How Supply and Demand Make Presidential Predictions

Called collective intelligence, sometimes crowds can be smarter than individuals.

Take jelly beans. When researchers have tried to compare the individual and the crowd, they have used the “guess-how-many-jelly-beans-in-the-jar approach.” For one experiment with 850 jelly beans in the jar, only one person out of 56 came close. The crowd though, when averaged, said 871. Similarly, guessing the weight of an ox that weighed 1,198 pounds after being slaughtered and dressed, the crowd average was 1,197.

So where are we going? To collective intelligence in presidential prediction markets.

Prediction Markets

Beyond jelly beans and oxen, the collective wisdom has been used in prediction markets. Whether looking at elections or the timing of interest rate hikes from the Federal Reserve, the price of the bet on a certain outcome can reflect its likelihood.

To see a prediction market, we can look at the University of Iowa’s business school. Through its Iowa Electronic Market (IEM), we can learn the probability of candidate’s success through the price of a contract. If, for example, it is 22-cents, then we have a 22% probability that they will win. Like any market, price fluctuates because of supply and demand.

For this month, the Iowa prediction market told us the VS (vote share) fluctuations for an unknown democrat and republican presidential candidate:

Meanwhile, another, the prediction market gathered yes and no “votes” for whether President Biden will remain a presidential candidate. Like Iowa’s prediction market, the price fluctuations depended on changes in supply and demand:

Our Bottom Line: The Power of the Market

Years ago, I had the opportunity to ask former Secretary of the Treasury Lawrence Summers a question. As he walked in one direction and I in the other, I waited for our paths to cross and then said that I taught economics and wondered what he thought was the most important idea my students could learn. Barely pausing, he said, “the power of the market,” and continued onward.

We could say that with the power of the market, we are in crystal ball territory. Freely fluctuating as Adam Smith suggested, the market provides a wealth of information.

My sources and more: Thanks to WSJ for inspiring today’s post. From there, I recommend going directly to the IEM and Polymarket websites to learn more about them. However, if you have time for a book, then do read The Wisdom of Crowds.

Please note that several of today’s sentences were in a past econlife post.