Picking the Next President: What Are the Odds?

My latest Wall Street Journal column about the election is titled “Making Sense of Disagreement.” I start with a simple question: who is the current favorite to win the election?

Polls taken since the Palin pick have typically suggested that McCain is the new favorite. But sorting out an underlying trend from the usual convention bounce is a tough task. And indeed, the latest poll-of-polls has the two candidates roughly even, with this morning’s numbers suggesting a trend back towards Obama.

My usual starting point is to turn to Intrade.com, whose markets had shifted last week to install John McCain as the new favorite.

Why start there?

Political insiders are known to follow the Intrade market closely, partly because the large sums of money being bet give the opinions of these traders greater credibility. Greater volume also makes it more difficult — or at least expensive — for politically-motivated traders to manipulate this market.

This morning, Obama holds a slight lead at Intrade — a reversal from recent days. This isn’t the only place to look though:

But there exists another major political exchange: Betfair. This British alternative also takes large real-money bets, but will not accept trades from U.S. customers. Across the pond the Democrats remain a robust favorite, with a 58 percent chance of winning the White House compared with the Republicans’ 42 percent chance.

The Iowa Electronic Markets also rate the Democrats as the favorites by a roughly similar margin. However, the Iowa market is linked to the winner of the popular vote, not the winner of the White House, and so perhaps it is not surprising that the Democrats are performing better on this score.

And in fact, there are plenty more markets also offering odds:

Various online bookmakers (and, in England, street-corner betting shops) are offering odds — and all rate Sen. Obama as a strong favorite.

There are myriad other play-money prediction markets that also point to an Obama victory. For instance, the market run by NewsFutures.com suggests a 53 percent chance of the Democrats taking the White House, while a competing market run by Inkling suggests a 61 percent chance for the Democrats.

(Note that the numbers above have shifted farther towards Obama since my column was written.)

How do we make sense of these competing numbers? In truth, I can’t:

The current variation in price is larger than I have ever seen in my years of studying prediction markets. The forces of arbitrage that would typically eliminate these differences have been handicapped by the legal restrictions preventing U.S.-based traders from using overseas markets. I also suspect that this week’s financial strife may be a pretty big distraction for many people who otherwise might be active traders. Even so, it is surprising that enterprising European- or Australasian-based traders are not exploiting the current arbitrage opportunities.

I’m left wondering just which set of prices to trust. Let me weasel my way out: I don’t know.

But I do know that all of these markets agree that the race is close, and if anyone has the edge, it is Obama. You can read my full column here, and the related thoughts of Emile Servan-Schreiber, the NewsFutures founder, here. (Disclosure: I’m an academic advisor to NewsFutures.)

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  1. ohcaroline1 says:

    With a reported half million new donors in August to the tune of 66 million, and the seemingly limitless supply of funds being willingly funneled into the Obama campaign by average and wealthy amerians alike, I don’t think it is as close as they predict.

    Those phone polls are notoriously unreliable as well. Hardly any one in my age bracket (18-30) has or uses a land line. Those polls must certainly be skewed towards SAHM’s and the elderly.

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  2. Mark Truman says:

    Does anyone know how they account for the lack of land lines? It seems like it would be an enormous hole in their projections?

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  3. Mike B says:

    I would like to once again mention the possibility for people using Intrade to hedge against a McCain victory when things got close. This would skew the price in McCain’s favor.

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  4. Martaru says:

    @ohcaroline1:

    You’ve hit the nail right on the head. From this morning’s news:

    A new Nielsen Mobile study indicates that one in five U.S. wireless households could be wireless-only by the end of 2008. Already 20 million households, or 17%, are abandoning land-line phones in favor of mobile ones. That’s up from only 8.5% in 2005.

    That’s got to skew the data quite a bit!

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  5. iampriteshdesai says:

    I hope Obama wins!!!

    Only he can bring USA back to the glory days. Bush and now McCain will sink the USA.

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  6. cy1time says:

    I’m wagering considerably on Obama so that if he wins, I can afford to pay all the new taxes that are sure to follow.

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  7. Tom says:

    I suppose the betfair numbers include a big element of hope. Europeans probably cannot comprehend why the US would elect another Republican to follow GWB

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  8. L says:

    Researchers at the University of Illinois and Southern Illinois University apply operations research methodologies to solve this very problem. You can see their prediction (it’s periodically updated) at http://election08.cs.uiuc.edu/ Check out their methodology if you’re a geek. It’s pretty cool. Right now, it’s predicting McCain with a 60% chance.

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