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Saturday, May 14, 2005

Betting On Social Security Reform

After so much talk by the left that Social Security is too important to "gamble" on by allowing private accounts (it's...hold on now...TOO RISKY). So, it's ironic to hear that Tradesports.com has a contract that allows you to bet on whether or not private accounts actually go through. At present, the consensus is that there's only a small chance - the December-2006 contract is currently trading at only $0.29 on the dollar.

I'm a big fan of prediction markets like Tradesports and the Iowa Electronic Markets. Thet're good examples of how markets aggregate available information into prices. I use them as examples in my introductory finance class to illustrate efficient markets, since valuing an Arrow-Debreu securoty (i.e. one that pays off $1 if an event occurs and $0 otherwise) is a lot easier to grasp than valuing a stock or bond.

Thanks to Tyler Cowen at Marginal Revolution and to Chris Masse for the heads up.

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