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Iowa Electronic Markets Open Presidential Market

Who will be the Democratic nominee for president in 2004? Traders in the Iowa Electronic Markets (IEM) are making their predictions with dollars invested in this real-money, web-based futures market known for its accurate predictions of election outcomes.

Operated as research and teaching tool by six professors at the University of Iowa's Henry B. Tippie College of Business, the IEM political markets are open to the public at tippie.uiowa.edu/iem. For an investment of as little as $5 or as much as $500, anyone can buy futures contracts based the outcome of the 2004 Democratic Convention.

Listed contracts include contracts for candidates Dick Gephardt, John Kerry, and Joe Lieberman, undeclared candidate Hillary Clinton, and a "rest of field" contract representing all another candidates. Although she has not declared as a candidate, the contract for Hillary Clinton is included because several polls and pundits have cited her as having support from Democrats.

Contracts for the candidate winning the nomination pay $1; losing contracts pay nothing. This payoff structure means that IEM prices reflect the probability of each candidate's winning the nomination. The current IEM prices can be viewed at the IEM website.

Since its beginning in the 1988 U.S. presidential election, the IEM has established a reputation for forecasting election results with great accuracy, predicting the outcome of the popular vote with an average election eve prediction error of 1.37 percent.

"Because traders have a financial stake in the outcome, they make their choices based on who they think has the best chance of winning, not necessarily on who they want to win," said Joyce Berg, an IEM co-director and UI professor of accounting. "We've found this market-based approach to be a very informative way to predict outcomes of elections and other events."

The IEM has also opened a vote share market for the 2004 presidential election to determine how the Democratic nominees would fare against a Republican candidate (most likely George W. Bush). Payoffs in this vote-share market are based on the percentage of the popular vote in the 2004 election.

The IEM may add contracts for other candidates or open new election-related markets as the election season progresses.


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