The election: You wanna bet?

Published 11:00 pm Wednesday, October 24, 2012

It’s tough to turn on the radio or television and avoid rumors and polls about who will be our next president. As of Tuesday, October 23rd, Gallup polls indicate a 51 to 46 percent lead for Romney. Meanwhile, the Huffington Post is predicting a 303 to 235 electoral vote win for Obama. With hundreds of other polls and prognosticators available, how do we even begin to guess who will win?

Some economists think prediction markets, such as Intrade or the Iowa Electronic Market (IEM), are the best place to turn for accurate predictions. IEM and Intrade are web-sites where people can bet on election outcomes. Unlike polls, betting markets ask people to put money where their mouth is: If a person thinks Mitt Romney is going to be our next president, then he or she can enter the market and buy a stake in Romney. At the moment, Romney contracts are selling for $4.30 per share. If Mitt wins, the buyer gets $10 per share; if Mitt loses, the person gets $0.

Even though Romney is polling well, the betting market is saying Obama will be our next president. The price for Obama, which has fallen in recent weeks, is $5.70 cents. When all is said and done then, people in the market think Obama is somehow going to pull out a victory in a couple weeks. If they are wrong, then we’d expect to see more buying of Romney and exit from the Obama bet. If, on the other hand, more favorable information comes out about Obama, his price (and likelihood of being reelected) will rise.

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Prediction markets draw in a large number of traders, which results in a “wisdom of crowds” effect. The diverse traders bring a lot of diverse perspectives to the market and the money at stake holds people accountable. Even staunch supporters of Romney may think twice before placing a big bet on him.

The prediction market for the president, which has predicted the presidential outcome since 1980 on the IEM, illustrates the benefits of letting people putting money behind their hunches. We bet on stocks and other investments all of the time, and resources in our economy flow to their highest valued use thanks to people being granted the freedom to bet. Betting on presidents allows for a similar aggregation of information.

Besides presidential betting markets and stocks, a number of other prediction markets also exist. Intrade has prediction markets for uncertain outcomes like Academy Award movie winners, and they have been quite accurate in recent years. A person could also place an Intrade bet on the odds of a 2013 airstrike on Iran. Just as there is wisdom in the 30:1 Las Vegas odds being given to my beloved Chicago Cubbies winning the World Series in 2013, markets backed by dollars could help us predict and prepare for events like war, extreme weather, and recessions.

The biggest problem with prediction markets turns out to be politicians: Many lawmakers find the idea of betting to be reprehensible and some have fought hard to shut down betting markets. They think people shouldn’t be allowed to bet on horrible outcomes, such as the location of a major terrorist act or the number of cases of swine flu per year.

While at first glance it might be hard to stomach the idea of people betting and profiting from tragedy, there’s something to be said for having more information instead of less: Wouldn’t it be beneficial to us all, for example, to know traders are betting on 10,000 or more deaths from swine flu? Or, wouldn’t it be useful for Texas farmers to know traders are betting on Dallas, Texas, having more than 140 days above 100 degrees Fahrenheit in 2013?

Betting markets help people plan, and they give us much needed information. They should be embraced instead of banned, and they should be allowed to operate in as many walks of life as possible, including Greyhound winners on dog tracks, World Series winners, presidential winners, terrorist activity, weather, and beyond.

Scott Beaulier is Executive Director of the Manuel H. Johnson Center for Political Economy at Troy University.