Despite ups, downs of 2016 campaign, UI’s election market stable

IOWA CITY - Donald Trump is sliding in the polls. Hillary Clinton and Ben Carson are rising.

And as voters react to Clinton's email and Benghazi testimony, Trump's latest insult and Vice President Joe Biden's decision not to seek the presidency, the polls have been changing on a near-daily basis.

But the University of Iowa's Iowa Electronic Markets, or IEM - tippie.uiowa .edu/iem - have been a virtual Sea of Tranquility.

For investors in the UI's 2016 U.S. Presidential Election Winner Takes All Mark, the Democratic contract has been selling at or near 60 cents and the Republican contract at 40 cents since early June. Only in the past week has there been movement in the market.

That means that more than three months before Iowa's first-in-the-nation caucus and a year before the 2016 presidential election, investors - who can put in up to $500 in the IEM - believe there is a 60 percent probability a Democrat will be elected president and a 40 percent probability a Republican will succeed President Barack Obama, according to Joyce Berg, the Sidney G. Winter Professor of Accounting, who oversees the IEM.

The stability of the market is 'not unusual this far out,” Berg said as she viewed the latest markets numbers on a computer screen in her Pappajohn Business Building office on the Iowa City campus. 'Investors recognize that a lot can happen between now and the election.”

For example, she said, although investors are predicting a generic Democratic win, the stability in the market suggests investors are confident that if Clinton stumbles, there still is time for the party to find a replacement.

And, she said, 'If Donald Trump blows up, there's time to recover.”

Unlike a poll, the IEM doesn't ask who people want to see elected or who they would support if the caucuses were tomorrow.

'A poll asks a person's preference, what they want to happen,” said Frederick Boehmke, UI political science professor and faculty adviser to the Hawkeye Poll. People investing in the IEM, however, 'are trying to make money, so they pick the candidate or party they think will win. They typically set aside personal preferences to make money.”

Polls, he said, are snapshot at a moment in time. The market 'is about who will win in the end.”

Both polls and markets react to news and developments in the campaigns, 'if investors think it will affect the election outcome,” Berg said. In 2004, political commentator Matt Drudge suggested news was forthcoming about Democratic nominee John Kerry having an affair.

Kerry's 'price took a dive and John Edwards went up,” she said. In the end, there was no solid news about a Kerry affair 'and his numbers recovered.”

The night before Colin Powell had a news conference to address speculation he might seek the Republican nomination, his IEM shares were trading for 60 cents. By 8 a.m. the next morning, they had dropped to almost zero as investors figured out he wasn't going to run.

In the 2008 campaign, Clinton's share price dropped and Barack Obama's went up when it was revealed she was putting her own money into the campaign, Berg said.

They think they know markets

Polls and prediction markets serve somewhat different purposes and create different perceptions of an election, Boehmke said. Polls 'tend to create the perception of more uncertainty.”

If one candidate is leading another 53 percent to 47 percent in a poll, it looks close. In a prediction market, 'shares likely would be trading at 90 percent for the leading candidate because a 53 to 47 percent lead makes it near certain that candidate will win,” Boehmke said.

Another big difference between polls and investor markets is who's participating. Pollsters seek a sample that matches the electorate or the likely caucusgoers as closely as possible in age, race and gender, for example.

Traders in the IEM, first used in 1988, look nothing like the electorate, Berg said. They tend to be male, educated and wealthy.

Investors typically fall into one of three categories, Berg said. There are 'wonks” who think they know politics, she said.

Then there are investors, many from the New York City area, 'who think they know markets - any markets,” Berg said. Many investors are students who find the market interesting or are participating as part of a class.

There's another group, what Berg calls 'noise traders,” who are not necessarily well-informed but participate because they like one candidate. The IEM has traced Internet Protocol addresses back to campaigns and once to the White House, she said.

In the end, Berg said, the demographics that pollsters pay attention to don't matter in an investor market.

'What we need is people with information,” she said.

Simply put, the IEM operates on a 'wisdom of crowds” model, Berg said. She sees it as a puzzle, 'and the person who can put pieces of the puzzle together sees the picture better.”

Over time, she said, that has produced remarkably accurate results.

'Our price the night before the election has been closer to the actual vote share than most polls,” she said. 'The further back you go, the more likely it is the IEM is more accurate.”

Seventy-five percent of the time, the IEM is closer to the actual outcome than polls.

'I've seen these markets work time after time and it still amazes me,” she said.