A chart shows share prices on the Iowa Electronic Markets for the projected outcome of the 2010 congressional elections. The blue line is the trend for Democratic control of House and Senate. Green stands for GOP control of House, and Democratic control of Senate. Red represents a Republican sweep, and the black line shows the prospects for a Democratic-led House and a GOP-led Senate.
Political prediction markets suggest that the outcome of next week's congressional elections is settled, with Republicans taking control of the House and Democrats slightly favored to hold onto a majority of sorts in the Senate. That forecast follows the current conventional wisdom. The interesting part is how the markets arrive at that conclusion: Rather than relying on polls of registered or likely voters, the markets render their judgment based on real-money bets from hundreds of traders.
It's the closest thing to political gambling, and it's perfectly legal.
For more than 20 years, the Iowa Electronic Markets have let Internet users buy and sell "shares" in political propositions -- for example, RH_NRS10 in the chart above stands for the proposition that Republicans will control the House and non-Republicans (Democrats and independents) will hang onto a Senate majority. You could buy into that proposition today at around 73 cents a share. If that's the way the election turns out, you receive $1 per share. If the outcome is different, you get zip. Nada. Nothing.
The IEM has special dispensation from the Securities and Exchange Commission to run this kind of operation because it's regarded as a University of Iowa research project with the purpose of studying how real-money behavior plays out in non-traditional markets. Similar set-ups have been put into force or at least proposed for box-office prediction, flu forecasting and even terror threats. (That last idea didn't get very far.)
In the political sphere, the IEM has done at least as well as the more traditional opinion surveys at predicting election outcomes. The reason has to do not only with the oft-cited "wisdom of crowds," but also with the fact that the potential payoff entices knowledgeable traders to swoop in on what they perceive as a good deal. That produces a market that quickly reflects the latest line on how the contest will turn out. Like the Vegas line on next weekend's big game, the result is authoritative but not foolproof.
Today, the average share prices on the IEM are 72.6 cents for a Republican House and a Democratic Senate; 15.3 cents for a GOP sweep; 12 cents for a Democratic sweep; and 0.2 cents for a Democratic House and Republican Senate. Just in the past couple of days, there's been a significant uptick in the Democratic-sweep share price, perhaps due to reports about Dem-friendly trends in early voting. Someone who bought the NRH_NRS10 stock at 8.3 cents a share could have made a 44 percent profit in just a couple of days, even if the Democrats tank next week. Now that's the free market in action!
If you're looking for the markets to send an overall message that's different from what pundits are seeing in the polls, that's not likely to happen. The traditional view is echoed not only by the IEM, but also by Intrade, an Irish-based online trading site that deals in political propositions as well as other prediction markets. Intrade's clients are basically putting 90 cents on a proposition that pays off $1 if the Republicans win the House, and 57 cents for a $1 payoff if the Democrats hang onto the Senate.
The judgment from the political market may be going against the Democrats, but President Barack Obama can still take heart from the early line for 2012. Intrade's traders lean toward the view that a Democrat will win the presidential election two years from now (61 cents vs. 39 cents for a GOP candidate). Will that view change after next Tuesday's election? Watch the final week of the campaign unfold in msnbc.com's Decision 2010 section, and tune in next week for your market update.