Trading Up

betting on (or against) the future

As my family is invading shortly, today’s post will be rather brief. That said, I’d like to focus on one of my favorite political analysis tools: the Intrade information market. Intrade is a service that allows users to invest (or bet, depending upon your point of view) on future political events. Participants buy “shares” of candidates with the promise that if said candidate wins, they will be rewarded (for a more detailed discussion on mechanics, check this). Although the sample size of buyers is often small and although the legality of the service in the US is highly dubious, the exchange is remarkably accurate. In 2006 it correctly predicted each senate race while in 2004 it gave president Bush an 80% chance of winning at a time when most polls suggested the race was up for grabs. The reason for this enhanced accuracy over polling has everything to do with the notion of costs. While responding to a poll is cost free investing money involves a risk of actual economic harm and a chance of actual benefit. As a result, people tend to think far more carefully about betting than about responding to questionnaires. In addition, the fact that the exchange prioritizes who people expect to win over who they want to win, it allows for more accurate pictures to be demonstrated. Of course, such exchanges are not entirely a new idea, with the Iowa Electronic Markets representing a government sponsored version of this model. Yet by opening its doors to a wide and international betting public intrade has the potential to harness a much greater market in achieving its data.

While I wish I was the one to have broken the value of information markets to the world (a la Peekvid), they are already considered a crucial tool by many top policy makers. Several years ago, the Department of Homeland security actually went so far as to establish such a market and use it to predict terrorist attacks. While such an idea may have worked in practice, it was considered too morally odious to be used (plus, it sort of provided an economic incentive for terrorists to attack). That said, the notion of harnessing market wisdom is a powerful one, and thus far has been highly effective.

Now that I’ve expressed my love for the system, lets see what the market says about 2008:
For the Republicans, Giuliani is currently leading with a trade value of 31 out of 100. Put another way, the market predicts a 31% chance Giuliani will be nominated in 2008. Interestingly, however, McCain is valued not far behind at 28.2. The implication, then, is that many are dismissing recent polling and think McCain will pull through. Interesting stuff. Also intriguing is that Mitt Romney is at 16.0, suggesting that contrary to recent articles bouncing through the blogosphere a significant constituency of investors think he still has a chance. Thus, polling showing Giuliani thumping McCain while Romney languishes in the single digits are not affecting the market, suggesting those in the know aren’t close to ready to call this race.

On the Democratic side of the equation, the results initially seem less incongruous. Hillary Clinton is shown with a 46% chance of winning based on her 46/100 share price, while Obama is a distant second at 23.5. That said, such figures are noteworthy insofar as the market does NOT predict Hillary to be the 2008 nominee. If her lead were expected to hold or be stable, one would expect a price nearer to the 65 to 70 range she enjoyed in the heady pre-Obama days. At this point, while a plurality of the smart money says Hillary will win, most says it won’t. As a result, the “aura of invincibility” has yet to convince the market. Perhaps the most fascinating result, though, comes not at the top tier but rather a half step back. Curiously, Al Gore is trading above John Edwards, with probabilities of 11.9% and 9.3% respectively. This remarkable showing for Gore reflects that many believe not only that he will run, but also that he has a chance of winning. For Edwards, however, a price of 9.3 is a dismal sign at this stage of the game. The final insight of these prices, then, may well be that the top tier is not Clinton Obama Edwards but rather Clinton Obama with Gore as a potential third.


2008? gore says no, markets say perhaps

Ultimately, markets, like all tools, are imperfect. As Dave Christie correctly noted while intrade predicted each individual senate race in 2006 it failed to predict the overall power shift. Still, the often remarkable accuracy of this device ought to be given at least some consideration in making political predictions. Markets have a certain intelligence about them, as well as a sort of beautiful simplicity even the most market wary among us can appreciate. Finally, for smart politicos out to put their money where their mouth is, such services offer a lucrative (although illegal) way to turn their analytical prowess into paydirt. Could political betting be the new internet poker? My brain says no, and my heart says probably not. Keep it real, DER