Prediction markets and the (US) election

At the Becker-Posner Blog, Richard Posner discusses Prediction Markets and the Election. This post covers mainly the Iowa Electronic Market. Posner writes

IEM, on which I'll focus, has correctly predicted the outcome of every presidential election since 1988, and its predictions have been consistently more accurate than the polls. An interesting comparison between the Gallup Poll and the Iowa market in the 1996 presidential campaign (www.biz.uiowa.edu/iem/media/96Pres_VS.html) reveals that throughout the entire campaign the Iowa market’s predicted outcome was much closer (in margin of victory) to the actual outcome than the Gallup Poll was. Studies have found that prediction markets beat polls and other prediction tools even when a prediction market uses play rather than real money.

Gary Becker comments on Political Prediction Markets. At one point Becker writes

I believe that online political prediction markets, and other online prediction markets as well, should be legal in the United States and elsewhere, even if the amounts bet were quite large. There is no important substantive difference between such online betting markets and the Chicago Mercantile Exchange and other exchanges that allow individuals and organizations to take positions on movements of stock indexes, housing price indexes, and prices of other derivatives. A distinction is sometimes made between political betting markets and derivative markets since participants in derivative markets may be hedging other risks that they face. Yet this distinction has little substance since if larger bets were allowed in online political markets, groups whose welfare depended greatly on political outcomes would make greater use of these markets. For example, if a Republican presidential win would mean greater spending on military weapons, companies in the arms business might hedge their risks by betting on Barack Obama.