Instruments of Divination
Everyone here is familiar with tracking polls. Many are too familiar. Some are tired of them. We have quibbled about margins of error and voter samples and survey design. We criticize old polling numbers in the morning and devour the new releases in the evening. Polls are a political junkie's compass and ouija board rolled into one; an imperfect way to orient in the present, on some days, and a desperate attempt to predict the future, on others.
There is another method of divination, however, another way to take a snapshot of the state of a presidential campaign at a specific moment in time and track the ebbs and flows of the election. This tracking instrument is not as widely known as the brand names of Zogby and Ipsos-Reid, but being a useful complement to polls, with its own set of merits and demerits, it certainly deserves mention in this highly politicized space. I am talking about the futures market.
Futures Markets
Remember the Total Information Awareness Program? The one that would suposedly help the government predict the probability of terrorist attacks by setting up futures markets? Well, because that part of the program was nipped in the bud before its inception you can't bet money on Yassir Arafat's assassination, but there are functioning futures markets that should pique the interests of any politico. There is the well-known NYMEX futures market where you can bet on the price of orange juice and crude oil, but those won't gauge the health of the Kerry campaign unless you have a theory involving the price of orange juice and voter turnout in Florida.
The University of Iowa Business School hosts a futures market for political outcomes. In the Iowa Electronic Markets, as they are known, enrolled traders have a choice between several contracts associated with the 2004 presidential election. (http://www.biz.uiowa.edu/iem/markets/Pres04_VS.html). In IEM's "Winner-Takes-All" market enrolled traders can buy futures contracts that pay out $1 in the eventuality that the Democratic Party wins the 2004 election with a vote share above 52%. There is also a Republican Party "above 52%" futures contract and two contracts that provide a payoff when one of the two parties wins with a vote share below 52%. Because only one contract will have value on November 3rd, the price of the four futures reflects the state of the race for the White House. If a Republican victory is perceived as more probable, the price of the Republican futures increases. There is also a "Vote Share" market, with futures based on the percentage of votes received by major parties on election day.
The advantage of futures markets is that they incorporate a variety of factors into simple, numerical, price data. Whereas poll totals may hide the electoral college map--which is what truly decides a presidential election--presumably futures prices take it into account the electoral college. Bets are made by people with an interest in the outcome and who strive to be right. The disadvantage of futures markets is that they may be subject to "technical" swings associated with contract renewal and conceivably they can be manipulated.
Closing the Probability Gap
So let's take the following with a grain of salt and a basketful of curiosity. This page (http://128.255.244.60/graphs/graph_Pres04_WTA.cfm) graphs contract prices for the four futures contracts mentioned above. The graph shows a dramatic swing up in the value of the "Democratic" contracts, which increased about 59% from approximately $0.29 to $0.46 since the first presidential debate. There has been a commensurate decrease in the total value of Republican contracts, with the Republican Party above 52% contract absorbing most of the decrease. Nevertheless, the aggregate probability of the Bush campaign is still higher than Kerry's, although the gap has narrowed substantially in the past week. This is in marked contrast to most polls, which have not shown such a drastic swing in fortunes (59% increase!) and which show the two candidates at parity.
I think that currently, Winner-Takes-All futures are more realistic than polls, they can take into account the incumbent advantage, the electoral college map and other historical factors.
Looking at the futures graph we can safely identify the first presidential debate as a pivotal turning point in this election. After the first presidential debate Republican fortunes have turned and the two sets of futures contracts are now approaching parity. If Kerry's futures supersedes Bush's, if the upwardly climbing blue line on the futures graph overtakes the falling red line, it will be a reflection of another crucial turning point.