Markets and Election Outcomes

Last week (September 22) the Wall Street Journal printed “Market Gains As Bush Rises and Kerry Falls” (unauthorized copy found here).

I’m extremely skeptical that the market should be read as approving or disapproving of Bush or Kerry, or particularly responding to individual polls. There’s so much noise in the market that I’d only expect an unthinking partisan to read candidate preference from market index behavior, particularly when the two candidates who can win are so similar policy-wise (though a partisan wouldn’t agree).

However, it should be possible to design securities which explicitly tease out the effect of a candidate’s election on the market (or something else). One approach is I believe known as “conditional futures”. Three securities would do it: a) has a value determined by whether Bush wins, b) has the value determined by a market index on a date in the future, and c) has the value determined by a market index on the same date in the future if Bush wins, or zero otherwise. If c/a > b then the futures market thinks a Bush win is good for the market index in question. Alternatively b) could be determined by the value of the market on the same date in the future if Bush loses, in which case if c/a > b/(1-a) then the market thinks a Bush win is good.

You can see some claims along these lines in a play money (unfortunately) market:

(In calculations below I use last trade if available, otherwise average of bid and ask.)

bid ask last
/  /   /
61 62 61

Bush is likely to win.

47 48 NA
25 30 25

25/.61 = 41 < 47.5 Bush win means lower stock returns? 51 53 52
33 39 34

52/.61 = 85 < 34/.39 = 87 Bush win means slightly lower chance of US getting nuked? CORRECTION: I misread *Nuke, which pay if the US does not get nuked. I should've written: "Kerry win means slightly lower chance of US getting nuked?" 75 77 76
20 74 NA

47/.61 = 77 > 76

Bush win means very slightly higher chance of terrorist attack in US?

Note these claims are mostly new with extremely thin volumes and probably don’t tell us much of anything at this point about the consequences of a (likely) Bush win, but one gets the idea, I hope.

Related notes:

Tradesports and the Iowa Electronic Markets (two real-money markets, though investment in IEM is limited) seem to be garnering lots of attention, at least amongst people I read. Geekmedia has yet another electoral map based on Tradesports markets for individual state outcomes (via Patri Friedman).

I think it isn’t widely known that large scale organized betting on election outcomes in the U.S. is a back-to-the-future phenomenon. I didn’t know until a few weeks ago when I encountered Historical Presidential Betting Markets while flipping through the Journal of Economic Perspectives at the newish San Jose main library (’tis very nice that it is a shared facility with SJSU, which means many more journals available to the general public). I indend[ed] to blog a summary.


Koleman Strumpf, one of the authors of the aforementioned paper, has also written on the effects of P2P — to much to read, too little time — and is an indie music fan. Funny quote from one of his media cites, The down low on downloads:

Strumpf, whose own tastes run toward independents, says it’ll be difficult for a study like his to measure their financial prospects. “The kind of albums that are put out by indie labels are not economically very important,” he says. “I know that must sound like a terrible statement. Believe me, if you look at my music collection, I’ve come to the conclusion that most of the music I listen to is economically irrelevant.”

8 Responses

  1. […] could meet this claim.) It would be very interesting to see versions of the above claims conditioned on the M Prize reaching some fundraising goal.


  2. Three open source prediction market software options

    In May there were none.
    The software that has run Foresight Exchange for many years was open sourced today (under an odd license).
    Zocalo had a new release last week.
    FreeMarket seems to have been available for a little over a month.
    For the heck…

  3. Prediction Markets Summit extract of an extract

    I sadly could not attend last Friday’s mini-conference in San Francisco on prediction markets, but Peter McCluskey has an informative write up.
    Apparently Tradesports explained why it makes it a pain to link to its contracts. They want to sell …

  4. […] Hindsight is wonderful, eh? Unfortunately there’s no reason to expect it to be 20-20 unless we hold nearly everything constant. Foresight is even harder. We desperately need tools that provide better estimates of the impact of policy than bogus intellectual handwaving and self-serving bureaucratic guesstimation. Conditional futures, which I’ve mentioned here and here may be one such tool. I don’t think conditional futures is quite the term of art, but see Robin Hanson’s page on policy markets for a good explanation and his pages on the Policy Analysis Market and idea futures for far more in depth treatment. […]

  5. […] Fortunately there are again (see Historical Presidential Betting Markets) markets to give anyone who wants one a reality check. However, it is rare (in the U.S.) for a “third party” candidate to be significant enough for an election market to cast any light on their chances. Often “field” will be available (for example, Intrade currently lists the following spreads for 2008 Presidential Election Winner (Political Party): Democrat 49.1/49.2, Republican 47.6/48.4, Field 2.9/3.2) but chance accorded by traders to “the field” has to be based on the expectation that a viable independent will come out of the woodwork (e.g., Ross Perot in 1988) rather than the expectation that a Green, Libertarian, or other minor party candidate has a non-negligible chance of victory. This is too bad in a way, as my casual observation says that minor party backers are more delusional than most when it comes to their candidate’s chances. […]

  6. […] Markets and Election Outcomes didn’t “tell us much of anything at this point about the consequences of a (likely) Bush win”, similar in 2008 “did not provide valuable information about how the election would affect the world” and there are none in 2012. Election dependent outcomes are either obvious or complicated enough prices will be meaningless or additional fodder for cheering. As fair elections are the pinnacle of human achievement and thus the proper goal of all policy and prices dependent on election outcomes would destabilize democracy, election markets should be prohibited worldwide. Similarly, conditional markets should be prohibited within organizations for their simultaneously dehumanizing and destructive effects on structures that have been the venue for the creation of the vast majority of wealth and innovation in human history thus far. […]

  7. […] an election day update of my post on conditional futures. What do the markets say about stock returns, nuclear weapons use and terrorist attacks in the […]

  8. […] 2004 I wrote about markets and election outcomes and an update on Bush and terrorist stocks. In 2008 I sketched a futarchist voter guide with what […]

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