Three economists grabbed a beer. A multibillion-dollar industry was born.
This was in Iowa City in 1988, long before anyone could bet on elections or Super Bowl halftime shows with their phone. The professors were trying to solve the sort of problem social scientists tackle over lunch. Why did polls get elections so wrong — and what could be done about it?
Civil rights leader Jesse Jackson had just trounced Michael Dukakis in the Michigan presidential primary — despite polls predicting Dukakis would win easily. Professor Robert Forsythe and two of his University of Iowa colleagues, George Neumann and Forrest Nelson, wondered how economics might do a better job than traditional polls.
It doesn’t take a Ph.D. to guess the punchline here. “Well, we would make a market off of it,” Forsythe recalled them concluding.
By the time they finished their meal, the trio had settled on an idea: a marketplace for betting on the outcome of events that could serve as a tool for forecasters. “It’s amazing after a three-beer lunch what you come up with,” he said.
he economists built a prediction market at the University of Iowa as an academic experiment to test whether their idea that betting markets could provide useful information about future events would even work. It did. The Iowa Electronic Markets helped plant the seed for the modern-day prediction market companies that have ballooned into a multibillion-dollar industry, offering contracts on everything from the Super Bowl to the number of times Elon Musk will post on X in early February.
Forsythe sees Kalshi and Polymarket as direct descendants of his academic experiment, and he has been gratified to see the ideas that he and his colleagues spent decades working on now operating at such a massive scale: Kalshi saw more than $1 billion in trading on Super Bowl Sunday alone. “It’s good to see markets having the kind of success they are — we really launched something,” Forsythe said, adding that the success of companies running with their idea has also stirred “a bit of jealousy.”
The original market in November 1988 was a modest enterprise. They stuck the server in an empty faculty office that was so small it barely had room for two chairs.
They called it the “Iowa Political Stock Market” and recruited university staff members and students to buy and sell contracts on how likely Dukakis was to prevail against Republican George H.W. Bush. At the time, most students didn’t even have personal computers to make trades, so they went to student computer labs — destinations that became outright crowded on Election Day.
Forsythe remembers waiting anxiously with his collaborators for the returns to come in, watching two separate television sets at Forrest Nelson’s house. “At one point, we were pretty much dead on,” he said, with one of them exclaiming: “Oh God — it better not change very much.”
They didn’t have to worry: Even with a tiny pool of less than 200 traders, the market was shockingly accurate. Its prices correctly indicated that Bush would get exactly 53.2% of the popular vote. The market’s forecast for Dukakis’ vote share was 45.2% — just 0.2 percentage points below the actual total of 45.4%.
While many of the early traders were political junkies who followed every campaign development, others were students who got more interested once they had “a few dollars on the line,” giving them a financial incentive to seek out new, relevant information that could affect the future outcome, Forsythe said.
The biggest profit in that first market? $13.54, on a $250 investment.
By the next presidential election, the operation had gone national as the “Iowa Electronic Markets” with the blessing of the federal Commodity Futures Trading Commission — but only with the understanding that it would remain an operation that ran for “solely academic and experimental purposes,” with no outside advertising, and individual traders couldn’t invest more than $500. The Iowa prediction markets continued to outperform many leading polls, especially during the run-up to an election.