I have been reading with great interest “The Wisdom of the Crowds” by James Surowiecki. Although there have been many intellectual works in opposition, such as “Extraordinary Popular Delusions and the Madness of Crowds” by Charles Mackay (1841) and other popular works, there is one thing that poked my interest.
Founded in 1988 and run by the College of Business at the University of Iowa, the IEM features trading markets to predict the outcomes of elections. The trades executed set the prices, much like stocks, and work this way as Surowiecki describes: If a candidate’s contract costs 50 cents, it means roughly that the market thinks he/she has 50 percent chance of winning. An 80 cent contract equates to 80 percent and so on.
What’s more interesting is a study of IEM’s performance in 49 different elections between 1998 – 2000 found that the election-eve prices on the IEM were on average, just 1.37 percent off in presidential elections.
So, obviously this is not election eve, the data as of Feb 3 shows Clinton getting ~ 60% vs Obama ~ 40% Democrat and McCain ~ 87% Republican in the Convention Market. Further, the Democrat Party has ~ 51.8% vs 48.8% Republican in the Vote Share Market.
And this is latest Vote Share Market Data.
Surowiecki explains that this data is compiled of a small sample of traders - 800 or so.
An error of 1.37% would bring the Republican side to 50.17% - still not enough to win! True that I have not seen the data after 2000 in the accuracy of IEM & also this logic can be challenged if the Democratic side shifts 1.37% down.
Nonetheless, it would be interesting to return to these figures on election eve!
