I have a lot of money riding on Tuesday’s presidential
election.
And it’s not because of the Bush tax cut.
My grandfather and I made a bet six months ago: If his political
party’s candidate should win the election, I must take him to
the Los Angeles restaurant of his choice (He has designated the
lovely Valentino, where a bottle of 1893 Château Lafite
Rothschild costs $19,000.), and if my candidate wins, he will be
taking me to L’Orangerie.
I thought that I was the only one wagering on the election, but
it turns out thousands of people are doing it all over the country
““ on Internet-based futures markets. These exchange Web
sites, like the University of Iowa’s Iowa Electronic Markets,
pay off contracts for real-life political and economic events that
people buy up on the markets. Essentially, traders purchase
“shares” of a political candidate and make money if
that candidate wins the election.
The Iowa Electronic Markets (IEM) was founded in 1988 and is
operated by the university’s Henry B. Tippie College of
Business. The IEM is used as a research and educational tool for
students and professors ““ over 100 universities have used it
since its creation. But besides all that learning, there is quite a
bit of money to be made. Accounts can be opened for as little as $5
and up to $500. There are other, larger markets, like Intrade or
TradeSports, but I will focus on the IEM since it’s the only
pseudo-educational market out there.
This year’s tight election has made for a huge jump in
activity on the IEM presidential winner-takes-all market. Activity
on this market has increased threefold, said Forrest Nelson,
professor of economics at Iowa and one of six directors on the IEM
board.
As of Sunday afternoon, Sen. John Kerry shares were trading at
$0.445 while President Bush shares were trading at $0.544, putting
Bush’s chances of winning at 54.4 percent according to the
market’s traders. The traders on the market are more
confident that Bush will win the popular vote, so if you think
Kerry is going to win, you’ve got a great deal and a chance
to make some sweet cash. Most other markets have the candidates in
a dead heat.
According to academics, these presidential markets are actually
more accurate at predicting outcomes than traditional polls, even
though polls track for whom people plan on voting, while the
markets track which candidate people think will win the
election.
“It’s as if a lot of well-informed people sit around
and decide which poll is good,” said Koleman Strumpf, an
associate professor of economics at the University of North
Carolina who has participated in the IEM. “One reason I have
confidence in the markets is that these types of markets have
existed for a long time, from the Civil War through the 1940s.
These markets worked incredibly well. They’ve worked
historically, for 12 or 13 elections.”
One interesting phenomenon that appears to regularly occur on
these presidential futures markets is the manipulation of prices.
In the Nov. 1 issue of Time Magazine, “Let’s Make This
Vote Interesting, Shall We?” notes that on Oct. 15, a trader
sold $140,000 of Bush contracts on Intrade, causing the Bush
futures to drop from $0.54 to $0.10. Buyers quickly snatched up the
great deals and soon the price of Bush futures was near its old
mark. While it appears this was an example of someone trying to
manipulate the market (possibly to boost the public’s opinion
of Kerry’s chances), there is really no way to definitely
tell whether manipulation is occurring.
“It’s really hard to tell when someone is
manipulating or doing real trades,” Nelson said.
“Sometimes it could just be because traders made a mistake or
a new trader got in and has different beliefs. So all sorts of
things can happen.”
Two academics that do know quite a bit about manipulating these
markets are Strumpf and UCLA associate professor of political
science Tim Groseclose, who as a team set out to manipulate the IEM
during the 2000 presidential race. In 2000, the two both opened
$500 accounts, and every day, they would flip a coin to randomly
determine which futures to buy up ““ those of Bush or Democrat
Al Gore ““ buying approximately $300 of futures a day. They
learned that while they could change the prices for a few hours,
the market would soon correct itself.
“These markets are efficient,” said Groseclose,
noting that the IEM average error has been less than 1.5 percent,
while major polls are usually off by more than 2 percent, a point
supported by the Time article.
Incidentally, Groseclose and Strumpf made some money off of the
2000 presidential election because on the final day of the
presidential race, their coin flip instructed them to buy up Gore
futures, which were trading at approximately $0.25 a share. Gore
won the popular vote, and the professors made about $500.
Groseclose has let Strumpf keep the winnings ““ at least until
the UCLA professor begins work on a paper about their experiment.
With this election just a day away, I know I am nervous for the
outcome, as are many others. There is one thing you can do to ease
your mind on Election Day: Bet against your man on one of these
markets. If he loses, at least you stand to make some money.
For my own sake, I wish I had thought of that sooner.
E-mail Miller at dmiller@media.ucla.edu.