02/03/2008 05:36 pm ET | Updated May 25, 2011

Political Traders: Can't Get Enough of That Hillary Stuff

by Clark Merrefield

There are few things more certain than the average human's quotidian and Sisyphean consideration of - and occasional obsession with - the future. Even the most mindless decisions, like who to vote for in a presidential election, require some flirtation with foresight.

With Super Tuesday on our toes, and with pundits and papers all atwitter with prediction fever, this might be a good time to take a quick look at what the Iowa Electronic Markets have to say about the presidential nominations. In particular, the race for the Democratic nomination may not be as close as it seems.

The Iowa Electronic Markets, founded by the University of Iowa in 1988, are real-money markets that deal with predicting future events. More succinctly put, the IEM are futures markets. Within the IEM there are several different markets, and conceptually they work something like the Dow Jones stock market. For example, in the Democratic nomination market, a buyer may purchase shares - called contracts in the IEM parlance - in the candidate she thinks is most likely to win the nomination. Or, the buyer may purchase shares in a candidate whose price is low but she thinks will go up.

"The IEM has generally outperformed the major national polls [at predicting political winners], and has been more accurate than those polls even months in advance of the actual election," James Surowiecki wrote in The Wisdom of Crowds. "If a candidate's contract costs 50 cents, it means, roughly speaking, that the market thinks he has a 50 percent chance of winning."

IEM political markets do not exist for each state's primary, but the Democratic and Republican nomination pool each has its own market. Market prices fluctuate depending, in part, on primary results - after Obama's win in Iowa the IEM political market swung wildly in his favor.

For the Republican side, John McCain's price is currently about 87 cents. To paraphrase Surowiecki, that means the market thinks McCain has an 87 percent chance of winning the Republican nomination. Mitt Romney's price, meanwhile, is 9 cents and Mike Huckabee's is about 3 cents.

The Democratic side, as most of us know, is more uncertain, and the nominee may not be decided before this summer's Democratic National Convention in Denver. An ABC News/Washington Post Poll from 1/9-1/12 had Hillary Clinton leading Barack Obama 42% to 37%. Clinton's lead is slightly smaller according to the 1/30-2/1 poll, 47% to 43%, virtually within the 3.9% margin of error. For these numbers the pollsters asked: "If the Democratic presidential primary or caucus in your state were being held today and the candidates were Hillary Clinton or Barack Obama, for whom would you vote?"

The IEM political market for the Democratic nomination currently prices Clinton at about 60 cents. Obama is at 37 cents. So it would seem the market is leaning strongly in favor of a Clinton nomination. The polls, as shown above, give the impression of a still tight race.

(One interesting distinction between polls and the market is that the questions asked by each are fundamentally different. While polls ask about individual action [For whom would you vote?], the IEM political markets ask for speculation [Based on your knowledge, however limited it may be, who do you think will win?...And don't forget to put your money down].)

This is not to say that Barack Obama won't be the Democratic presidential nominee. There are probably thousands of plausible intangibles not considered here. And it's all just speculation, anyway, right?

But the relevant question remaining for amateur statistics nerds is this: Will the IEM's power of speculation hold up on Super Tuesday, and through to the conventions?

For more information on real-money political markets, check Slate's special coverage here.