Social Networking's Impact on the 2008 Presidential Election - And Its Relevancy to Internal Controls

Thomas Jefferson used newspapers to win the presidency; F.D.R. used radio to change the way he governed; J.F.K. was to first president to understand television. Obama was the first to exploit the internet.

In the ongoing series leading up to Inauguration (after which we promise to find another area of interest to blog on - promise!), Honestly Lay Bare has been walking the hall ways of social networking.

The 2008 Presidential Election will be viewed as the moment when social networking as an organising tool came of age.

It was the backbone to one of the most successful political campaigns in United States history and was the basis for the largest known political fundraising effort.

But that isnt what interests Honestly Lay Bare.

What can risk management and internal audit learn from the social networking journey of the last 22 months?

Firstly, the Obama social networking journey.

**

In February 2007, a friend called Marc Andreessen, a founder of Netscape and a board member of Facebook, and asked if he wanted to meet with a man with an idea that sounded preposterous on its face.

Always game for something new, Mr. Andreessen headed to the San Francisco airport late one night to hear the guy out.

A junior member of a large and powerful organization with a thin, but impressive, résumé, he was about to take on far more powerful forces in a battle for leadership.

He wondered if social networking, with its tremendous communication capabilities and aggressive database development, might help him beat the overwhelming odds facing him.

“It was like a guy in a garage who was thinking of taking on the biggest names in the business,” Andreessen recalled.

“What he was doing shouldn’t have been possible, but we see a lot of that out here and then something clicks. He was clearly supersmart and very entrepreneurial, a person who saw the world and the status quo as malleable.”

And as it turned out, President-elect Barack Obama was right.

Like a lot of Web innovators, the Obama campaign did not invent anything completely new.

Instead, by bolting together social networking applications under the banner of a movement, they created an unforeseen force to raise money, organize locally, fight smear campaigns and get out the vote that helped them topple the Clinton machine and then John McCain and the Republicans.

As a result, when he arrives at 1600 Pennsylvania, Mr. Obama will have not just a political base, but a database, millions of names of supporters who can be engaged almost instantly.

The juxtaposition of a networked, open-source campaign and a historically imperial office will have profound implications and raise significant questions. Special-interest groups and lobbyists will now contend with an environment of transparency and a president who owes them nothing.

The news media will now contend with an administration that can take its case directly to its base without even booking time on the networks.

More profoundly, while many people think that President-elect Obama is a gift to the Democratic Party, he could actually hasten its demise. Political parties supply brand, ground troops, money and relationships, all things that Mr. Obama already owns.

And his relationships are not the just traditional ties of Democrats — teachers’ unions, party faithful and Hollywood moneybags — but a network of supporters who used a distributed model of phone banking to organize and get out the vote, helped raise a record-breaking $600 million, and created all manner of media clips that were viewed millions of times.

It was an online movement that begot offline behavior, including producing youth voter turnout that may have supplied the margin of victory.

Obama understood that you could use the Web to lower the cost of building a political brand, create a sense of connection and engagement, and dispense with the command and control method of governing to allow people to self-organize to do the work.

All of the Obama supporters who traded their personal information for a ticket to a rally or an e-mail alert about the vice presidential choice, or opted in on Facebook or MyBarackObama can now be mass e-mailed at a cost of close to zero.

And instead of the constant polling that has been a motor of presidential governance, an Obama White House can use the Web to measure voter attitudes.

**

The campaign's use of social networking is a great case study of rethinking an existing technology.

And perhaps that is what organisations should be doing if that want to improve their control environment in an era of cost consciousness.

Why?

A strong internal control environment is one where there is strong communication.

There would be no stronger demonstration by a company in the trust that it places in its employees to communicate appropriately than to create and foster communities of interest on its own social networking platforms.

Rather than debating whether we should be firewalling this or that site or whether we should be allowing our employees to blog, consideration could be given to emulating the Obama approach.

It has worked once - who is to say it won't work in a company.

