Sunday, February 3, 2008

Pre Super Tuesday Iowa Electronic Market Data

Here is the most recent Iowa Electronic Market graph for the 2008 democratic nominee. For a closer look at the numbers, you can go here. For the most part, it can clearly be seen that Clinton has, far and away, been the run away favorite. This all changed very suddenly come January and the Iowa primary, which Obama won handily. After that, investors overreacted and had an abrupt swing. And then just as abruptly, swung back the other way around to stabilize and favor Hillary again.

As we creep towards Super Tuesday, the charts clearly show Obama is gaining ground. Curiously enough, it appears Clinton still has a significant advantage, one that is must more pronounced than the polls. While the polls show Hillary and Obama in a virtual dead heat, the market shows a more favorable gap for Hillary.

Indeed, Obama has been making strides in the market, but, coming into Super Tuesday, those strides have been very volatile. It likely means the market is unsure about Obama, and aren't quite ready to commit, so are defaulting on Hillary until Obama can prove otherwise. Most likely, this decision will happen after Super Tuesday.

Given this uncertainty, however, it still doesn't explain why Hillary is still so favored over Obama. If polls believe the race is tight, why don't investors bet on Obama since he seems to have as equal chance of winning the nomination as Hillary? It seems reasonable to believe that if people think the outcome could go either way, then investors would plan for this. It seems natural that an equal number of investors would bet on Hillary and Obama. If anything, they might at least bet on Hillary, but hedge with Obama, thus, at least driving Obama's stock higher and Hillary's stock lower.

This is further confusing as investor's were already burned with Obama's win in Iowa, so here one would think they would give Obama more credit and bet more conservatively, evening out the two candidates. One explanation is that in Iowa, Obama took the nation, and thusly the market, by surprise. As markets hate uncertainty, they acted somewhat irrationally, and violently drove up Obama's stock at the expense of Hillary, only to later reverse themselves. The situation here is very different. Obama is already a known commodity, so investors know the odds. Yet still, they refuse to put faith in him. This indicates that despite what the polls and the press say, the 56,388 traders on the IEM seem to think they both have it wrong (meaning the market is correct). That in fact the race is close, but not as close as pundits would lead the public to believe. Of course, it's entirely possible the two prices will move closer together all the way until Tuesday. If this is the case however, why don't investors stake out their positions earlier? Well, whatever the reason, I'm sure this will all be figured out on Tuesday.

1 comment:

Dave said...

Three thoughts:

1) Polls are not predictors of future results. No one asks "who do you think will win" in a poll, they ask "who will you vote for?" Polls do not take into account a number of things: one, who has the better organization, who has the most superdelegates, who is a known entity in the market with a proven track-record of winning, who has been vetted and is a know entity. If a candidate has those things, investors in a prediction market will pay a premium for them. The Clintons have those things in spades (they have lost only one election between them, ever, and they clearly have the advantage when it comes to their machine).

2) Investors in prediction markets are not always (or even usually) focusing on the residual value of the contract on the occurence of the event. Many investors speculate as to intermediary events, for example primaries. Thus, even if you think Obama may not win nationally, you may believe he will do well in SC. Therefore, you buy his contract expecting an upturn in his value after he wins in SC, then sell it high and later buy Hillary low.

3) Except for the state of the market immediately before event occurence, prediction markets should not be seen as picking winners, but rather they are assesments of odds that do a better job of handicapping than individual prognostication. I think you would be hard pressed to argue that Obama does not still face serious hurdles in winning the nomination. I'm surprised the price on Hillary is as low as it is.