Here’s a reminder of how volatile early presidential races are: In 2007, people were betting money that Fred Thompson would win the Republican presidential nomination. They soon changed their minds, of course, and picked someone they thought more likely: Rudy Giuliani.
Think you know who will win in 2016? In this market, you can put money on it.
That information (and that chart) comes from the Iowa Electronic Markets, run by the University of Iowa's Tippie Business School. They are constantly running markets in different political races (and sometimes in Fed policy, too). In December, the 2016 markets opened, and as of February 5, contracts in the winner-take-all market for the presidential race were selling at 52 cents for Democrats and just under 50 cents for Republicans.
That winner-take-all market forecasts probabilities of who will win. Or, in other words, right now, the market predicts that Democrats are slightly (but only slightly) more likely to win the presidential race. If a Democrat wins, someone holding one of those Democrat contracts will win a dollar. The Republican holder will gain nothing (and lose whatever they paid). Participants can, of course, also gain money by selling their contracts at any time.
The market also sells similar contracts in party control of Congress, as well as popular presidential vote share — a 52.4-cent contract for Republicans will pay off in that market only if the GOP nominee gets 52.4 percent of the vote — no more, no less. That particular market forecasts vote shares. No Republican contracts have yet been sold in this market yet, but for now, Democratic contracts predict 52.3 percent of the vote going to that party.
Really, a lot of the old IEM data serves as a reminder of how volatile this presidential campaign, like the many before it, is likely to be. Consider the market’s data on the 2012 GOP race (keep in mind that this chart is only for the Iowa caucus, not the full primary season).
Anyone who remembers 2012 knows lots of candidates had their turns before the market decided that Rick Santorum — a last-second gainer, included in the “rest-of-field” category — and Romney would both be winners of the Iowa caucus.
And you can also see the tide turn decisively against Hillary and toward Obama in the 2008 nomination race.
(Iowa Electronic Markets)
And investors are also good at knowing when a candidate is cooked — just look at Howard Dean's 2004 plunge.
(Iowa Electronic Markets)
True, there are all sorts of prediction models out there, but this one has a pretty solid track record. In a 2008 paper, University of Iowa professors reported that the Iowa vote share market had outperformed polls nearly three-quarters of the time.
The market is so good at predictions, says one Iowa spokesman, because traders take a lot of information into account when money is on the line.
“Polls are up and down with what’s happening,” says Tom Snee, communications specialist at the University, but he adds that “the market is more stable because traders pay attention to more than what’s happening right now.”
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