October 29, 2006

Iowa Electronic Markets: Dems Take the House, Not the Senate

Filed under: Random Stuff — Bob Gifford @ 8:11 pm

One of the frustrating things during an election season, and especially a hotly-contested midterm, is keeping up with the horse race. Every day there are new polls, many showing a margin between the candidates smaller than the margin of error, and many of which contradict each other. Every pundit (and blogger) has their own spin, with predictions that (surprise!) precisely match their political views. How do you get a quick answer to the question “if the election were held today…” without having to wade through this morass of conflicting information?

Enter the Iowa Electronic Markets, where individuals can trade futures contracts on the outcomes of political and economic events, including the outcomes of elections. Traders are putting their own money on the line, so the over-riding objective is to be right, not to push a particular agenda. This isn’t to say that traders don’t have their own biases, but the Iowa Electronic Markets, like any free and open market, does a good job of cancelling individual biases to arrive at a market price, which in this case predicts the election outcome. This chart shows the market trends as of today.

The various lines represent the value of the 2006 congressional election contracts, which pay off in the event of different results:

RH_RS06 $1 if Republican House, Republican Senate in 2006 election
RH_NS06 $1 if Republican House, Non-Republican Senate in 2006 election
NH_RS06 $1 if Non-Republican House, Republican Senate in 2006 election
NH_NS06 $1 if Non-Republican House, Non-Republican Senate in 2006 election

The most valuable contract today (the black line), and therefore the most likely outcome, is the one that pays if the Democrats take the House but not the Senate. The red line shows the probability of Republicans holding both houses, and the blue line the probability of Democrats taking both houses.

The chart shows that, for a day or so, the Foley Scandal put both houses within reach of the Democrats (the high point for the blue line), but since then the scandal seems to have fizzled, and the Republicans have recovered a bit. The bottom line: unless something changes between now and election day, the Democrats take over the House but not the Senate. I’ll say more on this outcome in another post.

Update: Click here for the latest market chart from the Iowa Electronic Market

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