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I have a lot of money riding on Tuesday’s presidential election.

And it’s not because of the Bush tax cut.

My grandfather and I made a bet six months ago: If his political party’s candidate should win the election, I must take him to the Los Angeles restaurant of his choice (He has designated the lovely Valentino, where a bottle of 1893 Château Lafite Rothschild costs $19,000.), and if my candidate wins, he will be taking me to L’Orangerie.

I thought that I was the only one wagering on the election, but it turns out thousands of people are doing it all over the country – on Internet-based futures markets. These exchange Web sites, like the University of Iowa’s Iowa Electronic Markets, pay off contracts for real-life political and economic events that people buy up on the markets. Essentially, traders purchase “shares” of a political candidate and make money if that candidate wins the election.

The Iowa Electronic Markets (IEM) was founded in 1988 and is operated by the university’s Henry B. Tippie College of Business. The IEM is used as a research and educational tool for students and professors – over 100 universities have used it since its creation. But besides all that learning, there is quite a bit of money to be made. Accounts can be opened for as little as $5 and up to $500. There are other, larger markets, like Intrade or TradeSports, but I will focus on the IEM since it’s the only pseudo-educational market out there.

This year’s tight election has made for a huge jump in activity on the IEM presidential winner-takes-all market. Activity on this market has increased threefold, said Forrest Nelson, professor of economics at Iowa and one of six directors on the IEM board.

As of Sunday afternoon, Sen. John Kerry shares were trading at $0.445 while President Bush shares were trading at $0.544, putting Bush’s chances of winning at 54.4 percent according to the market’s traders. The traders on the market are more confident that Bush will win the popular vote, so if you think Kerry is going to win, you’ve got a great deal and a chance to make some sweet cash. Most other markets have the candidates in a dead heat.

According to academics, these presidential markets are actually more accurate at predicting outcomes than traditional polls, even though polls track for whom people plan on voting, while the markets track which candidate people think will win the election.

“It’s as if a lot of well-informed people sit around and decide which poll is good,” said Koleman Strumpf, an associate professor of economics at the University of North Carolina who has participated in the IEM. “One reason I have confidence in the markets is that these types of markets have existed for a long time, from the Civil War through the 1940s. These markets worked incredibly well. They’ve worked historically, for 12 or 13 elections.”

One interesting phenomenon that appears to regularly occur on these presidential futures markets is the manipulation of prices. In the Nov. 1 issue of Time Magazine, “Let’s Make This Vote Interesting, Shall We?” notes that on Oct. 15, a trader sold $140,000 of Bush contracts on Intrade, causing the Bush futures to drop from $0.54 to $0.10. Buyers quickly snatched up the great deals and soon the price of Bush futures was near its old mark. While it appears this was an example of someone trying to manipulate the market (possibly to boost the public’s opinion of Kerry’s chances), there is really no way to definitely tell whether manipulation is occurring.

“It’s really hard to tell when someone is manipulating or doing real trades,” Nelson said. “Sometimes it could just be because traders made a mistake or a new trader got in and has different beliefs. So all sorts of things can happen.”

Two academics that do know quite a bit about manipulating these markets are Strumpf and UCLA associate professor of political science Tim Groseclose, who as a team set out to manipulate the IEM during the 2000 presidential race. In 2000, the two both opened $500 accounts, and every day, they would flip a coin to randomly determine which futures to buy up – those of Bush or Democrat Al Gore – buying approximately $300 of futures a day. They learned that while they could change the prices for a few hours, the market would soon correct itself.

“These markets are efficient,” said Groseclose, noting that the IEM average error has been less than 1.5 percent, while major polls are usually off by more than 2 percent, a point supported by the Time article.

Incidentally, Groseclose and Strumpf made some money off of the 2000 presidential election because on the final day of the presidential race, their coin flip instructed them to buy up Gore futures, which were trading at approximately $0.25 a share. Gore won the popular vote, and the professors made about $500. Groseclose has let Strumpf keep the winnings – at least until the UCLA professor begins work on a paper about their experiment. With this election just a day away, I know I am nervous for the outcome, as are many others. There is one thing you can do to ease your mind on Election Day: Bet against your man on one of these markets. If he loses, at least you stand to make some money.

For my own sake, I wish I had thought of that sooner.

E-mail Miller at dmiller@media.ucla.edu.

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