Before Kalshi and Polymarket there was the Iowa Electronic Markets

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“Recently, I heard a story that changed how I think about prediction markets.”

One moment in the story in particular, it was part of the history of where prediction markets came from, which, as you may have heard, goes back hundreds of years in some form, but also in another form, prediction markets, as we know them today, were cooked up by economists trying to test some theories on markets. And in this story of the evolution of prediction markets, there's a moment when an economic historian studying the long ago early routes of prediction

markets realizes there's already a well-functioning design of a prediction market at the race track. Now, of course, many of you will say, yeah, obviously gambling is gambling, of course, but the part I didn't quite know is that prediction markets for elections were popular and robust until they mysteriously faded away. And one theory is, of course, racing took over, you know, because instead of an election every year, whatever, you can have a dozen races a week.

This all comes from this fascinating history of the economic origins of prediction markets,

the economists who cooked up the proto-production markets, the political machines that basically

had to financially bet on their candidates hundreds of years ago, and even farther back than that. So today, we're going to share an excerpt of this story for you. It comes from our friends at Throughline, NPR's excellent history podcast. They take one big question every episode and bring you the history and context behind it beautifully sound designed and deeply researched. Today, we pass it off to host Rund Abdel Fatta and throughline for a history of prediction markets.

Part one, three professors walk into a bar. On a spring afternoon in 1988, Robert Forsyth and two of his colleagues were sitting around a table at a local sports bar, called The Airliner in downtown Iowa City, and like they often did, the three economics professors got to talking about the news. And I would say the club association was helped because it was

“a three-year lunch, which led to this creativity, I think, some days. Three beers each or each”

of each each. It was an election year. After Super Tuesday, Michael Dukakis was the presumptive frontrunner for the Democratic nomination. That is, until a huge surprise upset. The polls have predicted a Dukakis victory, but it didn't happen. It was the day after the Michigan caucus, which, you may recall, a Jesse Jackson won. Jesse Jackson, he scored a stunning win yesterday in Michigan's Democratic caucuses, defeating Michael Dukakis by a margin of nearly two to one in the

popular vote. And that was a big surprise. The polls missed it all together. Going in, political polls had shown Jackson and Dukakis running neck and neck. But what happened was a blowout. Jackson won the Michigan caucus with 53% of the vote. And Dukakis only got 29%. And that's where it came from. He said, "Well, gee, you know, as economists, what we do are going to try to predict the outcome of something." And what's natural for a bunch of economists

had said, "Well, let's run a market only." Like a stock or commodities market. So Robert and his

They set up an online interface where those people could buy stock in political candidates.

“And just like on Wall Street, these political stocks could be traded. So, for example,”

when George H. W. Bush and Michael Dukakis ultimately went up against each other in the general

election. If you didn't like Dukakis' chances, you could sell your shares in him. The overarching idea here, the market might show what people were actually thinking, even better than polls could. The wisdom of the crowd. In low and behold, at midnight, the night before election day, we ended up predicting the outcome of the popular vote within two tens of one percent. That result outperformed major polls,

including Gallup, Paris, and CBS New York Times. It was so effective that Robert and his colleagues thought, "We'd like to do this again next election." This time with a bigger sample size. So, we went to the Quadri Futures Trading Commission and asked them whether they would give us

“permission to operate nationwide. And just so I understand what was the law that you needed to get around.”

Well, anytime you have people, it's changing real money. And the outcome is something. Question is, is this camera? Yeah, and even though there's some form of regulation that's going to oversee you. Back then, and now, the body that oversees that regulation in the U.S. is called the Commodity Futures Trading Commission, or the CFTC. It's been in charge of commodity futures, like markets that set the future price of grain since the 1970s. They've issued us,

but they call it a no-action letter. That letter was basically like a permissions lip.

