IEM allows users to buy shares in candidates


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Posted Online: April 07, 2007, 12:00 am
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By Jenny Lee, jlee@qconline.com

While some people watch the New York Stock Exchange, others watch the Iowa Electronic Markets to see who might win the 2008 presidential election.

People use real money to trade "shares" of political candidates in the Iowa Electronic Markets (IEM) to predict the outcome of presidential elections. The markets are supervised by the University of Iowa Henry B. Tippie College of Business faculty, who use IEM for research and teaching purposes.

Results have shown that a political prediction market, like IEM, can forecast the outcome of an election better than national polls.

"We run markets tied to outcomes of the election," said Thomas Rietz, a finance professor at the University of Iowa in Iowa City. "People can sign up with us on the Internet. The contracts we trade have values that apply to the election outcome.

"People are more willing to pay more for candidates they think are more likely to win," Mr. Rietz said.

The IEM has two types of markets -- a winner-take-all market and vote-share market.

A winner-take-all contract is available for both the nominating process and the general election.

A participant buys a winner-take-all contract for $1. If the participant's candidate wins the nomination, that contract is worth $1. If the candidate loses, the contract is worth nothing. Participants can buy winner-take-all contracts for the general election outcome, choosing which party will take the White House rather than a specific candidate.

The vote-share contract is available only for the general election, and pays off proportionately to the percentage of the vote the selected party receives.

Once a nominee is named, the names will be updated on the Web site.

Since IEM was created in 1988, the University of Iowa faculty has studied the results of the markets, national polls and the election. It's the longest established political prediction market, Mr. Rietz said.

Research shows that the markets predict the election outcome 76 percent of the time, better than about 600 polls, Mr. Rietz said.

He said the markets are a better predictor because they ask traders what they think will happen in the future. Pollsters ask voters who they're going to vote for today -- a sentiment that can change at any time.

In a market, traders can see what everybody else thinks and tailor their prediction, while voters in a poll don't have that advantage, Mr. Rietz said.

Traders from all over the world participate in the Iowa Electronic Markets. More than 100 universities have enrolled in the markets to teach students about accounting, finance, macroeconomics, microeconomics and political science, the IEM Web site says.

Other political prediction markets, such as Intrade, also use real money, while newsfutures uses play money.

On the 'Net

Iowa Electronic Markets: www.biz.uiowa.edu/iem

Intrade: www.intrade.com

newsfutures: www.newsfutures.com
















 



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