Many of you may have read the joke memo that former IMF Economic Counsellor Kenneth Rogoff penned in the guise of outgoing World Bank President Paul Wolfowitz warning Bank staffers against insider trading on Wolfowitz resignation contracts on InTrade, one of a number of websites that allow you to essentially make bets on the outcomes of political events.
Funny stuff. Yet very serious, smart people—including Nobel Prize winner and FP contributor Daniel Kahneman—believe that prediction markets similar to InTrade and competitor News Futures "could substantially improve decision making in the private and public sectors," and are pushing for the United States to make them legal (the famous Iowa Electronic Markets are a special case). One intriguing aspect of these markets is that, at least for the moment, insider trading is perfectly legal. Some economists argue that these types of markets function at their best only when they reflect all available information, insider and not.
It strikes me that Hamas, which is struggling to overcome an international boycott and finance its government, may be missing an opportunity here. InTrade has several contracts related to the likelihood of Hamas recognizing Israel. As you can see, the market is heavily discounting the possibility, whether it be by the end of June, September, or December of this year:
Hamas Accepts Israels Right to Exist ON or BEFORE 30 Jun07
Hamas Accepts Israels Right to Exist ON or BEFORE 30 Sep07
Hamas Accepts Israels Right to Exist ON or BEFORE 31 Dec07
If Hamas accepts Israel's right to exist by the end of June, these contracts suddenly become worth 100. If not, they become worthless. Until that time, the price fluctuates based on the odds the market places on the outcome. Below is a graph showing the December 07 contract price over time:
In theory, a quiet, dispersed buy of these very cheap contracts coupled with a well-timed leak could be a quick way to get some cash into the Palestinian Authority's bare coffers. And Hamas wouldn't even have to recognize Israel: Just whisper in the ear of a New York Times reporter that a deal is in the works, sell when the price spikes, and then deny the story.
Then again, it probably won't be long until somebody finds out what was going on. And at these small volumes, other market players will certainly notice if there is a significant buy, and suspect that something is going to happen. That doesn't mean Hamas insiders couldn't make some money, but there's a natural limit to how much the system can be gamed. At the end of the day, the smarter play would be to recognize Israel, renounce terrorism, and reap a financial aid windfall. But I'm betting that won't happen anytime soon.
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