Markets & Stocks
Trading the Oscars
You can't invest in the Oscar race just yet -- but the day may be coming when you can.
March 11, 2003: 11:12 AM EST
By Justin Lahart, CNN/Money Staff Writer

NEW YORK (CNN/Money) - To no small degree of controversy, back in March 2000 The Wall Street Journal decided it would do a poll to try and figure out who the Oscar winners would be.

No, not an ordinary poll, where the Journal would call up people like you and me and ask us what we think (Whaddaya mean I can't pick "8 Mile"?) -- the paper opted to survey as many of the 5,607 members of the The Academy of Motion Picture Arts and Sciences as it could. It got 356 of them to agree to give at least one of their choices. And when the Oscar ceremony was over, it turned out the Journal had pegged the winners for Best Picture, Actress, Supporting Actress, Supporting Actor and Director. It only missed on Best Actor, backing (in a tight race) Denzel Washington over Kevin Spacey.

But when the envelope got opened for biggest spoilsport of the year it wasn't the Journal but the Hollywood Stock Exchange -- a popular online noncash market where players trade on movie expectations -- that took top honors. The HSX Oscar Options market had predicted all six of the top categories, along with nailing Best Screenplay and Best Adapted Screenplay.

The HSX is just a game, but it's a game that some people take seriously. Its MovieStocks, which trade on expectations of a movie's four-week take at the domestic box, are regularly watched by Hollywood insiders. It's been the subject of scholarly articles with titles like "Extracting Collective Probabilistic Forecasts From Web Games." In May 2001 it was purchased by Cantor Index, the London-based spread-betting division of the Wall Street firm Cantor Fitzgerald.

Why the fuss? It turns out that, while not perfect, even markets that use fake money can give real insight into what lies in the future. Better even than what you can get by polling a bunch of experts and insiders, as suggested by the 2000 Oscar experience.

There are a few reasons for this, according to Dave Pennock, a researcher at Overture Systems (and one of the writers of that "Extracting Collective Probabilistic etc. etc." paper). First, markets are self-selecting. People who do well -- are accurate forecasters -- stick around. People who go broke, even if all they've lost is Monopoly money, quit. It also gives you a stake in giving your honest opinion.

Odds on favorites
HSX traders' Oscar picks
Best ActressNicole Kidman -- "The Hours"
Best ActorDaniel Day-Lewis -- "Gangs of New York"
Best Supporting ActressCatherine Zeta-Jones -- "Chicago"
Best Supporting ActorChris Cooper -- "Adaptation"
Best DirectorMartin Scorsese -- "Gangs of New York"
Best Picture"Chicago"

"When you're called on a polling question, there's no incentive for you to answer correctly," said Pennock. In fact, back in 2000 there was an active disincentive not to answer the Journal's questions -- the Academy made no bones about how pissed off it was when it got wind that the story was in the works.

But if you want a market to be an accurate forecast mechanism, you have to make traders put their money where there mouth is, points out University of Iowa associate professor of marketing Tom Gruca. Iowa has developed something called the Iowa Electronic Markets, an all-or-nothing futures market where academics use real cash to trade on events. It's best known for its political futures markets, which are widely watched by Washington types and have given good reads on election odds, but lately it's also offered an occasional movie future.

The Iowa movie futures have proven to be just as accurate in forecasting 4-week box office returns as HSX has even though it has far fewer participants. Theory says if you have less participants in a market, you have less inputs, and are therefore less accurate. The difference, said Gruca, is money.

"We have real money and HSX doesn't," he said. "When people are using real money, they have a motivation to be right versus a motivation to express their opinion."

The day when movie markets are played more seriously may be coming. In London, Cantor Index has begun to offer -- using information culled from trading on HSX as a starting point -- spread bets on box office take. The way such bets works, explains Cantor Indexes business manager Dominic Crosthwaite, is that participants are offered a spread, a range of what a movie is expected to take in at the box in, say, its first weekend. If they believe the movie's take will be above or below that range, they can place a bet.

Sounds like a bookie, right? Yes, but in London the difference between a wager and an investment is a little less hotly debated than it is here. Spread-betting products are part of the financial landscape -- the most active ones are related to expectations of where stocks will go -- and they're actively used by some investors as hedging mechanisms to limit losses.

One might use spread bets in movies to hedge as well. Let's say that Omega, the watch company, has spent scads of money for commercial tie-ins for the next James Bond movie, "You Only Live and Let Die Another Day Twice." But maybe it's worried that the movie is going to be a dud, so what does it do? Bets that the box office isn't going to be as much as the market expects. If the bet is wrong, it sells lots of watches. If the bet is right, it limits its pain.

"At the moment this is just a retail product," said Crosthwaite of the movie bets. "In terms of whether they would be offered as proper futures contracts which would allow people to hedge against box office revenues or future licensing costs, we're obviously looking into that and HSX has given us the chance to build our expertise in the movie sector."

So what about the Oscars? The University of Iowa's Gruca points out that when movies win big, they get one more run at the box office as well as getting a bump on DVD and video sales. So studios could use Oscar markets as a hedge against losing.

To say nothing of the stars. Nicole Kidman is heavily favored to win Best Actress for "The Hours." If that happens, she's going to get plenty of plum scripts and fat advances. But if it doesn't -- well, the slow descent into dinner theater always starts somewhere.

She should sell herself short to insure that she'll get something out of the gala besides advice from Joan Collins on how to dress.  Top of page

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