Forsythe Comments on IEM Predicting Election Results

In 1776, English economist Adam Smith noted that a market made up of individuals, each acting in his own self-interest, tends to behave in a manner that's wiser and more farsighted than the individuals themselves. In the past half-century or so, economists have built upon this idea with the "efficient market hypothesis. Since 1988, the University Of Iowa's Henry B. Tippie College of Business has been predicting the outcomes of elections with a futures market. About 7,500 participants around the globe buy and sell shares whose values depend on the percentage of the popular vote each candidate gets. As election night approaches, the prices of those shares become a very accurate predictor of who will win. "Our average error is about 2.5 percent," says economist ROBERT FORSYTHE of the University of Iowa in Iowa City. "We typically do better than polls." The Iowa research group has also set up markets that accurately predict the box office returns of movies.

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