US election win for the Democrats, says student stock market
US presidential election news stories might rely heavily on opinion polls for their material, but anyone who wants an accurate indication of how 2008 voting will turn out should take a look at a Midwestern university in the middle of America’s cornfields.
The Iowa Electronic Market (IEM), an online trading platform run by the University of Iowa, has a proud history of correctly predicting the outcome of US presidential elections – and since it began in 1988 it has outperformed the pollsters.
The IEM works like a futures market, where traders speculate on the future direction of the price of financial products (like stocks, shares, bonds and currencies) and commodities (like oil, gold, copper and wheat).
As more people bet on the price of oil going up, for example, the price of trading it on the market goes up as well. If more people bet on its price going down then its price on the futures market falls accordingly.
Because there are thousands of people around the world betting on prices rising and falling in this way, with expertise in different areas, varying levels of knowledge and access to different kinds of information, futures markets are seen as reasonably reliable indicators of what will actually happen.
US election betting
Where the IEM differs from normal futures markets is that it lets people effectively bet on the outcome of a wider variety of events.
At the moment, for example, ‘futures’ are being traded on the future direction of interest rates in the USA, the performance of the movie Beowulf at the box office, and the outcome of the 2008 US presidential election.
Some markets – like the Beowulf one – are purely academic, and only exist to provide Iowa’s economics students with model markets to study.
But the presidential market is very real. The first one was run in 1988 – and between then and 2004 the IEM has correctly predicted the election outcome far earlier, and with more accuracy, than traditional opinion polls.
The University of Iowa says that the IEM has correctly predicted the result of the election 74 per cent of the time – from more than 100 days before the election – and that only when it gets to less than five days before an election do traditional opinion polls start to be as accurate as it.
Despite Iowa City’s position in the middle of nowhere, in a state famous only for John Deere tractors and the Kevin Costner film Field of Dreams, the IEM is widely respected across the USA. Its prices are quoted in publications like the Washington Post and the Wall Street Journal.
Democrats to win, says IEM
The IEM is currently forecasting a Democratic victory. As of 18 February, the market’s prices forecast a 62 per cent chance of a Democrat win – or, in other words, it is offering odds of 4/6 that a Democrat takes the White House.
That Democrat will be Barack Obama if the IEM is to be believed. It is priced to suggest a 72 per cent chance of Obama getting the nomination. Meanwhile, the market believes that John McCain is virtually guaranteed the Republican nomination, pricing in a 95 per cent chance of a McCain victory.
If it can spot a winner from this distance, then the Hawkeye state has well and truly earned its nickname.