- MarketBeat (WSJ Blog) – Betting on Votes
So-called “prediction” markets such as Intrade and Iowa Electronic Markets are, like the stock and every other market, only as reliable as the information they process. They generally do a bang-up job guessing probabilities of outcomes, but can miss specific events badly if bad information gets in the mix. One example was the 2004 presidential election, when Intrade futures were briefly skewed by misleading exit polls that suggested John Kerry was going to win. Critics of prediction markets often use this episode as a cudgel to pound on those markets’ credibility. But one set of Intrade contracts seemed to do a better job during that election. These were the state-by-state contracts traders use to bet on which party will win each state’s Electoral College votes. Scott Johnston, managing partner at Belstar Group, a New York money-management firm, says these contracts got every state, and the election’s electoral college vote, exactly right in 2004. This may be because the people willing to put money at risk in a more narrowly focused contract like this have somewhat better information than those who bet on the winner-take-all headline contracts. Or maybe they just got lucky.
Comment It is often said there is nothing new on Wall Street, just those that forget the past. Rampant betting on the election is nothing new. In fact it was not uncommon for the betting to exceed the total spending on the campaigns. See, Manipulating Political Stock Markets: A Field Experiment and a Century of Observational Data*:
Political stock markets have a long history in the United States. Organized prediction markets for Presidential elections have operated on Wall Street (1880-1944).
Participants could wager not only on national races but also on state and local elections. The New York betting odds received substantial media coverage in the era before scientific polls. These historical markets are of special interest because partisans, including Democratic and Republican party operatives, actively and publicly traded. Accusations of manipulation and bluffing were rife.
The structure of these markets evolved over time. Although election betting was at times illegal, it was open conducted, well publicized, and employed standardized contracts, typically involving Winner-Take-All futures. The standard practice over much of the period was for a betting commissioner to hold the stakes (or signed agreements) of both parties and charge a five percent commission on the winnings. Our information about these markets comes from articles in the major New York newspapers, which provided nearly daily quotes from early October until Election Day.
Compared with modern prediction markets, the betting volume in the historical New York market was huge. Figure 4 assembles estimates from selected newspapers of the sums wagered in the New York market from 1884 to 1928.10 All of the dollars are converted to year 2000 purchasing power. The betting volume varied depending on whether the race was for President, Governor, or Mayor, the closeness of the contests, enthusiasm for the candidates, and the legal environment.
The period of greatest sustained activity was between 1897 and 1906. But the clear peak was the 1916 Wilson-Hughes peak, when $158 million (2000 dollars) wagered in the organized New York markets. This was more than twice the total spending on the election campaigns. The betting volume tended to be much higher in Presidential years than in years when the NY Governor ran alone or the New York City Mayor was up for election. The ratios were on the order of 100:39:37.11 That is, there was a large drop off between national and state elections, but only a small further decline for city races. The average of the median bet volumes reported in the 25 elections appearing in the figure was roughly $22 million (in 2000 purchasing power). As a point of contrast, activity on the IEM for the 1988-2000 elections has been orders of magnitude smaller, with trading volumes that never exceeded $0.15 million in any one election (see Berg, et al, 2003).
During the heyday of election betting in the late 1890s and early 1900s, the names and four-figure stakes of bettors filled the pages of New York’s daily newspapers.12 Thus, in contrast to the electronic markets of today, these activities were not anonymous. Such published stories may have served to advertise the political affiliation of the bettors as well as to confirm the existence of the wagers.13 Among the several hundred names periodically appearing in the newspaper betting stories was a substantial number of New York’s financial elite, including members of New York Stock Exchange.