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Another View:
Forget the Presidential polls, check the markets
By JAMES K. GLASSMAN
Guest Commentary
AT THIS point,
Presidential polls are volatile and meaningless. In January, the Gallup
survey had John Kerry leading George Bush, 55 percent to 43 percent; in
March, Bush was ahead by precisely the same margin. Gallup’s latest
survey, on May 25, has Kerry leading, 49 percent to 47 percent. There’s another way
to predict the winner, and, while it’s not foolproof, it’s proven far
better that polling. Don’t ask individual Americans for whom they’ll
vote if the election were today. Instead, ask traders on a specialized
exchange — similar to a stock market — for whom America will vote on
Nov. 2. One such exchange
is called the Iowa Electronic Markets, founded in 1988 by the
University of Iowa College of Business (http://www.biz.uiowa.edu/iem).
Anyone can trade by betting up to $500 to predict the outcomes of
events like governors’ races and Federal Reserve policy. Results have
been uncannily accurate. Academic papers
have found that the IEM, on average, has whipped the polls soundly. For
Presidential elections, the IEM’s margin of error on the brink of the
vote was just 1.5 percent, compared with 2.1 percent for Gallup.
Three-fourths of the time, the IEM has been more accurate than the
average pollster. In one of the Iowa
contracts, traders predict the share of the vote that Bush will receive
against Kerry. Winners receive Bush’s final vote percentage on Nov. 2
in cents, so this market provides a good gauge of who traders think
will win, and by how much. The latest quotation shows Bush leading
Kerry, 51 percent to 49 percent. While polls show
what people think now, the Iowa markets show what traders, with their
own money at stake, think will eventually happen. “Though
ever-changing,” the IEM forecasts, writes James Surowiecki in “The
Wisdom of Crowds,” his superb new book, “are considerably less volatile
(than polls) and tend to change dramatically only in response to new
information. That makes them more reliable as forecasts.” For example, in
contrast to polling, IEM trading has put Bush ahead of Kerry
consistently since February. Bush has declined slowly from a peak of 53
percent since mid-April and lately has leveled off. (A contract set to
debut in June will pay $1 to bettors who predict the winner of a
head-to-head Bush-Kerry contest; watch this one closely.) The IEM is what
economists call a “prediction market” where participants bet on
political and economic events. Such markets are flourishing on the
Internet. One, TradeSports. -
com, currently provides wagering on whether Don Rumsfeld will resign by
June 30 (current chances, just 7 percent, down from a high of 32
percent in early May), who will host the Olympics in 2012 (the betting
is on Paris) and who will be Kerry’s running mate (John Edwards leads,
with his stock sharply higher in the last month). Newsfutures.com, a
“pseudo-market” without real money at stake, offers contracts on
whether Osama bin Laden will be caught this year (31 percent chance,
according to current market prices) and whether Ariel Sharon will
outlast Yasser Arafat (35 percent). A similar market, Idosphere.com,
has betting on gas prices hitting $3 a gallon (22 percent chance right
now) and on suicide bombers hitting the U.S. this year (20 percent). In 2000, the
director of the quantum computing program of the National Science
Foundation encouraged the Pentagon’s think tank, DARPA, to study the
usefulness of prediction markets in assessing geopolitical risk. In
July 2003, press reports surfaced about a government-sponsored market
that could allow betting on events like bioterrorism attacks, military
casualties and assassinations. The uproar in Congress, headed by
Luddites like Sen. Byron Dorgan, D-N.D., led to abandoning the project.
That was a shame
because, as Surowiecki shows clearly, well-constructed markets are
better predictors than experts. “We should,” he writes, “ask the
crowd,” whose collective judgment tends to be better than the judgment
of its smartest participant.” In a classic example, the average guess,
made by 100 participants, on the number of jellybeans in a jar is
typically better than the best individual guess. In a new paper,
Justin Wolfers and Eric Zitzewitz of Stanford see a bright future for
prediction markets. Already, they are being used by businesses to
predict movie receipts and computer sales. Among the clients of
NewsFutures are Eli Lilly, the giant drug company, and Dentsu, Japan’s
top ad agency. So, as the election approaches, the smart strategy is to tune out the polls and check out the markets.
James K. Glassman is a resident fellow at the American Enterprise Institute and host of the Web site TechCentralStation.com
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