Gambling on the Election

[The following is an article written by the occasional staff writer, Kosmo. He mentioned this to me months and months ago and I am kicking myself that I didn’t partake for the experience.]

Would you like to gamble on the upcoming election?

I don’t mean an indirect gamble, like putting money into (or pulling money out of) the stock market.  I mean an actual direct wager.  You can do it, regardless of your state of residence, and it’s even apparently legal.

I’m talking about the Iowa Political Market.  It is a non-profit market operated by the University of Iowa’s school of business.  The site essentially allows what would otherwise be illegal gambling for the purposes of academic research and teaching (in other words, you are the product).

How it works

You send a check to fund your account.  An actual paper check, sent via snail mail.  A one-time account setup fee of $5 is deducted.  Investments are limited to $500.

Now you buy and sell contracts that are based on the candidates or parties.  There are two basic varieties:

• Winner-take-all: If your candidate wins, your shares can be cashed in for $1 each after the election.  If your candidate loses, your shares are worthless.  The presidential winner-take-all is by far the most popular market, with more than $100,000 invested.
• Vote share:  You can cash in your shares for ($1 * the proportional of the two-party popular vote).  For example, let’s say the Democratic candidate gets 69% of the vote, the Republican candidate gets 23%, and candidates for the other parties combined for 8%.  We exclude the third party vote to get a ratio of 69:23, or 3:1.  This means that the Democrat share would be worth 75 cents and the Republican share would be worth 25 cents.

What can you buy

(Note: quoted prices are around noon Central time on October 11.  They will change by the time you read this.)

Presidential race:

• In the winner-take all race, Hillary Clinton last traded at 83 cents per share and Donald Trump traded at 17 cents (technically they are Democrat shares and Republican shares).  If you bought $500 worth of Trump shares (2941 shares) and he wins in November, you could cash out for $2941.  It seems like there might be an opportunity to make a few dollars betting on Trump.  If you buy at 17 cents (which is the all-time low for Trump) and it bounces up to 22 cents next week, you can sell those shares for 22 cents and make a profit.  Surely at some point Hillary will have a bad day and Trump will spike a bit – that’s the ebb and flow of a campaign.  You don’t need to hold until maturity, and there are no per-trade fees.
• In the vote share market, Hillary Clinton last traded for 60 cents and Trump traded for 38 cents.  In an efficient market, these would always add up to 100, but this is a relatively small market.  If you actually bought both investments at those prices, you’d be guaranteed a profit – it would cost 98 cents and would be worth $1 after the election.  We first must exclude any third party votes and look at just the votes cast for those two candidates.  Let’s say there are 100 million votes case.  If you bought Hillary shares and she gets 60 million votes, you break even.  If she gets 55 million votes, you lose 5 cents per share.  If you own Trump shares and he gets 38 million votes, you break even.  If he gets 45 million votes, you have a profit of 7 cents per share.  I think the Trump shares are also a good buy here.  He only needs to get 38% of the two-party vote to break even.  For example let’s say that the third parties combine for 10%, leaving Clinton and Trump to split the remaining 90%.  If Trump got 38% of the 90% – or 32.4% of the total votes cast – to break even.  As divided as we are politically, that’s a pretty low bar to clear.

Congressional Races

You can also wager on control of congress.  These are all winner-take-all – whichever scenario plays out will be worth $1 and the others will be worthless.

There are four scenarios:

• Democrats control the Senate, Republicans control the House – 37.8 cents
• Republicans control the Senate and the House – 28.0 cents
• Democrats control the Senate and the House – 20.2 cents
• Republicans control the Senate, Democrats control the House – 0.3 cents (not 3 cents, 0.3 cents)
• Other (there’s a tie in either the House or the Senate) – 19.4 cents

Again, this is not a perfectly efficient market, since you can also a bundle of all five for $1.

Some knowledge of politics helps here.  After each census, congressional districts are redrawn to have equal representation (some states may gain or lose representatives, but even within a state, the population will shift).  Some states have non-partisan (neutral) committees to re-draw districts, in an effort to ensure fairness.  However, in most states, state governments control redistricting.  If your party controls the state house, state senate, and governorship, you can re-draw the districts to help your part.  This is called gerrymandering.  Both parties engage in the practice, but Republicans had more opportunities following the 2010 census, simply because they had complete control in more states than the Democrats did.  As a result, the Republicans have a pretty firm grip on the US House, at least until the next census, after which the districts will be re-drawn once again.

In the Senate, one third of the seats are up for election every year.  This year, the Republicans have 24 seats at risk and the Democrats have just 10.  If the Democrats win 15 seats and the Republicans win 19, the Democrats would gain control of the Senate, 51-49.  This is considerably more likely than the House flipping, although even this is a coin flip at this point.  For this reason, the combination of the House flipping and the Senate not flipping is an extreme longshot – it would pay out $1 on an investment of 0.3 cents.