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Forecasting Political Futures

The political world was stunned on January 19th when Howard Dean lost Iowa badly to John Edwards and John Kerry. If you had been paying attention to the IEM Political Market, you'd have seen it coming.

Totally legal under a federal waiver, the IEM Political Market allows anyone to invest real money (up to $500) in a candidate's fortunes. Briefly, how it works: Single shares in a single candidate fluctuate between zero and $1. If the candidate loses, the share is worthless. If the candidate wins, it pays off $1. With thousands of shares being traded, the numbers have high predictive value - proven over nearly 15 years of intensive academic research on political campaigns worldwide.

How were the numbers in the run-up to the caucuses? From mid-November to early January, Howard Dean was trading at a peak of around 76 cents. Suddenly, on January 11 - eight days before the Iowa caucus - his fortunes plummeted, eventually all the way to 51 cents on the night before the caucus. John Kerry had been stuck for weeks at less than a nickel - but from January 12-18 tripled in value.

As the IEM's builders have noted, polls ask "Who would you vote for today?" while the market asks "Who will everyone vote for on election day?" and are thus more stable and more predictive than snapshot polls.

The current betting line for the final Democratic nomination? Kerry is at 84 cents, Edwards at 16 cents, and Hillary Clinton at 1 cent. Of course, Kerry is down from his high of 94 cents a week ago, and Edwards has vaulted in value from a low of 3 cents just a week ago. Just a blip for Kerry - or a sign of another "market correction"?

See the graph of prices

Check out the IEM Democratic Convention Market

This item was originally posted at MandateMedia.com on February 19, 2004.

Posted on February 19, 2004 in