The Great ShakeOut

The intent is to hijack imagination to save lives.

For those readers of Honestly Lay Bare in Southern California - apologies up front.

You have just (or SHOULD have just) lived through the details of the following post.

For the rest of you, welcome to the biggest public emergency drill in United States history.

**

At exactly 10am in the morning on Thursday 13th November, about 5 million people in Southern California dropped to the ground.

They took cover under a sturdy peice of furniture and held on as they listened to radio stations and school p.a. systems playing a sound track of rumbling and crashing along with a man's voice declaring:

"If this were the magnitude 7.8 earthquake we're practising for today, you would be experiencing sudden and intense back-and-forth motions of up to 6 ft. per second. The floor or the ground would jerk sideways out from under you. Look around and imagine."

Normally large scale disaster drills - which happen weekly across the United States - are designed for professional rescuers, emergency managers and politicans.

Not for the people that are likely to become instant victims.

**

This drill, too, was originally scheduled as an exercise for only emergency officials.

That exercise - called Golden Guardian - was to involve 5,000 officials from the local police to the United States military, all pretending they are responding to a major quake along the San Andreas Fault.

In this case, though, California decided to invite the people too.

**

Why was it considered necessary - primarily because we nearly always do the wrong thing exactly at the wrong time in disasters such as a major earthquake (standing under door frames is no longer advisable!).

The intent of the ShakeOut drill was to hijack the imagination.

The southern section of the San Andreas Fault hasn't moved in about 300 years. It should move every 150 years - so California is overude for a major quake. But most Southern Californians cannot readily imagine a quake of that scale.

So the purpose of populist drills like this is to save lives.

As things stand now, were the ShakeOut had been a real earthquake, about 1,800 people would die and 53,000 would be seriously hurt.

Damages would reach an estimated US$213 billion and most people in the impacted region would be without electricity and clean water for weeks or months.

The Baltic Dry Freight Index

Risk management is a practice that is perfect in hindsight.

Everyone saw the dot com crash after it happened; everyone could have avoided subprime if only.

That is not to say that risk management is not without its uses ... it just struggles to develop a consistent, universally agreed and applied early warning system of country, economy, market, corporation or product distress.

With that in mind, Honestly Lay Bare went looking for a risk management early warning signal.

The signal had to fit two criteria - firstly it had to be difficult (though not necessarily impossible) to manipulate either due to its size or complexity and secondly it had to be a concept / idea that was subject to ongoing and rigourous analysis.

We think we have found one such signal.

**

The Baltic Dry Index (BDI - also sometimes referred to as the Baltic Dry Freight Index) is a composite of the Capesize, Panamax and Handymax Indices.

If, as Honestly Lay Bare was, you don't know what those Indices are ... they are the indicies for the different size of ships that are used for the transportation of bulk dry commodities such as coal, iron ore, wheat, soyabeans and steel products.

In essence it is a composite of global shipping costs on 26 shipping routes and it is based on a daily assessment from a panel of international ship brokers.

Why is the BDI important?

Well you can't just build a new cargo ship.

When demand for shipping goes up and the supply of boats remains constant prices will go up.

Hence the BDI index can be used as a gauge for the demand of shipping and a proxy for the level of international trade.

A historical review of the data shows a high correlation between global trade and the BDI.

Keep in mind other factors such as oil prices can affect the BDI, but at the same time shipping companies can mitigate these effects by hedging and reducing speeds to conserve fuel.

Most importantly the BDI is a daily index, so demand in the shipping industry can be tracked in real-time.

**

This sounded very academic until we started thinking of its applications.

Lo and behold, Google had thought of it before Honestly Lay Bare.

They too were on the look out for an early warning system - and in doing so have developed the Google Flu Trends tool.

Turns out a lot of ailing Americans enter phrases like “ flu symptoms” into Google and other search engines before they call their doctors.


That simple act, multiplied across millions of keyboards in homes around the country, has given rise to a new early warning system for fast-spreading flu outbreaks, called Google Flu Trends.


