So, What Do the Political Odds Markets Say About the Election?
Mitt Romney may love the market, but it doesn't love him. On one exchange, he trails Obama 2-to-1 -- a larger margin than opinion polls suggest.
Are the Libya violence and the Chicago teachers' strike having a powerful impact on the presidential race? There's passionate rhetoric on both sides, hundreds of commentaries across the media, and a number of opinion polls. But there's one source that, while imperfect, suggests a trend that has not yet been broken. That source is the Iowa Electronic Markets, an academic program that allows betting on political outcomes. The IEM shows that winner-take-all popular vote* chances for Barack Obama still are at about 2-to-1 over Mitt Romney.
In Britain -- where betting on U.S. elections is legal -- bookies give about the same odds. These odds held in London even after a £40,000 bet on Romney. A spokesperson for the leading bookmaker, Ladbrokes, said on September 12:
Our punter may think Romney's the man for the job, but we're not so sure. We're happy to keep the prices as they are, because as far as we're concerned, Obama is untouchable.
Of course, Ladbrokes could be wrong, and the Iowa markets could be, too. But the Iowa markets in particular are better at predicting outcomes than any single poll of voters is. A 2008 study by professors in the University of Iowa's Henry B. Tippie College of Business, sponsor of the non-profit program, concluded:
We gather national polls for the 1988 through 2004 U.S. Presidential elections and ask whether either the poll or a contemporaneous Iowa Electronic Markets vote-share market prediction is closer to the eventual outcome for the two-major-party vote split. We compare market predictions to 964 polls over the five Presidential elections since 1988. The market is closer to the eventual outcome 74% of the time. Further, the market significantly outperforms the polls in every election when forecasting more than 100 days in advance.
If there is bias in the Iowa markets and commercial gambling, it may actually be in Mitt Romney's favor, according to a 2004 MSNBC report:
Bill Thompson, a professor of public administration at the University of Nevada in Las Vegas and a gambling scholar, said online betting can sometimes skew toward the investing class, which likely vote Republican, or voters who don't bet or use the Internet, and gamblers usually bet with their hearts and not their heads.
Of course Romney supporters may dismiss current odds, but they can't claim that markets are unfair to their candidate. They recognized his chances for the nomination long before the polls caught up. On November 16, 2011, CNN reported of another market:
Intrade put Mitt Romney's odds of capturing the Republican nomination for president at 70% on Monday, while a fresh CNN/ORC International poll put the frontrunner's support at 24%.
And besides, Romney himself would never have achieved his wealth, fame, and candidacy without a firm belief in the superiority of market judgments to subjective judgments and rhetoric. So it's hard for Republicans to disavow the IEM prediction model. They may conclude that Romney needs to reorganize his campaign, or that the voting public is reluctant to recognize the imminent dangers of public debt as represented by Obama's policies. The numbers may change, but for now they're still there.
All this doesn't mean that polls and other indicators are useless, but only that prediction markets are superior to any single source. They're like a barometer that doesn't necessarily predict rain. They shouldn't be at the periphery of political discussion and debate. They should move to the center.
* Correction: This post originally stated that the winner-take-all market referred to the electoral college, not the popular vote. We regret the error.