July 29, 2016
Vanessa Miller

The Iowa Electronic Market, a futures market used as a research tool at the University of Iowa, has become known for its ability to show real-time ebbs and flows in political campaigns and its accuracy in predicting election outcomes.

News cycles and rumors can help or hurt candidate trading values on the market, which uses real money from participating investors but was developed by faculty in 1988 as a teaching and research tool.

Consider July 25, the first day of the Democratic National Convention in Philadelphia.

A rocky start — including leaked emails showing an establishment bias toward Hillary Clinton, the resignation of the DNC chairwoman and pro-Bernie Sanders protesters decrying Clinton’s nomination — created the busiest day of trading since the platform’s 2016 presidential election market opened in 2014.

More than 6,770 units were traded. Clinton’s value dropped from 68.4 cents on July 24 to 63 cents on July 25. Republican nominee Donald Trump saw a boost from 32 cents to 37.5 cents.

But by the end of the convention, Clinton’s numbers rebounded Friday to a final price of 69.5 cents, while Trump’s had dropped to 30.7 cents.

Trump did not see as much of a sway in the Iowa Electronic Market during the Republican National Convention in Cleveland earlier this month, although his value had been climbing in the days preceding — moving from an average of 27 cents on July 12 to nearly 33 cents on July 15 when he named Indiana Gov. Mike Pence as his running mate.

Opinion pollsters reported bigger swings, with Trump snagging the lead in a Real Clear Politics average after the Republican convention, and Clinton pulling back into a tie after the Democratic convention. Some Friday polls showed her again topping Trump.

UI finance professor Thomas Rietz said the Iowa Electronic Market is not as touchy as polls.

“Polls are trying to measure the current sentiment, which is probably actively changing during conventions,” Rietz said. “Whereas the market is based upon who will ultimately win given all the information at any point in time.”

Rietz and colleagues in the UI Tippie College of Business proved this accuracy by looking back through presidential election outcomes and comparing the results to the market’s forecasts and poll predictions.

“If we go back through time quite a long ways, what we get is when we compare to polls, we are closer to the eventual outcome about 75 percent of the time,” he said.

Rietz said the market is more reliable because, essentially, it encourages traders to separate themselves from their emotions — to some degree — and use logic in spending their money.

The market caps an investor at $500. That cap can help to filter out bias.

The staunchest supporters of a candidate typically spend the maximum on their choice right away, Rietz said.

“And then they’re done because they can’t trade anymore — they spent all their money,” he said. “Then the people who stay in the market, buying and selling all the time, tend to be the people that are less biased. And so the pricing mechanism in the market serves as an additional way to filter out what are otherwise potentially biased influence.”

Because UI’s market is less finicky than polls, it tends to better flag the real game changers during a campaign, said Joyce E. Berg, UI association professor of accounting.

“It seems to separate out what are the things that actually do affect election outcomes,” she said.

But even with that track record, Rietz said, the approximately 70-30 split between Clinton and Trump is “not a sure thing by any stretch of the imagination.”

The split means Clinton would win seven of 10 times and Trump would win three times out of 10.

“Fivety-50 is anybody’s guess, and 100 percent means it’s going to happen for sure,” he said. “So 70-30 is closer to anyone’s guess than it is it’s going to happen for sure.”

About the Market

The Iowa Electronic Markets is a futures market used as an academic research tool. To learn more or to set up an account, go to tippie.uiowa.edu/iem.