{"id":4282,"date":"2003-09-08T12:19:11","date_gmt":"2003-09-08T12:19:11","guid":{"rendered":"http:\/\/peterlevine.ws\/?p=4282"},"modified":"2003-09-08T12:19:11","modified_gmt":"2003-09-08T12:19:11","slug":"the-iowa-political-futures-market","status":"publish","type":"post","link":"https:\/\/peterlevine.ws\/?p=4282","title":{"rendered":"the Iowa political futures market"},"content":{"rendered":"

A well-known experiment, run by Iowa<\/p>\n

Electronic Markets, <\/a>allows traders to place bets on the outcome<\/p>\n

of political elections, including the current California governor’s<\/p>\n

race. According to a paper<\/p>\n

by Joyce Berg and others<\/a>, the Iowa Political Market has<\/p>\n

outperformed polls in predicting 9 out of 15 elections. Its<\/p>\n

average error in predicting election results is about 1.5%, compared<\/p>\n

to about 2% for an average poll. In some past elections, the Market<\/p>\n

avoided major errors that marred all the major national surveys, whereas<\/p>\n

it has never made a gross mistake itself. The apparently uncanny ability<\/p>\n

of the Iowa Electronic Market to predict the future was one of the<\/p>\n

reasons that the Defense Department recently floated the grisly idea<\/p>\n

of a futures market in terrorism.<\/p>\n

I’m struggling to understand the theoretical explanation for this<\/p>\n

phenomenon. I realize that markets efficiently aggegrate the knowledge<\/p>\n

of investors (who must try to make honest predictions, since their<\/p>\n

money is on the line). But where do the investors in a political futures<\/p>\n

market get their <\/em>knowledge? They cannot simply ask themselves<\/p>\n

how they intend to vote. As Berg et al. note, traders are "not<\/p>\n

a representative sample of likely voters; they are overwhelmingly<\/p>\n

male, well-educated, high income, and young" (p. 2). Some are<\/p>\n

not even US residents. Thus their own choices in the real election,<\/p>\n

assuming they vote at all, will be very different from those of the<\/p>\n

American people. Yet they seem to be able to predict the actual result<\/p>\n

more accurately than a random-digit telephone poll.<\/p>\n

One clue is that a relatively small number of "marginal traders"<\/p>\n

drive the market; they make many more trades than other people and<\/p>\n

are less prone to sticking with an unlikely bet out of loyalty. I<\/p>\n

would guess that these "marginal traders" are political<\/p>\n

junkies: people who have no sentimental attachment to any of the candidates<\/p>\n

but love to prognosticate about elections. We can assume that they<\/p>\n

have seen all the polls—but that still doesn’t explain how they<\/p>\n

outperform surveys on average. Could it be that they instinctively<\/p>\n

recognize a consistent error in polling, and adjust accordingly? For<\/p>\n

example, maybe polls tend to pick the real winner but predict a larger<\/p>\n

margin of victory than actually occurs. (Races tend to "tighten"<\/p>\n

right at the end.) Or maybe polls tend to make inflated predictions<\/p>\n

for the Democrats’ share of the vote, because they count too many<\/p>\n

low-income people as "likely voters." It’s also possible<\/p>\n

that the marginal traders rely on one or two polls that are better<\/p>\n

than the average. (Then we would find that the market outperformed<\/p>\n

polls in general, but was no more accurate than the best of the polls.)<\/p>\n

These are hypotheses backed with no evidence. But if one of them<\/p>\n

turns out to be true, then we don’t need a market to improve on surveys.<\/p>\n

We just need to make the same adjustment to poll results that the<\/p>\n

marginal traders (a.k.a., the political junkies) are making. Likewise,<\/p>\n

we would not benefit from a futures market in terrorism, but we should<\/p>\n

strive to understand how the best informed and least sentimental observers<\/p>\n

of terrorism make their predictions.<\/p>\n","protected":false},"excerpt":{"rendered":"

A well-known experiment, run by Iowa Electronic Markets, allows traders to place bets on the outcome of political elections, including the current California governor’s race. According to a paper by Joyce Berg and others, the Iowa Political Market has outperformed polls in predicting 9 out of 15 elections. Its average error in predicting election results […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5],"tags":[],"class_list":["post-4282","post","type-post","status-publish","format-standard","hentry","category-philosophy"],"acf":[],"_links":{"self":[{"href":"https:\/\/peterlevine.ws\/index.php?rest_route=\/wp\/v2\/posts\/4282","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/peterlevine.ws\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/peterlevine.ws\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/peterlevine.ws\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/peterlevine.ws\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=4282"}],"version-history":[{"count":0,"href":"https:\/\/peterlevine.ws\/index.php?rest_route=\/wp\/v2\/posts\/4282\/revisions"}],"wp:attachment":[{"href":"https:\/\/peterlevine.ws\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=4282"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/peterlevine.ws\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=4282"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/peterlevine.ws\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=4282"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}