As we move through election season, the polls start coming fast and furious; the pundits punditorate, the politicians spin, the news media pretend not to spin, bloggers blog, and everybody offers the inside scoop as to the outcome of the election. How is one to aggregate all this information into the best possible guess as to who will win the presidential election?
One excellent way to do it is to pay people to be right. This is exactly what is done at the Iowa Electronic Markets. If you are sure that John Kerry is going to be the next U.S. President, you can got to the IEM website and buy Kerry stock. Currently, for 46 cents one can buy an option to get $1 if Kerry wins. Bush costs about 54 cents. If you are sure Kerry is the man, this is an easy way to make money, $46 now will get you $100 in just a few months.
In fact, ignoring some niceties, most people should probably be willing to buy Kerry stock if they think the chance of him winning is more than 46%. The same goes for Bush. If people do start buying a stock, the price rises until one reaches the point where once again, as many buyers think Kerry has at least those odds of winning as sellers think he doesn’t. Thus the stock price is the probability of winning.
The market aggregates information based on your willingness to put money down on the proposition. This is not a poll. It is a probability based on the best guess of the investors. It lets the investors think through the punditry and the polls and the spin. And it rewards people who are right. As we move through the election, IEM should be high on your list of places to get info.
For myself, I view this as not much better than gambling, so I don’t particularly advise those opposed to gambling to dig in. But the numbers are useful nonetheless. If you want the best available guess, this is probably it. If you don’t think so, I know how you can make some money!
Here’s a graph of the last two months of prices. Kerry has been on top a couple times, but for most of the time, Bush has a slight lead. Also, this form of information gathering can be used for pretty much any question. The Pentagon got hammered a while back for contemplating using this method to figure out the probability of various bad things happening.