February 6, 2006

Manipulating election markets

Prediction Markets By: ams

Koleman Strumpf presented a very interesting paper at the Prediction Market Summit last Friday, so I finally read his article on Manipulating Political Stock Market. It bears on the experiment I am working on with some folks at GMU, since both deal with Manipulating markets. Koleman’s paper looks at three examples, two studies of naturally occurring manipulation attempts, and one controlled study of manipulation on the Iowa Electronic Markets. The most interesting is his study of what actually happened in the Presidential election markets that ran in New York and other major American cities between 1880 and 1944.

The newspapers reported daily prices on election wagers, and also often printed names and amounts bet. From these reports, we can tell that many prominent people in the stock market, business, and politics were visibly betting on the outcomes of political races. The betting volume was quite high: on an inflation adjusted basis, $158 Million in 2000 dollars were wagered on the 1916 race.

Koleman based his study on reports in the papers of charges of manipulation of the exchanges, and compared the prices before and after the manipulations were purported to take place. The study shows that while there may be a short term (1-day) effect from the alleged manipulations, the effects seem to wash out within 2 days.

Koleman goes on to study manipulation episodes on TradeSports, and a controlled study of manipulation on IEM. In both these cases as well, the effects of manipulation are transitory. The IEM manipulations were substantial but not sustained. It’s conceivable that in a market that doesn’t restrict deposits (IEM has a maximum of $500) a partisan could spend a more substantial sum over a longer period and sway the odds. But these studies don’t make it look likely to work.

We shouldn’t be surprised that there was betting on elections 120 years ago. Pope Gregory XIV banned betting on papal elections in 1591. He wouldn’t have bothered if betting hadn’t been rampant. Anyone know of any records of wide-scale election betting before that?

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