Electronic prediction markets provide both the advantages and the pitfalls of relying on the wisdom of crowds.
Economists at the University of Iowa started the original electronic election markets. Twelve years ago, Intrade entered the field and became a larger political gambling venue.
These markets harken back to the pre-World War II era, when New York gamblers bet millions on the political future of Woodrow Wilson. Prediction markets can be briefly manipulated, and they suffer the same waves of erroneous groupthink that can afflict any market, but their overall track record is pretty solid.
Economists Paul W. Rohde and Koleman S. Strumpf report that "in the 15 elections between 1884 and 1940, the mid-October betting favorite won 11 times (73 percent) and the underdog won only once." Economists Justin Wolfers and Eric Zitzewitz find that in the presidential elections from 1988 to 2000, the average vote share predicted by the Iowa markets 30 days out was less than 2 percentage points off, which is better than the final Gallup poll forecasts.
The Iowa markets and Intrade depict America's political future similarly. Gingrich-mania having passed, both give Mitt Romney a roughly 75 percent chance of winning the nomination. But his odds are worse in the general election, as the markets give the Republicans about a 45 percent chance of winning the presidency.
The markets give the Republicans a more than 70 percent chance of taking the Senate, and the Iowa markets give them a roughly 75 percent chance of keeping the House. Intrade puts the odds of the latter around 69 percent. The Iowa markets, which allow gambling on whether the GOP will controlling both houses, suggest a 60 percent chance of that.
