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July 28, 2004

Place Your Bets

Got the following from a university backdoor into the ScienceNOW paid subscription site, so there's no direct link to the story, but I thought someone besides myself would find this interesting.

Two articles published this month in the Journal of Economic Perspectives suggest that betting markets can out-forecast the polls. In one, Paul Rhode and Koleman Strumpf* of the University of North Carolina, Chapel Hill, relate that from 1884 to 1940, when election wagering was wildly popular, the betting favorite won in every year but 1916, when Woodrow Wilson beat Charles Evans Hughes with a last-minute upset in California. After 1940, because polls were perceived as more scientific, the gambling markets faded from public consciousness, says Strumpf.

But the current betting markets--led by Web sites such as www.intrade.com, tradesports.com, and fairbet.com--may outperform opinion polls. In the last four presidential elections, according to a paper by Justin Wolfers of the University of Pennsylvania and Eric Zitzewitz of Stanford University, the University of Iowa's Iowa Electronic Market has averaged an error margin of ±1.5% in the week before the vote, compared with ±2.1% for the Gallup polls. More recently, traders picked John Edwards as John Kerry's running mate 2 months before Kerry did.

Of the three sites listed above, I can only find election data at Tradesports and Intrade.com, and neither show enough information for me to see which candidate the market is predicting will win at the moment--though this graph of Bush's price shows a decline in his relative value. There are also graphs showing the likelihood of each winning the popular vote--though we know from 2003 that doesn't mean that the candidate will also win the election. They also seem to be brand new markets, so their predictive value is low, but for what it's worth Kerry's chances are commanding a higher price than Bush's.

Caveat: Those markets are so new that a couple of trades may render the above information incorrect by the time you see this. Treat it as a description of the markets in their infancy.

However, Bush partisans can take heart from the also mentioned Iowa Electronic Markets 2004 US Presidential Election Winner Takes All Market, which gives Bush a slightly higher price than Kerry at the moment.

They all seem like something worth an obsessive daily check or two on my part. Surely the information displayed is at least as valuable as what I get from Rasmussen.

*Yes, that Koleman Strumpf

Posted by Bigwig at July 28, 2004 11:13 PM | TrackBack
Postscript:
First time visitor to House Hraka? Wondering if everything we produce could possibly be as brilliant/stupid/evil/pedantic/insipid/inspired as the post you just read? Check out the Hraka Essentials, the (mostly) reader-selected guide to Hraka's best posts, and decide for yourself.
Comments

The tradesports/intrade markets prices can be read as the % chance an event will happen. Currently the market is perdicting about a 53% chance that Bush win. It is interesting to note that this is up from around 49% at the time of the convention.

Posted by: Jeremiah at August 2, 2004 12:58 PM

The tradesports/intrade markets prices can be read as the % chance an event will happen. Currently the market is perdicting about a 53% chance that Bush win. It is interesting to note that this is up from around 49% at the time of the convention.

Posted by: Jeremiah at August 2, 2004 12:58 PM

The whole "predictive markets" thing is overblown. The Iowa and Tradesports markets follow the polls instead of lead them. For a long time this spring, they both were undecided as to whether Dean or Clark would be the Democratic nominee. Kerry was in the low single digits.
Anytime anyone tells you about the awesome wisdom of the markets, ask them how their tech stocks are doing.

Posted by: Bamboon at August 2, 2004 03:21 PM

Bamboon, you're absolutely right. Those people putting their own money on the line have no clue who's going to win.

So, why don't you go over there and put some money on Kerry? If you're right, you'll more than double your money.

Or aren't you that confident?

Do markets screw up? Of course they do. Everything run by humans screws up on occasion.

But if you really think you know better than they do, well, they're giving you a chance to prove it. Talk is cheap, proof is not.

Greg

Posted by: Greg D at August 2, 2004 05:57 PM

My Amazon stock? Doing pretty well...

People are putting money on the line here instead of just giving an opinion. Their predictive power lays in the fact that gamblers look differently at this election than a voter would, after all no one wants to loose money.

Also note that these "stock" markets are available to anyone in the world, not just US citizens.

Posted by: Berend de Boer at August 2, 2004 06:00 PM

I have watched the Iowa markets for some time. In 2000, I even participated. Those markets are good but not perfect. They beat the polls - they have all the poll information plus things the polls can't measure.

I don't know about the other markets, but the Iowa markets have been around long enough that they have the bugs worked out.

This same idea was one part of the proposed Total Information Awareness, a clever forward-looking set of ideas by Poindexter. Unfortunately, a combination of ridicule, foolish moralizing and privacy fears by people who don't yet know we are at war all combined to kill that program.

Posted by: John Moore (Useful Fools) at August 3, 2004 02:31 AM
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