The Polls vs. Futures

I'm confused.(Nothing new there, of course.) Recent polls show that the race for the president is essentially a dead heat.

But I get a very different result when I checked on the presidential political futures market where investors are risking money on the outcome.

The betting on Intrade has Obama with with nearly a 60 percent probability of winning. The Iowa Electrinic Exchange gives Obama essentially the same odds.

The main reason to pay more attention to the prediction markets is that academic research shows that their track record at foretelling election outcomes is better than that of polling data. After all, investors are putting money at risk to their forecasting abilities.

Betting on politics has a long history. There were well-organized Presidential betting pools between 1868 and 1940, according to Historical Presidential Betting Markets, by economists Paul W. Rhode and Koleman S. Strumpf at the University of North Carolina, Chapel Hill. In the late 19th century and early 20th century, the betting on the Curb Exchange in New York (which evolved into the American Stock Exchange) and the lobby of the New York Stock Exchange at times exceeded trading in stocks and bonds. Major newspapers carried daily quotes during the election season, according to the professors. In the New York markets, wagering on a Presidential election peaked with some $198 million (in 2008 dollars) in bets placed in 1916. That's when Democrat Woodrow Wilson came from behind to defeat Republican challenger Charles Evans Hughes. The amount gambled that year was twice the sum spent on the campaign. Rhode and Strumpf calculate that an average of $44 million, in 2008 dollars, was bet during the Presidential contests from 1884 to 1928. And, says Strumpf, "these historic markets were incredibly accurate."

So, which is right? The polls? Or the market?

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About the author

Chris Farrell is the economics editor of Marketplace Money.

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