Two weeks after John Kerry's big speech, the Massachusetts senator appears, by all standard political indices, to be doing very well in his bid for the White House. Polls put him anywhere from 1 to 7 points ahead of the president in a head-to-head matchup. State-by-state surveys show Kerry holding a lead in the Electoral College count. And professional handicappers also seem to approve; as ABC's politics newsletter, the Note, put it on Wednesday, "the reality is -- as amazing as this seems -- this is now John Kerry's contest to lose."
But traders on the Iowa Electronic Markets -- a real-money futures-trading system celebrated for its accuracy in predicting presidential election winners -- aren't buying it. Or, more specifically, traders aren't buying shares of John Kerry futures and are instead favoring shares that will yield a payoff if George Bush wins the race in November. After reaching a peak of about 51 cents a couple of days before Kerry's speech, the price of Kerry futures on the market has steadily fallen in the past couple of weeks -- sinking to as low as 47 cents on Aug. 4, and coming to rest at their current price of about 49 cents. Bush, meanwhile, soared after Kerry's speech. The president's shares reached almost 53 cents on Aug. 3 and are now just above 50 cents. (Kerry's share price was rising on Friday morning, and he could conceivably catch up to Bush over the weekend.)
What accounts for the disparity between the polls and the IEM? Are the polls wrong, or is the IEM off? Should Kerry and his supporters be concerned, and can Bush rest easy?
The fundamental difference between an opinion poll and a prediction market like the IEM has to do with the time horizon. An opinion poll is a fuzzy snapshot of the electorate as it stands today; indeed, many surveys ask respondents only about how they might vote "if the election were held today." Traders on the IEM don't really care about a theoretical election held today -- they're mainly concerned with how things will play on the actual Election Day, and what happens today matters only if it affects what happens in November.
The many and various opinion surveys, the big convention speeches, the pundits' prognostications, the usual summertime speculation that precedes any election: "Our traders pretty much ignore all that," says Thomas Gruca, an associate professor of marketing at the University of Iowa and a co-director of the IEM. Betting money on an election focuses the mind, Gruca says, and traders learn to weed out real information from the fluff. (This accounts for why prices on the IEM remain relatively stable during an election, while polls, even in this tight race, tend to fluctuate by many points.)
What Gruca says rang true to me, a trader on the IEM for about three months. As I wrote in June, I'm supporting Kerry for the White House, but I'm betting against him on the IEM. Since my last dispatch, I did load up on a few Kerry shares. I did this on the day Kerry picked John Edwards as his running mate, a decision that obviously has real implications for the election.
But even though I was generally pleased with Kerry's convention appearance, it was difficult for me to conclude that one speech would count for anything in three months' time. So when I checked in to my IEM portfolio in the days after the convention, I did nothing. Yes, the Democratic Convention had been a success. But none of the underlying facts had changed: The economy is still expanding, however meagerly, and that helps Bush. Terrorism is still on all of our minds, and that fear helps Bush. And incumbents still generally win reelection, and my money's still on the president.
Should Kerry and his supporters be worried about what the IEM says? If all the traders were like me, inexpert and inexact in their stock-picking ability, they could dismiss the market. But the IEM works because not all of the traders are like me, and because some of them have real information about what might happen in November. This could be insider information -- information about a campaign's strategy, about a candidate's performance under pressure, or even about a terrorist attack -- or it could just be a certain specialized kind of expertise (for instance, an expert in oil prices might know how the supply and demand of crude will affect gas prices in some key swing state, thereby clueing him in to likely voter behavior there). The market works by collecting all these people's bits of information and processing it into a kind of collective intelligence, what James Surowiecki has called "the wisdom of crowds."
Obviously though, the market could be wrong. And if you think it is, and if you think you're smarter than all the people on the IEM, you know what to do -- sign up and put your money on the line.