Quality information: How the political prediction markets serve the political markets

Corporate investors and the political markets …

A corporate investor in the political markets goes long because, unlike a trader who is more short term minded and willing to get out of a contract before an event in the political markets occurs, the corporate investor has “skin in the game” by way of future profits and losses.

In the political markets, where an office seeker sells a narrative to the electorate in exchange for a vote, a corporation is concerned that the office seeker with a message or policy that puts the corporation at a disadvantage may win an election.  Therefore, the corporation will invest in the office seeker, whose policy proposals provide the corporation with a benefit, by financing the most effective ways for promoting the favored office seeker’s messaging.

The corporation’s uncertainty as to which office seeker to back and how well that office seeker will perform in the political markets hinges on the quality of information the corporation receives from the political markets.  The information from the political markets will be skewed, tainted, biased.  The office seeker may relay to the corporation that things are going well on the campaign trail; that town halls are packed; that the electorate is buying the message.  In reality, the office seeker may not have enough volunteer staff in key voting communities; town halls have been cancelled or poorly attended; and the office seeker’s message may not be resonating with voters.  For these reasons, a corporation may rely on the political prediction markets to close the information gap.

The accuracy of information is enhanced in the political prediction markets because the parties trading in these markets have “skin in the game” by purchasing one of two sides of an event contact, i.e. will office seeker A win or will she lose.  Traders are putting their money where their mouths are and to ensure maximum returns on their trade, traders seek out and incorporate the best information they can find regarding potential outcomes.

This information in general is about how an office seeker is increasing her value in the political markets.  For example, what are the messages being pushed by the office seeker? How relevant are these messages? How is the office seeker expending resources? Does the office seeker have an abundance of resources?  Where the answers are positive as to value of the messaging, then the possibility of a favorable event as determined in the prediction markets is also positive.

Conclusion: Both markets compliment each other …

Information is the currency that ties the political markets and the political prediction markets together.  Political prediction markets provide the means for cutting through the noise in two ways.  First, the corporate investor uses information from the political prediction markets to filter out less accurate information.  Second, actual traders in the political prediction markets are seeking out the best information possible and this higher quality information is observed by the corporate investor in the form of prices for each trade in the prediction markets.

It is all about the information…..

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Author: Alton Drew

I graduated from the Florida State University with a Bachelor of Science in economics and political science (1984); a Master of Public Administration (1993); and a Juris Doctor (1999). You can follow me on Twitter @altondrew.

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