Speculating on Presidential Politics: How to Pick a Winner
In the approaching U.S. Presidential election, there will be discussions about who is better equipped to lead the country for the next four years. Discussions will get heated and opponents demonized. Other discussions will turn to the horse race. Who is ahead? What is the extent of the lead? How can winners be predicted beyond the daily fluctuating and often conflicting polls that are constantly being reported?
Certainly, polls are used to forecast election outcomes, and are crucial in the process. But to see where the smart money is in an election, just look where the smart money is.
In commodities markets, the futures markets provide a best guess as to where the price will be in the future. Speculators abound. And, as I recently discussed (but also originally here at Bastiat’s Bastions), foolish market participants lose money and exit the market while those who are better at predicting are able to increase their market presence.
The market price in speculative markets is also the one that is at the middle of the pack, the price with as many dollars bet above the going price as below, making it a strong predictor.
Speculative markets can be best thought of as betting markets, like sports betting markets. Here is where we see the smart money in the market, where the center of the money being wagered by those who are confident enough with their predictions that they each “put his money where his mouth is.â€
This argument is nicely made in a recent Slate.com article, where the markets are explained. Take a look at Intrade.com and at the University of Iowa’s “Iowa Electronic Market, the first election market, (a research and educational tool set up by faculty members at the University of Iowa), but also look at each prospectus in the Iowa markets. Two types of markets to look at are the vote share markets, where the betting is on who will get what share of the vote, kind of like betting in sports markets with point spreads, and the “winner-take-all†markets which simply bet on the winner. The market prices for the vote share markets, then, are predictors at how the shares of the popular vote will turn out, while the price in the “winner-take-all†market is the market prediction of the probability of Obama or McCain winning the election.
At the close of the Iowa Electronic Market on August 20th, the prices in the vote share market stood at $0.511 for Obama and $0.499 for McCain. The redemption prices at the end of the election will be for Obama will $1.00 times the two-party vote share that Obama receives, and similarly for McCain shares. So, if a speculator thinks that Obama will garner more than 51.1% of the popular vote (among the two top parties), that speculator will be driven to buy shares of Obama, while those who think Obama will get less of the vote will be driven to sell shares.
In the winner-take-all market, the close-of-midnight prices on August 20th were $0.596 for Obama shares and $0.396 for McCain. If a speculator thinks that Obama has better than a 59.6% chance of receiving the most popular votes, that speculator has an incentive to buy shares of Obama in the winner-take-all market. If a speculator thinks McCain has better than a 39.6% chance of getting the most votes, that speculator has an incentive to buy McCain shares, but will have an incentive to sell if the speculator thinks McCain’s chances are lower.
There is a concept in economics called the “efficient markets hypothesis,†which only means that market prices embody all available information. One type of information that is crucial in these markets is the information provided by polls. Speculators in these election betting markets also use every bit of information available not only about which candidates are favored by voters but also about how driven potential voters are to actually make it to the polls to cast their ballots.
So, if you want to find out how your candidate is doing, look beyond the polls and the pundits to the betting markets, particularly those at intrade.com and at biz.uiowa.edu/iem. While no forecast is perfect, these markets have already proven to be better than the polls and television’s talking heads.
(Note: This article, written by Dr. Coats, was first published at BasilAndSpice.com on 8/23/08.)
-MC
November 5th, 2008 at 9:01 am
I think the market prices for the vote share markets prediction were very accurate because Obama is our new President.
November 5th, 2008 at 10:36 am
I was surprised at the different markets and issues people trade and bet on to predict as it said in the Slates article, “wisdom of crowdsâ€, for example, whether or not we will have a recession in 2008 or on Federal Income Tax rates. I think the vote share market predictions were accurate because in 28 states Obama won with over 50% of the votes. In the winner takes all market predictions the average for the Democrats was at almost 100%. I think in the last few months some of the momentum shifted from McCain to Obama. Reporters suggest it may have been linked to comments on the economy being strong when it really wasn’t. That’s a very common important issue to all Americans. Some states that normally voted Republican now voted Democrat pushing the popular vote to over more than 50 percent. This had not been done in years. I think more people realized Obama had a chance of receiving the most popular votes and began to buy share; the others decided to sell.
Finally, I think the prediction market is a very good source to forecast events. According to IEM “the market is closer to the eventual outcome 74% of the timeâ€, and its results are evident many days, often months before the ending results are calculated at the poll.
November 5th, 2008 at 1:07 pm
I think that the share markets were accurate. The vote share market’s forecast showed that Obama had the advantage. On the other hand, the winner takes all market had the Democrats with a insurmountable victory. Although Obama was not guaranteed his victory, he did win by a big margin so the predictions were very accurate.
November 5th, 2008 at 5:15 pm
Here are the latest election results and the Iowa Market’s projection for vote shares as of Midnight the night before the election. Total votes for Obama and McCain: 119513949, Total votes for all Presidential Candidates, including None of the above (but I have not idea what state has that on the ballot–I wish more did): 121064359. So far (there are still votes being counted,)Obamas has 63,428,971 votes to McCain’s 56,084,978 votes, giving Obama 53.1% of the Obama and McCain to McCain’s 46.9% of the Obama and McCain vote. The Iowa market predicted 53.6% for Obama and 46.5% for McCain. If you look at Obama and McCain’s shares of the total vote, Obama got 52.4% to McCain’s 46.3%. All in all, I would say that that is pretty close to the Iowa market predictions.
