Virtual Stock Markets in Taiwan
John Poindexter's brief tenure at the Pentagon fell apart when it was revealed that he was engaged in setting up a virtual stock market for terrorist acts. Thus, he was going to make it possible for players to invest in various amounts to bet on different kinds of terrorist-related activities to occur by certain dates. To the common mind, this was an obscene exercise and he was swept out of the door soon after the news broke.
The application of virtual stock markets (VSMs) is in fact a credible approach that can be used to predict market developments in many situations. The following example is for a political election and is described in a paper by Spann and Skiera in Management Science:
Such types of VSMs were first applied in the form of a political stock market to predict the outcome of the Bush versus Dukakis 1988 U.S. Presidential Election with participation restricted to members of the University of Iowa community. The results of these studies were encouraging, as they demonstrate that the predictions derived from political stock markets outperform opinion polls in terms of forecast accuracy. Furthermore, the results of political stock markets show that VSMs can perform well even if their participants are not a representative sample of the electorate. The reason is that a VSM elicits the participants' assessments of the election result, and a rational participant should not trade according to his or her individual preferences, but according to his or her prediction of the market outcome due to the overall preferences of all voters.
Here I turn to my attention to the presidential election in Taiwan on March 20th. Now, I am not aware of any formal VSMs being operated on this particular election. But I read the following in Mingpao Monthly:
(My translation) According to the opinion polls, including the internal polls of the DPP, Chen Shui-bian is lagging by several percentage points. Based upon the gambling odds being offered in Taiwan, most people believe that the Lien-Soong ticket will win by 500,000 to 700,000 votes.
The quoted paragraph refers to an open secret in Taiwan: there are rumored to be four large underground gambling syndicates in Taiwan which are accepting bets on the presidential election. Since these are underground operations, the total size of the bets is unknown. But the popular belief is that truly staggering amounts of bets are being placed. Here is the story in Taiwan Times:
Law enforcement officers yesterday said that they are embarking on a strict crackdown against gamblers, especially those who bet on the result of this year's presidential election. Meanwhile, the police on Tuesday night arrested three suspects who allegedly hosted an online gambling Web site.
"Gambling is illegal already. If the total amount of bets are too much, we will also indict gambling Web sites' host on charges of 'attempting to interfere with the election,'" said Minister of Justice Chen Ding-nan. Chen said that law enforcement officers also discovered that most of these gambling site hosts are "doing their jobs" in foreign countries.
Most of them are in China, Hong Kong and Macau. However, he emphasized that officers are monitoring every move of these gamblers and will arrest them when the time is ripe.
According to the police, most gamblers believed that the Lien-Soong camp will win the election by a victory of between 500,000 to 700,000 votes, with an estimated 12 million votes cast. Each bet has to be for at least US$1,000.
Chen would not confirm the information but said that, if true, it will definitely fit the charge of "attempting to interfere with the election."
He said that officers had not arrested anybody related to any huge bets like these as of press time yesterday.
"I have ordered all law enforcement officers to, from now on, carry out the strictest crackdown on gambling, especially gambling that is related to the election," Chen said.
"I hope these crazy gamblers and their huge bets will not affect the result of the election," he said.
When large amounts of money become involved, the nature of the VSM and the electoral landscapes are changed.
Consider the VSM from the viewpoint of the players. In the Iowa stock market, entrants are restricted to those within the University of Iowa community which is a very small number compared to the size of the total electorate, and they were playing for fun and pride over some theoretical point scores. But when many people have large amounts of money involved in the election results, their financial interests will supercede any political preferences. By the Heisenberg principle, their participation has changed the dynamics and interests in the election process. In the days ahead, we can expect to see people taking actions to protect their investments, including dirty tricks and ultimately voting against their own political beliefs.
Consider the VSM from the viewpoint of the gambling syndicates. All the players are betting against the house. The syndicates stand to lose big money, and it is only cold logic that they will take actions to protect their investments. Furthermore, they have the financial clout to play extremely dirty.
The VSM is not a stupid concept in itself. But like real-life stock markets, there needs to be some protection mechanism against insider trading and manipulation. For the terrorism VSM, if Osama Bin Laden were allowed to play too, he will obviously have an amazing winning streak which he will use to finance his more terrorist activities which he will predict perfectly. In the case of Taiwan, the gambling syndicates are presently out of control. President Chen Shui-bian likes to point out to everyone who cares to listen that Taiwan is a beacon of democracy for all of China, but this is one aspect that nobody else needs to have.
Taiwan's Justice Minister Chen Ding-nan yesterday ordered police to stop the widespread betting on the outcome of the presidential election, saying gambling could influence the result.
With 16 days to go to the March 20 vote, President Chen Shui-bian and Kuomintang challenger Lien Chan are locked in a tight race, which has triggered the wagering.
"From what we heard, some bookies now accept unlimited amounts as the presidential candidates are fighting an extremely tight race," the justice minister said.
He said an anti-mainland rally at the weekend, where more than 1 million demonstrators joined hands to form a human chain the length of Taiwan, had boosted support for Mr Chen, who is seeking a second term.
"This [betting] could affect the election result," Mr Chen said. Some gamblers had been working as volunteer campaign assistants to solicit votes for the candidate they had staked a bet on and improve their chances of winning, he said.
Gambling is illegal in Taiwan.
Some opinion polls in the past two days have shown that Mr Chen now leads Mr Lien after starting the campaign a distant second. Other polls indicate that Mr Lien is still leading by a slim margin.
The minister said some bookmakers had financial backing from counterparts overseas to help them accept larger bets, which he described as "terrible". Taiwanese media reports said bets taken so far amounted to at least NT$10 billion (HK$2.3 billion).
Bookmakers in Taoyuan, south of Taipei, had taken NT$1 billion alone.
The bookmakers are now offering even odds, compared to 3-1 in favour of a Lien victory at the beginning of the year. Just a month ago, gamblers were betting Mr Lien would win by 500,000 to 700,000 votes, with an estimated 12 million votes cast.
Yesterday, police in Taoyuan arrested a gambling ringleader, identified as Ho Sheng-sung, for offering unlimited bets. He had allegedly taken bets totalling NT$1 billion, police said.
Late last month, police arrested five bookmakers for allegedly setting up a gambling website to accept bets on the election. Police later said NT$9 billion had been discovered in nine of the bookmakers' bank accounts.