Pooling Our Collective Ignorance Does Not Yield Wisdom
by Chris Bowers, Sun Oct 03, 2004 at 11:22:47 AM EDT
On the morning of January 19, 2004, Howard Dean was trading at around 51 cents on the Iowa Electronic Markets, while John Kerry was trading at around 13 cents. Clearly, the market, like many people in the media, still thought that Howard Dean was going to win the Iowa caucus. However, the market was clearly wrong. In the end, Kerry more than doubled Dean's delegate percentage from the precinct caucus. I suppose the collective brilliance of the traders began to shine, however, when Kerry's numbers spiked as the returns began to come in.
The lack of good information is not the only problem with political futures markets. Further damaging their ability to predict is that they have almost no money invexted in them at all. As Barry Ritholtz writes at BOP News (emphasis mine):Lets compare these exchanges with the U.S. Capital markets, which are, in a word, massive. Total market capitalization for equities are ~$13 trillion dollars; for Federal debt (Bonds and notes) its about $4 trillion; while corporate bonds total in excess of $5 trillion.
The total dollar amount invested is the political futures? An absolute pittance.
Let's start with Intrade.com. They state they are the largest political futures exchange in the world. Their biggest contract - The George W. Bush Futures -- has about two million dollars invested. Over the past year, these futures have traded a grand total of six million dollars. The Iowa Political Futures market is downright tiny in comparison. Over the summer, they had less than $20,000 invested in their "winner take all" exchange.$20,000? All the Iowa Electronic Futures Market represents is the collective opinion of what literally a handful of investors think is going to happen in the election. This is a sample size that even Gallup would recognize as worthless.
So, not only do political futures markets not predict the outcome of elections, they also do even serve as an accurate reflection of majority opinion at any given time. The only opinions they do reflect are those of a miniscule number of whackos, about whom we know nothing, that have the money to invest in such a bizarre market. I thought I would never write this, but I actually think Gallup is a more accurate predictor of elections than the political futures markets.