A century ago, betting on the presidential election was a popular quadrennial pastime. Now, thanks to the Internet, so-called "prediction markets" are booming again--and drawing serious attention from economists.
Two articles published this month in the Journal of Economic Perspectives suggest that betting markets can out-forecast the polls. In one, Paul Rhode and Koleman Strumpf of the University of North Carolina, Chapel Hill, relate that from 1884 to 1940, when election wagering was wildly popular, the betting favorite won in every year but 1916, when Woodrow Wilson beat Charles Evans Hughes with a last-minute upset in California. After 1940, because polls were perceived as more scientific, the gambling markets faded from public consciousness, says Strumpf.
But the current betting markets--led by Web sites such as www.intrade.com, tradesports.com, and fairbet.com--may outperform opinion polls. In the last four presidential elections, according to a paper by Justin Wolfers of the University of Pennsylvania and Eric Zitzewitz of Stanford University, the University of Iowa's Iowa Electronic Market has averaged an error margin of ±1.5% in the week before the vote, compared with ±2.1% for the Gallup polls. More recently, traders picked John Edwards as John Kerry's running mate 2 months before Kerry did.
It might seem as if markets would be more accurate than polls because they involve more people, but according to Wolfers and Strumpf that is not the real reason. "Polls simply reflect voters' beliefs that day," Strumpf says. "Markets think of things that might change people's opinions months from now." Thus, for example, candidates always get a surge in popularity in the polls after a convention, but canny bettors know it won't last.
The Iowa Electronic Markets