RSMAS

 

FOR IMMEDIATE RELEASE

Trusting Hurricane Information

Hurricane Futures Market opens for 2007

3 Daves

(L to R) Dave Kelly, Dave Letson, Dave Nolan

VIRGINIA KEY, FL (August 13, 2007) — The University of Miami and the University of Iowa are pleased to announce that the Hurricane Futures Market is now open again for the 2007 hurricane season. Now in its third year, the Hurricane Futures Market (HFM) allows traders to buy and sell shares, based on predictions of where a given tropical storm will land. HFM aggregates, in real time, expert opinion on expected storm tracks.

Hurricanes are a terrible fact of life, as the 2004 and 2005 seasons graphically showed. Understanding how the hurricane forecast and warning system may be improved is a topic of great interest to meteorologists and the decision makers they serve. What information do people trust and rely on when it comes to hurricane forecasting? What additional information would benefit risk awareness and decision making in insurance, business, government and society? Rather than polling, HFM takes what could be a more accurate, if less conventional approach to answering these questions.

“Each year, we are surprised by studies that show people are not preparing for hurricanes adequately or evacuating when they need to,” said Dr. David Letson, associate professor in marine affairs and policy and co-principle investigator. “While this is a rather unorthodox approach to learning where people get their information to make these sorts of decisions, it can be viewed as more genuine than just a survey where people might just answer what they think you want to hear.”

The purpose of the Hurricane Futures Market is to investigate why public expectations for hurricane landfalls at times differ from the National Hurricane Center's forecasts. In assessing the risks faced, citizens rely heavily on the expert opinions of the National Hurricane Center.  Increasingly, people are turning to many other sources of forecast information on radio, TV, and the Internet. Often, this information directly plays into how the financial community assesses risks, such as windstorm insurance premiums.

“With the Hurricane Futures Market, we hope to learn which sources of hurricane information are most prevalent, how well that information is understood, and how the hurricane warning system might be improved,” said Dr. David Kelly, chairman of the University of Miami's Department of Economics and co-principle investigator.

How does it work?

  • Traders are given seeded accounts worth $100 each to invest in futures contracts whose payoff depends on where a given hurricane makes its first landfall.
  • Each time a new hurricane or tropical storm is named, the project creates a set of securities, each of which is associated with a pre-defined section of the U.S. coastline.
  • One dollar is paid to the owner of a security with the geographic coordinates matching where the storm makes its first U.S. landfall.
  • Prices for contracts indicate traders' beliefs about landfall probabilities.
  • People who buy low and sell high are rewarded for improving the market prediction, while those who buy high and sell low are punished for degrading the market prediction.

The Hurricane Futures Market is an experimental research tool and not a hurricane track forecast. HFM is a prediction market, that is, a speculative market created to capture collective wisdom and make predictions.  Markets have a history of being very good at forecasting many events. The futures price of oil, for example, is considered to be the best predictor for future availability of this essential commodity and is widely used by economic and political forecasters. Prediction markets are rapidly becoming useful decision support tools for corporations, such as Hewlett-Packard, Intel, Microsoft, Corning, Eli Lilly, and Google.

“In launching the Hurricane Futures Market, we ask whether it might teach us something about what information meteorologists and others with a vested interest in hurricane outcomes trust and use, and how well they understand it,” said Dr. David Nolan, assistant professor in meteorology and physical oceanography and co-principle investigator.  “When new information appears, it is reflected immediately in the futures price from the actions of buyers and sellers who are able to act first. Ultimately, the success of hurricane warnings depends on individuals' choices, and in turn on our understanding of how those individuals' risk perceptions evolve over time.”

Hurricane Futures Website: http://hurricanefutures.miami.edu/

Rosenstiel School is part of the University of Miami and, since its founding in the 1940s, has grown into one of the world's premier marine and atmospheric research institutions.

Media Contact:
Ivy Kupec
Rosenstiel School of Marine & Atmospheric Science
305.421.4704 (o)
http://www.rsmas.miami.edu