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'Election Stock Market' Predicts Strong Liberal Win

UBC online exchange lets free market investors bet on May 17 vote.

By David Secko, 2 May 2005, TheTyee.ca

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Politicians as pork bellies, just another future commodity to trade like stocks. That's the best way to think of BC parties if you want to predict who wins on May 17.

So say professors Tom Ross and Werner Antweiler, the directors of the University of British Columbia's Election Stock Market. Want stock in the BC Liberals? Ross and Antweiler can sell you some. NDP shares are cheaper at the moment. The two business professors who set up this futures market believe they can give pollsters a run for their money in predicting the election.

"When it comes to predicting popular vote share we can often do better than the polls," says Ross.

In fact, opinion polls aren't designed to predict elections, and instead are simply used to assess the mood of the electorate at some point in time. They are often referred to as a "snapshot" of public opinion. Furthermore, although in many cases opinion polls are quite accurate, they can be misleading, as in the case of the last federal election where some polls predicted Stephen Harper as the next prime minister.

This has led people like Ross and Antweiler to look for alternative methods for predicting elections, which in the case of UBC-ESM, a financial market that trades political contracts, also allows insights into the inners workings of free markets.

"I think it [the UBC-ESM] is a great idea and a fun thing to watch," says Kyle Braid, Vice-President of Ipsos-Reid. "It's a good way for voters to participate and engage themselves in the process."

'Just like pork bellies'

The UBC-ESM opened for business on February 1 and will close on May 17, 2005, the day before the provincial election. It involves real money. As of yesterday evening, 82 had invested $18,528.00 in last three months, and the B.C. Liberal party was trading at $0.611, a market prediction equivalent to the party winning 61.1% of the provincial seats.

"The UBC-ESM is a futures market just like trading pork bellies," says Antweiler. In fact, elections are uncertain, just like the future prices of commodities (e.g. pork bellies and oil) allowing people to take a position based on the available information and attempt to predict their outcome, says Antweiler.

Four types of markets are run at the UBC-ESM. One is based on the number of seats provincial parties will win (that stood at 61.1 for the Liberals, and 36.2 for the NDP on May 1).

There is a market to predict how the popular vote will be divided up (Liberals selling at 43.5, NDP at 36.5, the Greens at 12.6 and Other Parties going for 5.4 on Sunday).

There is a market on whether a party will win a majority government (that was trading at 89.2 for the BC Liberals, 9.0 for the NDP on Sunday).

And a market for the referendum on electoral reform. (The 'no' was going for 56.4 and the 'yes' lagged behind, selling at 40.0 Sunday).

People can invest anywhere from $25 to a maximum of $1000. This investment allows participants to buy individual contracts from the UBC-ESM system or other traders. These contracts can be traded just like stocks, but in essence, they are promises from the UBC-ESM to payout money based on the results of the election.

"If you have a liberal contract in the seat markets, then after the election we will pay you [a trader] $1 times the faction of seats the Liberal party gets," says Ross. "So, if the Liberals get 60 percent of the seats, we give you $0.60 for that contract," he says. The other markets work in a similar fashion and the UBC-ESM makes no profits from the venture.

What the payouts do is allow the buyers and sellers on the UBC-ESM to try and make money off their interpretation of how provincial parties will fair. "People will buy and sell, and stock prices will change, as the campaign unfolds," says Ross, "a mistake or misstep can therefore push down a party's share price."

This free market strategy gives a truer prediction of the views and thoughts of the public on the election outcome, says Antweiler. (The price of BC Liberal shares, while strong, has dipped a few points in recent days.)

Good, but not perfect

The idea of an election stock market got its start in Iowa in 1988. It was conceived at lunch one day after the Michigan primary that year by three economics professors from the University of Iowa.

"Jesse Jackson won that primary and it was a huge surprise," says Forrest Nelson, professor of Economics at the University of Iowa and one of the originators of the idea of election stock markets. "All the polls were predicting Dukakis would win and that Jackson wouldn't even make a decent showing," he says.

At the time, Nelson and his colleagues joked that if the financial markets in Chicago did a similar job in predicting the November price of corn they would be out of business. But, in this joke was a fruitful idea, recalls Nelson, and soon they were running the Iowa Electronic Markets in a bid to try to predict political outcomes.

In 17 years, the IEM has run 49 markets dealing with 41 elections in 13 countries. "Our latest market, dealing with the last U.S. Presidential election, had around 2,500 traders with a total investment around of $200,000 (U.S.)," says Nelson.

In 2000, a study of 15 of these IEM markets, available on the IEM web site, revealed that the IEM outperformed the polls in 9 cases, and quite dramatically in the 1988 and 1992 U.S. presidential elections. In a similar fashion, the UBC-ESM also accurately predicted the 2001 B.C. provincial election and 2000 federal election in Canada. Although, just like the polls, both stock markets don't always get it right.

