October 29, 2007 / 2:02 PM / in 10 years

Political markets see Clinton vs Giuliani contest

WASHINGTON (Reuters) - Traders on the Iowa Electronic Markets, which have been predicting U.S. elections with surprising accuracy for 20 years, are expecting a tight presidential vote next year, with the Democrat narrowly defeating the Republican.

And the most likely match-up? Hillary Clinton vs. Rudy Giuliani.

The non-profit market, run by professors at the University of Iowa in the key early voting state and allowed to operate since 1988 by special permission, is unique in the United States because it is the only one where investors put real money -- small amounts under $500 -- on the line.

It was started by the academics to see if markets, which are good at translating economic and financial information into a price, would be as good at synthesizing political information.

Joyce Berg, an accounting professor and member of the Iowa markets board, said the markets turned out to be better than national polls in predicting the final election results just days before the vote.

They scored even better against polls the farther away they were from the election.

“In just about 75 percent of the cases,” Berg said, “the price in the market is closer to the actual outcome of the election than the polls were.”

Though more than a year away, traders now are betting the November 2008 election will pit the two New York politicians against each other in the run for the presidency.

Recent trading gave Clinton, the senator and former first lady, a 70 percent chance of winning the Democratic nomination, versus a 16 percent chance for her closest challenger, Illinois Sen. Barack Obama.

Giuliani, the former New York City mayor, had a 40 percent shot at the Republican nomination, versus a 31.5 percent chance for former Massachusetts Gov. Mitt Romney.

Those figures are stronger than recent polling might suggest. Clinton’s numbers have been 44 percent to 48 percent in most surveys; Giuliani’s between 24 percent and 32 percent.

Traders predicted the Democratic candidate would ultimately win the election by about 4 percentage points.


But Berg cautioned the numbers were constantly shifting as new information reached the market. Candidates can surge and plummet.

“It’s not like you look in the magic crystal ball and you can see what’s going to happen in the future,” she said. “It’s pulling together all the available information that’s out there, saying ... this is what we think is going to happen.”

The number of prediction exchanges has grown rapidly with the advent of the Internet.

Some offer contracts on politics and geopolitical events -- like whether the United States is likely to take military action against Iran -- while others project movie box office sales or the value of money-making ideas.

Industry growth prompted the leading players this month to create a trade group -- the Prediction Market Industry Association -- to promote their interests.

Intrade, the Dublin-based firm that claims to be the largest political prediction market, uses real money but also runs non-cash political exchanges for the Financial Times and the National Journal newspapers on the Internet.

Trading on its sites produced numbers similar to those from Iowa. Clinton is projected to have a 70 percent probability of winning the Democratic nomination, while Giuliani has a 44 percent chance of being the Republican candidate.

And the Democrat has a 62 percent chance of capturing the presidency, versus 36 percent for the Republican.

John Delaney, the chief executive of Intrade, said the similar results are a sign the markets are trading on the same information. “We are in a world of information overload and prediction markets can summarize, aggregate, distill a huge amount of thought, opinion and expert view into single probabilities,” he said.

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