Last week wasn't the best for George W. Bush. At home, "Fahrenheit 9/11," Michael Moore's anti-Bush polemic, broke box office records. In Iraq, blood spilled anew -- bombings, beheadings and brutality dominated the headlines. Then there was the foul-mouthed vice president, the bestselling former president, and a couple of dispiriting polls. In other words, taken together, these seem like good times for John Kerry.
Yet last week on the Iowa Electronic Markets, I dumped my shares of John Kerry futures -- and I was proud to do it, too. The IEM is a real-money Web-based trading system run by the University of Iowa's business school. Among some political scientists and economists it is thought to be extremely good at predicting the results of presidential elections. This should cause heartache to Democrats, because ever since June 1, when the IEM's most popular presidential market opened for trading on the 2004 race, shares of John Kerry futures have been badly trailing those of Bush.
I like John Kerry. I appreciate his position on ... well, I like him anyway. There's almost no way I won't vote for him. But in the month that I've been playing the Iowa Electronic Markets, Kerry has not been kind to me; each time I've purchased a batch of Kerry shares, I've been burned by new lows. So when, in the middle of last week, I saw Kerry's stock price begin a nice climb from the depths to which it had fallen after the death of Ronald Reagan, I knew what to do -- sell! On Wednesday, Kerry's shares reached a near-record high of 49 cents. I put in my sell order, and by Thursday I'd sold five John Kerrys at 47 cents each. Other traders seemed to do the same; by Thursday Kerry had plummeted and Bush was heading up.
As a supporter of John Kerry, do I feel a little bit guilty about betting against him? Not really. On the IEM, you quickly learn not to let your personal politics cloud your trading strategy. Here, all that matters is what you think others will do in November -- and, like most of the other money on the IEM, my dollars are lined up in support of George W. Bush.
I was pulled into the IEM in part by the New Yorker columnist James Surowiecki, who writes lovingly about the market in his book "The Wisdom of Crowds." On the IEM, anonymous traders buy and sell contracts that offer payouts based on the outcomes of real-life events -- most famously, presidential elections. Here, in pretty much the same way that traders on the Chicago Mercantile Exchange buy and sell contracts for pork bellies, you can exchange shares of Kerry and Bush according to your guesses about how each will do in November.
Surowiecki's thesis is that large, independent groups of people possess a special wisdom about the future, and that markets like the IEM are a particularly good way to distill that wisdom. Under the right circumstances, he says, a crowd's guess for what will happen in tomorrow's election is a much better predictive tool than a survey that asks them how they will vote if the election were held today. Surowiecki's not lying: The IEM is good. Last year, for instance, traders determined about three weeks before the vote was held that Arnold Schwarzenegger would win the California recall election; by about two weeks in advance of the vote, they'd even begun homing in on Schwarzenegger's eventual vote share. In the 2000 presidential election, the IEM was predicting that Bush would win by the middle of October. In 1992 it performed even better, predicting Bill Clinton's win by August.
Part of my reason for playing the IEM is to test, on a firsthand basis, Surowiecki's theories about the power of markets. But it was also motivated by my preexisting interest in handicapping the race after mulling over each day's events. If, like me, you're interested in politics, you're also probably doing this already. You can't help doing it. Every bit of news seems to carry political meaning, and you're constantly working to measure it. You hear about Ronald Reagan, and the second thing that occurs to you, if not the first, is, will this help or hurt Kerry? You wonder about Michael Moore -- on balance, is he good or bad for Bush? Howard Stern: How much sway, really, does Fartman have? Is Jon Stewart a political force? That friend of yours who's been out of work forever -- he just got a job, a good one: Does the improving job market mean Kerry's toast? And does it mean anything that your friend the Republican is looking forward to "Fahrenheit 9/11"?
I got my first taste of this sort of fun during the Democratic primaries earlier this year when, for a brief while, I became addicted to the presidential market set up by the PBS show "Frontline." But because that market doesn't use real money, it was unbearably volatile -- candidates' share prices would rise and fall by tens of percentage points throughout the trading day, mostly because (I theorized) new people were continuously coming into the market, and armed with unearned cash, they were making silly trades. (A fool and his fake money are parted even sooner.)
The IEM uses real money, quieting the silliness. Setting up an account is not very easy: You've got to fill out a form, print it out, write out a check for your initial investment (plus a $5 fee), then find an envelope and a stamp and mail off the whole bundle to Iowa. A few days later you get an e-mail with your account info, and you can begin trading. I sent a very modest sum to Iowa -- only $30. This is mostly because I'm not betting man and I didn't want to lose my shirt. Other than in a 401K, I don't play the market, and I've never wagered on sports; I figured $30 was a nice, safe initial investment.
