Political futures markets have long been regarded as good forecasters of real outcomes, drawing as they do on the wisdom of crowds. But Dan Gross, senior editor at Newsweek, wouldn’t bet on it. He says they’re not so much forecasting as they are reacting.
BROOKE GLADSTONE: Many have declared the biggest losers of this primary season to be the pollsters. That’s why some who crave predictions are turning instead to the markets. Political futures markets, as they're called, allow you to bet on everything from delegate counts to which party will control the Senate after 2008.
They have been seen as more reliable forecasters because they draw on the wisdom of crowds. But Dan Gross, senior editor at Newsweek, wouldn't bet on it, and he’s been following two of the biggest political markets. DAN GROSS: Okay. You've got the Iowa electronic markets run out of the University of Iowa where people can essentially place bets on who will get the nominee and who will be the president. They're traded as futures contracts, so if it’s priced at 55 cents, that means there’s a 55 percent chance that person will win. It pays off a dollar if your person wins and pays off zero if your person loses.
There’s also Intrade, which is based in Ireland, which is a real exchange for all sort of events, political, economic events, everything from when Saddam would be captured to the odds of a recession. And there they have contracts on not only who will be the Democratic nominee and who will be the next president but on every single primary we've had so far. BROOKE GLADSTONE: Do we know how many people are betting on these markets and how much money is being wagered overall? DAN GROSS: Well, it’s really not that much. At Intrade they have 70,000 registered customers and 6,000 to 10,000 people who have traded something in the past month. The volume in all the 2008 political markets so far is about $40 million of risk being traded.
On the one hand it sounds like a lot, but when you compare that to the activity in the real stock market it’s really a tiny amount. BROOKE GLADSTONE: There was a headline in the Las Vegas Sun from a couple of weeks ago. It read, quote, “Markets pick 'em better than the polls.” And, you know, Dan, this is a common claim, that these futures markets are better predictors of outcomes than the pundits, than polls, tea leaves, you name it. But you don't buy that. How come? DAN GROSS: When you look at the activity in these markets, I think it’s clear that in many ways they are just reacting to conventional wisdom rather than setting it. What you see frequently is the action of the prices really following what happens in the polls and what happens as the tallies are counted.
We saw this earlier this month after Iowa, which the markets didn't really project Obama would win. He went to the frontrunner status. The contract price soared from about 25 to 35, meaning that he had a 25 percent chance of winning the nomination before Iowa to 35 immediately after.
And in those next few days, when he seemed to be getting a lot of momentum in New Hampshire and the polls were showing that he was doing quite well, that spiked to 70, which is a very high price for one of these contracts. And the Hillary contracts were obviously going in the opposite direction.
Now, in the afternoon of the day of the New Hampshire primary, when exit polls started to leak out and when we first started to get the reports from television showing that Hillary was ahead, the Obama numbers started to plummet back towards where they were before and the Hillary numbers started to go up again.
So I think it’s a very clear example there of the markets reacting to this new information that comes out into the public realm. BROOKE GLADSTONE: So why are these markets so celebrated as being more accurate than the pollsters? DAN GROSS: On the one hand the financial media, places like CNBC, The Wall Street Journal, financial news blogs, they like these prediction markets because they're in a language that their viewers can understand. It’s a way of talking about politics without getting into political wonkery and insidery language.
And the second is that, you know, we've seen many examples of polls, even though they say they have a margin of error, people taking polls as gospel. And when you have tight elections, the margin of error can really make all the difference in a poll being right or wrong.
Intrade, the biggest political prediction market, is proud that in 2004, on the day of the campaign, its markets accurately predicted the outcome of every state election except for Alaska. And I don't think that can necessarily be said about all the polls because of their margin of error. BROOKE GLADSTONE: So then they are more accurate, and yet you wouldn't advise anybody to put their money in one. DAN GROSS: I think they're more accurate than polls maybe on the day of an election that’s happened after eight or night months of campaigning [BROOKE LAUGHS]where the conventional wisdom was that Bush was going to beat Kerry. I think that was the conventional wisdom at the time. They are completely inaccurate if you want to know today who’s going to win the election in November.
You know, back in April, 2007, when the campaigns got started, Rudy Giuliani was the prohibitive favorite in these Intrade markets. So what was the market telling us at that time? The Rudy Giuliani contract was trading at 40, 40 cents on the dollar, which was the highest among all Republicans back in April. Today it’s at a penny. BROOKE GLADSTONE: Do you have any tips at all for a safe bet out there on Intrade? DAN GROSS: Perhaps if they had a contract on the inaccuracy of polls. BROOKE GLADSTONE: [LAUGHS] Dan, thank you so much. DAN GROSS: Any time. BROOKE GLADSTONE: Dan Gross is a senior editor at Newsweek and author of The Money Box column at Slate.