Betting on the Elections – Why Do Gamblers Beat Polls?

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People will gamble on just about anything, from the average temperature to award winners to when we’ll find alien life.

Election outcomes are a popular betting arena, and one where it sounds easy to lose a lot of money, with so many candidates in the presidential race. But oddly enough, according to the University of Iowa, gamblers as a group are better than pollsters at predicting winners.

In the video below, Money Talks News founder Stacy Johnson talks with the director of the Iowa Electronic Markets, which was started in 1998 for research and education but trades real money. Check it out, and then read on for more about how it and other popular trading sites work.

As Joyce Berg mentioned in the video, the markets beat the polls 75 percent of the time. On another popular site, Intrade, the majority of gamblers correctly guessed the winner of every state in the 2004 presidential election, and only missed two in 2008. How come?

There are whole books about this subject, like The Wisdom of Crowds. But here are three simple reasons it make sense…

1. Polls ask for opinions and personal preference – who do you want to win, do you agree with the candidates’ stance on issue X, and so forth. Bets are made to win money, not to express personal views, which may be subject to personal preferences and prejudices.

2. Randomness doesn’t ensure informed responses. Any pollster worthy of the name understands the importance of random sampling and sample size – more people from more backgrounds usually gets a result with higher accuracy and better representation of the group. With polls, there’s no particular reason for the people who get randomly picked to be well-informed about the candidates or issues. Even though pollsters recognize that and try various techniques to weight responses and avoid bias, they can’t match the obvious incentive gamblers have to pay attention: money. In short, those who are putting their money where their mouths are should be better informed.

That’s why when Texas governor Rick Perry totally blanked in a debate on the agencies of government he said he wanted to abolish, his odds of winning the nomination dropped by half on Intrade within a couple of minutes. (You can watch Perry crash in this YouTube clip.) People randomly polled shortly afterward might have missed the debate.

3. Markets have more data. Individual polls might survey a thousand random people about a particular question, but the people putting their money on the line look at all of the polls and plenty of other factors – debates, the economy, political history, the latest news scandals, and so on.

How it works

On Intrade, contracts are put out on yes-or-no propositions like “Barack Obama will win re-election in 2012.” Shares are priced somewhere between $0 and $10 depending on what the market believes is the likely outcome at the moment – prices will react to new events and information just like the stock market does.

When the outcome is determined, the market settles at $0 (if it didn’t happen) or $10 (if it did) and the money is paid out. You have to keep enough money in your account to cover potential losses. So if you buy 10 shares at $5 a share, you’re betting $50 on what at the time seems to have even odds. If you win, you’ll make a $50 profit.You can also profit (or cut losses) by selling shares before an outcome is determined as the share price and the odds shift. The minimum amount to start an account is $25. For the risk-averse, there’s a “play money” version of Intrade too.

On Iowa Electronic Markets, the account minimum is $5 and is capped at $500. Shares are priced between $0 and $1.

Is it legal?

The Iowa Electronic Markets are. They got a “no-action letter” (PDF) back in 1993 from the Commodity Futures Trading Commission, which essentially means that agency won’t take action against this market as long as it’s maintained for academic purposes and the operators of the exchange don’t make a profit.

Sites like Intrade are more problematic. Intrade is based in Ireland, where this form of gambling is legal. According to the Justice Department, however, the Federal Wire Act prohibits U.S. citizens from gambling on the Internet. To read more about this potentially sticky wicket, check out this article from Slate.com. But if you’d rather be safe than sorry and really feel the need to bet real money, stick to the Iowa markets.

But whether you gamble or not, if you’re interested in the outcome of elections – and who isn’t – it’s good to know there’s a potentially more reliable indicator than the latest poll you saw on the evening news.

Want to look at polls and other information? Here are some links to get started…

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