The presidential futures markets have opened at the University of Iowa. To participate, you just place a “bet” on a candidate. Not really a wager, the bets are purchases of presidential futures contracts that vary in price. The average price of all contracts for one candidate conveys the likelihood that he or she will win.
A similar predictions market, PredictIt explains:
“PredictIt allows you to make predictions on future events by buying shares in the outcome, either Yes or No. Each outcome has a probability between 1 and 99 percent. We convert those probabilities into US cents.
For example, Trader A thinks an event has at least a 60 percent chance of taking place so she offers 60 cents for a Yes share. PredictIt matches her offer with that of Trader B, who is willing to pay 40 cents for a No share. Each trader now owns a share in the market for this event on opposite sides.”
After that, futures owners can buy and sell their shares to all who participate in the market. The result is an equilibrium price that forecasts whether a candidate has a good chance of winning.
Where are we going? To the power of markets.
In the Iowa presidential markets, so far, Donald Trump has had the best numbers. We could translate Trump’s 41 cents into a 41% chance of winning, Rubio’s to 26% and Cruz, 21.7%.
Meanwhile, on the Democratic side, Hillary was far ahead of Bernie with an average option price of $.75 versus $.277.
As for the November election, the popular vote will determine the payoff in the Iowa markets. For now, with no specific candidate yet, the futures give the Democrats a slight lead over the Republicans, 51 to 49.
Our Bottom Line: The Power of the Market
Maybe a decade ago, seeing former Secretary of the Treasury Secretary Lawrence Summers, I walked over and asked for the most important economic idea I could share with my students. Without missing a beat, he responded, “The power of the market.”
In presidential prediction markets, we are using the power of the market to generate the forecast wisdom that individuals lack.Read More