Reference no: EM13233224

Consider two models for estimating, in advance of an election, the shares ofvotes that will go to rival candidates. According to onemodel, pollsters' surveys of a randomly chosen set ofregistered voters before an election can be used to forecast thepercentage of votes that each candidate will receive. The first model relies on the assumption that unpaid survey respondentswill give truthful responses about how they will vote and that theywill actually cast a ballot in the election. The other modeluses prices of financial assets (legally binding IOUs) issued bythe Iowa Electronic Market, operated by the University of Iowa, topredict electoral outcomes. The final payments received byowners of these assets, which can be bought or sold during theweeks and days preceding an election, depend on the shares of votesthe candidates actually end up receiving. The second modelassumes that owners of these assets wish to earn the highestpossible returns, and it indicates that the market prices of theseassets provide an indication of the percentage of votes that eachcandidate will actually receive on the day of theelection.

Which ofthese two models for forecasting electoral results is more firmlybased on the rationality assumption of economic?

How wouldan economist evaluate which is the better model for forecasting electoral outcomes?