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GOP Keeps Senate, Loses House, Betting Site Says Ronald Kessler WASHINGTON -- Republicans will hold their majority in the Senate but lose it in the House, according to the current odds given by Iowa Electronic Markets (IEM), a wagering Web site that has proven to be more accurate than opinion polls in predicting election results.
In the mid-term elections, IEM gives Republicans a 66 percent chance of retaining their majority in the Senate and a 67 percent chance of losing the House. Before Bob Woodward's "State of Denial" came out and the scandal broke over Rep. Mark Foley's, R-Fla., activities with pages, the Iowa markets pointed toward a Republican win in both houses of Congress.
IEM is run by the University of Iowa's business school. The university portrays it as a teaching tool and avoids calling IEM gambling.
Instead, it describes IEM as a "real-money futures market where contract payoffs depend on economic and political events such as elections."
Results You Can Bet On Call it betting or call it research, those who sign up on the IEM Web site can invest up to $500 on a range of election results. As many as 7,500 people place bets with IEM. On Election Day 2004, the site received more than a million hits.
Started in 1988, IEM is the longest-running political prediction market in existence. The only major similar market is Tradesports.com, a Web site based in Ireland where bets are placed on sports events as well as on elections. Currently, Tradesports is mirroring IEM's forecasts for the outcome of House and Senate races.
Story Continues Below Many experts believe prediction markets are more accurate than opinion polls because voters don't have the incentive to tell pollsters the truth. When their money is on the line, they do.
However, events can quickly change voter sentiment. Looking at IEM at a particular moment in time does not necessarily foretell the future. To sway voters, Republicans are counting on ads that began Sunday emphasizing the stakes if Democrats start stripping away strong national security measures.
In addition, polls cannot take into account the Republican National Committee's sophisticated micro-targeting efforts to identify potential Republicans and motivate them to vote. An Oct. 18 NewsMax article outlined why Ken Mehlman, chairman of the RNC, believes Republicans will retain both houses of Congress despite what the polls are saying.
Results Not to Bet On In the 2004 election, exit polls predicting a win by Sen. John Kerry were strikingly wrong. An average of the final week's nonpartisan polls had shown President Bush with a lead of 2 percentage points over Kerry, according to the Web site RealClearPolitics.com.
On the other hand, as of midnight before Election Day, IEM gave President Bush a 50.4 percent chance of winning the 2004 election, while Sen. John Kerry was given a 49.5 percent chance of winning. The actual results were 51.4 percent for Bush and 48.6 percent for Kerry.
"Tip: take bettor wisdom over Zogby or Gallup any day," Richard Karlgaard, publisher of Forbes, wrote in the Oct. 16 issue. Larry Kudlow often cites bettor election predictions in his syndicated column and on his CNBC show.
Prediction markets do better than opinion polls because they are able to capture "the wisdom of crowd" and pose the right questions, according to Don Luskin, chief investment officer of TrendMacrolytics.
When Hillary Clinton was matched up against Sen. John McCain in a hypothetical presidential election, she lost by a single percentage point. But when pollsters referred to her as "Hillary Rodham Clinton," she trounced the Arizona Republican by 7 percentage points.
When their dollars are at stake, bettors are more likely to integrate and weigh all the evidence than when asked for their opinion by pollsters, Luskin says.
So why not scrub the polls?
One theory is that prediction markets are influenced by the results of opinion polls. But if that were true, individual polls would also influence each other. Moreover, long before the Internet and opinion polls came into existence, election betting was accurately predicting election outcomes. From 1884 to 1940, betting was conducted on Wall Street by specialized brokers called betting commissioners. The betting odds for each candidate were published daily in the New York Times and other papers.
The so-called New York betting markets correctly predicted 12 of the 13 presidential elections between 1884 and 1940, according to Koleman S. Strumpf, Koch professor of economics, University of Kansas School of Business, who co-authored a paper examining the markets. In the one exception, the betting swung to even odds by the time the polls closed. The Gallup Poll, the first scientific opinion poll, began in 1935.
The arrival of opinion polls and stricter anti-gambling laws drove out the New York betting markets. The Internet has led to their revival. Because IEM is run as an academic research project, it is not subject to state gambling laws.
"If I wanted a single best guess of the outcome of an upcoming election, I'd certainly look at a well-organized prediction market before I'd look at the polls," Forrest Nelson, a director of IEM and one of its three founders, tells NewsMax.
One study by Nelson and two others documented that prediction markets are "considerably more accurate long-range forecasting tools than polls across elections and across long periods of time preceding elections."
The election markets aren't magic, Nelson says.
"They aren't always going to get it right on the button," observes Nelson, a professor of economics at the University of Iowa's Tippie College of Business. "And more information is almost always better. So why not look at both polls and markets?"
In 2000, the market predicted that Bush would win more of the popular vote than Gore, but he did not.
"Election eve prices suggested Bush would win 51.4 percent of the three-party vote [Democrat, Republican and reform] and that Gore would win 46.9 percent," Nelson says. "The next day Bush garnered only 49.7 percent to Gore's 49.9 percent. So the market guessed the wrong winner of the popular vote, but the average error was only 2 percent."
In the midterm elections of 2002, the Republicans won control of both the House and Senate, though the market gave that outcome only a 28.3 percent chance of occurring. "The outcome favored by the market was a Republican House/non-Republican Senate, with a probability of 57.0 percent," Nelson says.
But electronic markets quickly incorporate new information. In a 2005 paper, Strumpf and Paul Rhode noted that Bush's market shares on Tradesports fell 5 points during a 2004 Bush-Kerry debate that pundits later said Kerry won. Subsequent polls showed a Kerry bounce. Pundits who had seen Bush as the favorite began to see the race as a dead heat.
Collister "Coddy" Johnson, the national field manager for the Bush-Cheney 2004 campaign, says campaign strategists do look at prediction markets.
"It was certainly the case that the [Bush-Cheney] campaign was aware of electronic poll results in '04 and that the Republican National Committee continues to be aware of them, and it is a data point to be considered," Johnson says.
An Eye on the Metrics
Ken Mehlman, chairman of the Republican National Committee, looks at the Iowa markets every day.
"My goal is to have as many metrics as I can have," Mehlman says. "So I look on a regular basis at daily polls in key states and at the tracking polls, which I get from the campaigns and from the other committees. I get weekly numbers about the Democrats and Republicans and how they've done in turning in absentee votes and early votes, which is obviously important. I get weekly numbers on voter registration."
Nelson and his colleagues began the markets as a research project after they saw the results of the Michigan Democratic caucuses, which Jesse Jackson won, beating Michael Dukakis, the eventual nominee.
"We were talking about how the polls got it wrong," Nelson says. "If the Chicago markets did as bad a job at predicting the price of corn, those markets wouldn't exist," he said.
As for the question of why IEM avoids references to gambling, you can bet that Nelson has an answer.
"While I might agree that this looks an awful lot like betting, there's a difference in the motivation," he says. "At some point, everything in life is a gamble. But the primary purpose of gambling is pure entertainment. We take this as a serious attempt to collect information that people think is valuable."
Ronald Kessler is chief Washington correspondent of NewsMax.com. Get his dispatches FREE sent you via e-mail. Click here now.
Editor's note:
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