Nevertheless, the theory behind their accuracy is that people trading on the stock markets will think deeply and give truthful answers about how other people are going to vote. There is also a form of feedback that comes with such financial markets, in that people will dig out more information to see if their views conform with others, says Nelson.

"In this sense, comparing them [IEM and UBC-ESM] to polls is a little unfair, since polls aren't proposing to forecast things, and at the election stock markets want people to predict the outcome of a real election," says Nelson.

But, the election stock markets can be reflective of public opinion, says Evi Mustel, owner of Mustel Group, a market research group that released an opinion poll on the B.C. election on April 14, 2005. "The UBC-ESM still uses the polls…but also adds an interesting face to the horserace of trying to predict the actual winner," she says.

Teaching tool

Ross and Antweiler are also using the UBC-ESM as a controlled experiment to see how people act while investing, as well as using it as a teaching tool at the UBC Sauder School of Business.

"We have a very good understanding of this market since we know who the traders are and we set the parameters," says Ross. "We can test questions like whether trader preferences for political parties are ignored or influence their investment behavior," he adds.

UBC-ESM is already revealing that a financial market can get people really interested an election, persuading them to follow issues and developments during a campaign.

"It's like developing a big panel of experts," says Ross, "where people in the markets are thinking hard, checking out and processing the new polls, and coming up with a prediction."

David Secko is an intern at The Tyee. [Tyee]

David Secko is a student at the University of British Columbia School of Journalism with a focus on science reporting.

14 Comments:

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  • allan

    7 years ago

    Comments on "'Election Stock Market' Predicts Strong Libera

    Interesting twist to the old guessing game, but fraught with the same structural weaknessess and biases as any opinion poll.

    Who's playing in this market? The handicapped, the unemployed former health care workers, people who live week to week on meager paycheques?

    I would suspect most are investment freaks, coupon clippers and other similar types who can't get their mind around anything unless there is a freaking $ sign hanging off it.

    Give me a break, you'll get a better read from a hamburger poll.

  • bigEd

    7 years ago

    [B]right on the mark Allan

  • Budd Campbell

    7 years ago

    I couldn't agree more. I know that this market has had a reasonably good record with federal elections, and perhaps with past provincial elections too.

    Still, when you look at what this market is saying, and then take into account the informed cautionary note sounded by Rafe Mair elsewhere on the Tyee, it's pretty obvious that the participants in this market are driven by emotions not observations. Even if you grant that their popular vote projection is reasonable it is not consistent with their seat projection, given the hiving off of a considerable share of the Liberal popular vote in a dozen and a half rotten boroughs that are Liberal enclaves before the balloting even commences. Liberal victories in these seats, by stratospheric majorities, are automatic, foregone conclusions, a more sure fire bet than election by acclamation.

  • Budd Campbell

    7 years ago

    I couldn't agree more. I know that this market has had a reasonably good record with federal elections, and perhaps with past provincial elections too.

    Still, when you look at what this market is saying, and then take into account the informed cautionary note sounded by Rafe Mair elsewhere on the Tyee, it's pretty obvious that the participants in this market are driven by emotions not observations. Even if you grant that their popular vote projection is reasonable it is not consistent with their seat projection, given the hiving off of a considerable share of the Liberal popular vote in a dozen and a half rotten boroughs that are Liberal enclaves before the balloting even commences. Liberal victories in these seats, by stratospheric majorities, are automatic, foregone conclusions, a more sure fire bet than election by acclamation.

    The only conclusion one can come to is that it's Liberals, Gordon and Michael Campbell style Liberals, who are "investing" in this market and that they are not as well informed as they so proudly claim.

  • John

    7 years ago

    I just had a look at the UBC election market. Libs are overvalued. While I don't doubt that as things now stand libs are favourites to win a majority (40 seats), the confidence that the UBC market (and whoever it is buying liberal contracts) is expressing is an exageration by any reasonable measure. I like Rafe's comments elsewhere in Tyee today (upset per 30 plus seats still possible), and I've been relying on McMartin's seat by seat prediction over the popolular vote polls. It's obvious that enough seats are up in the air to make this a serious contest, however Canwest would spin popular vote polls. That the NDP are challenging in 40 plus seats is no small thing given what happened last time. Most analysis suggesting NDP with 30 seats seems to me to be based only on a conservative assumption that the 20 seats up for grabs (as per McMartin for example) will break evenly - in other words, the liberals will hold after contest half of these 20 which they won last time. I think they will probably break in the NDP's favour for various reasons, making a 30+ seat result the most likely, and a 40 seat win unlikely but plausible in my opinion. This view point is cheap and a bargain if you agree on the UBC election market.