Morris Coats
November 8th, 2008 at 7:10 pm
I think that the share markets were pretty accurate in their predictions of Obama taking out the Presidency over McCain. It showed that Obama had the overall advantage with about 54%, which in the end was very accuarate because look who is now the new President.
November 9th, 2008 at 10:09 pm
The markets did a great job at predicting Obama as the new president. I truly believe the closeness of the prediction was due to the efficient market hypothesis. Also, the fact that speculators “put their money where their mouths are” makes prediction outcomes more realistic.
November 10th, 2008 at 12:32 pm
I believe the markets were very accurate and the election turned out to be over soon than expected. I thought that it may be a close election and a decision would not be made until late in the night, but as the markets predicted Obama won by a comfortable margin. He was pretty much announced the winner by 8:00pm.
November 10th, 2008 at 7:34 pm
It looks like the markets were quite accurate in predicting the outcome of the election. The election ended up a lot more one-sided than I thought it would be.
November 10th, 2008 at 8:28 pm
The betting markets predicted the turnout of the presidential elections very well, as Barrack Obama won the race. These markets are better at predicting the outcomes of elections rather than the daily polls because the speculators look at the poll results and make their judgments and bets based on the average of the polls and who seems to be favored among the american people. Other information is taken in consideration, which brings us to the efficient market hypothesis where all of the information needed to make the decision is available for speculators.
November 10th, 2008 at 9:46 pm
It appears that the markets have predicted the results of the elction with great accuracy. The more information a person has, the better decision and judgement he can make on an issue. Those involved in these markets had access to poll data and information that was very valuable in their decision process, thus proving the “efficient market huypothesis.” With this being said we can take away that markets are an excellent way to predict results because they allow people to make their decisions on all the data concerning the issue. The economy was obviously a major factor in this election and helped Obama gain momentum over John McCain in the final weeks.
November 11th, 2008 at 12:36 am
It is obvious that these prediction methods have greater accuracy then the above mentioned techiques. I agree that persons involved in “poll betting” are likely to reflect the voting public more correctly because, like the betters, voters will take incentive to vote. Additionally, using a market to show the potential conclusions of the election proves to be efficient because one has to weight their gains and losses based on the remaining voting/betting group. I find this idea to be intersting considering the efficient market hypothesis that these betters can, and do use, their available resources.
November 11th, 2008 at 9:47 am
Comparing the results of the election i beleive that the markets were a good tool in order to forecast future results. Seeing how prices in an efficient market already reflect all available information (including polls) I do not find a reason as to why outcomes would differ from that of the market.
November 11th, 2008 at 11:01 am
I believe the markets prediction on the political race is a good tool to how the results will turn out. People will buy into what’s hot at the time just like in the stock market. Obama was or still is considered “hot” at this time considering all the endorsement and support from a lot of high profile people. He was supported by Oprah, Sean Diddy Combs, and a lot of the celebrities, and even with the youtube “Obama Girl” gaining lots of support of the people. This made Obama the clear favorite among many people therefor getting the popular votes. All these celebrites also have a huge influence over a lot of people. Take Oprah for example. She is one of the most powerful women in the world and a lot of people believe in her and her views as expressed on her talk show.
November 11th, 2008 at 3:34 pm
The electronic markets called the election much more closely than the ones used by the media. Although the poles usually refect accuracy well, the markets only account for all the reasons why the president would win. The poles only record people who are willing to ahare how they voted witch creats lots of bias. Overall I think these markets should be watched more closely by media and others politicians to help predict future politicians.
November 11th, 2008 at 4:37 pm
The incumbert president has a 25 – 30% approval rating as compared to a 90% approval rating following 911. Nixon Left office with a 24% approval rating and Carter a 34%. With such a low approval rating and the hope Pres Elect Obama is offering, the pollsters had an easy job at predicting the election.
November 11th, 2008 at 5:51 pm
I’d consider the share markets to have been very accurate on calling this past election. I was somewhat skeptical at first–especially when I saw the margin that Obama was leading the markets by, as I thought that the election would be much closer. However, I was wrong and the predictor markets were right. I would say that the market participants are the key to the accuracy of its predictions, as they were likely to be educated on topics and used poll data to help base their “bets”. Also, as media coverage increased near the election, much momentum shifted toward Obama and this was not ignored by the markets. In the end, Obama clearly won by a large margin just as the markets predicted.
“We compare market predictions to 964 polls over the five Presidential elections since 1988. The market is closer to the eventual outcome 74% of the time.” – I believe them.
November 11th, 2008 at 7:17 pm
I believe the market bets were accurate as the final result was Obama elected as president of the United States. The markets predict better the outcome rather than the polls because people actually use the polls to make their bets. So after collecting all the information they need, they vote and the error margin is very small which the actual presidency results have proved.