Iowa Electronic Markets provide foresight on elections, valuable education to students

DES MOINES — Three economists and a political scientist walked into a bar, the old story goes.

Shortly after, Thomas Gruca says, the Iowa Electronic Markets — first-of-their-kind political betting markets — were born.

Gruca, a University of Iowa marketing professor, has been director of the Iowa Electronic Markets since 2020.

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The Iowa Electronic Markets were born at the school after that fateful meeting at a bar in 1988, when four University of Iowa professors expressed amazement at Jesse Jackson’s performance in that election’s Democratic presidential primary, which Gruca said the polls failed to catch.

Those professors came up with the notion of something similar to financial markets.

“When you look at a stock price, if you ask economists or finance people, they say that price embeds all the information that everyone has right as of this moment about the value of that company. And if new information comes out, the stock might go up. It might go down. But right now, this is our best guess,” Gruca said. “So if markets can do that, why can’t they do this with other important events?

“And that’s where the Iowa Electronic Market idea came about.”

Nearly four decades and 10 presidential election cycles later, the Iowa Electronic Markets have become most well-known for their presidential election forecasting, and to a lesser degree its predictions on Congressional majorities.

But the Iowa Electronic Markets are so much more than that, Gruca says. According to the school, the program teaches University of Iowa students business, economics and technology concepts in a hands-on, interactive environment, and increases students’ economic literacy.

The markets are operated by faculty at the University of Iowa Henry B. Tippie College of Business.

“It’s not ever going to make any money, but we use it to train our students, a lot of them in finance,” Gruca said. “So it’s really not just — people see the public face every four years, but we do this all the time to train our students, mainly finance and economics.”

How prediction or betting markets work

Broadly speaking, prediction markets allow people to bet on outcomes of future events, which thus provides a prediction of that outcome.

As it pertains to politics, whereas polls survey voters about for whom they plan to vote in an election, political prediction markets allow people to bet on who they believe will win an election.

That is a crucial distinction that can give prediction markets an edge in forecasting an outcome like an election, Gruca said.

“When you ask people who are you going to vote for, generally, people are answering who they want to win. They’re telling you, in their heart of hearts, ‘I want my candidate to win,’” Gruca said. “When you’re in a prediction market, you don’t make money by trading with your heart. You make money trading with your head.

“So you have to put that aside and say, ‘OK, basically this is the person I want to win, but when my money is on the line, this is the person I think is going to win.’ And that’s a big difference.”

How the Iowa Electronic Markets work

Students can invest real money — between $5 and $500 — and trade in a variety of contracts, including which presidential candidate will win the popular vote — not the Electoral College, more on that later — and which party will win a majority of seats in the U.S. House and U.S. Senate.

Outside politics, students also can trade in contracts predicting a future outcome, such as an economic indicator, a company’s quarterly earnings, or a corporation’s stock price returns.

More than 100 universities from around the world — mostly research-oriented universities like Harvard, MIT, Michigan and Northwestern — have enrolled in the Iowa Electronic Markets, according to the University of Iowa. And faculty members across the country use the markets in accounting, finance, macroeconomics, microeconomics, and political science courses.

What do the 2024 markets say?

How is trading going on the 2024 presidential election?

As of Friday, the “Democrat will win the popular vote” contract was selling in the Iowa Electronic Markets for 87 cents, which means traders believe there is an 87 percent chance Democratic presidential candidate Kamala Harris will win the popular vote.

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Gruca said there is not enough information for traders to aggregate to create a viable Electoral College prediction market.

That means traders could buy the candidate who loses the presidential election, but their contract will still pay out if that candidate wins the popular vote — just as it went with Hillary Clinton in 2016 and Al Gore in 2000.

The Iowa Electronic Markets also conduct a separate “vote share” market, where traders buy and sell contracts based on the percentage of the vote that candidates will get. As of Wednesday, the Democratic candidate share was at 55 cents, meaning traders believe Harris will get 55 percent of the popular vote.

Previous market predictions

There have been notable moments in previous election cycles’ Iowa Electronic Markets. Among them:

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Comments: (515) 355-1300, erin.murphy@thegazette.com

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