|
 2008
Presidential
Prediction Markets
Can Cut Through the
Clutter of Polls and
Pundits
A Wharton
economist argues
prediction markets
can cut through the
clutter of polls and
pundits.
As the 2008
presidential race
heats up, voters are
overwhelmed by a
flood of new data:
Who is ahead in the
polls? Who is
winning the "money
race"? How are the
dynamics of the race
likely to respond as
the candidates tack
left and right,
advertising
strategies change,
and we learn whose
Web site is drawing
more eyeballs?
Political prediction
markets provide us
-- the consumers of
this information --
with a way to cut
through this
clutter.
A prediction market
is a bit like the
stock market, except
that you are buying
shares whose value
depends on the
success of a
political candidate,
rather than the
profits earned by a
corporation. And
just as stock prices
are a useful
barometer of the
health of a company,
so too the price of
a prediction
contract is a
barometer of the
health of a
political campaign.
BEST BETS
NOTE: Wagering on
political or other
events is illegal in
some jurisdictions.
It is the accuracy
of market-generated
forecasts that led
the Department of
Defense to propose
running prediction
markets on
geopolitical events.
While political
rhetoric about
"terrorism futures"
led the plug to be
pulled on that
particular
experiment, the
original insight --
that markets can
help make sense of
vast amounts of
disparate
information--
remains valid.
Experimental
prediction markets
were established at
the University of
Iowa in 1988, and
they have since
amassed a very
impressive record,
repeatedly
outperforming the
polls. Research by
economic historians
has documented
betting on elections
over a century ago,
and the impressive
forecasting record
of prediction
markets was also
evident in the
period before
scientific polling
was adopted.
More recently, in
the 2004 primaries,
prediction markets
pointed to the
disintegration of
Howard Dean's
candidacy in advance
of the fateful Iowa
caucuses. In the
2004 presidential
election, the market
favorite won the
Electoral College in
all fifty states; in
2006 the markets
also picked every
Senate race.
Sportsbook.com is
one of many online
gambling websites
offering bets on the
2008 US Presidential
race.
Sportsbook.com was
the first website to
accurately mirror
the growing support
of Republican
candidate, Ron Paul,
considered a long
shot by both the
mainstream media and
in polls.
WISDOM OF CROWDS
In a truly efficient
prediction market,
the price will come
to reflect the
influence of all
available
information. For
instance, those
discouraged by Ms.
Clinton's recent
polling in New
Hampshire are
probably selling,
while those who
believe endorsements
by the Iowa Register
are crucial are
buying; Ms.
Clinton's campaign
to increase her
likeability may lead
some to buy, while
recent mis-steps by
her campaign may
lead others to sell.
Economists
influenced by the
possibility of a
recession are buying
various Democrats,
while political
scientists schooled
in the incumbency
advantage are
probably buying
Republicans.
Through this process
of different people
trading based on
their own
observations about
the race, prediction
markets prices come
to aggregate
disparate pieces of
information into a
single summary
measure of the
likelihood of
various outcomes.
Moreover, if this
market operates
efficiently, it will
appropriately
summarize all of
this information and
the price will
become the most
statistically
accurate forecast of
the election
outcome.
Two other
characteristics also
distinguish
prediction markets.
First, they respond
to all sorts of news
beyond shifts in
public opinion,
including changes in
campaign staff,
political
re-positioning, and
performance on the
trail.
Second, prediction
markets are
forward-looking,
while polls are
often
backward-looking.
For instance, Fred
Thompson continues
to do well in
national polls
largely due to name
recognition, while
prediction markets
have discounted this
advantage,
understanding that
candidates like Mike
Huckabee will become
better known through
the campaign. Indeed
the markets
currently believe
that Mr. Thompson is
less likely to win
the Republican
nomination than
fringe candidate Ron
Paul.
Sites such as
Sportsbook.com first
opened Fred Thompson
with very short odds
but limited
action on the late
entry Republican has
since forced this
and other online
gambling sites
to list Thompson as
a long shot well
ahead of polls that
later reflected this
notion.
Presently,
Ron Paul is ahead of
Fred Thompson in the
Odds Department
while John McCain
has been
surging well ahead
of the polling
information.
In fact, many
laughed at
Sportsbook.com
oddsmakers who
maintained McCain at
5/1 odds at a time
when the media had
already left
the Arizona Senator
for dead
Beyond Mr. Thompson,
polling data for
Republican
candidates is much
more consistent with
the markets,
suggesting a
four-way race in
which Messrs.
Giuliani and Romney
are the leading
candidates, with
Messrs. McCain and
Huckabee not too far
behind. The markets
predicted Mr.
Huckabee's surge a
few weeks before the
polls, and it
appears to have come
at the expense of
Mr. Romney. The big
story this week,
though, is John
McCain, who has
resurrected his
campaign. The market
now judges him to be
a clearly credible
alternative.
 On
the Democratic side,
national polls
suggest a landslide
for Ms. Clinton,
while the markets
suggest that the
race is still very
competitive, with a
one-in-three chance
that Obama or
Edwards will
ultimately win the
nomination.
Turning to the
general election,
the markets are
titling strongly
pro-Democratic,
ranking them a 61%
chance of taking the
White House.
Stay tuned during
the campaign, and
we'll continue to
track where the
markets undermine
the conventional
wisdom, and when
they start to point
to barely emergent
trends. I can't
predict what these
trends will be, but
I'll bet that the
markets will yield
interesting
insights. I will
highlight them for
you in the coming
weeks.
-----
Justin Wolfers, The
Wall Street Journal
Originally published
December 31, 2007
7:22 pm EST |
