Wednesday, October 15, 2008

Reality Check from Iowa

A friend of mine insists that because of the recent economic turmoil and unpopular bailout, Democrats do not have a chance at maintaining control over Congress this election cycle. Like me, he prefers a divided government over a united one (and since Obama is the likely winner, this lose of control would be an optimistic note). But politics is one of those areas where people indulge in their irrational hopes.

The Iowa Electronic Markets encourage people to stop, think, and rationally weigh the data. It's basically a betting system. You buy an "asset" for a candidate. If the candidate wins, you get a dollar. If he doesn't you get nothing. People bid against one another for these assets and a value emerges. We can use this value to predict outcomes (and very successfully, too).

Consider the market for the presidential campaign, focusing on the winner take all option (based on who gets the most popular votes).

The blue line represents assets that Obama will get the most votes and the red line represents McCain will. Obama runs at about 85 cents. In others, he has an 85% chance of getting the most votes (though because of electoral math, this is not the same thing as saying he will win).

There's no graph for Congress or either of its chambers yet but here are the current bids (all as the average bid for Democratics gaining seats):

Congress: 0.953
House: 0.921
Senate: 0.949

The markets are not perfect (maybe participants have a systematically different knowledge base) but this is the strongest evidence I've seen of what we'll see on election night. And it looks like the Democratic Party across the board.

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