What the electronic betting markets are saying about the election and what does it mean?

Well, it’s 4:00 p.m. and the anxiety is building. The last time I felt this anxious was watching the Bush-Clinton election. Since then, polling has been increasingly displaced? supplanted? complemented? by betting markets with large numbers of traders, which try to aggregate, as it were, the wisdom of crowds. This election has seen people track how well the candidates are doing through the Iowa Electronics Markets, Tradesports.com and the like.

How these markets work and if they efficiently aggregate information are of course subject to debate, though most people seem to think that in these markets people are less willing to engage in cheap talk since they’re putting their money where their mouth is. I admit that I was more heartened by this afternoon’s Iowa Electronic Markets prices on election outcomes than by the early exit polls (also since I have no idea where these polls come from or who did these polls). And just now I was completely heartened by the price changes at tradesports.com on a Bush victory (falling) and a Kerry victory (rising). In fact, the move up of a Kerry victory by more than 52% by a tenth of a cent cheered me up further. Then I begin to feel like a stock trader in the 1990s.

Last the IEM was showing,


(click here for the latest IEM prices)

and tradesports.com was showing something similar; (here for the latest tradesports.com prices on the election.)

All excitement from price movements aside, the question of if and how markets predict elections is an interesting one. It’s premised on the idea that markets can aggregate information in settings characterized by many people with different sets of knowledge and that the aggregation in the form of prices represents the best information available. Here’s an article that addresses the pro side of markets in election bets, unsurprisingly from the Ludwig von Mises Institute. And Daniel Davies at Crooked Timber has a couple of posts that are more skeptical of the value or at least significance of these prices–here and here.

Also if you’re interested, the latest issue of The Economists’ Voice has some results from an experiment on election betting markets where contingencies (of the what if Osama bin Laden is captured in October-type) are offered, in a paper by Justin Wolfers and Eric Zitzewitz.