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Iowa Electronic Markets favor Obama in weeks leading up to presidential election

BY NICK HASSETT | OCTOBER 23, 2012 6:30 AM

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The Iowa Electronic Markets — a system of real-money future exchanges run by University of Iowa faculty — is calling a front runner in the upcoming election. The system favors President Obama by a wide margin, leaving one market committee member puzzled.

Faculty in the Tippie College of Business run the markets, in which students and nonstudents can trade in “shares” or contracts regarding the outcome of events such as elections. The price of a contract reflects demand; the market drives up the price of shares attached to a likely winner, just as with any stock market.

According to the organization’s website, more than 100 universities have enrolled in the UI markets since their establishment in 1988.

The Presidential Election Markets are split into two categories: vote-share and winner-takes-all markets. The vote-share markets are traded on the basis of the percentage of votes each candidate gets in the general election.  The winner-takes-all markets are based solely on the winner.

Historically, the markets have been quite accurate in predicting the outcome of elections. In 2008, the market favored Obama by a huge margin leading up to Election Day. This was also true in 2004, when the markets gave former President George W. Bush an advantage in the fall. In fact, one of the only instances in which the market prediction didn’t hold true was in 2000, when Bush edged out a victory over Al Gore in a widely disputed election result. In that case, the markets widely fluctuated at the eleventh hour, first giving the advantage to Bush before settling on Gore.

The latest data from the IEM have shown Romney recovering some ground in both markets, though Obama still leads by 3 points in the vote-share market and more than 20 in the winner-takes-all market.

UI economics Professor Forrest Nelson, a member of the markets’ steering committee, said that while the vote-share markets this year are close to historic averages, the winner-takes-all market has been particularly slanted toward Obama.

“The extent to which the market has favored Obama surprised us,” he said. “Earlier in the year, when the Republican primary candidates were beating up on each other, it made a bit more sense, but now, in the fall, I don’t quite understand. I think the market may be a bit overconfident.”

However, Thomas Gruca, another member of the markets’ steering committee, said the difference is not too surprising.

“It’s hard to unseat an incumbent,” he said. “Generally, you don’t think that they’ll lose. [Traders in the market] don’t just believe that, they’re willing to put money on it.”

Though the markets may be accurate in their predictions, the UI College Republicans and Democrats hadn’t heard of them before.

“[The market] is an interesting concept, but we’re really focusing on the voters,” said Quentin Marquez, the vice head of the UI College Republicans. “It’s not something that’s on our radar.”

Katherine Valde, the president of the UI College Democrats, echoed those sentiments, saying the organization is focused on getting momentum going with early voters.

Though Nelson thinks programs such as the markets should receive more attention in the media and the public compared with polls, he said, the ultimate goal of the markets is to provide a real-world application of theories for students.

“The [market] is like a laboratory for business students,” he said. “Chemistry students get to mix chemicals, and our students get to participate in a real market and see how their actions influence market prices.”


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