Why the President Is Still a Heavy Favorite on the Prediction Markets

Today I received a rather frantic email from a Democrat:
I am SCARED! What is going on with all those polls. Really? Obama’s debate performance was crap but how could it change so drastically!?

It's true, I hadn't written much recently, but I wanted to see how the polls were shaking out and it wasn't clear that any of the fundamentals had changed.  Still, I suppose I should at least blog on what others are writing, namely that Obama is still heavily favored by those who have money on the line:

[S]tart adding up electoral votes until you hit 270. You’re going to find a pivot state: a state that if Obama holds he wins and that if Romney can reach he wins, and that state has been Ohio for virtually the entire election cycle. It means that if Romney can get all the states up to that point, he can win this election. But that includes Florida and Virginia on top of Ohio and those are three big hurdles and that means on the flip [side] that all Obama has had to do is hold one of those states. Just one of those main three states, and that's what's been giving him that edge this entire time.

People always ask me, "Well, how would prediction markets do if there weren't these polls? Are they just regurgitating these polls?" And the answer is, prediction markets do quite well, thank you. And we can tell that because prediction markets existed prior to polling. Standard polling that we know and love started in 1936 with George Gallup. And two great researchers, Koleman Strumpf and Paul Rhode, wrote a paper showing the history of prediction markets from the late 19th century up through that time and how they were incredibly effective in predicting elections. In 1916, around $200 million in today's dollars were exchanged on prediction markets on that election. That's a lot of money.

PS: So in 1916 Woodrow Wilson beat Charles Evans Hughes and $200 million in today's dollars was bet on that election alone?

DR: Yes. Back in the day they were actually some of the most traded stocks on Wall Street, predictions on elections every four years, and they did great.

PS P.S.: If you want to follow the presidential race on the prediction markets yourself, here are three links: Intrade; Betfair, where to translate odds like 1.47 into a percentage, you divide 1.47 into 1 (about 68%); and finally IEM — the Iowa Electronic Markets, where the current odds are in the two boxes on the lower right; Obama, above; Romney, below. Be advised, though, that Intrade and Betfair represent wagering on who becomes President. IEM betting is on who wins the popular vote.

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