Care to Wager on That?

We are hearing a lot about presidential polling these days. It’s easy to doubt the results of these polls: few respondents have focused at all this early on the presidential elections.

But there’s a better way to get information about how the presidential election is going: the Iowa Electronic Markets. These markets allow people to invest in futures contracts on specific events like the outcome of a presidential election or nomination. For example, if you own a futures contract on Hillary Clinton, and she wins the Democratic nomination, your receive $1 (and zero if she does not get the nomination). The relative prices of these contracts aggregate investor predictions about the outcome of the presidential races. Such predictions should be better than alternative forecasts since people in the markets have every reason to be as well informed as possible and have the chance to make money if they have superior information about the outcome of an election. Indeed, such markets have done better than traditional polling in predicting electoral outcomes.

How are things going these days at IEM? On the Democratic side, Hillary Clinton looked to be in trouble in early April; Barack Obama’s contract had drawn even in value. Since then, however, Hillary’s contract has steadily gained about 20 percent in price while Obama’s has lost about a quarter of its value. Obama did close a similar gap in contract value during the first two weeks of March so the Illinois senator is hardly out of the game. But the trend should be disconcerting for Obama. It looks like he needed the New Hampshire primary to fall ten months earlier than it will.

On the Republican side, the leader for the past two months has been “none of the above” or more specifically, an unnamed candidate other than Giuliani, McCain or Romney. Giuliani has generally and slowly trended downward over the past two months. McCain fell rapidly in March and stayed down until early May when he rose rapidly, passing Giuliani briefly last week. Now, however, McCain is falling as rapidly as he rose. He now trails both Romney and Giuliani. Romney has experienced three sharp upward spurts followed by equally rapid declines. Unlike Hillary, none of the top three seem to be gaining ground toward the nomination. The IEM strongly suggests that someone other than Giuliani, McCain or Romney will be the eventual nominee.

You can also buy a contract on the November 2008 result. Currently a Democratic winner-take-all contract goes for sixty cents; the GOP one goes for forty cents. Both contracts have gained (or lost) about ten cents since the end of the 2006.

In sum, there’s money to be made here if you believe Obama or John Edwards will get the Democratic presidential nomination. There’s even more money to be made buying a futures contract on a Republican victory in 2008. As a great investor once said (to paraphrase): “the moment to invest everything is the moment of absolute and complete pessimism.” The smart money is saying we are going to have our first female president in 2009. So there’s money to be made betting (um, investing) against that result.

A final thought: Shouldn’t someone check the White House accounts to make sure the president isn’t buying every DEM08 winner-take-all contract on offer? That would explain a lot.