Tests of the new Web tool from Google.org, the company’s philanthropic unit, suggest that it may be able to detect regional outbreaks of the flu a week to 10 days before they are reported by the United States Centers for Disease Control and Prevention.

In early February, for example, the C.D.C. reported that the flu cases had recently spiked in the mid-Atlantic states.

But Google says its search data show a spike in queries about flu symptoms two weeks before that report was released.

Its new service at google.org/flutrends analyzes those searches as they come in, creating graphs and maps of the country that, ideally, will show where the flu is spreading.


The C.D.C. reports are slower because they rely on data collected and compiled from thousands of health care providers, labs and other sources.

**

As quickly as we thought there were no such things as an early warning system - we found two.

What we were not able to find, however, were reliable and universally agreed early warning signs for corporate or divisional distress.

What would they be if they did exist (and perhaps they already do).

How about the spend on information technology lawyers?

Well it is the theory (yet to be put to rigourous analysis) of Honestly Lay Bare that if there is a corporate distress moment looming one of the first things that goes by the wayside is major investment in information system upgrades.

For major information system implementations to take place you are going to need a contract.

A contract for a major information system implementations is likely to be complex so you are likely to need an information technology lawyer.

No information system implementation - no contract - no information techology lawyer spend.

(Thanks to Brett for the BDI idea Post based in part on Google Uses Searches to Track Flu's Spread by Miguel Helft, The New York Times, November 12 2008)

The Presidential Transition Act of 1963

The only thing more expensive than education is ignorance

In what will be a series of posts that explore relevant aspects of the recent United States election to the world of independent assurance, Honestly Lay Bare today brings down from the shelf the Presidential Transition Act.

The Presidential Transition Act of 1963 (Public Law 88-277, 3 U.S. C. 102 note) was enacted to provide for the orderly transfer of executive power in connection with the expiration of the term of office of a President and the inauguration of a new President.

Since the time the Presidential Transition Act was passed, transitions have grown more complex and cumbersome, often leaving the new administration without the head start it needs to begin governing on inauguration day.

What in the world can The Presidential Transition Act of 1963 have to do with the best practice execution of corporate governance, risk management and internal audit.

Thanks for asking!

**

The United States Government Accountability Office (the GAO) – the audit and investigative arm of the United States Congress – has recently released a website called www.gao.gov/transition_2009 which should serve as the model that all professionals interested in mitigating risk within their organisation (or indeed countries!) can turn to during times of either Board or Senior Management transition.

What the GAO has done is to revisit all of its recent work to identify where its work can help address urgent challenges facing the United States, to assist new appointees from President Obama down to focus on the challenges of governing and to help identify areas with potential to save billions of dollars.

Keep in mind that this is the first post September 11, 2001 transition of power and is in an environment where there are serious challenges relating to financial markets and the economy.

As the Acting Comptroller General Gene Dodaro said at the time of the release of the website: “The new website is designed to be easy to navigate and to find information since this is a period when appointees have limited time to learn about their new positions and the challenges that come with making a successful transition from campaigning to governing”.

The GAO is designated by the Act as a primary source of briefings to new appointees.

**

Translate this now what role assurance professionals can and should play in ensuring smooth transitions of power.

Should corporates seek to develop their equivalent of the GAO site and would that be beneficial to the continuity of understanding of risk within the organisation.

Honestly Lay Bare can see the day when organisations serious about ensuring that risks are perpetually managed well develop and maintain a secure transition website that is used to inform, educate and caution incoming or newly appointed senior custodians of the past and current health of the organisation and what challenges may lie ahead.

Yes it will cost money but to use the words Margaret Thatcher … the only thing more expensive than education is ignorance.

Ignorance of risks should never be an option.

The Stockholm Syndrome

This is an example of what the world of auditing can learn from the world of pyschology.

