Betting on the Futures of Politics
Thursday, October 2, 2008; 2:23 PM
Last September, Bethan Brome Lilja, a Massachusetts commercial photographer, made a bet of sorts that seemed absurd at the time: that Sen. John McCain (R-Ariz.) would win the Republican presidential nomination.
Although McCain's campaign organization had imploded that summer and his polling numbers were near rock-bottom, Lilja purchased about $75,000 worth of contracts on an unusual futures market called Intrade speculating that McCain would pull out the nomination. She also wagered that former New York City Mayor Rudolph Giuliani would lose his campaign for the GOP nomination, despite polls showing him very much in the running.
Today, Lilja's high-stakes political speculation looks prescient, and she has made more than $300,000 off the market -- roughly four times the amount she initially invested.
Intrade, a nine-year-old financial exchange based in Dublin, Ireland, invites investors worldwide to trade contracts tied to political outcomes. The exchange operates much like a financial futures market, only profits are contingent on the result of a political race or an electoral map shakeup, rather than a company's growth. The price of a contract indicates how likely investors consider an outcome.
For example, a contract tied to the prediction that McCain will win the election selling for 47 points means that investors believe McCain has a 47 percent chance of winning the election. On Intrade, a point represents 10 cents, so one share of stock in McCain is worth $4.70. Confident investors place tens of thousands of dollars or more on one contract.
Prediction markets have been around in one form or another for decades. Throughout the 2008 presidential campaign, Intrade has generated nearly $50 million worth of futures contracts. Betfair, a market based in the United Kingdom also attracts millions of dollars in bets. Its Web site predicts nearly $70 million will be invested on the U.S. presidential election.
U.S. law prevents predictive trading nationwide, with the exception of the Iowa Electronic Markets which began as an academic research tool and today caps investments at $500.
The markets at times have worked as an uncanny bellwether of political trends -- in some cases proving to be a more accurate indicator of political trends than the pundits or the polls.
A few days before Democratic presidential candidate Barack Obama (Ill.) announced his selection of Sen. Joseph Biden (D-Del.) as his running mate on Aug. 23, a contract linked to the prospects of Biden being picked jumped 300 percent on Intrade. Shortly before Obama picked Biden, Sen. Evan Bayh (Ind.) and Gov. Tim Kaine (Va.) were on pundits' short lists.
And as soon as a blog leaked news of a jet landing in Anchorage to pick up Alaska Gov. Sarah Palin the day before McCain announced his selection, a contract tied to Palin being picked as McCain's running mate soared in market value. Market expert Justin Wolfers, an associate professor at the University of Pennsylvania, noted "That was picked up in seconds on Intrade." The mainstream news media didn't pick up the speculation on Palin until several hours later.
Investors drawn to this form of speculation "have to be a little savvy," said economist Dean Karlan of Yale University. "At the end of the day it's a security," he said.
And to do well in this form of speculation, experts say, investors have to check their political leanings at the door and invest money strictly based on who they think will win or lose. Lilja, a Democrat, will only bet on Republican outcomes. "I don't want my own personal bias to get in the way," she said.