TRADING ON THE WISDOM OF CROWDS

May 1, 2008

Most polls have the Democratic nominee winning in November, some handily, but here's a prediction you can bet on: John McCain is at nearly even odds to win the popular vote, at a 46 percent likelihood, up from the mid-30 percent range in the summer.  This is the latest spread from the Iowa Electronic Markets, where traders put their money where their mouths are, says the Wall Street Journal.

Political columns will cheer or jeer a close race.  The purpose of the markets is different: to embrace the counterintuitive notion that predictions by large numbers of people betting their own money have more value than ostensibly scientific measures such as polls.  Markets rule, even in politics, says the Journal.

Indeed, this could be the election cycle that legitimizes Web-based prediction markets:

  • These services -- which also identified Barack Obama's popularity among Democrats early on -- show how the Web lets people combine their views so that, in the aggregate, they're eerily likely to get it right.
  • This collective intelligence also accounts for why Google results, determined by an algorithm reflecting the popularity of Web results matching a search, are so relevant.
  • Likewise, Wikipedia entries edited by many anonymous citizen "editors" can be remarkably accurate.

Before polling became the accepted currency for information about likely voting results, in the 1940s, newspapers carried the latest betting odds as the most relevant source of information.   Some $165 million in today's dollars was wagered in Wall Street on the 1916 election -- twice the amount spent on the election campaign itself.

Iowa Electronic Markets claims that its results have been more accurate 75 percent of the time versus some 1,000 opinion polls since the early 1990s.  Intrade's traders correctly called the results of 49 states in the 2004 presidential election.

Source: L. Gordon Crovitz, "Trading on the Wisdom of Crowds," Wall Street Journal, April 28, 2008.

For text:

http://online.wsj.com/article/SB120934176381348507.html 

 

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