By Andrew Goldberg
As presidential candidates crisscross the country seeking votes and campaign cash, they aren’t the only ones chasing the early money in politics.
Political prediction-market traders, a new breed of gamblers, are hoping to strike it big by betting on which candidates will be nominated.
At Intrade.com, a popular online prediction market based in Dublin, Ireland, political investors are wagering real money on presidential prospects the same way buyers and sellers at the Chicago Mercantile Exchange trade oil and soybean futures.
“There’s always been something of a speculator within me,” said Alex Forshaw, who bought several hundred shares of Barack Obama to win the Democratic nomination. “I was obsessed with poker before this. I did OK at it, but politics is my real forte.”
Although Intrade has emerged as the new leader in the growing prediction industry, a lower-stakes prediction market run by the University of Iowa has been popular among academics for the past two decades.
In the first quarter of 2007, Sen. Hillary Rodham Clinton, D-N.Y., led Sen. Barack Obama, D.-Ill., on Intrade. John Edwards, the former senator from North Carolina, whose stock has fallen in recent weeks, is now neck and neck with Al Gore for third.
On the Republican side, Rudy Giuliani, the former mayor of New York, leads Mitt Romney, the former governor of Massachusetts, and Sen. John McCain, R-Ariz. Fred Thompson, the former Tennessee senator and actor who hasn’t announced his intention to run, is virtually tied with Romney and McCain for second place.
Forshaw, who started a blog to talk about his trades, said he first felt the political prediction itch during the 2004 presidential primaries. “I nailed them, and I was determined to find a way to turn my knowledge into money,” he said.
Political junkies willing to back up their predictions with their pocketbooks need only log onto Intrade.com and open an account. A red and green ticker crawls across the top of the site, alerting traders to the latest ups and downs in the stocks of presidential hopefuls. Registered users can then use credit cards to buy and sell shares, with the market making its money by taking a few cents out of every transaction.
The precise wording of contracts varies slightly at different prediction sites, but the basic rules remain the same: Political stocks typically trade at up to $10 a share, with the price at any point considered to be the percentage probability that the event will occur. Thus, traders bullish about Edwards’ chances could have purchased his contract at $1.60 (a 16 percent chance of victory), on Dec. 28, 2006, the day he formally announced his intention to run. If he locks up the Democratic nomination, the contract will close at $10.
But unlike pure gamblers, anxious armchair pundits don’t have to wait for all the votes to be counted to cash out. Political contracts operate in the same way as traditional stocks, fluctuating in price in response to speeches, gaffes, polls, endorsements and any other news events likely to affect a candidate’s chances of winning. Whereas some traders purchase shares in their political favorites and hold them all the way through the campaign, most are content to sell their shares at a gain long before they settle at the maximum $10 mark.
More than 2 million shares have already been traded in presidential primary contracts on Intrade this year. John Delaney, the company’s CEO, is convinced 2008 will be the market’s biggest year yet.
“Our ’08 volumes are already approaching the total for ’04 volumes—and we are still 20 months away,” he said earlier this year. “Our own internal prediction market states that 2008 is going to be amazing, with trading volumes on the Intrade presidential futures markets set to exceed by several hundred percent our 2004 volumes.”
And 2004, he was quick to add, was itself a record year for the company, which has grown exponentially since it started in 2001.
Part of the reason for that growth is that markets have proved more reliable than polls, said Justin Wolfers, an economics professor who teaches a business school class on prediction markets at the University of Pennsylvania. The University of Iowa’s electronic market has correctly called every presidential race since its inception in 1988 and come within one point of guessing the total percentage of votes received by the winner.
Wolfers predicted that cable news shows would turn to prediction-market experts for analysis in 2008.
“My forecast is that they’ll either have someone in the studio whose job it is to track the markets, or the James Carvilles of the world will learn how to interpret the markets, and they’ll integrate that into their commentaries,” he said.
Recent developments suggest he might be right. Slate magazine has started publishing hourly updates of the latest data from several prediction markets.
“If a single prediction market is wiser than the pundits and the polls, imagine how wise all the prediction markets are together,” the magazine said. “That’s the idea behind Slate’s ‘Political Futures,’ which offers a comprehensive guide to all the big political prediction markets.”
In 2006, RealClearPolitics.com, a polling site favored by political insiders, included price quotes from Intrade alongside its polls, and even Google offered its users the chance to personalize their homepage with updated quotes from Intrade.
Political junkies who can’t afford real portfolios can compete for bragging rights at fake-money markets like TheWSX.com and NewsFutures.com. Intrade, which also offers its own fake-money market, recently worked with the Financial Times to create FTPredict.com, a new site where prediction-market enthusiasts use virtual money to compete for real prizes.
David Perry, who founded the Washington Stock Exchange, said that political consultants and congressional staffers had already expressed interest in tapping into data generated by his market.
“What the public sees is interesting, but what is truly interesting is the data we’re able to generate on the back end,” he said. “We’re able to actually provide that data to a whole list of people from policymakers to political consulting firms and lobbying companies that want a more accurate picture of what the political future might be on any subject.”
But prediction markets aren’t just for political buffs.
Adam Siegel, the co-founder of Inkling, a prediction market site that provides businesses with the software to conduct their own internal markets, said companies like Microsoft and Eli Lilly are making use of markets to set prices and predict profits.
Similarly, the Hollywood Stock Exchange (HSX) allows traders to bet on movie box-office returns, and PicksPop focuses on forecasting the results of reality television shows. Even medical professionals at the University of Iowa’s influenza market are using the wisdom of crowds to predict the severity of the flu season.
Forshaw, who is shorting Edwards and Clinton—betting that their values will decline—wants to get even more involved in prediction markets after college.
“Right now, I consider myself a student, albeit not a very good one,” he said. “I wish I were a political day trader!”