Category Archives: Political Markets

Environmental Futures

Following the controversy about hacked climate-science emails that has exploded in the last few days, our friend Robin Hanson has proposed that climate science could benefit from the clarity that prediction markets are uniquely able to bring to hotly disputed issues in science and elsewhere. Nate Silver, the polling wiz of 2008 election fame, agrees and details some of the best reasons to back environmental prediction markets.

This seems a good time, then, to revisit a presentation about “Environmental Futures” that we delivered back in September 2004 at a California Institute of Technology seminar graciously hosted by economist John Ledyard. Robin was there too, and our presentation nods gratefully to his famous paper “Could Gambling Save Science” as the spring board for our ideas about various implementation scenarios for Environmental Futures.

Five years later, is the world finally getting ready for some of these ideas to become reality? We hope you will find this presentation stimulating…

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Betting on a better world

Emile is presenting a paper today at the Annual Meeting of the International Studies Association in New York, as part of a panel discussion on “the role of normative and performative predictive ideas” in International Relations, chaired by Ariel Colonomos of CERI-CNRS.

Emile’s paper overviews how prediction markets might benefit forecasting in international relations. You can download it here in pdf.

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Trading data from 2004 and 2008 U.S. presidential elections

We often get requests for data from our political markets, so here they are, free to download. Our way of celebrating this Thanksgiving, and the rebirth of America’s moral leadership. Enjoy!

Click on an image to download the data in Excel format.

trading history of the "Democrat to be elected President" contract from February 2007 to election day (November 4, 2008). Click the image to download the data in Excel format.

2008 election: trading history of the {Democrat to be elected President} contract from February 2007 to election day (November 4, 2008).

trading history of the {Bush to be reelected President} contract from mid-July 2003 to election day (November 2, 2004).

2004 election: trading history of the {Bush to be reelected President} contract from mid-July 2003 to election day (November 2, 2004).

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Political prediction markets are good for your health

In his latest best-selling book “The Logic of Life”, undercover economist Tim Harford makes the point that voting is a fool’s errand and that, rationally, everyone should be gambling instead. A recent New York Times review sums up the author’s position as follows:

If you really want to make a difference, buy lottery tickets — your chances of hitting the jackpot are roughly equal to your chances of swinging an election — and devote your winnings to political lobbying.

Lottery tickets? Surely you’re joking, Dr. Harford! The economic rational man or woman should instead be playing the political prediction markets, which offer much better odds of winning than lottery tickets!

Doctor recommendedBut even that misses the point of why people should play real-money political markets, like Intrade or Bet2Give. The main benefit is that, win or lose, it’s likely to help you live longer. You read it here first.

How so, you ask? Well, it is a well known fact that stress weakens the immune system, which in turn makes you more vulnerable to, say, death by cancer. We also know that one of the major causes of stress is the lack of control over your environment. Psychologists call that “learned helplessness“, and its adverse effect on health has been dramatically illustrated by experiments such as the following (from a National Institute of Health report):

In one study rats were given injections of cancer cells following experience with [electric] shocks that were either uncontrollable, controllable, or nonexistent. The rats that received the uncontrollable shock (the learned helplessness rats) were less able to resist the cancer cells, and less than one-third survived. In contrast, some rats experienced the same intensity electric shock but could turn off the shock by pressing a lever. Two-thirds of these rats survived. Other rats were placed in the shock compartments but experienced no shocks. A little more than half of these rats survived.

Mission AccomplishedWhen it comes to political elections, most people feel quite like those helpless rats receiving uncontrollable shocks. Your individual vote, if you even have one, doesn’t amount to any kind of meaningful control over the outcome, even though this outcome can be extremely aggravating emotionally, financially, and/or physically if the wrong person wins. The resulting stress can reduce your ability to fight diseases, as it does in rats.

But prediction markets finally offer a way to break free of our “learned political helplessness”. Now you can hedge against despair by investing in the election of candidates you dislike. Your preferred candidate wins: rejoice! The other guy wins: at least you’re compensated for the aggravation… Furthermore, you can use your winnings to improve your immediate environment anyway you choose, which beats hoping that your vote will help elect the right guy who will then, perhaps, change your world for the better. Like those rats who get to exercise a measure of control over their shock treatment, your stress level is reduced by your renewed sense of control over political outcomes, and you get to live longer as a result.

In the context of this high-fever election year, it would not be difficult for psychologists to test empirically the health benefits of political prediction trading, or at least it’s effect on politics-induced stress levels. Needless to say that NewsFutures would be happy to collaborate on any such research project which would, if the results are as we expect, provide compelling reason for enshrining political betting as a basic human right, alongside voting.

