DavidMRothschild on May 18, 2011 @ 2:20PM
Within the past week, both Mike Huckabee and Donald Trump announced that they would not seek the Presidency in 2012. The prediction markets had plenty to say about these candidates both before and after they dropped out of the running. Both men's likelihood of winning the Republican nomination peaked at nearly 9%, but the markets show that the end of their campaigns came about under very different circumstances. Below is a chart of Mike Huckabee's likelihood of winning the Republican nomination, where the red line marks the moment when he made the announcement he was not running during his weekly Fox News TV show. One day before his on-air announcement, when rumors of an impending announcement on his campaign began to spread, this market tanked rather quickly. The market was reasonably quick to recognize that he was going to drop out of the race. However, it appears as though the market began to second-guess itself over the following 24 hours - perhaps due to conflicting rumors - and by the time of his announcement, the Huckabee contract regained about 1/3 of the value lost during the previous day.
Donald Trump's likelihood of winning the Republican nomination peaked just before President Obama released his long-form birth certificate on April 27, and began its precipitous decline just as Obama announced the death of Osama Bin Laden on May 1. The final drop on May 17 coincided with his announcement that he will renew his job as a television personality, rather than run for President. While Huckabee was an extremely viable candidate prior to his announcement, Trump had already been trending towards irrelevancy, even before his announcement.
I regret that we had not been tracking Jon Huntsman's chances until very recently, but the other two candidates who clearly benefited the most probability of victory with the Huckabee announcement were Mitt Romney and Tim Pawlenty. As I note in the first chart there are really two separate noteworthy events in Huckabee's withdrawal from the race. The first occured when rumors of an impending announcement were circulating and the second occurred a day later when his decision was announced. The first reaction of the market was to assume that Romney was going to really benefit from Huckabee's departure. After the rumors began, going into the formal announcement (where the red line is located), Romney had absorbed almost all of the Huckabee's total loss. Yet Romney gained little from the formal announcement while Pawlenty, who had already fallen back down to his pre-rumor level, got a nice boost from the actual announcement. One thing is clear from this analysis: the market is undecided on who benefited from the Huckabee announcement.
DavidMRothschild on May 08, 2011 @ 2:43PM
A key question in political circles over the last few days has been the effect of the death of Osama Bin Laden by the U.S. armed forces on the outcomes of the 2012 election. Indubitably, the event is beneficial to the Democratic party and President Obama in particular. Polls conducted in the days following the event gave Mr. Obama at 9 percentage point increase in approval. There are a few points to consider on the prediction market's reaction to the event.
First, it definitely increased President Obama's probability of victory in 2012. On average his probability of victory has gone from around 60% to around 63%. Second, both Intrade and BetFair, the two leading markets, took a surprising amount of time "digesting" the information. Today, seven days after the event, they are still moving sharply. Prior to Mr. Obama's press conference announcing the death of Osama, the probability is relatively flat for weeks, but after the event there is a distinct trend in both markets that is still visible. Third, the two markets ultimately disagreed on the trajectory of the "digesting". Betfair is digesting the news by moving even further in favor of an Obama victory and Intrade, from an almost identical position, is moving back toward the pre-Osama death probability of victory. I am not going to discuss here the true underlying value of Osama's death, beyond the values provided by the markets, but I can state that in a few days arbitrage will bring these two markets together and we can have a clearer picture of what the markets feel is the underlying value of Osama's death on the 2012 Presidential election.
There appears to minimal effect on the House. The probability of the Democratic party regaining the House remained flat through the last two weeks.
DavidMRothschild on April 13, 2011 @ 3:28PM
Three recent polls have come out in regard to the Republican Presidential Nomination. These polls by CNN, Fox, and NBC have Donald Trump in first, third, and second respectively. Further, they have Mitt Romney in fourth, second, and first respectively.
Imagine that there is three types of information about the current field of Republican candidates: first is known to the average Republican voter, second is known to political informed people, and third is unknown. An example of the first type of information for Trump is that he is a popular TV personality and for Romney that he is a former governor of Massachusetts. An example of the second type of information for Trump is that his business affairs and personal life are very rocky and for Romney that he was an extremely successful businessman. The third type of information is all of those things that will happen between now and Election Day, for which is unknown.
In short, differences between poll-based and prediction market-based forecast of who will ultimately win the Republican nomination hinge heavily on the second type of information: information that political informed people in the prediction market know and the average Republican voter does not know now, but will know on Election Day. In this situation, that type of information is generally neutral or positive for Romney, Tim Pawlenty, and Mitch Daniels, but negative for Trump. That is why although Trump is trending second in the polls of today, the self-selected politically informed people who gamble in the prediction markets have Trump as the fourth most likely person to get the Republican nomination. They are betting that the public will learn what they know about Trump and then become less likely to vote for him, relative to the other candidates.
2012 President - Likelihood of Republican Nomination
DavidMRothschild on April 11, 2011 @ 4:44PM
Let me pose a question that address in further as this blog progresses: What is the appropriate level of volatility in an efficient forecast? Here is the forecast of the World Series winner for the three most probable teams: Phillies, Yankees, and Red Sox, based on BetFair prices. The probabilities cover the first week and a half of the season. Useful volatility represents new and meaningful information, un-useful volatility is just random movement. While the starting pitching has been a little less than amazing, the Phillies (7-2) are basically achieving at expectation and their probability remains essentially flat. Having to make the playoffs and then win three rounds, it is essentially impossible for them to move much beyond 25% this early in the season, even if they win every game. The Yankees (5-4), just dropped 2 of 3 from the Red Sox (2-7), but remain slightly up and the Red Sox slightly down from the start of the season. Does it seem reasonable that the Red Sex have a 13% of winning the World Series? Does going 0-6 in a 162 game season mean they are 25% less likely to win or does it provide minimal new information? The Yankees are clearly moving upward in because of the probability of making the playoffs the AL East winner increases their chances of doing well in the playoffs, but is that putting too much weight on the first step? These are questions I will address in later posts ...
DavidMRothschild on April 08, 2011 @ 5:58PM
The table is now not as useful as a chart of the evening. The deal was struck at 10:30 PM and the probability derived from Intrade's prices moved just as the deal was being announced. That being said, it was generally moving in that direction as some information was dispersed. At 10:30 PM HuffingtonPost and others were still giving very neutral headlines, while Intrade was in its steady march downward towards no shutdown.
Watch this number as we approach midnight! It is currently at 55% with 6 hours to go ...