Marketing the Election

From Capitol Hill Blue

Politics
Marketing=20 the Election
By LINDA SEEBACH
Oct 31, 2004, = 02:27

If the up-and-down swings in the presidential polls have left = you=20 dizzy, maybe you should look at the political betting shops = instead.=20 They're volatile, too, but they tend to be more accurate than most = polls.

People answering pollsters' questions have no = particular=20 reason to be truthful, even if they do know their own minds, while = people=20 who have real money on the line have good reason to make = thoughtful and=20 informed decisions about what is likely to happen.=20

Since 1988, the Tippie College of Business at the University of = Iowa=20 has operated the Iowa Electronic Market, which among other issues = tracks=20 the presidential race. As of Friday, contracts for a Bush win were = trading=20 about 6 cents above contracts for a Kerry win. The spread was = wider for a=20 while in September, but has consistently favored Bush since the = end of=20 August.=20

There's a separate contract for share of the popular vote, and = it is=20 saying that the vote is likely to be agonizingly close. But we = knew that.=20

The Iowa market is tiny, though, because traders are limited to = an=20 investment of $500 under federal rules on commodities trading. = It's a=20 research tool, not a gambling venue. So a lot of the betting = action has=20 moved to an Irish site, tradesports.com, which does trade sports = but will=20 allow people to bet on pretty much anything they want to, = including=20 politics.=20

Two researchers, Justin Wolfers of the Wharton School of = Business at=20 the University of Pennsylvania and Eric Zitzewitz of the Stanford=20 University Graduate School of Business, asked tradesports to = create=20 contracts that allowed people to bet on a combination of = events - for=20 instance, that Bush would win and that Osama bin Laden would be = captured=20 before Oct. 31. The difference between the price of those = contracts and=20 the one for a Bush win alone shows that the market believed that = bin=20 Laden's capture would lift Bush's re-election chances to 91 = percent. At=20 the time, the standard Bush contracts were trading at $66.60.=20

As of Friday, bettors at tradesports were estimating Bush's = chances of=20 winning at 51 percent, and his share of the popular vote at 51.5 = percent.=20

Betting on elections is nothing new, as Paul Rhode and Koleman = Strumpf,=20 of the economics department at the University of North = Carolina-Chapel=20 Hill, have written. In fact, before scientific polling became = common,=20 newspapers followed the odds as they covered the election.=20

The authors note that Andrew Carnegie, returning from a visit = to=20 Scotland late in October 1904, was quoted in The New York Times: = "From=20 what I see of the betting ... I do not think that Mr. Roosevelt = will need=20 my vote. I am sure of his election ..."=20

Huge amounts were at stake in some election years. In 1916, the = betting=20 volume in the New York City markets (converted to 2002 dollars) = reached=20 $165 million dollars.=20

Concern that people would try to influence elections by = manipulating=20 the markets eventually led to the end of the formal political = market "and=20 once polling was invented, journalists forgot it ever existed," = Wolfers=20 said Thursday.=20

But the evidence suggests that the markets are surprisingly = resistant=20 to manipulation, he says. Traders who are "buying publicity," as = he calls=20 it, trying to move prices artificially so market-watchers will = think that=20 a candidate is gaining or losing support, can do so but only for a = short=20 time.=20

Bush contracts on tradesports have apparently been the subject = of=20 several such attacks. Don Luskin of the Web log poorandstupid.com = wrote on=20 Oct. 16:=20

"Yesterday the price of the futures were sold down from about = 55 to 10=20 with a single 10,000-lot order entered by a single trader ... = Within=20 moments after the order was completed, the price recovered back to = the=20 low-mid-50s."=20

Wolfers told me that the first time something like this = happened, in=20 September, people in a tradesports forum were talking about how = much money=20 they made. One wrote, "Is this part of the new Kerry attack=20 strategy - flood the markets? Let's take their money."=20

Though it's not publicly known who the trader might be, another = forum=20 participant observed that it might be worthwhile for the Democrats = if the=20 media began reporting that Bush and Kerry were close to a tie. At = the=20 time, Bush contracts were around 62 to 64, and the price quickly = recovered=20 to that level. "Sites like ours are more accurate than any poll = possibly=20 could be," someone said.=20

Markets collectively have much more information than any of the = individuals in them, which is why market economies work better = than=20 planned ones.=20

Markets also require participants, if they want to be = successful, to=20 separate what they hope for from what is probably true, and to = make=20 realistic judgments about what other people are likely to do. If = you have=20 to "put your money where your mouth is," you may find out what you = really=20 believe.=20

(Contact Linda Seebach of the Rocky Mountain News at=20 www.rockymountainnews.com.)

=A9 Copyright 2004 Capitol Hill Blue

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