May 1, 2009

I guess it was inevitable: Intrade, the “prediction market” that allows you to place bets on events happening in the real world, is now allowing traders to buy contracts based on how many people in the US contract Swine Flu in the next couple of months. Essentially, Intrade enables people to buy contracts that will pay off if a certain prediction comes true in a set period of time, allowing people to bet on everything from the outcome of presidential elections, to who will win on American Idol; these contracts are traded like stocks on Intrade, their value rising or falling as traders assess and reassess how likely the predictions are of coming true.

At the moment, Intraders think there’s a 90% chance that there will be more than 500 cases of Swine Flu in the US by the end of June, and a 40% chance of more than 5000.

It’s all a bit crass, and more than a little macabre, but in the past prediction markets have been surprisingly accurate at predicting all sorts of things. In this case, we’ll see.

Intraders aren’t the only ones attempting to use economic insights to make sense of the Swine Flu crisis. In the New York Times Economix blog, former International Monetary Fund chief economist Simon Johnson contrasts how public health officials have handled Swine Flu so far with the performance of financial officials handling our ongoing financial crisis.

“I’m concerned about this virus and taking it seriously,” Johnson writes. “Yet I’m currently much less worried about the swine flu outbreak, in terms of both its economic impact and how it will affect lives, than I am about the continuing financial system disruption in the United States, Western Europe and around the world.”

Why? Because he’s got a lot more faith in public health experts than he does in his fellow economists. Medical advances allow researchers to quickly make sense of emerging viruses, and drug companies to quickly whip up vaccines. Public health officials are much better at communicating real risks to the public, in contrast to financial officials who’d prefer to pretend the risks aren’t there until it’s too late.

As for economists, well, Johnson says, “we recognize an insolvent bank when we see one, sometimes. But can we prevent major bank-type institutions from failing, can we stop such failures from cascading through the global financial system, and can we be sure that such panics will not push the global economy into deep and prolonged recession?” Indeed, he concludes, everything we’ve seen over the course of this crisis demonstrates that “economics is in a position similar to that of medicine before the germ theory of disease.”

In other words: there’s no way public health officials are going to make a bigger mess in dealing with the Swine Flu than our financial officials have made in dealing with financial crises.

If like me you’ve been more worried lately about Swine Flu than you have been by our financial mess, that’s actually sort of reassuring.

— David Futrelle

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