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Their finest hour

Far from failing in New Hampshire, prediction markets performed at their best, providing traders with a much needed reality check.

Hillary Clinton’s upset victory in New Hampshire has encouraged venomous criticism of prediction markets for having overwhelmingly predicted an Obama victory instead. Proof, they say, that all this talk about the superior ability of markets to peer into the future is just so much hype.

This isn’t the first time that an election cycle provides the fuel needed to burn markets at the stake for the heresy of pretending to make useful predictions by harnessing the wisdom of the crowds. We’ve been here before. Remember the Democrats retaking the Senate in 2006, against all odds, or Howard Dean’s unforeseen collapse in 2004 in Iowa?

The classic first line of defense in these cases is to remind people that market “predictions” are really just probabilities, so any one outcome cannot invalidate the approach. The argument is sound and backed up by loads of data. But it would of course be much more convincing if we, as an industry, would remember to show at least as much humility when our market “predictions” appear correct instead. If you’re going to spread the idea that your market called all 50 states in the last U.S. presidential election because each correct outcome was predicted with over 50% chance, then you can’t hide behind probabilities when an 80% prediction comes to naught, as in Obama’s NH collapse.

The second typical line of defense is to admit fallibility, while, paraphrasing Churchill, claiming that “prediction markets are the worst form of forecasting, except for all those other forms that have been tried from time to time”. It is indeed easy to argue that pundits and polls erred even more than markets last Tuesday.

But over here at NewsFutures we don’t think markets have anything to apologize for. We think, rather, that they performed perfectly in New Hampshire, doing exactly what they are designed to do: capturing the consensus opinion in a much finer and dynamic way than all the amorphous media buzz, and, remarkably, giving Clinton a significant chance to win — 20%, give or take a few — even while the pundits and the polls, and some in her own campaign, had already left her for dead.

In fact, it is possible that the people who, on election day, had the best notion that Clinton could still pull it off were those staring at the price of that Obama stock, having to make a decision to buy, hold or sell. Why, they wondered, is it stuck at 80% if it’s such a sure thing? Why are there still people on the other side willing to put down good money on Clinton? What do they know that I don’t? What reports are they reading, what polls are they looking at? Prediction traders were surely among the very few people who, on election day, were confronted with the reality that Obama could still lose, despite what they heard from the pundits and the polls. By virtue of playing the market they were thus better informed than anyone else. For that reason, the NH primary should be chalked up as one of the prediction markets’ finest hours.

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Demise of a Sarko Killer

She was billed as the only one who could steal this election from Nicolas Sarkozy. The media had dubbed her “the queen of the polls”, so towering was her popularity over her socialist rivals for the party’s nomination. She was strikingly beautiful (for a politician), feminine yet tough, motherly yet authoritative, reassuring yet unafraid to break taboos. She was all at once Delacroix’s Liberty Leading the People, and Joan of Arc. Ségolène Royal had the look and feel of France’s itself. She couldn’t lose. She would crush Sarkozy’s ambition like she had trampled on her own party’s heavyweights, with a smile.

However, through months and months of this media hype, prediction traders remained skeptical. The price of the “President-Royal” contract only briefly caught up with Sarkozy’s just before the official campaign started, then collapsed.

The most interesting “prediction market moment” of the campaign happened just a few days before the final May 6 vote. On May 2nd, Royal and Sarkozy faced off in the first and only televised debate. By this time, Sarkozy was well in the lead, trading at 80% to Royal’s 20%, but any slip-up, any gaffe could have dramatic effects on the voting just four days later…

The candidates were facing each other. Royal, dressed to kill in black and white, never looked more righteous and “presidential”. When she wasn’t speaking, whe was staring down Sarkozy as if to project her implacable will upon the enemy of the people, a technique she had learned from her mentor, François Mitterrand (who had used it successfully against Jacques Chirac). Sarkozy responded by looking subdued, avoiding eye contact with his rival, slightly hunched like a scolded child; A far cry from the hot-tempered, conquering, Napoleonic character everyone had expected to witness. When Royal, in a fit of “righteous anger” accused him of being “immoral”, he kept his head down and barely responded.

After the debate, the pundits were all agreed that Royal had scored some points, and even die-hard Sarkozy fans openly worried that Royal had bested their champion. The next morning, newspapers and radio stations still conveyed the impression that Royal’s performance had probably helped her. However, the trading pattern one could observe on NewsFutures and other prediction markets told a different story altogether. The price of Sarkozy’s contract actually rose a little during the debate and just after, as evidenced in the chart at left. The next morning, this gain held, even as political pundits on the radio stations were still praising Royal’s performance. The disconnect continued until the afternoon, when the results of a poll taken just after the debate showed that it was Sarkozy that had come out on top, confirming the market’s impression.

