election speculating

I've recently ventured back to the the Iowa Electronic Markets. The IEM is currently offering a market for the '04 Democratic Convention (among other markets). If you send them the money to open an account, the site lets you buy or sell "shares" in individual candidates with real money for whatever are the prevailing market prices being offered by other IEM participants. Shares for the candidate that wins will return $1 per share; shares in everyone else return nothing. So this means that the IEM prices can be thought of as market-estimated probabilities of a particular candidate winning the election.

(Pretend you are perfectly rational. If you believe a candidate has a 50% chance of winning the election, then shares should seem like a bargain if they are less than 50 cents and should seem overpriced if they are greater than 50 cents.)

Polls tell you whose ahead or behind, but that's not the same as "what's the probability that X is going to be the Democratic nominee?" I presume the way it is able to circumvent legislation regarding gambling is that everything is small-stakes and the market is used for research purposes.

Anyway, currently shares are being offered for Kerry, Gephardt, Lieberman, Hillary Clinton, and Rest-of-Field. Call me crazy, but I suspect that Clinton, even though she's trading for only 4 cents a share, is still overvalued, given that she's not running. Gephardt, although he actually is running, seemed overvalued to me at his current price of 20 cents; I suspect the overvaluation may be the result of the market being run out of Iowa, where Gephardt may be stronger than anywhere else outside of Missouri. Lieberman was running around 10 cents a share, which still seems too high for winning the Democratic nomination,
unless he decides to become more of an actual Democrat. So, since probabilities have to sum to one, I bought shares in Kerry (~31) and Rest-of-Field (~35). I'm expecting that Rest-of-Field will split into Dean, Edwards, and maybe some others as the election approaches--whatever, if Warren Beatty or Michael Dukakis enters the field, may ROF shares cover them too.

In 2000, I won money in the Presidential Election market by buying up shares of Gore. I bought these with the belief that he was actually going to win the election (or, at least, had a higher probability of winning than what the market was giving him). I presumed the day after the election that my shares were worthless. Instead, as it turned out, the original market prospectus indicated that the winner, for IEM purposes, was whoever won the popular vote, so my shares were all worth $1 and the people who bought Bush shares got nothing. Ca-ching!