Rhetorical Outbursts

I’m fascinated by the The Wisdom of Crowds approach to predicting elections (and all sorts of other things).

Prediction markets like the IEM, operated by the University of Iowa, have proven more accurate at predicting elections than traditional polling. As the Wikipedia article on prediction markets explains:

These markets actually have a long and colorful lineage. Betting on elections was common in the U.S. until at least the 1940s, with formal markets existing on Wall Street in the months leading up to the race. Newspapers reported market conditions to give a sense of the closeness of the contest in this period prior to scientific polling. The markets involved thousands of participants, had millions of dollars in volume in current terms, and had remarkable predictive accuracy.

I think the reason these markets are accurate is that they take into account all sorts of information in addition to the polls. In effect they aggregates all the polling, news, individual expertise, analysis, and even inside information into one, simple-to-understand number. It’s the same mechanism that makes free-markets work: price.

So what is the liklihood that Republicans will retain control of the Senate? What about the House? Well, over the next two weeks, I’ll be checking the prediction markets more often than polling numbers to find out the anwers to those questions. Currently, it costs $76.20 on TradeSports to purchase options contracts that will be worth $100 if the GOP retains control of the Senate or worth $0 if the party loses control. That price means that there’s essentially a 76% chance right now that the Republican will keep the Senate. You can see from the chart that the price is up from $66 two days ago. In other words, people willing to put their money where their mouth is think that the Republican’s chances are improving on the Senate side. The numbers are comparable on the IEM.

As for the House of Representatives, the price forcontracts on GOP control has similarly risen from $32 to $38.80 in the last two days. A 39% chance of keeping the House isn’t good for the GOP, but I’m not sure it’s quite as bad as you might think from watching all the media reports and listening to stories of Democrats measuring for curtains in their new offices. Stay tuned.

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