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  • baalhadad baalhadad Oct 8, 2012 12:41 PM Flag

    Another midnight close in the Iowa Electronic Markets

    yet gambling addict Alan can't let go of it. From Salon (Alan could also benefit from reading to author's book on successful vs. loser siblings, since he is such a spectacular failure, esp when compared to both brothers):

    Thursday, Nov 16, 2000 12:01 PM PST
    A free market election failure
    Iowa economists gambled that they could predict the presidential election. They lost.
    By Dalton Conley

    If there were ever a time when the country needed a better way to predict elections, it is now.

    For a while, it seemed like economists had the answer: create a futures market for political candidates. A decade ago, the University of Iowa received a special waiver to allow gambling on U.S. elections. And so the Iowa Electronic Markets were born to test an economic theory: the efficient markets hypothesis.

    The theory is simple. It states that the current price of any commodity in an exchange market reflects the total amount of information available at the time; in other words, it’s the “correct” price or the best possible prediction.

    In terms of politics and predicting elections, the implication is that free markets are smarter than polls or pundits. However, it seems that for the time being at least, economists will have to go back to the drawing board with the rest of us, for the futures markets performed as badly, if not worse, than astrology, sports superstitions and every other method for handicapping the presidential race.

    There are actually two presidential markets in Iowa. The more popular version is called the winner-take-all market, in which investors buy futures contracts that pay $1 each on Nov. 10 if your chosen candidate wins the popular vote as reported by the New York Times that morning.

    The other market is called the vote-share market; it pays out $1 multiplied by the proportion of the popular vote received by that candidate on the same day. So if you bought Bush vote share futures at 40 cents apiece, and then he garnered 48 percent of the popular vote, you’ll walk off with 8 cents for each contract you owned.

    This year, both methods failed. As Bush and Gore quibble over who will claim the presidency, the Iowa Election Markets seem to mimic the confusion, delivering two contradictory results.

    Iowa’s winner-take-all market pegged Bush as the clear winner, with confidence in a Bush win soaring in the days before the election. But on Election Day, the market swung wildly and finally flipped to favor Gore. The ambivalence held: Even as late as Nov. 10, the day the market closed, Gore futures were selling for 96.9 cents, not the full dollar they should have cost, given the payout. The vote-share market was more stable, but closed at an anomalous pricing of 49.1 cents for Bush and 48.1 cents for Gore.

    Continue Reading

    Dalton Conley is university professor and director of NYU's Center for Advanced Social Science Research. His latest book is "The Pecking Order: Which Siblings Succeed and Why." More Dalton Conley.

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