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Political futures

— Will the Democrats win control of the House? Will the Republicans will hang onto the Senate? Who's going to win the presidency in 2008? No matter which side you come down on, there are virtual stock markets where you can put your money where your political views are. And an economist says the markets seem to do at least as well as the pollsters on predicting the election's outcome.

"Price is a beautiful thing," Justin Wolfers, an assistant professor of business and public policy at The Wharton School at the University of Pennsylvania, said Sunday. He laid out the latest line on political markets and other types of predictive schemes during the annual New Horizons in Science symposium, presented in Baltimore by the Council for the Advancement of Science Writing.

These sorts of markets aren't all that new - the Iowa Electronic Markets, for example, have been letting online users put down real money on their election projections for the past decade. Currently, there's a rising sentiment that the Democrats will indeed take over the House, with the Republicans in charge of the Senate.

To be sure, the outlook could change as quickly as the stock market does - but Wolfers' point is that online prediction markets can come closer to the mark than the political polls. "These markets are quite accurate on average," he said.

You don't even need to limit the trading pool to hard-core political junkies, Wolfers noted. In fact, it's better to have "as much uninformed, idiotic money in the market as you can," he said.

"It's their money that draws in the intelligent money," he explained.

Wolfers took a closer look at some of the past and present predictions - and laid out some interesting implications:

  • Based on a market analysis of the prices for Democratic primary contenders in 2004, as well as the trading on the party's presidential prospects back then, vice-presidential candidate John Edwards just might have won the election if he had run at the top of the ticket. Edwards had a market projection of 55.4 percent of the vote - while the actual Democratic candidate, John Kerry, came in at 50.1 percent.
  • For the 2008 election, a similar analysis projects Sen. Hillary Clinton, D-N.Y., as garnering 48.7 percent of the virtual vote, while "Anybody But Clinton" tests out at 48.1. "The implication is that Hillary is at least as electable as the competing Democratic candidates," Wolfers said.
  • On the other side of the political fence, Sen. John McCain, R-Ariz., draws a virtual vote of 54.0 percent, with "Anybody But McCain" getting 43.8 percent. Wolfers said that should give pause to anyone in the Republicans' ABM camp.
  • On other fronts, the markets indicate a 28 percent chance that terrorist leader Osama bin Laden will be captured by 2007; a 28 percent chance that Iran will be attacked by the end of 2007; a 20 percent chance that military action will be taken against North Korea by the end of 2007; and a 22 percent chance that Defense Secretary Donald Rumsfeld will resign in 2006.

"As of now, you're a certified political expert," Wolfers joked.

Under questioning, the economist acknowledged that markets weren't the perfect way to arrive at rational results, whether you're talking about predicting elections or making investments.

"The markets do it terribly," he admitted. "But 'terribly' turns out to be better than anyone else can do."

For more from Wolfers about prediction markets, check out this PDF file of a draft paper he and a co-author put together in 2003. You can also monitor the Iowa Electronic Markets, as well as the NewsFutures prediction market, the Foresight Exchange and TradeSports. There's even a box-office futures market at the Hollywood Stock Exchange and a hurricane futures market at HedgeStreet.

If you're interested in a newfangled approach to grand old political coverage, be sure to check in with our recently redesigned politics section. And let me know whether you think all these prediction markets are the wave of the future or just a gimmicky gamble.