Political Futures Market Predicts Elections Better Than Public Opinion Polls

The dismal showing (some say utter failure) of US Public Opinion Polls during the current 2008 US Presidential campaign primaries, makes it timely to examine an intriguing alternative for numerically accurate election prediction. The March 2008 issue of Scientific American (a favorite since childhood!) has a major writeup on the remarkable record of a political stock exchange and futures market like the Iowa Electronic Market which began in 1988 with three economics professors from Iowa...

The World Wide Web was still a glint in the eye of Tim Berners-Lee when the Iowa Political Stock Market opened on June 1, 1988. Nearly 200 students and faculty members began buying contracts on George H. W. Bush, Dukakis and others using the relatively primitive tools of the pre-Web Internet. A Bush or Dukakis contract was bought or sold in a futures market, the same type in which Iowa hog farmers trade pork bellies. Instead of pigs, however, the investors in the Iowa Political Stock Market were trading contracts on the share of the vote that a candidate would receive on Election Day.

Up until the morning of the election, traders carried out their transactions, although a rule stipulated that no one could invest more than $500. Taking a simplified example, a Bush contract in the vote-share market paid $0.53, corresponding to Bush’s 53 percent of the vote, and a Dukakis contract paid $0.45, tied to the Democrat’s popular vote percentage. If you had bought a Bush security at $0.50 before the market closed the morning of the election, you would have made a gain of
$0.03.
...
Would the expected share of the votes represented by the market’s closing prices on Election Day match the actual share the candidates obtained more closely than the polls would? The experiment worked. The final market price corresponded to Bush’s and Dukakis’s market shares better than Gallup, Harris, CBS/New York Times and three other major polls.

Wow! Move over SWS. Futures Market operator IEM, Scientific American reports,

"...has continued to beat the polls consistently for presidential elections and at times has prevailed in congressional and international races. A paper being prepared for publication by several Iowa professors compares the performance of the IEM as a predictor of presidential elections from 1988 to 2004 with 964 polls over that same period and shows that the market was closer to the outcome of an election 74 percent of the time. The market, moreover, does better than the polls at predicting the outcome not just around Election Day but as long as 100 days before."

How does it work?

Developers of the IEM and other prediction markets contrast a poll with a market by saying that the latter takes a reading not of whom people are going to vote for but of whom they think will win—and cash wagered indicates the strength of those beliefs. You might have voted for Kerry in the 2004 election because you opposed the Iraq War, but after watching news shows and talking to neighbors, you may have decided that George W. Bush was going to win. When putting money down, you might have picked Bush.

You can look at the current state of the IEM Markets dealing with the 2008 US Presidential election and even join the trading action with real money (MasterCard, Visa and Paypal probably accepted!)

On the eve of Super Tuesday, interesting how the Market thinks JOHN McCAIN has the Republican nomination sewn up, while the Democratic race between HILLARY CLINTON and BARACK OBAMA is tightening up, with no clear winner yet predicted.