R. Morris Coats

Bayou Business Review, August 23, 1999

This past weekend saw the first political showdown among the Republican Presidential hopefuls in Iowa's "straw poll." While the straw poll in Ames, the hometown of Iowa State University, seems to be hardly more than a device for bleeding the less well-financed candidates of campaign funds, at the University of Iowa in Iowa City, a more interesting and more accurate means of judging the various candidates' chances seems to go almost unnoticed.

The University of Iowa runs something called the Iowa Electronic Market on the Internet at www.biz.uiowa.edu/iem. This market is essentially a political stock market where buyers and sellers buy and sell "shares" of candidates, based on how they think that candidate will do.

Here is how it works. Each share of a candidate is redeemable after the election for one dollar if that candidate wins the election. If that candidate loses, the share becomes worthless. Shares trade at a price equal to market participants' estimate of the probability or chance of that candidate winning. If someone thinks that the market underestimates a candidate's chance of winning, they can buy shares in that candidate, pushing up that candidate's price and the market's estimate of that candidate winning.

What researchers in the past have found is that the Iowa political stock market and others like it in Canada and Europe are better at forecasting winners and winner percentages than polling techniques. Since market participants have real money riding on their bets of how candidates will fare, they have a huge incentive to estimate candidates' chances of winning accurately, leaving aside favorites. The market combines the estimates of the market participants coming up with an average of the estimates of market participants. Since there is room to make substantial money in this market if you are better than others at estimating chances of a candidate winning, there are quite a few political experts who speculate in the Iowa political stock market. The market prices, then, are averages of the estimates of experts who are willing to "put their money where their mouth is."

If you have Internet access or can get to a library in the area, check the site out. The site has a market for the Republican Convention winner, or nominee, the Democratic nominee, percent of seats for the major parties in Congress and even the New York Senate race. When I last looked at the Republican nominee market, a share of George W. Bush was going for about 75 cents, with Steve Forbes at about 9 cents, Elizabeth Dole around a nickle and Dan Quayle trading at 3 cents. Surprisingly, the second runner behind Bush, according to the market, is answer e, a Republican named "none of the above," who was trading at a dime.

As you can guess, for the Democratic Nomination Al Gore is way ahead of Bill Bradley, at 70 cents to Bradley's 26 cents (with "other" trading at 4 cents). More interesting is the New York Senate race, with Rudy Giuliani trading at 55.6 cents and Hillary Clinton trading at 35.8 cents.

One last word on the subject, a former Nicholls professor, Rebecca Morton, is now at University of Iowa and is quite involved with their political markets research.

Recently, the independent oil producers in the U.S. tried to get a huge tariff slapped on foreign oil, particularly from Mexico and Venezuela, claiming that those countries were illegally selling their oil here at below cost, a practice known as dumping. I wrote in a recent column that such a tariff would have crippled the U.S. economy by increasing the cost of trade, the primary source of wealth in the country. In Louisiana, the tariff would have ruined Lake Charles, where a major refinery is designed specifically for Venezuelan crude. Well, Clinton officials wisely decided against such a tariff.

In the news recently was an item about research done by two economists, Stanford's John Donohue and University of Chicago's Steven Levitt. They report that about half of the decline in crime in the 1990s can be attributed to abortions of children unwanted by their parents in the 1970s and 80s and that unwanted children are more likely to commit crimes. It was not until today that I received a copy of this 60-page paper. Until I can read it, I will withhold judgement, but I am sure it will be a topic to come.