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Before Kalshi and Polymarket there was the Iowa Electronic Markets

June 24, 2026 • 22m

Summary

⏱️ 9 min read

Overview

This episode traces the fascinating history of prediction markets from their 16th-century origins through their golden age in early 20th-century America to their modern resurrection. The story centers on how three University of Iowa economics professors accidentally reinvented election prediction markets in 1988 after being surprised by polling failures, only to later discover that robust political betting markets had thrived for centuries before mysteriously disappearing in the 1940s—possibly overtaken by the more frequent action of horse racing.

The Birth of Modern Prediction Markets at an Iowa Sports Bar

In 1988, three University of Iowa economics professors had a creative breakthrough over a three-beer lunch at a local sports bar. After Jesse Jackson's stunning upset victory in the Michigan caucuses contradicted all the polls, they wondered if markets might predict elections better than traditional polling. This casual conversation led to the creation of the Iowa Electronic Markets, which would outperform major polls and spark the modern prediction market revolution.

  • Three economics professors met at The Airliner sports bar in Iowa City for a three-beer lunch that sparked creative thinking
  • Jesse Jackson won the Michigan caucus with 53% versus Dukakis's 29%, despite polls showing them neck and neck
  • The professors decided to create a market where people could buy and trade stock in political candidates
  • The Iowa Electronic Markets predicted the 1988 popular vote within two-tenths of one percent at midnight before Election Day
" I would say the conversation was helped because it was a three-beer lunch, which led to this creativity, I think, some days. "
" The polls missed it altogether. And that's where it came from. He 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 say, well, let's run a market on it. "

Navigating the Legal Gray Area Between Markets and Gambling

To expand their election market nationwide, the Iowa professors needed permission from the Commodity Futures Trading Commission, which oversees futures markets. The question was whether their creation constituted gambling or legitimate forecasting. The CFTC issued a 'no action letter' allowing the markets to operate under strict constraints: they had to stay small, accept no more than $500 per person, avoid paid advertising, and focus only on presidential elections without making a profit.

  • The CFTC issued a 'no action letter' allowing the Iowa Electronic Markets to operate under specific restrictions
  • Rules included a $500 maximum per participant, no paid advertising, and no profit-making
  • Between 1988 and 2004, the Iowa Electronic Markets beat traditional polls 74% of the time
" Anytime you have people exchanging real money, the outcome of something, the question is, is this gambling or not? "

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