So, once again, prediction markets performed quite well in an electoral context. This, of course, won’t come as a big surprise to anyone familiar with the field.

Perhaps the more interesting observation in this case is that Ségolène Royal had embraced a “participative” campaign style that very much drew on the “widsom of the crowds”. Her campaign rallies were organised as bottom-up “listening” events designed to extract themes and practical solutions directly from the people themselves. She would ceaselessly repeat that “people are the best experts of what they are living through”. When pressed to give her opinion on a controversial issue, she would often reply that, as President, rather than imposing her views from the top down, she would invite all concerned parties to debate and come up with a proper solution. It is ironic that, in the end, the crowd itself preferred to trust the more authoritarian, decisive, top-down candidate. There is a lesson here about democracy: The crowd demands to be able to choose its leaders, regularly, but then it expects them to lead, not follow.

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Results of the Dutch Political Stock Market

Dutch GovernmentToday Queen Beatrix of Holland officially asked prime minister Jan Peter Balkenende to head a newly formed coalition government, and so we closed down the Dutch Political Prediction Market that we had been operating for de Volkskrant. The election actually took place three months ago, on November 22, but the process of negotiating a new three-way governing coalition proved arduous. It’s time to assess the market’s behavior.

The market proposed three sets of contracts to predict the following:

1) Vote shares for thirteen political parties on election day: linear-payoff contracts, 0.01 euro per percentage point. We set maximum payoff caps for these contracts in an attempt to make shorting affordable in the case of small parties. For instance, the SP contract (Socialist Party) had a maximum payoff of 0.15 euro because de Volkskrant’s political experts estimated that SP could not score more than 15% of the vote in any case.

2) Which of eighteen possible coalitions might to form a new government: binary contracts, 1 euro for the winner, 0 for the losers.

3) Who would become the next prime minister: binary contracts, 1 euro for the winner, 0 for the losers.

For each of these groups of contracts, participants could buy a full set (a “basket”) for 1 euro, just as is customary on the IEM. They could also short and cover individual contracts.

Participants could deposit up to 100 euro ($130) into their accounts. In all, about 90,000 euro was deposited into some 1,800 accounts.

Predicting Vote Share

The big surprise of this election – every election has one – turned out to be the big gains registered by the Socialist Party (SP). It scored over 17% of the vote when, a month earlier, everyone expected it to score at most 13%, and it became the third largest party in parliament. No one saw that coming until just before the election: not the experts, not the polls, and not the market. In fact, because the experts were so wrong, we had miscalibrated the maximum payoff cap of the SP contract at 0.15 euro, thus making it incapable of producing a correct prediction in any case. We should have known better than to trust experts!

Because the SP contract was so badly calibrated, we compared the market and the polls on the other three big parties only. At first glance, the quality of the market’s vote share predictions were somewhat disappointing compared to the three main polls: Over the week that preceded the election, the polls, as a group tended to be more accurate than the market, as summarized below:

Predictions last week before election

However, the story changes dramatically if, instead of looking at the predictions just before the election, we consider the predictions several weeks earlier. Four to seven weeks before election day (i.e, throughout October), the polls were much less reliable and the market clearly out-predicted them, individually and as a group.

Predictions several weeks before election

Now, whether we think this is a good result or a bad result depends on whether we think that it is more useful to predict elections just one week ahead or several weeks ahead…

Predicting the winning coalition

A very interesting thing happened on election day, once it became clear that the two biggest parties, CDA and PvdA, did not win enough seats in parliament to form a coalition together. A governing coalition would need to involve at least three parties, and negotiations promised to be arduous… However, as the chart below shows quite clearly, the market immediately expressed a strong preference for the CDA-PvdA-CU coalition (green curve), even-though the politicians, for their part, rejected that possibility and preferred to start negotiations for another coalition: CDA-PvdA-SP (orange curve). Those negotiations collapsed within a couple of weeks, and the politicians eventually agreed to form the coalition that traders had envisioned on election day.

Coalition contracts

Predicting the prime minister

In the end, outgoing Prime Minister Jan Peter Balkenende (CDA) kept his job. It is clear from the chart below that he had the market’s preference almost from the beginning and throughout.

Premier contracts

For those who want to dig deeper into Dutch politics and the results of this latest election, we recommend the excellent wikipedia entry.

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