As long as the Iowa Electronic Markets followed a few set rules, the CFTC would allow it to do its thing. And the rules were, um, to be stateswalled, the Clinton accept the concept over $500, and we didn't engage and pay the advertising. So they could only run markets on presidential

“elections. Sports were off the table. And the Iowa Electronic Markets did not make a profit”

between 1988 and 2004, the Iowa Electronic Markets grew from a one-off experiment, to one of the most reliable predictors of American presidential elections. During that period, its predictions beat traditional polls 74% of the time. And as the market continued to grow, so did the public's interest in it. I'm Bob Edwards, and this is NPR's morning edition. If you think you know the next president of the United States will be, there's a place in Iowa,

where you can back up your convictions with a bucket too. At what point did you realize that people outside of the University of Iowa, outside of your orbit were starting to pay attention to what you all were doing? Well, we started to get a lot of national publicity. This was different now, that before we knew at the Wall Street Journal and the financial times of London and NPR. NPR and one of the television media started picking us up because it was just

so different. I mean, who would ever made a market on election? Oh, so they thought this was the first

time something like this was happening. That's right. It was, of course, not the first election betting market, not by a mile. After the break, we go back farther and meet an economic historian trying to find the origins of election betting. More through a line, after the break. On considered this NPR's afternoon news podcast, we cover everything from politics to the economy to the world, but every story starts with a question. NPR, we stand for your right

to be curious to make sense of the biggest story of the day and what it means for you. Follow consider this wherever you get your podcasts. Every episode of it's been a minute, NPR's What's Happening in Culture Podcast starts by asking three questions. Who? How? Why now? If the culture's asking it, we're talking about it. At NPR, we stand for your right to be curious and indulge your cultural curiosity.

Follow it's been a minute wherever you get your podcasts and we'll break down the zeitgeisty topics that are feeling your feed. Hi, it's Terry Gross, host of fresh air. Hey, take a break from the 24-hour news cycle with us and listen to long-form interviews with your favorite authors, actors, filmmakers, comedians and musicians, the people making the art that nourishes us and speaks to our times.

So listen to the fresh air podcasts from NPR and WHOY. Okay, let's call this part two, the race track. We pick it up with run from throughline and Coleman's Trump.

markets for almost 20 years. Coleman may be an economist, but his driving interest is in human behavior.

On top of prediction markets, he's written papers about illegal file sharing,

“tax evasion, and the economics of addiction. And he says, if you want to understand where”

prediction markets came from, just head down to your local horse track. My uncle, I used to take me to the race track and have me been on horses. I guess I was already a social scientist in training at 10 years old because, first of all, yes, back many, many years ago, you could be 10 years old and go to a race track and bad and no, like, I couldn't even reach up to the camera and nobody seemed to care very much. But it was his interesting as much to me to

watch what everybody else was doing. And a lot of things that I see when I look at markets today, I could sort of first see then. Watching people read the odds and make bets,

talk Coleman something essential about gambling. Winning makes people feel good and the longer the

odds, the better the winners feel. I remember when I was younger and I was watching people do it.

“If somebody would bet on a long shot horse, and that horse would actually win, the person would not”

only win a lot of money. But they were going around to all their friends saying how smart they were because they managed to figure out this very, very unlikely thing from happening. And I sort of realize that's, you know, part of this sort of psychology of these markets is people like to be smart. People like to use this as a way of sort of showing off their smarts of how they figure these things out. I should say here, there's been a lot of back and forth over the years about whether or not

prediction markets are really just betting dressed up as something fancier. Or if you're looking at legal definitions, whether they might count as gambling. We're not here to litigate that. Coleman's point is as long as people have been putting money on things, whether it's on the stock market and insurance or at the race track. Social scientists and economists have been able to learn something about us from those bets. So, flash forward to the 2000 presidential election. George

W. Bush versus Al Gore, one of the closest presidential races in a century. Coleman was doing research about election forecasting at the University of North Carolina. And he was keeping a close eye on the Iowa electronic market. I was writing a paper about the Iowa electronic market when my then colleague is at the University of North Carolina at the time Paul Roady came by my office asked me

what I was doing. And I said I'm looking at the first political prediction market we have.

And Paul who's an economic historian said, nope, that's totally not correct. He was MIT and I'm Stanford and a lot of times creative fractions happen from people with their perspectives. That's Paul Roady. He's an economic historian at the University of Michigan. But back in the early 2000s, he worked on the hall from Coleman at the University of North Carolina. I happened to be reading some microfilm at the library and came across new stories in October

November 1924 at that election market. So, I got Coleman struck to his office and said, hey, did you know this happened? And he wasn't aware that they happened so it was a interesting surprise for both of us. Paul and Coleman started digging into the archives in earnest. And it turns out pretty much as long as there have been elections, people have been betting on them. Back to the 16th century, there's betting on who would become the Pope.

