As the presidential race enters the home stretch, my most recent Wall Street Journal column assesses the likely outcomes. My conclusion probably comes as no surprise: “Barack Obama is the hot favorite to win.”
I begin by noting that prediction markets currently rate Obama an 85 percent chance to win. But I think that these may slightly understate the probability of an Obama victory:
My reasoning is based on a phenomenon that behavioral economists call the “favorite-longshot bias.” In essence, people tend to overbet unlikely outcomes, and so the odds often overstate the chances of a longshot (like McCain) winning, and conversely understate the chances of the favorite.
Most of the previous evidence of the favorite-longshot bias came from analyzing horse-race betting markets. But recently, Andrew Leigh, Eric Zitzewitz, and I have turned to assessing whether a similar bias affects political prediction markets. Our findings — while preliminary — show that it is exceptionally rare that political underdogs win. When political races are close, this bias isn’t so important. But in lop-sided contests, prediction markets really tend to overstate the support for underdogs.
In fact, our best estimates suggest that when election-eve prediction markets suggest a 15 percent chance of victory — as they presently do for Sen. McCain — that the true probability may be as low as 4 percent. Thus, Sen. Obama is not quite a sure thing — but he’s close.
How does this assessment compare with the polls?
To my eye, they tell a similar story, and my adjusted assessment of the prediction markets — suggesting that Sen. Obama is a 96 percent chance to win the election — matches that of FiveThirtyEight.com’s Nate Silver, the current darling of the poll crunchers.
Our approaches differ. My assessment is based on a reading of the prediction markets, taking account of historical biases against the favorite. Mr Silver’s assessment is based on crunching data from countless state and national polls. But viewing the data through either lens, it is hard to see a path to a McCain victory.