25 April 2007
Tomorrow afternoon, the Harvard-MIT Positive Political Economy seminar will be presenting at talk by Robert Erikson, professor of Political Science at Columbia University. He will be giving a talk entitled "Are Political Markets Really Superior to Polls as Election Predictors?". The seminar will meet on Thursday, April 26 at 4:30 in room N354 at CGIS North (this is also the room where the Applied Statistics workshop meets on Wednesdays). An abstract follows on the jump:
Election markets have been praised for their ability to forecast election outcomes, and to forecast better than trial-heat polls. This paper challenges that optimistic assessment of election markets, based on an analysis of Iowa Electronic Market (IEM) data from presidential elections between 1988 and 2004. We argue that it is inappropriate to naively compare market forecasts of an election outcome with exact poll results on the day prices are recorded, that is, market prices reflect forecasts of what will happen on Election Day whereas trial-heat polls register preferences on the day of the poll. We then show that when poll leads are properly discounted, poll-based forecasts outperform vote-share market prices. Moreover, we show that win-projections based on the polls dominate prices from winner-take-all markets. Traders in these markets generally see more uncertainty ahead in the campaign than the polling numbers warrant—in effect, they overestimate the role of election campaigns. Reasons for the performance of the IEM election markets are considered in concluding sections.