Clinton's stock soars

If prediction markets are wiser than pundits or polls, Hillary Clinton is a shoe-in for the Democratic presidential nomination.

According to 'political futures' indices operated by Intrade and Iowa Electronic, on which traders buy contracts on election outcomes in the same way they wager on pork bellies on the Chicago Board of Trade, the Democratic presidential nomination is a one-horse race. The Republican political futures market shows more even money, but greater volatility.

 

Clinton's stock has soared to between $71 - $75 on both indices. This means that speculators are willing to pay between $71 and $75 for a contract that will pay off $100 if Clinton wins the Democratic nomination, and $0 if anyone else does. Barack Obama's stock has dwindled in the last month, with speculators willing to pay only $15. This strong showing on the futures market reflects a conviction that present reality is immutable: Clinton has led Obama in the polls by at least 20 percentage points since August.

In the Republican camp, Rudy Giuliani's stock has seen a recent spike, ostensibly at the expense of Fred Thompson, who has turned in a series of lacklustre performances of late. Mitt Romney's creeping poll popularity is reflected by a steady increase in his stock value throughout 2007.

Can we trust political futures?

Prediction markets have their fans. According to a 2000 paper by Joyce Berg, the Iowa Political Market outperformed polls in predicting 9 out of 15 elections. Its average margin of error in predicting election results was about 1.5%, compared to about 2% for an average poll.

The markets adhere to the same principles as parimutuel betting at racetracks, where the crowd is better at picking winning horses than any individual punter.  This chimes with James Surowiecki's Wisdom of Crowds theory, which champions collective intelligence over that of the individual expert.

Those that consider a trading price a proxy for the probability of outcome think that market accuracy is enhanced by people who are prepared to "put their money where their mouth is". Speculators are more interested in a correct outcome than a preferred outcome, so traders are participating in a kind of unemotional Keynesian beauty contest based on their knowledge of public perceptions

Yet the Wisdom of Crowds theory necessitates a broad church. Eric Nielsen from the Gallup Organisation says that trading on political futures is confined to a homogeneous group of Internet users. Most political futures traders are male, well-educated, high income, and young. They are also political or gambling junkies: people who have no ideological attachment to any presidential candidate, but enjoy speculating on outcomes. They are therefore unrepresentative of typical voters. Obama might agree.

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