Iowa University Prediction Markets

Cite this Article
J.W. Verret, Iowa University Prediction Markets, Truth on the Market (November 06, 2011),

These things continue to fascinate me and provide lots of opportunity for procrastination.  The Iowa University Prediction Market IEM has a new update on the Republican presidential primary:

Romney Leads the Iowa Electronic Markets

October 26, 2011 |  The Iowa Independent

by: Lynda Waddington

The value of the former Massachusetts governor continues to rise above all other 2012 GOP candidates for the real-money future traders on the Iowa Electronic Markets.

At this same time in 2008, contracts for Mitt Romney were trading at 30.2 cents, meaning that the futures traders believed he had a roughly 30 percent chance of claiming the GOP presidential nomination. Today, contracts for Romney are trading at nearly 68.8 cents.

The futures trading closest to Romney presently are those for the “Rest of Field,” or individuals for whom there is no current contract on the market. The ROF contract is selling at 15.5 cents. Other contracts selling on the GOP convention market presently are Texas Gov. Rick Perry at 11.5 cents, U.S. Rep. Michele Bachmann at 3.4 cents and U.S. Rep. Ron Paul, at 1.4 cents.

Historically, however, there is a word of caution from the markets for Romney and a ray of hope for those trading at lesser levels. John McCain’s price on the Iowa Electronic Markets at this time four years ago was 7.1 cents, meaning that traders believed at that time he only had a 7 percent chance of capturing the nomination. McCain began trending upward during the first week in December, and became the IEM’s most probable candidate on Jan. 1, 2008, when his contract was selling for 29.6 cents.

What GOP candidate was leading the pack on the IEM at this point during the 2008? Former New York Mayor Rudy Giuliani, whose contract was selling for 40.1 cents.

The IEM is operated by the University of Iowa’s Tippie College of Business. Contracts for the correct outcome pay off at $1, all other contracts pay off at zero. Traders can invest up to $500 in the market.

Now readers may ask, could the primary field really have changed that much in 2008 within a matter of weeks?  That’s the thing about markets, we’ll never know what the “true” odds were at the time.  But ask yourself whether you think pundits will systematically do a better job of predicting election outcomes than the prediction markets.  If the answer is no, then guess what?  You’re a Hayekian.

As a side note, I wondered whether the site was covered under SEC or CFTC jurisdiction.  In fact, its not.  The site explains:

The IEM has received two no-action-letters from the Division of Trading and Markets of the Commodity Futures Trading Commission. Without explicitly asserting jurisdiction over the IEM or any of its submarkets, these letters, dated February 5, 1992, and June 18, 1993, extended no-action relief to the IEM’s Political and Economic Indicator Markets. The letters are available at the CFTC website as part of their Freedom of Information Act documents: