Election Prediction Markets Bet on Obama

Posted by: Ben Steverman on November 3, 2008

Here’s one rare investment that, at least so far, has paid off handsomely in 2008: Barack Obama.

Various election futures markets allow traders to make bets on politics. On Nov. 1, 2007, on the Iowa Electronic Markets, the Illinois senator was given about a 14% chance to merely win the Democratic presidential nomination.

Today, traders are betting Obama has a 90% chance of winning it all by being elected president.

Of course, the Republican nominee, Arizona Senator John McCain, could make a lot of money for certain investors by pulling off an upset on Nov. 4.

As of midday on Nov. 3, the Iowa Electronics Market gives the Republican a roughly 8.8% chance of winning the presidency.

Thus, if you bet on McCain for a “share price” of $8.80, you get a payoff of $100 if he wins. That’s a return of more than 1,000% if you’re right.

Intrade also runs a presidential prediction market: It gives Obama a 92% chance and McCain a 9.5% chance of victory. Another site (not open to U.S. bettors) is Betfair.com, which gives Obama odds of almost 93% and McCain probability of about 8%.

How accurate are these markets?

Many, including the founders of the Iowa Electronic Markets (see video below for more on IEM), say the collective wisdom of traders often beat the accuracy of polls in past elections.

Ben Kunz makes the argument for prediction markets — both in politics and other fields like public health — in this BusinessWeek piece.

On the IEM, you can bet on each candidate’s percentage of the popular vote. Right now, that gives Obama about 53.4% and McCain 46.8% of the vote. A key test of these markets will be how close this is to actual results.

There are plenty of legitimate questions about how well these markets work. This fall, observers alleged that Intrade’s presidential futures market was being manipulated, creating odds that were inconsistent with (and more favorable to McCain than) other markets. Intrade’s CEO John Delaney investigated and said one institutional Intrade member had been making big buys that skewed the market. Delaney said the trader was trying to “manage certain risks.”

Alex Tabarrok at Marginal Revolution didn’t think this called into question the concept of prediction markets:

This supports Robin Hanson’s and Ryan Oprea’s finding that manipulation can improve (!) prediction markets - the reason is that manipulation offers informed investors a free lunch. In a stock market, for example, when you buy (thinking the price will rise) someone else is selling (presumably thinking the price will fall) so if you do not have inside information you should not expect an above normal profit from your trade. But a manipulator sells and buys based on reasons other than expectations and so offers other investors a greater than normal return. The more manipulation, therefore, the greater the expected profit from betting according to rational expectations.

Even if markets get the liquidity they need to work efficiently, they have yet to prove they’re much more than an entertaining parlor game.

These markets might be able to predict the obvious, but do they really tell us more than a statistically adept poll-watcher like Nate Silver or Chuck Todd?

If working properly, the markets end up reflecting conventional wisdom. But they don’t really predict the future. A year ago, while Obama was given 14% of winning the Democratic nomination, McCain was given a 7.5% chance of winning the Republican nomination. Both “predictions” weren’t just wrong, but wildly so.

Furthermore, the usefulness of election prediction markets for investors as a so-called “risk manager” is questionable. First, the risks and benefits of an Obama victory should already be reflected in other markets. For example, health care stocks already have been hurt by the prospects for a successful Democratic effort to reform health care. Second, unless you expect to get a job in a McCain or Obama administration, the direct economic effect of a political outcome is not easy to determine. The impact of, say, the Indiana gubernatorial race (which you can also bet on at Intrade) is even harder to detect.

If you’re betting for McCain or Obama, in other words, it’s unlikely you’re trying to hedge against other losses if you lose. Rather, you’re probably just a political junkie having fun and trying to make a little money.

More than 100 million people will vote for president, and each vote will have been determined by a multiplicity of factors. The complexity of it all is mind-boggling. The only thing that comes close to complexity of the factors that influence election vote totals is the many inputs that determine the price movements of a stock or other investment.

