Tag Archives: IEM

01.02.2012 | Presidential Futures

The prices of buy and sell contracts for the Republican presidential candidates in Iowa provide a good history of the beginning of the primary race.

Romney contracts (max of $1) on the first and last day of each month since September 1 were:

September: $.32/$.61
October: $64/$.82
November: $.82/$.52
December: $.52/$.91

This is how the market works:

The Iowa Electronic Market (IEM) indicates the probability that a candidate will finish in the top 2 in the Iowa caucuses. So, a 22-cent contract displays a 22% probability. Like any market, the price representing a Romney victory fluctuates because of supply and demand.

Explained on the IEM website, “Contracts for the correct outcome pay off at $1; all other contracts pay off at zero. As a result, the price of the contract at any given time is the probability that the traders believe that event will happen.” The maximum investment is $500.

Polls or Markets? This study says the markets were more accurate than polls 3/4 of the time between 1988 and 2004.

The Economic Lesson

Former Secretary of the Treasury Lawrence Summers said that the most important idea to learn about the U.S. economy is “the power of the market.” As a process that creates prices and quantities for goods and services, markets are a source of information and incentives for businesses and consumers.

Through their price making mechanism, prediction markets might also be a forecasting tool.

An Economic Question: Here, the Iowa futures are shown for the 2012 presidential election. What do the numbers display?

Posted by: adminEcon
Tags: demand, IEM, prediction markets, presidential election, supply
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11.12.2011 | Presidential Wagers

Looking at the University of Iowa GOP Iowa Caucus Market, you could create these headlines:

“Gingrich gains.”
“Cain crashes.”
Perry plummets.
Romney remains.

With quotes indicated every 15 minutes, the University of Iowa prediction market for the Republican presidential nomination is a fascinating barometer. Pre-debate gaffe, the price of a Perry contract was 31 cents. After the debate, it nose-dived to 17 cents. For Romney, the average price of a contract remained in the vicinity of 80 cents. Meanwhile Cain moved down, 47 cents to 22 cents, and Gingrich moved up from 8 cents to 36 cents.

The Iowa Electronic Market indicates the probability that a candidate will finish in the top 2 in the Iowa caucuses. So, a 22-cent contract displays a 22% probability. Like any market, price fluctuates because of supply and demand.

Explained on the IEM website, “Contracts for the correct outcome pay off at $1, all other contracts pay off at zero. As a result, the price of the contract at any given time is the probability that the traders believe that event will happen.” The maximum investment is $500.

The Economic Lesson

Can a crowd be smarter than an individual? In The Wisdom of Crowds, financial writer James Surowiecki, says “Sometimes, yes.” Starting with a crowd betting on the weight of an ox and ending with the crowd and democracy, Surowiecki looks at “collective intelligence.”

Surowiecki divides “collective intelligence” into 3 categories:

Cooperation problems focus on how people work together. The issues they look at include legislative compromise (or gridlock) and getting a large group together for a dinner.
Coordination problems display how many independent individuals impersonally coordinate their behavior. Examples would take us to rush hour traffic and stock markets.
Cognition problems involve information that makes one answer more accurate than another. Predicting future monetary policy, the future weight of an ox, and who will win the Iowa Caucuses are cognition problems.

An Economic Question: Thinking of prediction markets, how could a demand/supply graph demonstrate a candidate’s poor performance during a debate?

Posted by: adminEcon
Tags: demand, IEM, politics, prediction markets, supply, University of Iowa
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