Prediction Markets and Election 2008

The ability of markets to process large volumes of pricing information is indisputable. So while polling is still the method of choice for predicting voter behavior, prediction markets, by letting voters put their money where their mouth is, may be a more efficient and continuous means of predicting our next president. With that in mind I scoured the existing prediction markets that allow real money trading -- Iowa Electronic Markets and InTrade -- as well as those that only use play money -- News Futures and Prediction Xchange (currently offline) -- for information on who our next president will be.

In case you are wondering I feel that InTrade is perhaps the best prediction market site because of its easy navigation and advanced graphing capabilities. I am not endorsing that you engage in betting on any of these sites, and if you want to learn more about the potential legal consequences of doing so you should check out this article from Slate.

The electronic prediction markets pose a question, for example "Will Hillary Clinton be the 2008 Democratic Nominee for President?" If Hillary wins the contract is worth $100, if she loses it is worth $0. So logically the more likely she is to win the more someone will pay for the contract and the higher the contract will be worth. Let's start with the real money sites:

1. Iowa Electronic Markets (IEM) - IEM is predicting Hillary Clinton will be our next President. More money is riding on a Democratic victory 53.3 over a Republican victory 46. The candidate voting has had an interesting month. On the democratic side Hillary Clinton 40.8 and Barack Obama 40.5 opened the month in a dead heat, with Edwards 7.7 a distant third. The catch all for other candidates was at 12. By the end of April Hillary bumped up to 43.9, Barack fell to 32.4, Edwards is at 9 and the others are at 15. Why is Barack falling and others rising? Is the call for an Al Gore candidacy stealing votes from Obama?
   
2. InTrade - InTrade is predicing Hillary Clinton will be our next president. Hillary Clinton has a wide margin over Obama. The current bid price for Hillary is 47 versus 30.5 for Obama. The third candidate is actually Al Gore with 10.5 over John Edwards with 7.2. According to InTrade Al Gore is still a very strong dark horse candidate. This may help us understand the IEM data better. The one weakness of the IEM market is that lack of a separate trade for Al Gore, who is lumped in with all the other Democratic candidates.
   
3. NewsFutures - NewsFutures is predicting Barack Obama will be our next president. Currently Barack Obama is the 46% favorite to be the 2008 Democratic Nominee for President. Hillary Clinton is a close second at 43%. Republicans are dogs (44) to the Democrats (56) in the general election.

So what have we learned? All the sites are predicting a Democratic victory and the two that trade real money are predicting a Hillary Clinton general election victory. It is however up to you how realistic you think this is. If you have information that leads you to believe that there has been a mispricing I encourage you to put money on it.

In the meantime those chartists out there can digest this chart for Barack Obama from InTrade. It looks solid to me as Barack is still way out in front of his moving averages but he may have some resistance in the low 30's.
Here to is the chart for Rudy Guiliani. You can see that Rudy was up on strong volume in February and March but had trouble breaking 40. He is still the leading Republican candidate.