AI Summary
5 min readIn 1988, three economics professors sat down for a three-beer lunch at a sports bar in Iowa City. The day after the Michigan caucus, where Jesse Jackson had just stunned the political world by defeating Michael Dukakis by a two-to-one margin, the professors started talking. Polls had gotten it wrong again. One of them, Robert Forsythe, had a thought: what if you could trade political candidates like stocks? That afternoon, the Iowa Electronic Markets were born.
The professors gathered a couple hundred students and faculty, set up an online interface, and let people buy and sell shares in presidential candidates. On election night, their market predicted the popular vote within two-tenths of one percent—beating Gallup, Harris, and the CBS/New York Times poll. They wanted to do it again, bigger. So they went to the Commodity Futures Trading Commission for permission to operate nationwide. The CFTC granted a "no action letter" with strict rules: accounts capped at $500, no paid advertising, no sports betting, no profit. Between 1988 and 2004, the Iowa Electronic Markets beat traditional polls 74% of the time. The Wall Street Journal, Financial Times, and NPR started paying attention. Everyone thought this was something new.
The forgotten history of election betting
It was not new. Not by a mile.
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What you'll learn
- 1 (01:36) **The Origin Story of Modern Prediction Markets** - Planet Money introduces an excerpt from NPR's *Through Line* about the history of prediction markets, pointing to a key moment: an economic historian discovered a well-functioning prediction market design at the racetrack.
- 2 (03:23) **The Three-Beers Lunch in Iowa** - In 1988, three economics professors at a sports bar in Iowa City brainstormed a market to predict election outcomes after a surprise Jesse Jackson win in the Michigan caucus.
- 3 (05:39) **The Wisdom of the Crowd Outperforms Polls** - The IEM's first test predicted the 1988 presidential election results within 0.2%, beating major polls like Gallup and CBS News.
- 4 (07:28) **From Experiment to Public Phenomenon** - Between 1988 and 2004, the IEM beat traditional polls 74% of the time and gained national media attention from the Wall Street Journal and NPR.
- 5 (10:02) **Part Two: The Race Track as a Social Laboratory** - Economist Coleman Strumpf explains that the racetrack taught him the psychology of prediction markets: people bet to show off their intelligence and feel smart.
- 6 (12:44) **The Economic Historian's Discovery** - Paul Roddy, an economic historian, tells Coleman Strumpf that the IEM was *not* the first political prediction market, prompting them to dig into archives.
- 7 (14:46) **The Golden Age of Curb Exchange Betting** - Around 1900, election markets flourished on the curb outside the New York Stock Exchange, where political elites and bankers traded publicly.
+ Full timestamped outline available in the app
Show Notes
There was an entire political era when party bosses were expected to conspicuously gamble on their candidates (even if they secretly hedged).
And in the 1980s, a few economists designed an election market that beat out election polling 74 percent of the time.
Today, we’re running an excerpt from our friends at Throughline, NPR’s excellent history podcast. Subscribe right now if you don’t already. And, listen to their extended version of the episode to hear about the early markets for betting on terrorism and military uses of prediction markets.
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Today's episode was produced for Planet Money by Sam Yellowhorse Kesler, edited by Alex Goldmark, and engineered by Maggie Luthar. The original Throughline episode was produced by Rund Abdelfatah, Casey Miner, Cristina Kim, Devin Katayama, Sarah Wyman, Julia Redpath, and Kyana Moghadam.
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