And, as the past year has shown in both the presidential campaign and the stock market, life can be very unpredictable.

(Below the jump, a video interview with Joyce Berg, director of the IEM.)

Reader Comments

Lou

November 3, 2008 5:43 PM

Isnt it obvious about McCain?
The republicans and conservatives just could not embrace McCain who crossed the line to many times for immigrants, no child left behind, etc.

Nor could the public face another 4-8 years of trillions of dollars in off budget war spending

Nor could the public face another 4-8 years of unregulated hedges, derivatives and contract default options

Nor could the public face even a small overlap between the people in the Bush/Cheney administration and the McCain/Palin.

If Obama is as bad as the republicans/conservatives fear then they can look forward to a re-invigorated party and a strong resurgence of their party in the next congress/senate election cycle 2 years later not to mention a 1 term Obama administration.

But make no mistake Ihave never seen people hate a presidential administration more than Bush/Cheney, worse than Carter, worse than Nixon/Ford, worse than LBJ...I mean there are people praying for Bush's assassination.

Of course its common sense really but I will say it anyway, had the republican and conservative party turned on Bush/Cheney and reigned him in then they wouldnot be in the situation they are current in.

This is a rebuke not just of Bush/Cheney but of the entire republican/conservative establishment that enabled them.

Are the liberals & democrats communists/socialists and just as screwed up as the rep/cons. Yup! So this is not a vote for Obama but an anti-incumbant rebuke. The sooner the repub/conserv digest and purge those neocon elements from their party the sooner the public will kick the dems out.

michael

November 3, 2008 8:24 PM

The largest tell from either candidate so far was the choice of Palin. This was frightening for those of us living abroad. We are not electing just the US pres., but the leader of the free world and the chance of Mrs. Palin at the helm is heart-stopping.

HAL

November 3, 2008 11:30 PM

GO AHEAD ,VOTE IN THE ANTI-CHRIST,YOU'LL ALL GET WHAT YOU HAVE COMING.OF COURSE THE MARKET KINGS ARE GOING TO PUSH FOR MR. HANDOUT,IF ALL ELSE FAILS ,START A BANK AND THE U.S. WILL PAY YOU AND ALL THE OTHER ECONOMIC LEECHES.

ww terry

November 3, 2008 11:37 PM

Hate, sexism, anger, all the abnormal behavior I have seen coming out of democrats letters, blogs, comments boggels the mind. This attitute of anyone but Bush mantra is mentally ill. Example: Sarah Palin. The search and destroy actions of the left against this inteligent, charming, successful woman and mother have no prior example in our history. It's like a group of people gone mad. Then to champion a street hustler with no experience for president in times when we need the best and brightest (Obama's 130 IQ doesn't qualify) A man who has repeatedly given the middle finger to his opponents is not a class act. He's a street thug bent on the destruction of our country. God, has America ever fallen to a shadow of what it once was.

Yousef Harish

November 4, 2008 2:06 AM

Lou,

You are clearly an ill-advised, uneducated twit. Your comments do not approach any semblance of logic.

Chuck

November 4, 2008 7:59 AM

"The republicans and conservatives just could not embrace McCain who crossed the line to many times for immigrants, no child left behind, etc."

Uh,if Republicans and conservatives couldn't embrace McCain, then how did he become the party's nominee? There's part of the problem. Many of us feel that he was foisted upon us by a media who have long-admired J McC's "maverick" image. Of course, their love for him only lasted long enough for them to have him installed. Then it was time to tear him to ribbons when he came up against Obama, Who Shall Remain Unknown. At least until he's coronated.

And, by the way, our ire was directed McCain's stance on ILLEGAL IMMIGRATION, not immigrants. We believe in the rule of law, that if you want to come and live in our country, you are welcome to do so LEGALLY. We don't want to give those who are in our country illegally driver's licenses, health care, Social Security or benefits that OUR OWN CHILDREN WHO ARE NATURAL-BORN CITIZENS can't get. We worked hard for the money that has been taken from us in taxes and we want it spent on people who play by the rules, learn to speak English and assimilate into our society, not those who sneak in here and try to change our values and heritage.

