Reference no: EM132432664

Consider two models for estimating, in advance of an election, the shares of votes that will go to rival candidates. According to one model, pollsters' surveys of a randomly chosen set of registered voters before an election can be used to forecast the percentage of votes that each candidate will receive. This first model relies on the assumption that unpaid survey respondents will give truthful responses about how they will vote and that they will actually cast a ballot in the election. The other model uses prices of financial assets (legally binding IOUs) issued by the Iowa Electronic Market, operated by the University of Iowa, to predict electoral outcomes. The final payments received by owners of these assets, which can be bought or sold during the weeks and days preceding an election, depend on the shares of votes the candidates actually end up receiving. This second model assumes that owners of these assets wish to earn the highest possible returns, and it indicates that the market prices of these assets provide an indication of the percentage of votes that each candidate will actually receive on the day of the election.

The model for forecasting electoral results that is more firmly based on the rationality assumption is:

a. Either of the two models of estimating the percentage of votes that each candidate will actually receive on the election day.

b. Neither of the two models of estimating the percentage of votes that each candidate will actually receive on the election day.

c. The Iowa Electronic Market model using prices, as the traders on this exchange have a strong incentive to make the best possible forecast.

d. The pollsters' surveys of a randomly chosen set of registered voters about how they will vote on the election day.