My Two Cents

Presidential Futures Market

Chris Farrell Sep 10, 2008

The Democratic and Republican conventions are over. The barricades are down and the party faithful are fired up. now puts it as a “tossup” between John McCain/Sarah Palin and Barack Obama/Joe Biden. It’s a tight race. .

Wanna bet the polls are right? You can on the Iowa Electronic Market prediction market. It’s an online futures market that allows investors to gamble up to $500 on the election’s outcome. At current prices, the market is betting that Obama has a 57% chance of winning the White House come November. To be sure, that’s down from a recent peak of 63%. But it’s still significant gap. The bottom line: Obama is in the lead.

Will the polls or the futures market prove to be a better predictor? Many economists lean toward “follow the money.” For example, a recent paper by three accounting professors at the Henry B. Tippie College of Business at the University of Iowa compares futures market predictions to 964 polls over the five Presidential elections since 1988 and found the market more accurate 74% of the time. The market outperformed the polls in every election when forecasting more than 100 days in advance.

Of course, these professors are from the business school that runs the futures market. Still, a considerable amount of historic data has been mined to give the futures market credibility. In essence, if you believe markets are reasonably efficient, then you’ll expect the polls to turn Obama’s way as the election gets closer.

Of course, the superiority of political markets as election predictors is controversial, and fare from everyone buys into the market efficiency story. Nevertheless, the great virtue of a prediction market–like all markets–is that it’s a relatively objective way of aggregating a lot of information. Plus you can check up on it whenever you like.

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