Faulty polls screw up the political prediction markets. – REDUX – The no polls case, now.

No Gravatar

Two days ago, I stated brashly that political prediction markets aggregate the polls, mainly. (Mike Linksvayer nuanced my propos, in the comment area.)

GOP Keeps Senate, Loses House, Betting Site Says. – [US political prediction markets] – by Ronald Kessler – 2006-10-24

One theory is that prediction markets are influenced by the results of opinion polls. But if that were true, individual polls would also influence each other. Moreover, long before the Internet and opinion polls came into existence, election betting was accurately predicting election outcomes. From 1884 to 1940, betting was conducted on Wall Street by specialized brokers called betting commissioners. The betting odds for each candidate were published daily in the New York Times and other papers. The so-called New York betting markets correctly predicted 12 of the 13 presidential elections between 1884 and 1940, according to Koleman S. Strumpf, Koch professor of economics, University of Kansas School of Business, who co-authored a paper examining the markets. In the one exception, the betting swung to even odds by the time the polls closed. The Gallup Poll, the first scientific opinion poll, began in 1935. The arrival of opinion polls and stricter anti-gambling laws drove out the New York betting markets. The Internet has led to their revival.

Paper: Historical Prediction Markets: Wagering on Presidential Elections – (PDF) – by Paul W. Rhode and Koleman S. Strumpf – 2003-11-10

My Question: Before 1935 (that&#8217-s when George Gallup crafted the first scientific polls), what the hell those political prediction markets were aggregating, for Christ&#8217-s sake??? And where is our good doctor Koleman Strumpf when we need him?

Previous blog posts by Chris F. Masse:

  • Become “friend” with me on Google E-Mail so as to share feed items with me within Google Reader.
  • Nigel Eccles’ flawed “vision” about HubDub shows that he hasn’t any.
  • How does InTrade deal with insider trading?
  • Modern Life
  • “The Beacon” is an excellent blog published by The Independent Institute.
  • The John Edwards Non-Affair… is making Memeorandum (twice), again.
  • Prediction Markets = marketplaces for information trading… and for separating the wheat from the chaff.

Faulty polls screw up the political prediction markets.

No Gravatar

In today&#8217-s soapbox:

Yet it turns out that in 2002, IEM markets indicated that Republicans would lose the house. Which we now know is wrong. They were pretty consistent in their 2004 presidential prediction, however. I recall that Surowiecki discussed the fact that the predictive markets for congressional elections tended to be less accurate than the presidential ones&#8211-because fewer people got involved in the betting.

Wrong. Volumes are OK. If I remember well, the polls were wrong in 2002, so don&#8217-t look any further for the cause of failure of those IEM prediction markets.

Paper That Documents This 2002 IEM Debacle: Iowa Electronic Markets – (PDF) – by Paul Gomme – 2003-04-15

Until September, Republican control of the House was seen as a 50–50 proposition, while their control of the Senate received a probability of around 20 percent. In October, the likelihood of a Republican-controlled House fluctuated between 65 percent and 90 percent while the likelihood of a Republican Senate fluctuated around 40 percent. It was not until election day results came in that market participants locked in on the eventual outcome: Republican control of both the House and Senate. Of course, this outcome was generally a surprise: Neither pollsters nor political commentators called the Republican win in the Senate.

I Disagree With This Paragraph Of The Same Paper:

Better than Gallup? The IEM political markets have a couple of advantages over their closest “competitor,” the public opinion poll. One advantage is that data from the IEM are available virtually instantaneously and almost continuously. Results from polls are typically several days old when they are reported and are taken at discrete intervals. Consequently, data from the IEM are more amenable to studying events like the untimely death of a Senate candidate. A further advantage of the IEM is that contracts can be written based on intrinsically interesting events, such as who controls the House or Senate. Poll results require more massaging to answer such questions.

My Take: Give the polls a break, and quit saying that our predictive market-generated technology is a &#8220-competitor&#8221- to the polls. Without polls, the political prediction markets could return to the locker room. Plus, prediction markets aggregate probably [see comment] more than just the polls.

Hint: A public roasting of David Perry over his impersonating of George Gallup is in the tube and will be published soon on this blog.