What’s Better at Predicting Elections: Polls or Markets?

Uni­on Pub on Cap­it­ol Hill wasn’t host­ing a nor­mal de­bate-watch­ing party. In­side and on the patio, yes, on­look­ers drank their beers or gin and ton­ics, and watched the 11-can­did­ate GOP field duke it out on-screen. But among the more than 500 at­tendees, many were also there to make a profit.

On the mar­ket, par­ti­cipants could buy “shares” on ques­tions. There were stocks for which can­did­ate would see the biggest postde­bate bounce, and there are stocks for who will be the GOP nom­in­ee, with real money on the line. The pre­dic­tion-mar­ket web­site Pre­dic­tIt sponsored the event.

The way the mar­ket works is there is a bin­ary ques­tion for each can­did­ate that a trader could buy. For ex­ample, someone could buy shares that, yes, Jeb Bush will be the nom­in­ee or shares that, no, Bush will not be the nom­in­ee. There are also broad­er polit­ic­al ques­tions, such as “will the gov­ern­ment shut down on Oct. 1?” or “Will Greece exit the Euro­zone in 2015?”

Brandi Trav­is, chief mar­ket­ing of­ficer for Ar­is­totle In­ter­na­tion­al Inc., the tech­no­logy com­pany that helps run Pre­dic­tIt with Vic­tor­ia Uni­versity of Wel­ling­ton, said mar­kets are of­ten more ac­cur­ate than polling. Her com­pany got in­ter­ested in pre­dic­tion mar­kets after the suc­cess of In­trade, the Ire­land-based pre­dic­tion mar­ket that cor­rectly pre­dicted 49 of the 50 state out­comes in the 2012 pres­id­en­tial race.

As far as leg­al­ity is con­cerned, in Oc­to­ber 2014, Vic­tor­ia Uni­versity re­ceived a no-ac­tion let­ter from the U.S. Com­mod­ity Fu­tures Trad­ing Com­mis­sion out­lining how to main­tain com­pli­ance with the law. Pre­dic­tIt is only al­lowed to have 5,000 traders for each ques­tion, and each in­di­vidu­al in­vest­ment has a lim­it of $850.

Pre­dic­tIt’s web­site says the pur­pose is to re­search wheth­er pre­dic­tion mar­kets are a more re­li­able form of meas­ur­ing a like­li­hood of an event. A 2008 study showed Iowa Elec­tron­ic Mar­kets, a pre­dic­tion mar­ket based out of the Uni­versity of Iowa’s Tip­pie Col­lege of Busi­ness, is closer to the elec­tion out­come than polls 74 per­cent of the time.

“So when In­trade was shut down, we thought how could we go about get­ting this, launch­ing one of these [pre­dic­tion mar­kets] in the U.S. so that we have ac­cess to this in­form­a­tion,” Trav­is told Na­tion­al Journ­al ahead of the de­bate. Ar­is­totle’s web­site says its na­tion­al voter file has more than 190 mil­lion re­cords with at­trib­utes such as vot­ing his­tor­ies. When asked which cam­paigns use Ar­is­totle’s soft­ware and data, Trav­is said they could not com­ment.

“We don’t see really polling as a com­pet­it­or,” Trav­is said. “And we don’t think we’ll ever re­place polling be­cause it’s a very dif­fer­ent set of in­form­a­tion you’re provid­ing.” While polls ask people what they want to hap­pen or what they feel, pre­dic­tion mar­kets are filled with people act­ively go­ing to place money on what is go­ing to hap­pen, which sup­presses wish­ful think­ing that may come through in tra­di­tion­al polls.

That was the case with Tom O’Bri­en. He’s a per­son­al sup­port­er of Sen. Rand Paul, but put his money be­hind Carly Fior­ina, who had pos­it­ive re­cep­tion after the de­bate, and—some­what re­luct­antly—in Jeb Bush. He also puts some stocks in Louisi­ana Gov. Bobby Jin­dal.

“I’m a real­ist,” he said when de­scrib­ing his ra­tionale.

Fior­ina sup­port­ers were em­boldened. Max­imili­an Mer­rill, a lob­by­ist who sup­ports the former CEO, put money be­hind her in the mar­ket, say­ing she was the next Ron­ald Re­agan.

“I think to­night proved that I was right,” Mer­rill said. “I’ll bet you a dol­lar at least that Carly … is at the very least the VP nom­in­a­tion” choice.

Ahead of the de­bate, Trav­is poin­ted me to Daniel Kaseff, a stu­dent at George Wash­ing­ton Uni­versity who was sport­ing a t-shirt with the phrase “I sup­port Deez Nuts 2016” and who Trav­is told me is one of Pre­dic­tIt’s top traders.

“It lets me just take what I’m do­ing any­way as a hobby and trans­late that in­to mak­ing money,” he said. Kaseff, who also in­terned for Demo­crat­ic Sen. Richard Blu­menth­al, sees him­self as more of a short-term trader and said that Fior­ina “had a lot of room to climb.” She had the most to gain from the de­bate, which made her a safe bet. 

On the ques­tion of “Who would see the biggest bounce?” from the CNN de­bate, Fior­ina’s stock rose throughout the even­ing. Be­fore it star­ted, Fior­ina was at 35 cents, but shot up to 54 cents af­ter­ward.

But some of her com­pet­it­ors didn’t ne­ces­sar­ily take a nose­dive. On the sep­ar­ate ques­tion of who will be the GOP nom­in­ee, Bush was still in the lead and only dropped by two cents throughout the night, fol­lowed by Sen. Marco Ru­bio, who saw his stock in­crease five cents after the de­bate.

Many in the bar were not in­volved in trad­ing and some were just look­ing for a place to watch the de­bate, but for those who were trad­ing, this de­bate seemed to of­fer the same ex­cite­ment that traders get on the stock mar­ket floor dur­ing an ini­tial pub­lic of­fer­ing.

“When I was in ju­ni­or high, I liked get­ting stocks as a Christ­mas present and I found what I en­joyed do­ing was play­ing penny stocks,” said Robert Sin­ners, vice chair­man for mem­ber­ship for the D.C. Young Re­pub­lic­ans. “I budget like 25 bucks every two weeks or so. I’ve made some and I’ve lost some.”