Futures Markets Allow Presidential Race Wagers
Thu Oct 21, 2004 08:25 AM ET
By Andy Sullivan
WASHINGTON (Reuters) - As if the U.S. presidential contest wasn't enough like a horse race, Web users all over the world can now bet on the outcome through online futures exchanges that treat politics like corn, cocoa or other commodities.
At Web sites like the Iowa Electronics Markets (
http://www.biz.uiowa.edu/iem/) and Dublin-based Intrade (
http://www.intrade.com), members can buy contracts predicting that President Bush will win re-election on Nov. 2 -- or sell them off if they think Sen. John Kerry will unseat him. Savvy traders can make money along the way as prices fluctuate with the candidates' fortunes.
On the Iowa exchange, traders on Wednesday gave the Republican Bush a 59.8 percent chance of winning. On Intrade, Bush re-election contracts were trading at 59.5, meaning that traders believed Bush had a 59.5 percent chance of being re-elected.
Most national polls on Wednesday showed the candidates running at a dead heat or Bush slightly ahead.
Democrat Kerry fared better with a 55.7 price at the Presidential Market (
http://presidentialmarket.org), where traders compete for a trip to Washington for the inauguration, but do not wager real money.
The Iowa markets have predicted the winner in all but one election since they were started as a teaching tool in 1988, said Joyce Berg, a University of Iowa accounting professor.
With 3,000 participants, the exchange's 1.4 percent margin of error over that period is lower than the 2 percent average of telephone polls, Berg said.
Markets like these can predict the outcome with a high degree of accuracy because traders examine the evidence critically before making a decision, said Intrade spokesman Mike Knesevitch.
"They're putting their money where their mouth is, and when people do that they typically do a lot of research and they come to a more studied opinion on these things," he said.
Among Intrade's 40,000 traders, Knesevitch said bets on financial exchanges are most popular, followed by politics.
"It's a clever use of the logic that's behind markets in general, that is the collectivity will come out with the right answer," said Gary Jacobsen, a political-science professor at the University of California in San Diego.
All three exchanges, which allow participants to wager on outcomes in specific states, can measure developments in the race that might not show up in polls.
During the second presidential debate on Oct. 8, Bush contracts on Intrade plunged from 58 to 52, then bounced back as pundits said Bush did not get beaten too badly, he said.
FUTURES MARKET
Smaller events show up in the markets as well.
On Oct 11, Knesevitch said: "Both candidates were in New Mexico today. New Mexico (Bush contracts) dropped two points today, so whatever Bush was doing wasn't working."
Futures exchanges emerged in the 19th century as a way to hedge risk in agricultural markets. A farmer might sell his corn on the exchange before it is grown to make sure he has a guaranteed profit. A breakfast-cereal maker might buy that contract to ensure a steady supply at a guaranteed price.
In the last 30 years, futures exchanges have evolved to hedge against fluctuations in the stock market, interest rates, currencies and other financial products.
The Defense Department considered setting up a futures market last year to help predict the likelihood of dire world events such as terror attacks, but scuttled its plans after lawmakers protested.
On the Internet, market makers have been equally creative. The Hollywood Stock Exchange (
http://www.hsx.com) trades in the "shares" of movie stars, while tech geeks can wager virtual dollars on questions like broadband penetration at MIT's Innovation Futures (
http://innovationfutures.com).
The markets also tap into the tradition of betting on elections. In an era before reliable polling techniques were developed, betting markets accurately predicted the outcome of every election between 1868 and 1940 except for the close contest of 1916, according to research by University of North Carolina professors Paul Rode and Koleman Strumpf.
Intrade plans in November to register as an exchange in the United States, allowing institutional investors to hedge hurricanes, snowstorms, and even political events.
A pharmaceutical company, for example, could buy Kerry contracts to offset losses if he wins the election and allows drugs to be imported from Canada, Knesevitch said.
"I could point back to the corn market on the Chicago Board of Trade, (when)... they were portrayed as corn gamblers," he said. "That blossomed into one of the largest, best-used hedging mechanisms ... in this country."
-Rudey
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