Elections in city states in Venice in Genoa and in the U.S., you can like find markets going back to George Washington, how long the stamp act would be in place before the American Revolution. Paul and Coleman say, for centuries, these markets stayed relatively small. There wasn't a ton of money on the line. Sometimes the bets didn't involve money at all. If the candidate I support doesn't win, I'm going to cut my beard.

“Or I'm going to walk from New York to Boston. Or you have to eat a crow if I'm right.”

You have to push me in a wheelbarrow down Main Street. But around the turn of the 20th century, election markets in the United States really started to steam. The main place that people would trade on elections was something called the curb exchange, which literally as the name suggests was the curb outside the New York Stock Exchange. They'd be sitting on the curb and they'd be trading stocks and signaling the people in the

offices about them. Stocks to be clear in political candidates. People running for office.

tell us what the overall price was, but the names of the people trading.

“And if you look, the people were trading. These were like the lead of the city.”

These were people from Tamony Hall, these were bankers, Wall Street folks, people on hotels. People would be doing this very publicly. So if you were like the head of the Republican Party, or you're the head of the New York Times, you'd be expected to go to the batting commissioner and be willing to offer money for your candidate. So if you're part of the publicity about your standing behind this person, you think they have a good shot of winning.

Were you expected to bet on your own candidate or could you bet against your candidate if you thought your candidate wasn't going to win? So we knew that like William Jennings Bryant, the populist from Nebraska, was not popular with the workers in New York. The Democratic machine in New York has to like that for him. But then the stories are behind the scenes,

“they're placing bats the other way to so they cancel out. Because they don't want to lose money.”

Like publicly, they'll say, we love him. We endorse him, but they don't want to lose their money in the market. Yeah, so they're going to be like hedging or going against their candidate. All of this was happening in a sort of legal gray area, making a friendly bet on the outcome of an election wasn't against the law. But if he did that, you weren't supposed to vote. But I don't think anybody ever said we're turning away from the polls because we know that

you bet on elections. Were these prediction markets, as far as you can tell, good at predicting the outcomes of elections and whatever else was being bet on? So this was like the second thing that I was wrong about. My sense was, okay, the markets will do as well as they can, but there's not much information to be had. These markets won't really tell

us anything. Well, that I was definitely wrong on. And they were always right, basically. They

would tell us who would win. They could give you sense of whether they're be a landslide. It was really pretty remarkable. By the 1980s, the Iowa electronics market would put that theory into practice, but why did it take them so long? That's after the break. You know, every day on up first NPR's Golden Globe nominated morning news podcast, we bring you

“three essential stories. At the heart of each story, our questions. What really happened?”

What really mattered? What happens next? At NPR, we stand for your right to be curious and follow the facts. Follow a first wherever you get your podcasts and start your day knowing what matters and why. Hi, it's Terry Gross, host of fresh air. Hey, take a break from the 24-hour news cycle with us and listen to long-form interviews with your favorite authors, actors, filmmakers, comedians, and musicians. The people making the art that nourishes us and speaks to our times.

So listen to the fresh air podcasts from NPR and WHOY. This week on shortwave with the price of jet fuel soaring, the hunt is on for other ways to power air travel sustainably. We are working with companies that take post-aneroic digested human sewage and turn that into jet fuel. How scientists are considering every possibility, even poop, to power the future of air travel. This week on shortwave, listen in the NPR app or wherever you get your podcasts.

And now, part three, the other golden age of prediction markets back to run from through a line with economist Coleman Strumpf. You kind of pointed out that late 19th century to World War II era as this kind of golden age almost of prediction markets, why did they fall off after that for a while? It's a combination of factors. One of the things that both drove the popularity of the markets as well as the discussion of the markets was the press coverage.

Through this period, all the newspapers covered it, but they were never very comfortable doing this.

