obama to buy ads on their candidates' behalf. But what's interesting is that if your candidate loses you get your money back. How do they do it? They hedge on Intrade, as explained here, so that they can give a refund to half of their customers. (Supporters of the winning candidate are presumably happy enough about the outcome that they don't mind parting with some cash.)

Unfortunately, Intrade is still pretty small, in large part due to anti-gambling laws in the US. The government hasn't done anything to Americans that actually trade on the site, but it's a real pain to transfer money into it. Prior to the UIGEA (Unlawful Internet Gambling Enforcement Act) it was pretty straightforward to get money on it. Either way, it's all in a gray area limiting its size.

It's too bad though, because we can think of several more interesting uses for the service, a la Centrist Messenger:

• Options for campaign employees: Companies use 'em to get employees motivated, so why not political candidates? It'd be a great way to motivate the campaign's foot soldiers.
• Policy hedges: Think antitrust. Suppose you're an investor, and you're counting on a merger to close, but you know that one candidate takes a much stricter view of antitrust. Why not take out a contract that pays off in the event that candidate wins?
• Campaign financing: Getting clear odds on political outcomes could help aid all kinds of campaign financing decisions, like whether or not it's worthwhile to take on campaign debt -- or for an outsider, whether it's worth giving to a candidate or not. 

Unfortunately, due to laws that govern both gambling and politics, we're not optimistic about seeing much progress on this stuff. But if the laws are every going to change, it'll be important for people to realize that these markets can be a lot more than just a place to make a wager -- though they're really great for that too.