WASHINGTON — Think you know a lot about politics? Think you know who will win the next election? Well, it’s time to put your money where your mouth is.
Created in 2012, PredictIt is an online political futures market run out of the University of Victoria in Wellington, New Zealand, where users can buy shares in speculative political outcomes. Unlike some other online political markets, PredictIt is simple to sign up for, user-friendly and most importantly, legal.
The price of the share corresponds with the percentage of people who believe an outcome is likely. For example if 75 percent of people believe that Hillary Clinton will receive the Democratic nomination, the shares will cost roughly75 cents. Popular markets can sell over 40,000 shares with a $850 limit per person.
If your outcome bears out, the shares are worth $1, but if you guess wrong your shares are worth nothing.
“Prediction markets are a good way to get people interested in politics,” said Brandi Travis, spokeswoman for Aristotle, a Washington-based political consulting group that helps run PredictIt. “They are fun and even accurate a lot of the time.”
Online prediction markets for politics began in the 1980s.Among, the first was the Iowa Electronic Market created at the University of Iowa, which has proven to be an accurate predictor of elections.
“The aggregation process seems to work much better than polls do,” said George Neumann, one of the founders of the Iowa Electronic Market. “So much so that our biggest client in election years is Whitehouse.gov.”
In the 2008 presidential election, the Iowa market was able to correctly predict a comfortable victory by Barack Obama and even which candidate – Obama or John McCain – would carry the day in 48 out of 50 states.
Prediction markets are successful because they bring together the collective insights of thousands of users. By using real money each investor is motivated to find the best information available to make a profit.
“We don’t care about a random sample like polls do,” Neumann, of the Iowa market, said. “Give us your best and your brightest and we will get more accurate data.”
PredictIt and the Iowa Electronic Market are legal because they are non-profit organizations created for educational purposes. The organizations received a “no action letter” from the Commodity Futures Trading Commission, giving them permission to operate.
Not all prediction markets have been so lucky. In 2012, the popular, for-profit political market Intrade was fined by the CFTC for trading futures outside a legal market. PredictIt copied the Iowa Electronic Market’s model in order to avoid litigation.
The trick to PredictIt, like any futures market, is to buy low and sell high. This can be achieved by diligently following news events influencing the markets.
I invested $10 into four PredictIt outcomes to gain insights into how prediction markets operate. On Sunday I bought 10 shares against Benjamin Netanyahu getting re-elected as prime minister, 5 shares against Clinton testifying on Benghazi by March 31, 3 shares against Loretta Lynch being confirmed as attorney general by March 20, and 1 share against Wisconsin Gov. Scott Walker rising to 18 percent in the presidential polls also by March 20.
As of today I have lost almost half my money.
Lost big on the Israeli election. Netanyahu’s party was slightly behind in the polls when I invested but the prediction market was in his favor. Unsurprisingly, market ended up being more accurate.
I also missed the news that Clinton was given a March 27 deadline to testify on Benghazi and my shares prices plummeted.
I was able to correctly predict the Loretta Lynch market, having digested a news story over the weekend where Mitch McConnell said he planned to block her confirmationif an anti-abortion amendment was not included in a trafficking bill. I bought the shares at 50 cents, now worth 70 cents.
What I learned from investing in PredictIt is that although it may be called “investing in political futures,” it feels more like gambling. The highs and the lows of watching my share prices fluctuate felt like time sitting at the blackjack table. After losing big, I wanted to put more in and win my money back on “sure things.”
“It is gambling, everything’s gambling,” Neumann said. “We vote our values but we bet our beliefs.”
That might be the reason why prediction markets have pretty good records.. When people make decisions out of greed, ideology and even politics does not cloud the air.