Then in the 1930s, that's when the scientific polls galloped and some other folks came around. And so the polls were doing something that was kind of the same thing. And newspapers were much more comfortable writing about polls than they were with markets. The other thing, in some sense, has to do with interest of the people trading. So if you're somebody who really likes this for whatever reason, you like to be known as a good forecast, or you like to make money, you like the

adrenaline rush, any of these factors, the problem with elections or at least I'll just say U.S. elections as we don't have enough of them. This is around the time when Thor read racing, started to really take off. And so instead of a couple of then a year, you could have 12 races a night. And I think for people who were interested in that, I think the horse track was more

at that time. As far as Coleman and Paul can tell, presidential election markets went

“dark sometime in the 1940s. And then for the next four decades, radio silence.”

I have never found one person who could have been around during that period, or even books that

talk about elections during that period that mentioned these markets. This was not some small tiny thing. I don't know how they managed to slip through the cracks of, you know, what's known about that time, but they seemingly did. Until 1988, when three professors in Iowa went for a three-beer lunch, and the Iowa electronic markets, catapulted prediction markets back into the public consciousness as an alternative to political polls. Here's Robert Forsyth again,

one of the founders of the Iowa electronic markets. Once we went nationally, two things happened. We would get phone calls from traders around the country. Dr. Realizing we had a $500 limit that money to send us a check for $700,000 to invest in the market. And we'd have to say, "Well, gee, that'd be great, but we only can take $500 in your money." But we've got to realize that many of these people weren't speculators. These were people that

were involved and were trying to hedge some political risks that would affect their company, their operations. Say you're worried a certain candidate might win and pass laws that will hurt your business. You can hedge your bets. Put some money on the person you do not want to win. If they win, you cover your losses. So that was the one kind of phone call. And then we would occasionally

“get a phone call saying, "This is great, but you have to stay small. We stay in the United States.”

Once you come with us and come over to the Cayman Islands, they'll be operated there. And you can run in the Congress direction." And maybe he should have done that. I don't know. That's the important time. We were a bunch of academics who were particularly concerned with our teaching and our research. And so we turned those opportunities down. Looking back on it now. Why do you say, "Well, maybe we should have done that."

Well, you know, there are days that I'm sort of jealous of a calls sheet and a polymark. I mean, they've really taken the same idea. I mean, they're running the basic same prediction

markets we did when I'm on a much bigger scale. Fact-down, they basically used the same rules

for trading and issuing contracts that we used back in 1988. But they certainly have expanded it vastly until you can just about trade or anything there. The Iowa Electronic Market established something important. It demonstrated to modern economists that prediction markets worked. And that sparked a chain reaction says economists Coleman's Trump. Once we see, oh look, these markets kind of work in the modern

“period. Could we use these markets to forecast other things? So could we look at other elections?”

Could we look at current events? And I think it kind of showed to the world that these things could work. But maybe it was only in this one specific domain. And we didn't yet know would that same kind of forecasting savvy translate into other situations? So that was for other markets to tell point out. That was Economist Coleman's Trump, speaking with Rund Abdel Fata and throughline NPR's History Podcast. Each episode, they take today's big questions and find the

context in history. Deeply research stories, beautifully sound designed. This is just a part of their episode on prediction markets. They have much more on terrorism future markets and military applications. Check it out in their podcast feed. We will put a link in our show notes.

Thanks as always to our NPR+ supporters, reminder that we have a live virtual book tour event

for you this Thursday June 25th at 3 p.m. Eastern. Check out the start of our most recent bonus episode for details on joining. We're hoping to do more virtual events like this. And if you are in a supporter and want to become one, yes please go to plus.npr.org. This episode was produced for Planet Money by Sam Yellow Horse Kessler and edited by Alex Goldmark. America Baris and I'll let throughline and run, give you the credits in their classic

throughline style. I'm Rund Abdel Fata. Throughline was created by me and Romteen Annablui. This episode was produced by me and Sarah Wyman, Julia Redpath, Casey Feiner, Cristina Kim, Devon Kadiyava. Kiana, welcome! I remo-guchi, Julie Kaye. Thank you to David Beary, Brett Nili, Johannes Durgy, Dylan Kerks, Rebecca Ferrar, Yolanda Sengwany, and Tommy Evans. And shout out to Michael Strumpf. Fact checking for this episode was done by Kevin Volkl.

band Drap Electric, which includes Navid Marvi, show Fujiwara, Ania, Mizani. This is NPR.

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