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Last updated: August 29, 2008 11:00 pm
You can spot a good market by the way it reacts to news. Barack Obama has spent the past week in Denver, orchestrating the Democratic party convention to maximise news coverage and gee up the faithful. Fellow presidential hopeful John McCain aims to do the same for the Republicans, starting with the choice of Alaska governor Sarah Palin as his running mate on Friday.
Opinion polls react to these set-pieces with a typical “convention bounce”. By contrast, spreadbetters, and traders on prediction markets such as Intrade and the University of Iowa Electronic Markets will probably be unmoved. The gamblers put about a 60 per cent chance on Mr Obama moving into the White House next year – the same view that has persisted for most of the summer. That reflects the advantage of prediction markets: participants are putting their money where their mouths are, so it takes genuine news to affect prices.
What rapidly turned Mr Obama into favourite to take the Democratic nomination in February was not the results of the fairly predictable Super Tuesday primaries. Rather it was the admission by Hillary Clinton that she had personally contributed $5m to her own campaign.
Monetary motivation has also helped to make political markets a better bet than opinion polls. Both become more accurate the closer they get to the event. Yet academic research suggests that the margin of error is consistently smaller among prediction markets. In 2004, the Intrade political markets correctly predicted the outcome for votes in all 50 states.
Furthermore, political betting markets should continue to improve as they become increasingly deep. The IEM, with its academic bent, has about 1,000 active traders. The for-profit Intrade reports $100m of trading on the presidential election so far this year, six times the level of 2004. As well as attracting new voters, Mr Obama has brought fresh punters into the fold.
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