Before Kalshi and Polymarket there was the Iowa Electronic Markets

**Erika Beras** (0:01)
Hey, guys, we have an episode for you. We always do. But first, we have a question.

**SPEAKER_2** (0:05)
A lot has happened in the past five or so years, and we want to know how you all are holding up. Did you make any big decisions that are maybe backfiring now? Like, did you move to Montana during the pandemic and now your work wants you back in the office in Seattle?
What's your plan?

**Erika Beras** (0:23)
Or is your money in the stock market right now and you're just like watching it grow, grow, grow, grow? What are you spending it on?

**SPEAKER_2** (0:30)
Yeah, we want to check in with our whole Planet Money community. Does it feel like things cost a lot more these days? Groceries, going on dates, doing something fun for your family. Have you found any great life hacks to help you get by or maybe even thrive in this economy?

**Erika Beras** (0:46)
Yeah, we want to hear from you and maybe we'll call you up for a future show about how things feel right now. Send us an email about how the economy is affecting you and your life at planetmoneyatnpr.org and maybe we'll call you up to chat.

**SPEAKER_2** (1:00)
That email planetmoneyatnpr.org. All right, Erika, you have a show to start.

**Sarah Wyman** (1:05)
This is Planet Money from NPR.

**Erika Beras** (1:10)
Recently I heard a story that changed how I think about prediction markets. One moment in the story in particular. It was part of the history of where prediction markets came from, which, as you may have heard, goes back hundreds of years in some form. But also in another form, prediction markets, as we know them today, were cooked up by economists trying to test some theories on markets. And in this story of the evolution of prediction markets, there's a moment when an economic historian studying the long ago early roots of prediction markets realizes there's already a well-functioning design of a prediction market at the racetrack.
Now of course, many of you will say, yeah, obviously gambling is gambling, of course. But the part I didn't quite know is that prediction markets for elections were popular and robust until they mysteriously faded away. And one theory is horse racing took over. You know, because instead of an election every year or whatever, you can have a dozen races a week. This all comes from this fascinating history of the economic origins of prediction markets. The economists who cooked up the proto-prediction markets, the political machines that basically had to financially bet on their candidates hundreds of years ago, and even farther back than that. So today, we're going to share an excerpt of this story for you. It comes from our friends at ThruLine, NPR's excellent history podcast. They take one big question every episode and bring you the history and context behind it, beautifully sound designed and deeply researched.
Today, we pass it off to host Rund Abdel-Futta and ThruLine for A History of Prediction Markets.

**Sarah Wyman** (2:57)
Part 1 Three professors walk into a bar.

**Rund Abdelfatah** (3:02)
On a spring afternoon in 1988, Robert Forsythe and two of his colleagues were sitting around a table at a local sports bar called The Airliner in downtown Iowa City. And like they often did, the three economics professors got to talking about the news.

**Robert Forsythe** (3:18)
And I would say the conversation was helped because it was a three beer lunch, which led to this creativity, I think, some days.

**Rund Abdelfatah** (3:26)
Three beers each or each of you had a beer?

**SPEAKER_2** (3:29)
Each, each. Okay.

**Rund Abdelfatah** (3:32)
It was an election year. After Super Tuesday, Michael Dukakis was the presumptive frontrunner for the Democratic nomination.
That is, until a huge surprise upset.

**Bob Edwards** (3:42)
The polls had predicted a Dukakis victory, but it didn't happen.

**Robert Forsythe** (3:46)
It was the day after the Michigan caucus, which, as you may recall, Jesse Jackson won.

**SPEAKER_7** (3:54)
Jesse Jackson. He scored a stunning win yesterday in Michigan's Democratic caucuses, defeating Michael Dukakis by a margin of nearly two to one in the popular vote.

**Robert Forsythe** (4:04)
And that was a big surprise. The polls missed it altogether.

**Rund Abdelfatah** (4:08)
Going in, political polls had shown Jackson and Dukakis running neck and neck.
But what happened was a blowout. Jackson won the Michigan caucus with 53% of the vote, and Dukakis only got 29%.

**Robert Forsythe** (4:21)
And that's where it came from. We said, well, gee, you know, as economists, what would we do if we were going to try to predict the outcome of something? And what's natural for a bunch of economists is to run a market on it.