Prediction Markets and the French Elections

France and Europe are tautly waiting for the results of the first round of the French presidential elections. Last surveys see Sarkozy and Royal head-to-head - and in the second round. However with 40 percent undecideds, anything remains possible. With the polls closing at 20:00, we will see whether there will be a surprise candidate making it to the second round - like right-wing Le Pen last time. My personal guess is that the centrist Bayrou has indeed some chances of kicking Royal out. But that might also be wishful thinking.

Not only pre-election polls try to give us an idea of the results. There are also prediction markets like the Iowa Electronic Market that tried to exploit the "wisdom of crowds". While the IEM does not have a French presidential election market, the German edition of the Financial Times does. The "strategists stock market" can be found here. Last trades (expected percentages) are as follows:

• Nicolas Sarkozy............... 32,00
• Segolene Royal................ 26,36
• Francois Bayrou............... 18,10
• Jean-Marie Le Pen............ 14,00
• Others.......................... 10,00

It will be interesting to see how it performs compared to classical polls. At Germany's last general election in 2005, although being far from accurate, the "Wahlbörse" prediction market run by the weekly DIE ZEIT outperformed the research institutes. More on this can be found in the article "The predictive quality of political stock exchanges and polls" by Lena-Maria Schaffer, who is now a PhD student at ETH Zurich.

Both The Economist and TIME magazine had nice pieces on the use and usefulness of prediction markets a while ago. They can be found here: The Economist "Information markets", or (no login required): here. TIME asks The End Of Management? (or here).
As a good starting point to learn more, you can read some of the (NBER) papers by Justin Wolfers at UPenn and Eric Zitzewitz of Stanford.

Now I gotta go back to my portfolio and see how my 2120 undervalued Bayrou shares perform...