What was otherwise a routine bank robbery in central Stockholm in August 1973 has far reaching consequences for how independant assurance providers remain independant in the face of both great adversity and great kindness.

***

On August 23, 1973, Jan Erik Olsson, on leave from prison, walked into Kreditbanken at Norrmalmstorg, central Stockholm and attempted to hold up the bank.

Swedish were called in immediately, two of them went inside, and Olsson opened fire, injuring one policeman. The other was ordered to sit in a chair and "sing something".

He started singing "Lonesome Cowboy".

Olsson then took 4 people as hostages. He demanded his friend Clark Olofsson to be brought there, along with 3 million Swedish Kronor ($730,000 US 1973 value), two guns, bullet-proof vests, helmets and a fast car.

Olofsson was brought in by permission of the government and established a communication link with the police negotiators.

One of the hostages, Kristin Enmark, said she felt safe with Olsson and Olofsson but feared the police might escalate the situation by using violent methods.

Olsson and Olofsson barricaded the inner main vault in which they kept the hostages. Negotiators agreed that they could have a car to escape, but would not allow them to take hostages with them if they tried to leave.

Olsson called up the Swedish Prime Minister Olaf Palme and said he would kill the hostages, backing up his threat by grabbing one in a stranglehold; she was heard screaming as he hung up.

The next day Olof Palme received another call.

This time it was Kristin Enmark - a hostage - who said she was very displeased with his attitude, asking him to let the robbers and the hostages leave.

The drama went on.

On August 26, the police drilled a hole into the main vault from the apartment above. From this hole a widely circulated picture of the hostages with Olofsson was taken.

Olsson fired his weapon and threatened to kill the hostages if any gas attack was attempted.

On August 28 the gas was used anyway, and after half an hour Olsson and Olofsson surrendered.

No one was physically injured.

***

It was this bank robbery and hostage crisis that gave rise to the concept of the Stockholm Syndrome.

The Stockholm Syndrome is a psychological response sometimes seen in an abducted hostage, in which the hostage shows signs of loyalty to the hostage-taker, regardless of the danger (or at least risk) in which they have been placed.

According to the psychoanalytic view of the Syndrome, the tendency might well be the result of employing the strategy evolved by newborn babies to form an emotional attachment to the nearest powerful adult in order to maximize the probability that this adult will enable — at the very least — the survival of the child, if not also prove to be a good parental figure.

This Syndrome is considered a prime example for the defence mechanism of identification.

***

So what relevance does the Stockholm Syndrome have to the world of independence assurance?

Does the name of David Duncan help you?

Duncan was the United States Government's star witness in the Arthur Andersen trial.

He was an Andersen employee for 20 years, who was the partner in charge of the Enron account since 1997, for which he was paid over $1 million.

He was fired from Andersen in January 2002 and charged with obstruction of justice for ordering Andersen staff to shred over a ton of papers related to Enron.

Duncan has said that he ordered the shredding as he had fears over the interpretation that he had provided to aspects of Enron accounting.

Were Duncan's actions therefore a corporate manifestation of the Stockholm Syndrome.

Did he act in the interests of Enron and not in the interests of providing a fair and balance assessment of their financial status?

Was Duncan somehow "captured" by Enron to the point that he could not otherwise see the failings in his actions?

Even if he didn't think that he was doing it he ultimately showed loyalty to Enron to the detriment of Arthur Andersen.

In doing so how different was he from the hostages of Kreditbanken?

The Capital Hill Baby Sitting Co-Op Depression

Whimsical parables are not a waste of time but the key to enlightenment

Honestly Lay Bare loves a great academic journal article.


They don’t come much better than an article in the Journal of Money, Credit and Banking in 1978 (yep – 30 years ago!)

Last week, Paul Krugman, the esteemed Princeton economist and New York Times columnist, won the Noble Memorial Prize in Economic Science for his work on international trade patterns.

He considers this article (the one from the Journal … not alas from Honestly Lay Bare) as the story that changed his life and his understanding of risk and her manifestions within an economy.

