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Playing the market for natural resource management

24 November, 2008

CSIRO economists are inviting people in Canberra, Sydney and southern NSW to join the Australian Knowledge Exchange (AKX) – an online prediction market, which aims to forecast water availability.

The AKX has been set up by CSIRO to test whether trading knowledge online can work for natural resource management.

“The AKX works like a futures market,” says CSIRO economist, Dr Stuart Whitten. “This study has been set up to find out whether traders can combine their knowledge to predict dam levels in the region, in much the same way as stock market traders predict future prices of commodities like oil.

“Interested people can register online, get A$100,000 play money and start trading predictions. At the end of each month for three months, the trader who has predicted the dam levels most closely will win a small cash prize.”

“We want all sorts of participants to take part in this trial,” Dr Whitten says. Knowledge markets work by providing incentives for people to disclose information essential to the market. Like all markets, from fruit markets to the stock market, knowledge markets aggregate information about the value of a resource and express it via the price.

Knowledge markets have great potential in natural resource management, where information is widely dispersed and held by many different people with competing needs.

In the case of natural resource management, knowledge markets could be used for things like accurate forecasting of crop production, water availability or pest pressure.

As well as enabling better management of our environment, such markets would provide a hedging tool for businesses exposed to risks like water availability, allowing them to share and profit from information as well as offset risks.

“We want all sorts of participants to take part in this trial,” Dr Whitten says. “That includes water managers, end users like farmers and even people with rain gauges or a passing interest in the weather.

“The results will be used to test the effectiveness of knowledge markets as predictive tools for natural resource management.

“And unlike many other markets these days, we can guarantee that no one will lose money trading in the AKX.”

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