Ticket Futures Market and Risk-Neutral Pricing

Alan Krueger, an economics professor at Princeton University, wrote an interesting article a while back on the emerging market for ticket futures -- i.e., like forwards/futures for pork bellies, companies are beginning to offer futures for tickets to sporting and other events in the uncertain future -- for the 'Economic Scene' column in the New York Times. You can read the piece at http://www.krueger.princeton.edu/02_02_2006.htm

Prof. Krueger offered an interesting example of pricing under uncertainty and risk using the example of a futures contract for a Super Bowl ticket. Here is an excerpt:

If fans are risk-averse, then ticket futures add economic value. To see this, suppose that there is a 10 percent chance of a fan's team reaching the Super Bowl and that a futures contract costs $250 while a ticket could be purchased the week of the game for $2,500. At these terms, a risk-loving fan intent on going to the Super Bowl if his team plays would wait to buy a ticket for $2,500, and a risk-averse fan would buy a futures contract for $250.

Indeed, a risk-averse fan would be willing to pay more than $250 for a futures contract in this situation. Like an insurance policy, ticket futures sell at a premium over their expected value because they help risk-averse buyers hedge against uncertainty.

To gauge the size of the premium, note that a fan could guarantee a ticket to the Super Bowl by buying a futures contract for every team in a conference; one is bound to make it. Call this expenditure the sure-thing price of a ticket. If fans were risk-neutral, the sure-thing price would equal the price that tickets are expected to cost at game time — say $2,500 this year. The excess of the sure-thing price over $2,500 gives a rough indication of the market valuation of insuring against risk.