Old-time prediction markets

In my latest Marketplace commentary, I pointed out that the accuracy of prediction markets would improve as they went more mainstream. Essentially, as markets widen and deepen, their informational efficiency should improve. I had assumed that we would need to wait for the future for this to happen. However, Paul Rhode and Koleman Strumpf provide some fascinating evidence from the past in thieir paper, "Historical Presidential Betting Markets." The highlights: This paper analyzes the large and often well organized markets for betting on presidential elections that operated between 1868 and 1940. Over $165 million (in 2002 dollars) was wagered in one election, and betting activity at times dominated transactions in the stock exchanges on Wall Street. Drawing on an investigation of several thousand newspaper articles, we develop and analyze data on betting volumes and prices to address four main points. First, we show that the market did a remarkable job forecasting elections in an era before scientific polling. In only one case did the candidate clearly favored in the betting a month before Election Day lose, and even state-specific forecasts were quite accurate. This performance compares favorably with that of the Iowa Electronic Market (currently the only legal venue for election betting in the U.S.). Second, the market was fairly efficient, despite the limited information of participants and attempts to manipulate the odds by political parties and newspapers. Third, we argue political betting markets disappeared largely because of the rise of scientific polls and the increasing availability of other forms of gambling. Finally, we discuss lessons this experience provides for the present.... The extent of activity in the presidential betting markets of this time was astonishingly large. For brief periods, betting on political outcomes at the Curb Exchange in New York would exceed trading in stocks and bonds. Crowds formed in the financial district ? on the Curb or in the lobby of the New York Stock Exchange? and brokers would call out bid and ask odds as if trading securities. In presidential races such as 1896, 1900, 1904, 1916, and 1924, the New York Times, Sun, and World provided nearly daily quotes from early October until Election Day.... In the 15 elections between 1884 and 1940, the mid-October betting favorite won 11 times (73 percent) and the underdog won only once (when in 1916 Wilson upset Hughes on the West Coast). In the remaining three contests (1884-92), the odds were essentially even throughout and the races very close. The capacity of the betting markets to aggregate information is all the more remarkable given the absence of scientific polls before the mid-1930s. The betting odds possessed much better predictive power than other generally available information. Moreover, the betting market was not succeeding by just picking one party or by picking incumbents. Over this period, Republicans won eight of the elections in the Electoral College and Democrats seven; the party in power won eight, the opposition seven.Hat tip: The Monkey Cage's John Sides.