Nov. 24, 2008
IEM within less than half percentage point in presidential race prediction
With all the votes counted, the Iowa Electronic Markets predicted the final vote count in this year's presidential election to within a half percentage point.
Prices on the IEM's Vote Share Market predicted that Barack Obama would receive 53.55 percent of the two-party presidential popular vote, and John McCain would receive 46.45.
After the ballots were counted, Obama received 53.2 percent of the vote, and McCain received 46.8 percent, leaving an average error per contract of only .3 percent.
The average absolute error by public opinion polls, meanwhile, was 1.2 percent. But Tom Rietz, a finance professor at the University of Iowa's Tippie College of Business and a founder of the IEM, said the IEM traders saw Obama's win even before anyone knew who the two parties' nominees would be.
"This year was a good year for pollsters in that most polls correctly foresaw the vote share that Barrack Obama would take in the two-party popular vote," said Reitz. "But traders in the Iowa Electronic Markets showed little doubt about the election outcome for more than two years, since the market opened in June 2006. During this 886 day period, the average absolute error was 1.29 percent for the IEM, amazingly similar to the final polling results but for a much longer period."
More than 1,100 traders exchanged 513,467 contracts on the two presidential markets, worth a value of $235,341.
IEM traders also called the Minnesota Senate race to within 2 percentage points of the actual results. According to the last prices, traders predicted Democrat Al Franken and Republican Norm Coleman would each receive 40.2 percent of the vote.
After Minnesotans went to the polls, Coleman and Franken were in a virtual tie with 42 percent of the vote. A recount is currently underway.
The Iowa Electronic Markets is operated by the University of Iowa's Tippie College of Business as a real-money futures prediction market. Begun in 1988, the IEM is a research and teaching tool that has achieved an impressive prediction record, substantially superior to alternative mechanisms such as opinion polls. Such markets have been significantly more accurate than traditional tools in predicting outcomes ranging from political election results to movie box office receipts.
STORY SOURCE: University of Iowa News Service, 300 Plaza Centre One, Suite 371, Iowa City, Iowa 52242-2500.
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