Iowa University ‘E-Market’ Predicts Caucus Winners, Losers
By Charles Babcock
January 3, 2008 09:30 AM
Based on its results so far, no matter how well Barack Obama does in the Iowa caucuses on Thursday, Hillary Clinton is still going to be the Democratic nominee.
The Des Moines Register poll showed Obama leading Clinton on the eve of the Iowa party caucuses by a margin of 32% to 25% on Wednesday.
But the Iowa Electronic Markets at the University of Iowa makes a different prediction. Shares on Clinton as of midnight Tuesday, the most recent available, were worth 63.3 cents, or more than twice as much as those on Obama, worth 24.4 cents. Former Sen. John Edwards came in at 12 cents. The values are equivalent to percentages of a party’s voting electorate. The trading in various candidacies for their party’s nomination has been going on since March 2.
On the Republican side, the IEM showed Mitt Romney emerging as the party’s nominee in November by a margin of 29.6% to 23.3% for Rudy Giuliani and 23% for John McCain. Mike Huckabee trailed the field with 15% compared with Fred Thompson’s 3.6%.
The IEM is a futures trading market set up as an ongoing experiment by the University of Iowa’s Tippie College of Business.
In 1996, 2000, and 2004, it called close presidential races correctly and has often been cited as one of the first functioning examples of “the wisdom of crowds.” It predicted Al Gore would win the popular vote by a narrow margin in 2000 and President Bush would prevail over Democrat John Kerry in 2004.
The markets allow individuals, often university faculty and grad students, to trade with $5 to $500, placing their bets on shares that represent various Republican and Democratic candidates. But the market is not strictly a local or state-based phenomenon. It is open to anyone around the world who pays a $5 fee to set up an account and boasts about 7,000 traders. As individuals buy and sell stock in the various candidates on an open market, the exchange offers them the chance to make or lose small amounts of money.
The IEM is being run as an ongoing test of whether marketplaces can serve as a way of screening out sentiment and biased political opinion in favor of a broader and more realistic point of view.
The goal for the traders is to back the right candidate for his or her party’s nomination, and make money on the investment. The money has to be placed behind a candidate early enough to reap the gains as other traders start backing the same candidate, driving up share prices. The backers of winning candidates collect $1 per share, regardless of what they paid to obtain the shares.
The “wisdom of crowds” principle is now used on social Web sites such as Digg and Del.icio.us. In political races, such marketplaces have a reputation for being within 1.3% of actual results, or closer than public opinion polls. But they often are most accurate close to election, not far in advance of it. The IEM on the 2008 November election shows the Democratic nominee beating the Republican in the November elections, regardless of who the nominees are, by a margin of 51.1% to 48.8%.
“Sen. Clinton can survive a second- or even third-place showing in Iowa, as long as the gap behind the first-place finisher is not too large,” said University of Iowa political scientist Peverill Squire.
On the Republican side, Mike Huckabee made a strong debut on the Iowa Electronic Markets on Dec. 5 but then slowly faded through his first day of trading. The price of a Huckabee contract opened at 23.2 cents on the IEM’s Republican nomination market, indicating that the market believed Huckabee had a 23.2% chance of being the Republican nominee. This was close behind the second-place price of Mitt Romney, whose contract was trading at 23.9 cents. But by 8 a.m. Dec. 6, Huckabee’s price had fallen to 19.8 cents, while Romney’s had risen to 24.9. On the eve of the primary, Romney was trading at 29.6 while Huckabee was down to 15 cents.