Prediction Market Could Supercede Polling

WASHINGTON – Do you think you know who will win the Iowa primary or the Democratic nomination? Are you willing to put your money where your mouth is?

If so, you can invest in a political futures market.

"We've built a futures-style exchange," said Mike Knesevitch, communications director for Intrade.com, a Web site that accepts wagers on the outcomes of political and current events.

Units trade for values between 0 and 100, which can be thought of as a percentage. For example, on Friday, Howard Dean was trading between 47.5 and 50, meaning investors believed he had a 47.5 to 50 percent chance of winning the Democratic nomination.

If Dean wins the nomination, the market would close at 100. If he loses, the market would close at zero. The numbers change every day based on events in the news.

There was a "direct correlation between the capture of Saddam Hussein and the probability traders assigned for George Bush to win the election. Dean and Clark declined in value because they are the anti-war candidates. Lieberman and Edwards and Gephardt, who are pro-war candidates, actually climbed in value," Knesevitch said.

Intrade is a division of Dublin-based Trading Exchange Network (search), an online betting outlet that has 28,000 members who have exchanged almost $1 billion betting on politics, sports, awards shows and other topics, including the weather.

On Friday, investors wagered that there was a 26 to 32 percent chance Usama bin Laden would be captured or neutralized by the end of June. They were also betting there is a 25 to 33 percent chance that a Palestinian state will exist by Dec. 31, 2005.

Intrade, which has been around since 2001, already exhibited its predictive powers in the California gubernatorial recall race.

"Our traders gave Arnold Schwarzenegger a 70 percent probability to win the governorship of California months before the election when public opinion polls were showing it was a very close race," Knesevitch said.

Unlike polls, which strive to survey a representative group, Intrade's members are largely white and male, and 70 percent of them make their livings in the financial world.

But that shouldn't make a difference in the futures market picking the correct result, said Justin Wolfers, professor of political economy at Stanford University (search).

Prices are a result not of whom traders want to win, but who they think will win, Wolfers said. It is possible that traders will bet on a candidate they support in order to try to generate a news story, but in a large market such as Intrade's, their effort would be balanced out by traders seeking to make money.

"Market manipulation fails because if a whole bunch of guys bet on a candidate, then a bunch of other guys will make money betting against him, so the price will return where it should be," said Wolfers, author of a new study on prediction and gambling markets. "People with political beliefs are definitely in the market, but it's set by the marginal guy who is really interested in making money."

Knesevitch added that gamblers have a vested interest in making smart choices that ultimately will be closer to the mark.

"Because individuals risk capital on it, they are more thoughtful on their opinion; they are more studied on what's going on in the marketplace, so it's a better indicator than a public opinion poll," Knesevitch said.

But some polling experts disagree on whether Intrade would serve any use in predicting the outcome of political races.

At a scientific conference, a political futures market "would be laughed right off the podium," said Jim Wolf, director of the Indiana University Public Opinion Laboratory (search).

"There really is no scientific ground for saying that this kind of approach is a legitimate or let alone a better measure," Wolf said.

Wolfers disagreed, saying political futures markets are so much more accurate than polls or pundits that it's "bad news here for pollsters.

"If you are a politician, you should maybe look at this data instead of hiring a pollster," he said, adding that traders have the advantage not only of polling information, but also of other information they have gathered; for example, a campaign worker may have information about the election that a poll would not reveal.

"When I go to bet at Intrade, I know what the polls are, so I take account of the polls in my betting decisions," he said.

Wolfers acknowledged that reliance on this tool could lead to a different set of problems including the potential for market manipulation and market bubbles, but "even if those problems occur, the evidence is that the markets do a better job than polling."

"I suppose it deserves a little more investigation, but it is not a trend that could overtake polling," Wolf said.

Knesevitch said that the political futures market is a self-regulated marketplace that prevents the kind of shortchanging that can happen in other types of betting pools.

"When you go to those other Web sites, you have one individual who would be in effect a bookie for you. When you have one person controlling the value of commodities, the markets become less efficient," he said.

Knesevitch acknowledged that he has not seen any indication the presidential candidates have been tracking their standings on Intrade's market, and calls to several campaigns confirmed this.

However, he added, "I do suspect that as we become more visible they will."

Even the seemingly most likely political candidate to take the bait has not bitten so far. Blair Hull (search), a candidate in the Illinois Senate Democratic primary, was trading between 16 and 20 on Friday. Although Hull got his start at the blackjack tables in Las Vegas, from which he used his winnings to build a multimillion dollar business on the Chicago financial exchanges, his campaign said it regards polling as much more effective than information from Intrade.

The political futures market is "not something we see as a viable way to poll or determine who has an advantage in the race," said Hull communications director Jason Erkes.

"It is intriguing, but it still falls into the classification of more of a game, perhaps a fad, that might attract attention for a little while," Wolf said.