"But make no mistake I have never seen people hate a presidential administration more..."

Nor have I. And it was driven by a ridiculously-biased media and Democratic party who criticized absolutely everything the man did or tried to do. We've seen 8 years of bile, starting before the 2000 election was even over. Everthing was spun into a negative. The people were fed a constant stream of this, and those who weren't able to think for themselves substituted hate for reason and a sense of fair play. Those who are taught to hate, hate.

And what does this say about the haters? Conservatives harbor strong feelings about the policies of their opponents, but when a Ted Kennedy is diagnosed with brain cancer, we exhibit grace and sympathy, rather than celebrating and hoping that he'll die soon. We don't gleefully greet the death of a distinguished member of the opposing party with cheers and exhortations that he will burn in Hell, the way Dems/liberals did when Tony Snow passed away. We don't pray for the assassination of our President, regardless of party affiliation.

Make no mistake -- the base is energized for McCain. It's doesn't have much to do with McCain, himself. There are two other factors that will drive us to the polls: Obama & Palin.

Will it be enough to overcome the incessant cheerleading for Obama perpetrated by an almost criminally-negligent mainstream print and broadcast media? Maybe not. But they didn't fool everybody.

Nigel Eccles

November 4, 2008 10:29 AM

The comparable for prediction markets should not be perfect foresight. A year ago both McCain and Obama were long shots. They had lost momentum, they were down in the polls and there were strong front runners. Odds of 14% and 7.5% were accurate given the information of the time.

In elections, prediction markets compete with polls (which also marked Obama and McCain down a year ago) but for many questions their only rival is the pundit. As I am sure you are aware, 'the pundit' has a track record only slightly better than the astrologer.

Lloyd

November 4, 2008 10:48 AM

"the haters". It cracks me up when conservatives attempt to tag that phrase to liberals. For the folks who gave us the "culture war" and are media-personified by Bill O'Reilly and Ann Coulter to accuse anyone else of hating, is pure pot-calling-the-kettle-black ridiculous. And after the hate-fueled bogus impeachment of Clinton, which left Bubba more popular than before, you'd think the conservatives would have figured it out. Most Americans don't share their views, and have no use for their hate.

Obama will win because the last eight years have demonstrated that American conservatism has nothing to offer. Except, of course, hate for "the haters".

Bob

November 4, 2008 5:30 PM

Hal,

Because you write in all caps, I am more inclined to believe anything you say. But you fail to identify the "ANTI-CHRIST" I am supposed to vote for. Please clarify, as i do not wish to help elect the wrong anti-Christ. (Christ was on the young side and sort of against the establishment, preached love, etc., so I think I get your meaning. I think I can figure out who the "anti" of that would be.) When, o when, will America wake up and follow the advice of sound thinkers like you?

Vyvy

November 4, 2008 7:25 PM

MCCAIN + PALIN = MCPAIN! :->

A Democratic presidency will instill more confidence globally whereby this Democratic administration can begin to REPAIR and to build up our alliances abroad, to lessen our American citizens' apathy in the political process, to focus on regaining our American ingenuity where desperately needed, and to strive toward working collectively as a nation to heal, fix, etc. the "ills" that are weakening us as a nation from what has occurred in the current administration for 8 years! We all need to be trying to work for the common good of this great nation of ours by turning our attentions toward preparing, planning, and surviving within this 21st century. I choose the high road of positivity, NOT the quagmire of negativity that is running rampant on this planet. To me, life is meant to be ENJOYED, NOT ENDURED... :->

We're screwed w/Obama

November 4, 2008 8:30 PM

Karl Marx is alive and well, and apparently is sporting a new fall color.

Be Stake

February 11, 2010 7:38 AM

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Bestake

February 11, 2010 8:32 AM

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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