What Are Political Futures?

Political futures are a type of futures contract used to speculate on the outcome of political events. Although they are similar in function to commodity futures contracts, political futures are currently illegal in the United States.

Key Takeaways

  • Political futures are used to speculate on political events.
  • They are traded on prediction markets, such as those operated by the University of Iowa or the Victoria University of Wellington.
  • Newer markets, such as the open-source "Augur" exchange, are making it possible to trade political futures without any third-party intermediaries.

Understanding Political Futures

Political futures markets are a type of prediction market in which participants speculate by buying "shares" in a particular forecasted outcome. For example, an investor might be a political future in which they profit if a given political candidate wins their upcoming election. Other investors would buy shares in the opposite outcome, and would stand to benefit if that candidate loses.

Political futures are similar to binary options, in that the outcomes must be unambiguous and mutually exclusive. For instance, the question "Will Joe Biden win re-election in 2024?" would be an appropriate subject for a political futures contract. On the other hand, a question such as "How many Model 3s will Tesla (TSLA) manufacture in 2020?" would not be an appropriate question, because the answer cannot be reduced to a binary outcome such as "Yes" or "No."

If the investor's prediction is correct, then they receive a payout, while incorrect predictions receive nothing. Understandably, riskier bets are associated with higher potential payoffs, and vice-versa.

In the U.S., where "gambling" on elections is still outlawed, the only U.S.-based political futures market that receives cash bets is the Iowa Electronic Markets (IEM) platform, which is operated by the University of Iowa for research purposes. After starting as a teaching aid in 1988, it received an exemption from the Commodity Futures Trading Commission (CFTC) in 1993. Under the terms of this exemption, the IEM must operate for strictly academic purposes, meaning its administrators must not profit from the platform. Also, the IEM is prohibited from purchasing ads.

The IEM is typical of political futures markets, in that traders can buy and sell real-money contracts based on their beliefs about election outcomes. Until the past 2020 presidential elections, participants were limited to contracts of $500 and could speculate on the outcome of the 2020 presidential election.

Real-World Example of Political Futures

Prediction markets have been growing in popularity throughout the world, so much so that they could potentially compete with existing regulated exchanges. Nevertheless, due to the dubious legal standing of political futures in the U.S., those wishing to speculate on political events may need to make use of markets in other countries.

One popular example is "PredictIt," a prediction market operated by the Victoria University of Wellington in New Zealand, which operates under similar terms as the IEM.

Another example is the open-source prediction market, "Augur." Founded in 2014, this market uses blockchain technology based on the Ethereum platform. It allows participants to create, predict, and speculate on derivative contracts linked to the outcome of specific events—cutting out third-parties entirely. 

In addition to political forecasting, Augur can be used to hedge against events such as market crashes and geopolitical upheaval. Questions about the legality of such markets, and how they should be regulated, still have to be resolved in the U.S. and elsewhere.