Tuesday, December 9, 2014
Written by: Tom Snee

The opening bell has rung for the 2016 Iowa Electronic Markets’ (IEM) presidential and Congressional control markets that give traders the opportunity to buy and sell contracts that will predict the results of the next general election.

The new markets include:

A real money futures market operated by the University of Iowa’s Tippie College of Business, the IEM gives traders the opportunity to buy and sell contracts based on what they think the outcome of a future event will be. Contracts for the correct outcome pay off at $1, all other contracts pay off at zero. As a result, the price of the contract at any given time is the probability that the traders believe that event will happen. Traders can invest up to $500 in the market.

Traders on the recently closed 2014 Congressional Control market first saw the emergence of a potential GOP sweep in summer 2013. The market opened in December 2012 with traders initially favoring the contract for a status quo Congress—Republican House, Democratic Senate—for the first year. But the contract representing a GOP sweep started to trend upward in the summer of 2013 and then emerged as the most likely outcome in December 2013—11 months before Election Day—when the price of the contract for a GOP sweep passed the price of the contract representing a status quo Congress. Except for a few scattered days of trading, it remained the most likely outcome for the rest of the campaign, crossing the 50 cent threshold in August and continuing to trend upward until the election.

View a chart showing the IEM prices during the life of the 2016 Congressional Control market.

UI is the only university in the country to operate an experimental real money prediction market that researches exactly how prediction markets work and why they’re so often successful. As part of that research, the IEM is used for more than just political races. In the past, faculty members have used the IEM in their classrooms to predict, to varying degrees of success, things like box office movie openings and the price of Microsoft stock.

The market researches the theory of the wisdom of crowds, that a group of knowledgeable people aggregating information can assess the likelihood of future events with some reasonable degree of accuracy. The real-money aspect adds to the accuracy, giving traders an incentive to make a more thoughtful forecast.

The research has found its way into the private sector, as well, as several businesses have set up internal markets to help in planning. Motorola and Best Buy, for instance, both used internal markets to help in making marketing, purchasing, and distribution decisions.

More information on the IEM—including information on opening a trading account—is available at tippie.uiowa.edu/iem/markets/. Current presidential market price quotes can be found at iemweb.biz.uiowa.edu/quotes/Pres16_quotes.html and Congressional control market quotes can be found at iemweb.biz.uiowa.edu/quotes/Congress16_quotes.html.