***

The story is told in an article titled "Monetary Theory and the Great Capitol Hill Baby-Sitting Co-op Crisis” by Joan and Richard Sweeney. At the time of the article Richard Sweeney was the deputy director, Officer of International Monetary Research at the United States Treasury.

The Sweeneys tell the story of—you guessed it—a baby-sitting co-op, one to which they belonged in the early 1970s.

Such co-ops were quite common: A group of people (in this case about 150 young couples with congressional connections) agrees to baby-sit for one another, obviating the need for cash payments to adolescents.

It's a mutually beneficial arrangement: A couple that already has children around may find that watching another couple's kids for an evening is not that much of an additional burden, certainly compared with the benefit of receiving the same service some other evening. But there must be a system for making sure each couple does its fair share.

The Capitol Hill co-op adopted one fairly natural solution.

It issued scrip—pieces of paper equivalent to one hour of baby-sitting time. Baby sitters would receive the appropriate number of coupons directly from the baby sittees. This made the system self-enforcing: Over time, each couple would automatically do as much baby-sitting as it received in return. As long as the people were reliable—and these young professionals certainly were—what could go wrong?

Well, it turned out that there was a small technical problem.

Think about the coupon holdings of a typical couple.

During periods when it had few occasions to go out, a couple would probably try to build up a reserve—then run that reserve down when the occasions arose. There would be an averaging out of these demands. One couple would be going out when another was staying at home. But since many couples would be holding reserves of coupons at any given time, the co-op needed to have a fairly large amount of scrip in circulation.

Now what happened in the Sweeneys' co-op was that, for complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low.

As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple's decision to go out was another's chance to baby-sit; so it became difficult to earn coupons. Knowing this, couples became even more reluctant to use their reserves except on special occasions, reducing baby-sitting opportunities still further.

In short, the co-op had fallen into a recession.

Since most of the co-op's members were lawyers, it was difficult to convince them the problem was monetary.

They tried to legislate recovery—passing a rule requiring each couple to go out at least twice a month. But eventually the economists prevailed. More coupons were issued, couples became more willing to go out, opportunities to baby-sit multiplied, and everyone was happy. Eventually, of course, the co-op issued too much scrip, leading to different problems ...

What the Capitol Hill Baby-Sitting Co-op experienced was a real recession.

Its story tells you more about what economic slumps are and why they happen than you will get from reading a year's worth of Wall Street Journal editorials.

And if you are willing to really wrap your mind around the co-op's story, to play with it and draw out its implications, it will change the way you think about the world.

For example, suppose that the U.S. stock market was to crash, threatening to undermine consumer confidence. Would this inevitably mean a disastrous recession?

Think of it this way: When consumer confidence declines, it is as if, for some reason, the typical member of the co-op had become less willing to go out, more anxious to accumulate coupons for a rainy day. This could indeed lead to a slump—but need not if the management were alert and responded by simply issuing more coupons.

Above all, the story of the co-op tells you that economic slumps are not punishments for our sins, pains that we are fated to suffer.

The Capitol Hill co-op did not get into trouble because its members were bad, inefficient baby sitters; its troubles did not reveal the fundamental flaws of "Capitol Hill values" or "crony baby-sittingism."

It had a technical problem—too many people chasing too little scrip—which could be, and was, solved with a little clear thinking.

But if it's all so easy, how can a large part of the world be in the mess it's in?

First, we have to imagine a co-op the members of which realized there was an unnecessary inconvenience in their system. There would be occasions when a couple found itself needing to go out several times in a row, which would cause it to run out of coupons—and therefore be unable to get its babies sat—even though it was entirely willing to do lots of compensatory baby-sitting at a later date.

To resolve this problem, the co-op allowed members to borrow extra coupons from the management in times of need—repaying with the coupons received from subsequent baby-sitting. To prevent members from abusing this privilege, however, the management would probably need to impose some penalty—requiring borrowers to repay more coupons than they borrowed.

