Political Prediction Markets: Calling the Indian Elections ..

Rate Blog: 
5
Average: 5 (1 vote)

One of the oldest and most popular applications of prediction markets is to forecast political elections. These markets in particular have been very active for the US Presidential elections. Studies have indicated that these markets existed (informally) and actually flourished during the early twentieth century.  In contemporary times one of the most famous and longest running (started in 1998) political stock market is the Iowa Electronic Markets (IEM). IEM is a small-scale real-money futures markets conducted by the University of Iowa, College of Business, run for education and research perspectives. Although trading with real money on election futures is not allowed in USA, however IEM is an exception as it operates under a special two no-action-letters from the Division of Trading and Markets of the Commodity Futures Trading Commission. There existing data set contains the results of over 50 markets covering several elections in 13 different countries.

The prediction markets have predicted the outcome of several U.S. presidential elections (winning candidate and vote share) and the prediction performance in these markets have been superior (both in absolute terms and relatively to opinion polls), in both the short-term and over longer horizons. Empirically it has been shown in studies that three days out of four, an opinion poll will be less accurate than the market price in Prediction Markets in predicting the election outcome. The prediction markets estimates are also more stable and less volatile in days leading upto the elections (refer Fig 1). Surowiecki in the Wisdom of Crowds says that predictions of what the voters of the country will do are better than the predictions you get when you ask the voters themselves what they are going to do and that in essence probably sums up the relative superior performance.

                                 Source: Arrow, Kenneth J., et al. "The promise of prediction markets."

In the Indian context predicting polls is relatively more complex than in the US. In India there are multiple regional parties (unlike the two party system in US) and local issues dominate. This creates issues in generalizing results based on sample collected. With face to face surveys the only viable mode to reach out to rural areas (currently), the logistic challenge and costs are prohibitive for a meaningful opinion poll exercise. Some of the other issues are the ownership (or having direct influencing powers) of certain media houses by politicians. Also unlike US there are no overseeing bodies who can regulate these opinion polls and ensure transparency in methodology, sample sizes and giving an accurate error percentage. Also some of the inaccuracies are because of respondents in India, not very forthcoming with their opinion for fear of retribution. So given these reasons , opinion polls have had a history of inaccuracies (e.g. in Lok Sabha 2004 when BJP was projected to come back to power but Congress won the majority).

Although there have been improvements on Opinion Polls conducted for the elections in 2014 (more data on that in a separate posting) , however at the same time as sting operations on a private agency which conducts surveys for all major media conglomerates have shown how the commercial interests of the surveying agencies have made them manipulate results to benefit their political masters. Rahul Gandhi has infact called the opinion polls predicting a rout of Indian National Congress a ‘joke’. To support his claims, he cites the earlier instances of failure in 2004 and 2009. This adds on to the earlier demands from his party and then the representation by the Law Ministry to the Election Commission on banning opinion polls. This could be a tactical war cry, however this does raise several questions on the statistical validity of the results and methodology followed by different opinion polls. It is however to be noted that it is a positive progress that these issues are being highlighted and discussed, but banning opinion polls as demanded by the Indian National Congress (and as supported by the Law Minister from the party) may not be the solution as it would be highly repressive and against the virtues of freedom of speech and opinion.

Given the context of multiple opposing opinions (maybe a few biased) and all having their own sense of reality, it makes a lot of sense to use prediction markets in India to use the wisdom of the crowds (very informed owing to social media) to improve and develop a consensus from these opinion poll predictions. With this though we welcome you to participate in the IndiaPredicts 2014 Prediction Market event, and lets together participate in playing Nostradamous !!

References

  • Surowiecki, James (2005). The Wisdom of Crowds. Anchor Books.
  • Arrow, Kenneth J., et al. "The promise of prediction markets."
  • In India’s National Election, Don’t Trust the Polls (The Diplomat , Feb 24th 2014)