What is the IEM? • Electronic futures market under CFTC regulatory purview • Trading occurs over the Web • Traders buy and sell contracts tied to political and economic events: • political outcomes • economic events • earnings or returns outcomes
What is the IEM? • More specifically: • Political outcomes • Vote/seat shares • Winning candidates • Earnings or returns outcomes • Corporate earnings • Movie box office receipts • Stock returns and price levels • Economic events • FOMC decisions
What is the IEM? • History: • Begun in 1988 • Conducted on elections in Austria, Australia, Canada, Denmark, Finland, France, Germany, The Netherlands, Russia, Sweden, Taiwan,Turkey and the U.S.
Benefits from the IEM • Research • Teaching • External Support – Microsoft, National Science Foundation, FIPSE (U.S. Dept. of Ed.), NASDAQ Foundation • Media Coverage
Vote Share Market REP08_VS: Payoff: $1 x Republican nominee’s share of 2-party vote Price: Predicts Republican nominee’s vote share DEM08_VS: Payoff: $1 x Democratic nominee’s share of 2-party vote Price: Predicts Democratic nominee’s vote share Example: 2004 Presidential Vote Share Market
Winner-Takes-All Market REP08_WTA: Payoff: $1 if Republican wins in 2008 Price: Predicts Republican’s chances of winning DEM08_WTA: Payoff: $1 if Democrat wins in 2008 Price: Predicts Democrat’s chances of winning Example: 2008 Presidential Winner-Takes-All Market
IEM Growth Year Invested 1988 $ 4,967 1992 $ 83,226 1994 $ 42,000 1996 $213,160 2000 $244,326 2004 $340,756
Market Properties • Price discovery and is it efficient? • Collection, aggregation and dissemination of information • Will motivated traders get you the best aggregated wisdom about an election?
Market Properties • Relative to Polls • Who is being sampled? • Which responses are used? • How are undecided allocated?
What Have We Learned? • The average trader is biased – partisanship matters • Biased traders AND market accuracy? Yes • Marginal traders
WINNER TAKE ALL Dem versus Rep Aggregate Probabilities
Web site http://www.biz.uiowa.edu/iem