Under this new system, couples would hold smaller reserves of coupons than before, knowing they could borrow more if necessary. The co-op's officers would, however, have acquired a new tool of management. If members of the co-op reported it was easy to find baby sitters and hard to find opportunities to baby-sit, the terms under which members could borrow coupons could be made more favorable, encouraging more people to go out. If baby sitters were scarce, those terms could be worsened, encouraging people to go out less.

In other words, this more sophisticated co-op would have a central bank that could stimulate a depressed economy by reducing the interest rate and cool off an overheated one by raising it.

Now, imagine there is a seasonality in the demand and supply for baby-sitting.

During the winter, when it's cold and dark, couples don't want to go out much but are quite willing to stay home and look after other people's children—thereby accumulating points they can use on balmy summer evenings.

If this seasonality isn't too pronounced, the co-op could still keep the supply and demand for baby-sitting in balance by charging low interest rates in the winter months, higher rates in the summer.

But suppose that the seasonality is very strong indeed.



Then in the winter, even at a zero interest rate, there will be more couples seeking opportunities to baby-sit than there are couples going out, which will mean that baby-sitting opportunities will be hard to find, which means that couples seeking to build up reserves for summer fun will be even less willing to use those points in the winter, meaning even fewer opportunities to baby-sit ... and the co-op will slide into a recession even at a zero interest rate.

***

As Krugman notes “so the story of the baby-sitting co-op is not a mere amusement. If people would only take it seriously—if they could only understand that when great economic issues are at stake, whimsical parables are not a waste of time but the key to enlightenment—it is a story that could save the world.”


(Post based nearly completely on Baby Sitting the Economy by Paul Krugman Slate and Monetary Theory and the Great Capital Hill Baby Sitting Co-op Crisis by Joan and Richard Sweeney The Journal of Money, Credit and Banking 1978)

Three Mile Island: A "Normal" Accident

It is almost inevitable that some combinations of minor failures will eventually amount to something catastrophic

The Three Mile Island accident of 1979 was the most significant accident in the history of the American commercial nuclear power generating industry.

There were no deaths or injuries to plant workers or members of the nearby community which can be attributed to the accident.

Public reaction to the event was probably influenced by at least three factors: first, the release (a few weeks before the accident) of a popular movie called The China Syndrome, concerning an accident at a nuclear reactor; secondly, what was felt to be a lack of official information in the initial phases of the accident; and lastly, many of the statements made by political and social activists long opposed to nuclear power.

Whatever the sources of the local fear and outrage, public reaction to the event is judged by some epidemiologists to have induced stresses in the local population that could have caused adverse health effects.

The accident began on Wednesday, March 28, 1979, and ultimately resulted in a partial core meltdown in Unit 2 of the nuclear power plant (a pressurized water reactor) of the Three Mile Island Nuclear Generating Station in Dauphin County, Pennsylvania near Harrisburg.

***

The conclusion of the President's commission that investigated the Three Mile Island accident was that it was the result of human error, particularly on the part of the plant's operators.

The trouble started with a blockage in what is called the plant's polisher-a kind of giant water filter.

Polisher problems were not unusual, or particularly serious.

But in this case the blockage caused moisture to leak into the plant's air system, inadvertently tripping two valves and shutting down the flow of cold water into the plant's steam generator.

As it happens, Three Mile Island had a backup cooling system for precisely this situation. But on that particular day, for reasons that no one really knows, the valves for the backup system weren't open.

They had been closed, and an indicator in the control room showing they were closed was blocked by a repair tag hanging from a switch above it. That left the reactor dependent on another backup system, a special sort of relief valve.

But, as luck would have it, the relief valve wasn't working properly that day, either. It stuck open when it was supposed to close, and, to make matters even worse, a gauge in the control room which should have told the operators that the relief valve wasn't working was itself not working.

By the time engineers realized what was happening, the reactor had come dangerously close to a meltdown.

Here, in other words, was a major accident caused by five discrete events.

