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Political markets sense disturbance in the force

Image: Rubio and Trump
GOP presidential hopefuls Mario Rubio and Donald Trump tangle at October debate. (Credit: CNBC)

Although Donald Trump has long dominated coverage of the GOP presidential campaign, electoral prediction markets have been favoring Marco Rubio instead. Until now.

The shift in support could be a significant signal, because over the years, prediction markets have chalked up at least as good a record as traditional political polling when it comes to handicapping elections.

The concept, pioneered by the Iowa Electronic Markets, involves letting “traders” buy shares in a given proposition. The proposition may be that the Seahawks will win the Super Bowl, or that Trump will win the GOP nomination.

In a winner-take-all market, the price of a share can rise or fall depending on the demand. If the prediction you’ve invested in comes true, you’re paid a specified amount – say, $1 per share. But if you’re wrong, you get nothing.

It may sound like Vegas betting, but economic researchers use the method to study how the “wisdom of crowds” can affect market movements. The concept has come into play in other settings as well, ranging from anticipating flu outbreaks topredicting whether a Microsoft project will stay on track.

For 20 years, presidential elections have provided valuable test cases for prediction markets. “It really does well in primaries, especially early,” said David Rothschild, an economist at Microsoft Research in New York City.

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By Alan Boyle

Mastermind of Cosmic Log, contributing editor at GeekWire, author of "The Case for Pluto: How a Little Planet Made a Big Difference," president of the Council for the Advancement of Science Writing. Check out "About Alan Boyle" for more fun facts.

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