How do you read the Political Futures charts? Let’s consider the market for Democratic presidential nominee. At the time of this writing, Intrade shows a price of “29.2” that Barack Obama wins the Democratic nomination and “45.1” that Hillary Clinton wins the nomination. What this means is that bettors are willing to pay:
- $29.20 for a contract that will pay off $100 if Obama wins the nomination, and $0 if anyone else does; and
- $45.10 for a contract that will pay off $100 if Clinton wins the nomination and $0 if anyone else does.
A month ago, by contrast, the same Obama contract would have cost $19. This suggests that Intrade participants have gotten more confident that Obama will capture the nomination.
|Intrade||Iowa Electronic||News Futures|
UPDATE: Over at Andrew Gelman’s blog, a caveat emptor:
Here’s an article by Bob Erikson and Chris Wlezien on why the political markets have been inferior to the polls as election predictors. Erikson and Wlezien write,
Election markets have been praised for their ability to forecast election outcomes, and to forecast better than trial-heat polls. This paper challenges that optimistic assessment of election markets, based on an analysis of Iowa Electronic Market (IEM) data from presidential elections between 1988 and 2004. We argue that it is inappropriate to naively compare market forecasts of an election outcome with exact poll results on the day prices are recorded, that is, market prices reflect forecasts of what will happen on Election Day whereas trial-heat polls register preferences on the day of the poll. We then show that when poll leads are properly discounted, poll-based forecasts outperform vote-share market prices. Moreover, we show that win-projections based on the polls dominate prices from winner-take-all markets. Traders in these markets generally see more uncertainty ahead in the campaign than the polling numbers warrant—in effect, they overestimate the role of election campaigns. Reasons for the performance of the IEM election markets are considered in concluding sections.