March 23, 2007 at 12:07 AM ET
The longest-running online market for political prognostication is up and running - and there are already a couple of front-runners. Clinton and McCain? Nope. For now, it's Obama and Giuliani. By the way, if you're the speculative type, you could have made a profit on John Edwards by buying low and selling high.
The idea behind the Iowa Electronic Markets is relatively simple, if unorthodox: You trade contracts in the various candidates or parties as if they were offerings on a commodities market, at prices ranging from zero to $1. After the election, each contract pays off $1 if you predicted the correct outcome - and nothing for the losers.
"We like to say this is not rocket science, it's just a case of putting your money where your mouth is," said George Neumann, an economics professor at the University of Iowa and one of the market's inventors.
Neumann and two other Iowa professors - Bob Forsythe and Forrest Nelson - developed the market back in 1988, without the benefit of online trading. "It was held together with chewing gum and baling wire, but it seems to have worked," Neumann joked.
Since then, the market trends have predicted the outcome of every presidential election - although you'd have to read the fine print for the 2000 election, which had Al Gore barely beating George W. Bush. "We pay off on the winner of the majority share of the two-party vote - we had to tell people to go back and read the prospectus," Neumann said.
Neumann estimates that 3,000 people or so use their online accounts for the presidential contract-trading. When it comes to anticipating the actual results of the election, he said the market does "much better than polls, because it gives people the right incentives to answer."
For one thing, traders are investing real money - usually more than $2 million during an election cycle. Also, the people participating in the market tend to be far more knowledgeable than your typical poll respondent.
"The more knowledge they have, the more predictive power there is," he said.
As you'd expect, students and political junkies are the biggest players. "Our biggest customer, as judged by domain name, is WhiteHouse.gov," the professor said. Participants are limited to $500 each to keep the market from spiraling out of control.
The Republican-vs.-Democrat market has been active since last June, and the Democrats have had the upper hand for pretty much the whole time. It gets more interesting when you look at the party nominee markets, which opened up just this month.
After some initial volatility, former New York Mayor Rudy Giuliani has been leading the GOP nominee market by a significant margin, leaving U.S. Sen. John McCain back in the pack with Mitt Romney. In fact, the "rest of the field" category - which would include folks such as Sam Brownback and Mike Huckabee - has recorded an uptick over the past couple of days.
On the Democratic side, Sens. Hillary Clinton and Barack Obama are neck and neck. Obama is currently in the lead, even though Clinton has built up a huge advantage in the fund-raising race. John Edwards, meanwhile, is trailing the "rest of the field."
Speaking of Edwards, the past 24 hours have seen some wild swings in his standing, no doubt caused by the speculation over how his wife's health would affect his campaign. On Wednesday, the value of his contracts dwindled to 5 cents a share. But when it turned out that he was staying in the race despite the return of his wife's cancer, the value spiked upward - if you can call 12 cents a spike.
Could someone have made a profit by buying Edwards' contracts on Wednesday night and selling them today? "Yeah, you could do that," Neumann said. No one's going to get rich, due to that $500 limit - but this could be just the thing to spice up all that political punditry we'll be hearing over the next year and a half. I'd love to see Chris Matthews, Tim Russert and the rest of the crowd rated based on the rise and fall of their political predictions.
If you're looking for a political-market tip sheet, you'll have to add Politics.MSNBC.com to your list of favorites. Slate provides a frequently updated ticker of political futures, including Intrade's trading levels as well as Iowa's - and that ticker shows Clinton with an edge over Obama.
Predictive markets and politics are made for each other, but the market paradigm is good for other applications - even Super Bowl prognostication. The University of Iowa's operation runs academic markets projecting economic trends and even the box-office returns for the movie "300."
"Next week, we'll open up the avian flu market," Neumann said. That market, which is restricted to medical personnel, is actually aimed at making a real-world difference. Health-care experts will combine their projections on where bird flu may strike, using a market model - and if the model proves to be valid, the system could be used to project where resources should be concentrated to stop an outbreak before it starts.