There is no way the engineers in the control room could have known about any of them.

No glaring errors or spectacularly bad decisions were made that exacerbated those events. And all the malfunctions-the blocked polisher, the shut valves, the obscured indicator, the faulty relief valve, and the broken gauge-were in themselves so trivial that individually they would have created no more than a nuisance.

What caused the accident was the way minor events unexpectedly interacted to create a major problem.

***

This kind of disaster is what the Yale University sociologist Charles Perrow has famously called a "normal accident." By "normal" Perrow does not mean that it is frequent; he means that it is the kind of accident one can expect in the normal functioning of a technologically complex operation.

Modern systems, Perrow argues, are made up of thousands of parts, all of which interrelate in ways that are impossible to anticipate.

Given that complexity, he says, it is almost inevitable that some combinations of minor failures will eventually amount to something catastrophic.

In a classic 1984 treatise on accidents, Perrow takes examples of well-known plane crashes, oil spills, chemical-plant explosions, and nuclear-weapons mishaps and shows how many of them are best understood as "normal."

***

Perrow’s observations raise an interesting challenge for the pracitce of risk management.

Is it posssible that there is a type of event that we can expect with absolute certainty as to its occurence if not the timing.

In Perrow’s wordings – a normal accident.

If there is such a beast then doesn’t that challenge our underlying assumptions about the likelihood of a risk event eventuating or more precisely the process by which we currently identify which events should be classified as subject to normal accident or not.

Number 44

By watching the political stock market it is possible to gauge the effect of an ad, a policy announcement or an alleged affair on the part of a candidate almost instantaneously

On this the eve of what has been the most interesting Presidential campaign in modern times, Honestly Lay Bare revisists a concept that we touched upon in February 2006 about prediction markets.

See: http://www.honestlylaybare.com/2006/02/internal-internet-based-virtual-stock.html

The purpose of today is not to rehash the relevancy of such markets to the management of risk within corporations nor is it to push any one political viewpoint.

No, the purpose of today is to put one such market - the Iowa Electronic Market - to the ultimate test (and to pander to Honestly Lay Bare's near insatiable appetite for American politics).

***

The Iowa Electronic Markets, or IEM, is a group of real-money preidction markets / future markets operated by the University of Iowa Tippie College of Business.

The IEM allows traders to buy and sell contracts based on, among other things, political election results and economic indicators.

The premise behind the IEM, which was first used in the 1988 presidential election, is that voters don't have any incentive to tell pollsters the truth.

But when their own money is on the line, people will act on information that affects the chances the candidates have of winning or losing an election.

The political election results have been highly accurate, especially when compared with traditional polling.

This may be because it uses a free market model to predict an outcome, instead of the aggregation of many individuals' opinions. The speculator is more interested in a correct outcome than in his or her desired outcome.

***

In the final days of the 2008 campaign (as of Friday 31st October 2008), traders on the IEM continued to favor Barack Obama and Congressional Democrats to win next week's general elections.

A contract for Obama was selling for 85 cents on the IEM's Winner Take All market, while a contract for John McCain was selling for 15.3 cents.

The numbers mean that IEM traders believe there is an 85 percent probability that Obama will win the popular vote on Tuesday, while McCain has a 15.3 percent probability of winning.

The 85-15 price spread has been largely unchanged for about three weeks.

On the IEM's presidential Vote Share market, Obama's contract was selling at 54.7 cents, while McCain's was selling at 47 cents.

Those figures mean that traders believe Obama will receive 54.7 percent of the two-party popular vote, while McCain will receive 47 percent.

On the IEM's Congressional Control markets, Democrats are being given a 96.1 percent chance of maintaining control of both chambers of Congress. House Democrats have a 98.8 percent probability of adding to their majority and Senate Democrats a 97.5 percent probability of adding to theirs.

***

Come Tuesday - assuming no hanging chads - we will find out whether the IEM is right.

If it is, score that as another win for predictive markets.