Tuesday, October 28, 2008

Political markets futures

« Traders Give Edge to Obama » according to the Iowa Electronic Markets election markets (October 16, 2008, http://www.biz.uiowa.edu). Barack Obama’s contract is still trading at prices considerably higher than John McCain’s. It was selling on that day for 85.8 cents, which means traders believe there is a 85.8 percent probability Obama will win popular vote. A McCain contract, meanwhile, was selling for 14.6 cents.

On the Vote Share market, an Obama contract was selling for 58 cents, which means traders believe Obama will receive 58 percent of the two-party popular vote. A McCain contract on the Vote Share market was selling for 46.6 cents.

But could these bets be deliberately biased by friends of a candidate? As noted by Tim Hartford in Slate (July 7, 2007, http://www.slate.com) there are several reasons to lie to pollsters, but no reasons to make a money-losing bet. It might be worth, however, placing a few money-losing bets if they make you look electable, and especially - I would add - if it helps raising money for your campaign because your apparent (future) success makes you a high return alternative for political pressure groups and investors.

Economic historian Paul Rhode and economist Koleman Strumpf point out that an investment of about $20,000, small change by the standards of modern presidential-election campaign, can significantly change the price of these future contracts. This could have been the case of Hillary Clinton contracts (chances of becoming president) that started to climb dramatically by mid-May, topping 40 percent after months of fluctuating between 20 percent and 30 percent.

The cost escalates rapidly however with the volume of the market. Manipulation will not be so cheap in future. For now, the Iowa Electronic Markets notes that trading has been heavy, with more than 8,000 contracts trading hands on Wednesday 15th.

And last but not least, both parties could encourage such self promoting losing bets …. making manipulation more difficult.

If competitive online betting is legalized in France in the near future, it would be worthwhile to launch such a political betting market in advance of the next few votes.

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