  • dgb

    7 years ago

    I think Allan has got it right. It's great fun for little futures players chappies, but its about as real as the burger poll.The only poll that counts is on election day.To quote a great philosopher, "It aint over till it's over".

  • Bailey

    7 years ago

    Investors are just as prone to self delusion as anybody else. They're no more acute or intelligent than the poor, only different. Look how many investors bought Enron even after it was apparent to all what was going on.

    They will be seeing what they want to see, believing what they wish. They will be a poor choice to predict this outcome. No group of gamblers will ever predict the outcome of any horserace with any accuracy. Otherwise bookmakers would go broke.

  • Ouroboros-DELETED

    7 years ago

    I'm afraid "allan" has failed to grasp the underlying concept behind the UBC-ESM. The UBC-ESM is NOT an opinion poll so it doesn't matter who the participants are. There is no requirement for the participants to represent a random sampling of the population in order for the market's predictions to have validity.
    The UBC-ESM is a BET about future outcomes. It's a place where people who are are not very good at predicting the outcome of elections lose money to people who are better at predicting the outcomes of elections regardless of either participant's age, gender, academic achievement or any other kind of socio-economic distinction.
    If you think that the UBC-ESM methodology is introducing some kind of systematic bias into the predictions then here's a great opportunity to make some money off of those "investment freaks and coupon clippers" that you are so contemptuous of. All you have to do is bet against them if you are so sure they are wrong. Or, does the thought of facing an actual "freaking $ sign" cause you to have doubts about your prowess as a prognosticator?

  • Budd Campbell

    7 years ago

    Ouroboros snidely asked, "does the thought of facing an actual "freaking $ sign" cause you to have doubts about your prowess as a prognosticator?"

    Obviously, Ouroboros has no doubts. As far as he is concerned it's a Liberal lock, no questions asked, and a good thing too!

    So, ... Ouroboros, if you're that confident, how many Liberal shares did you buy? At what price? Or do you consider public disclosure of your market activities to be contrary to the ethics of rational markets?

  • allan

    7 years ago

    Hey ouroboros, I'm not trying to predict anything and I prefer to keep gambling and freaking $ signs out of elections if you don't mind.
    But perhaps I'll bite and take a chance.

    I'll throwing my hopes and vote on good (and honest) government. I'm betting that if we can rid ourselves of this dishonest and incompetent Liberal government, those without big $s, people like the poor and elderly, students, people seeking medical treatment etc., will get to feel like winners.

    I think I grasp Disneyish pea in the shell flim-flammery when I see it, especially when it comes from lifelong pro-business analysts who don't see the irony of playing monopoly in a publicly funded university setting.

  • TonyGuitar

    7 years ago

    Where would the left influence come from in a poll taken in a stricly right wing environment? Polls are an unofficial hobby and not much more.

    Society is ever more segmented into isolated fragments so that polling accurately will be virtually impossible.

    TonyGuitar at BendGovt.blog.ca

  • Ouroboros-DELETED

    7 years ago

    Just because the UBC-ESM is currently predicting a Liberal majority doesn't necessarily mean that the election will turn out that way. After all, predictions don't CAUSE the outcome. It's just that a number of commentators have questioned, as every thinking person should, the validity of the prediction. The point I was making in my previous post was that the validity can't be questioned on the grounds of who participates in the market.

    There ARE possible sources of bias in the UBC-ESM's predictions. An obvious one is that the market is small. As I write this there are only 87 people participating with an average bet/investment of about $218. That makes the total market capitalization only $19,000. Anybody who was willing to throw away, say, $10,000 could swing the market in any direction they chose. (I know there is a $1,000 cap on individual accounts but 10 people working together could accomplish the same result.) That $10,000 could be looked at as an advertising expense by whichever party decided to try this. After all, look at all the exposure the poll gets - $10,000 can't buy you that kind of exposure in a conventional advertising campaign.

    Is the UBC-ESM prediction wrong because of the conspiracy I outlined above or for some other reason? If you KNOW that the answer is yes then here is your opportunity to make a little cash from your talent as a seer. If you only WISH that the prediction is wrong then, of course, you will not be investing any money.

    Personally, I don't believe I have any particular talent for seeing into the future so I won't be investing. I think I am better off sending the money I might have otherwise invested in the market to the political party of my choice to help actively shape the election outcome rather than just passively waiting for the outcome to see if my bet pays off.

  • allan

    7 years ago

    "The point I was trying to make in my previous post was that the validity can't be questioned on the grounds of who participates in the market," writes Ouroboros.

    Then on what grounds would it be questioned?

    I'm left with this sense that being Christian is great because God has told us it is.

    Sorry, but there's just a tad too much faith being pushed in both claims.

  • I Say

    7 years ago

    GC 59 CJ 20 (+/- 2) oh yeah and CJ loses her own riding.

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