Huckabee Bought and Paid For — on Iowa Electronic Markets

Mike Huckabee is passing another benchmark of legitimacy: as of noon Wednesday he’ll be traded on the Iowa Electronic Markets (IEM).

The IEM is one place where politicians literally are bought and paid for.  In the University of Iowa business school project, traders buy and sell contracts on political candidates (not the kind of contract John Gotti tried to put on Rudy Giuliani).  Traders use their own, real money (not Ron Paul Liberty Dollars) and for more than 15 years, the IEM has been known for its accuracy in predicting general election outcomes. 

But unlike general election contracts, in which the payout is based on a share of the vote, the nomination markets are winner take all.  Shares for the winner pay a dollar, and shares for other candidates are worthless.

Iowa Electronic Markets director Joyce Berg says that all candidates aren’t included from the beginning, as shares that are selling for close to zero don’t trade much and just clutter the process.  “We start with named candidates that we think traders will think of as viable candidates,” she said, “and then we include a contract called Rest Of Field which literally means everybody else.”

“We’ve been watching our Rest Of Field price in the Republican national convention market,” said  Berg, “and it’s been above 15 cents for a couple weeks and above 20 cents for the last couple of days.  When that happens, we look around to see who might be in that Rest Of Field contract that we should separate out, and this time it looked like it might be Huckabee.”

The Rest Of Field climb coincides with recent positive polls and increased media attention for the former Arkansas governor, including Huckabee’s first place showing in last weekend’s Des Moines Register Iowa Poll.

“Contract prices are an assessment of who’s going to win the nomination, they’re going to be a probability,” said Berg.  “A price of 30 cents mean our traders think there’s roughly a one third chance that candidate will be the nominee.”

The last time a candidate was added was in June, when Fred Thompson started trading.

Republican trading has been volatile, though Berg says GOP volume is only slightly higher than Democratic trading.  While Rudy Giuliani has been the top priced contract most of the way, Rest Of Field and Thompson have both led for extended stretches.  John McCain was briefly a leader in March, and Mitt Romney had the top price after his Iowa Straw Poll win in August.

“The spikes will follow news, and not even in the way a newspaper would define it,” said Berg. “Generally the debates don’t have an effect on the market.  Our interpretation is that the candidates at the debates aren’t really saying anything new.  But if something happens, things that people didn’t know before but know now and think will effect the likelihood of nomination, then you see prices change.”

Berg says it’s difficult to directly assess the accuracy of a nomination probability market.  “We judge our accuracy on those vote share markets, because every time there’s a (general) election, there’s a vote share I can compare it to,” she said.  “With these probability markets, it takes a lot of data to say whether they’re accurate or not.  We’ve got other markets that are these zero-one markets, and they seem to be calibrated right.  That, together with our data from the vote share markets, makes us pretty confident.”

But Berg notes the market isn’t predictive of future events.  “In 2004, you saw the caucus results have a big impact on the market for Howard Dean,” she said.

Looking at the Democratic graph, showing Hillary Clinton trading at about 66 cents and leading since April, Berg said, “In 2004, this is exactly the way the graph looked for Howard Dean.”  Dean fell from a high of 74.9 cents on Dec. 13, 2003, to just 51 cents the night before the caucuses. By the end of caucus night Dean had dropped to 35 cents.