Iowa investor project names Obama early 2012 leader

BY KATIE HEINE | JULY 11, 2011 7:20 AM

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Traders are taking a gamble on the Democratic Party.

Investors participating in an Internet-based, real-money market predict President Obama has a 57.5 percent chance of being re-elected in the 2012 election.

As of 2 p.m. Sunday, the Democratic contract was selling for 57.5 cents through the Iowa Electronic Market’s Winner Take All market. The presidential market, run by researchers at the University of Iowa’s Tippie College of Business, opened July 1 and is open to the general public.

And UI market researchers said the market’s continuity has an edge over political polls.

“The most trivial part is knowing what’s going to happen in elections,” said George Neumann, a UI economics professor and cofounder of the Iowa Electronic Market. “You can’t use polls — those are too discrete. The market runs 24 hours a day, continuously.”

Neumann said the market’s prediction is “far more accurate” than polls because traders have a private incentive of money and the market is a random sampling of opinions instead of a random sampling of facts.

The Iowa Electronic Market was developed at the UI in 1988 as a research tool for students to invest real money to forecast the outcome of future events such as political elections, stock-price returns, or box-office sales for movies. Since then, the market has grown and expanded, though its primary use remains an academic tool, Neumann said.

Approximately 1,400 traders had access to the political market as of 2 p.m. Sunday, said Thomas Rietz, a UI finance associate professor and Iowa Electronic Market board member. Researchers are unsure of how many individuals have actually traded, Rietz said.

Participating individuals can invest $5 to $500 in various markets, and payoffs are determined by the actual results of an event. More than $2,700 was invested in the Winner Take All market as of 2 p.m. Sunday, Rietz said.

Another significant difference between the market and a political poll is what is being measured.
Unlike a poll — which measures whom people would like to win — the Iowa Electronic Market election is based on who investors believe will win.

“By putting your own money in [the market], you strip away some of your preference and put it more on who you think will win,” said Tim Hagle, a UI associate political-science professor. “You might be voting against your actual preference.”

Market results, unlike polls, are also visible to traders, Rietz said. And while a possibility of manipulation among the market exists, he said, the amount of money traders are allotted to invest is too minimal to have an effect on other traders.

“Any one person is very marginal in the market,” he said.

Between the elections from 1988 to 2004, the presidential market, when compared with more than 964 polls, was more accurate 74 percent of the time, Rietz said.

And while the trade values are likely to change as Election Day nears, Neumann said, the Iowa Electronic Market’s continuity is more responsive than other polls at providing an accurate reflection of a candidate’s probability of winning nomination.

“People continuously reassess their opinions,” he said.

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