The IEM has two markets on the presidential election. (It has others related to Federal Reserve policy and the fortunes of tech firms.) One market is winner-takes-all, in which you're simply picking the guy you think will take the White House in November. In the winner-takes-all market, each contract you hold for the winner of the race will pay you $1 on Election Day; each contract you hold for a loser will pay nothing. If you buy a Bush contract for 50 cents right now, you will get a buck on Election Day if Bush wins the election. If Kerry wins, you lose your 50 cents.
The IEM's other market, the vote-share market, is somewhat more complicated. Here, for each candidate contract you own, you'll get $1 multiplied by that candidate's percentage of the vote on Election Day. If Kerry wins 48 percent of the vote in November, for example, you'll get 48 cents for each Kerry share you own, and 52 cents for each Bush share. (The votes that go to third-party candidates are not counted.)
Because it offers greater precision, the vote-share market is probably the more interesting of the two as a forecasting tool. But that market is also more difficult to play, since you need to make more precise guesses about each candidate's prospects. Perhaps for this reason, the winner-takes-all market is by far the more popular of the two, and it's the one I chose to play.
The IEM's winner-takes-all market immediately presents a trader of moderate and sometimes flighty politics (which is how I think of myself) with a difficult question: Who will win the White House in November? Ordinarily, as a matter of idle chitchat, this is not very difficult to answer; if you follow politics, you're assessing this question routinely. But putting money on your answer, even if it's just pocket change, alters the stakes of the game. When you first log in to IEM you have a bunch of uninvested cash and a difficult first move -- should I buy Kerry or Bush?
I started out buying both in roughly equal amounts, just to get a feel for the system. But when Ronald Reagan died, Kerry took a dive, and I saw an opportunity. I bought 10 Kerry shares for about 44 cents each, near their record low. I figured that Kerry was bound to rebound after Reaganmania passed. Indeed, during the week of Reagan's memorial, the Los Angeles Times released a poll showing Kerry dominating Bush in the race -- and prompted by that poll I bought more Kerrys.
The trouble was, I got a little too confident in Kerry. The L.A. Times poll was big news in political circles, and I confess I felt a sense of elation. People might finally be seeing, I thought, that George Bush has not been great for America; I figured Bush's price would dive, and Kerry would soar. For some reason, though, Kerry peaked on June 11, the day after the poll was released, and then began to sink. Meanwhile, it was Bush's share price that rose.
A better man would have stuck with Kerry as he fell, but I got scared. After June 11, I began to drop most of my Kerry shares, some at a loss. In dollars, the pain was negligible -- I lost less than 50 cents. But the psychic pain was real. Kerry had cost me money, and I'd lost my faith in him.
Looking at the graph of daily prices in the winner-takes-all market over the past month, Kerry's shares seem to move according to this psychology. Once in a while, either prompted by the news or for seemingly no reason at all, investors flock to Kerry, and there's a sudden one- or two-day Kerry rally. Then, just as suddenly, people -- people like me -- lose all confidence in the man, and we begin to sell. If you time it right, you can make money from this volatility (by buying low and selling high). That's what I did last week, when I saw Kerry's share price approach 50 cents. I knew the highs wouldn't last, and I started dumping the Democrat.
Bush's shares, too, rise and fall, but they move more smoothly than Kerry's. This is probably a virtue of incumbency. Few traders are going to suddenly panic over Bush's prospects. The reason for this is simple: The economy, stupid. Presidents who preside over expanding election-year economies are almost always reelected, and it's likely that many of the traders who participate in the IEM are aware of this. Given how disastrous Bush's economic policies have been for many Americans, it almost sounds like a joke to say that it's likely the president will win back his office on the strength of his economic record. But it's one of those jokes that are also true.
Of course, all this could change. The market has still not weighed in on how "Fahrenheit 9/11" will affect the race. Bush's shares did fall between Saturday and Sunday, but Kerry's didn't bounce up very far. Iraq seems a mixed bag at the moment, too, what with the news of the handover of sovereignty to Iraqis coming at the same time as the possibility of much more violence there. For the immediate future, I'm still buying Bush and selling Kerry. But as I play the IEM until November, I'm not ruling out changing my bets.
As of Monday afternoon, I was in the black. I owned 13 Kerry shares, which were trading at around 45 cents each, for a total value of $5.89. I had 32 Bush shares at 54 cents, about $17.28. I had $7.46 in uninvested cash. The grand total? $30.63 -- that's 63 cents in my pocket thanks to George W. Bush. I'm pretty sure that's more than I made from his tax cuts.