prediction markets update

Today’s Gallup tracking poll of registered voters shows a 1 point margin (45-44) favoring Barack Obama over John McCain. Similarly, a WSJ/NBC poll was published today showing a statistical dead heat between these two candidates. However, a more reliable indicator of what’s really going on is provided by intrade.com, which trades “all or nothing” futures contracts on a number of different contingent events, including who is likely to be elected the President of the United States. These contracts pay 100 points (where 1 point = $.10) if a specific contingent event occurs and 0 points otherwise otherwise; consequently the prices for these contracts represent discounted, risk neutral probabilities 

According to intrade.com, Obama currently has a nearly 3:2 edge over McCain (which is actually down considerably from the 2:1 advantage which Obama had a few months ago after he became the presumptive presidential nominee). An important problem with national polls such as Gallup or WSJ/NBC is that these polls are designed to provide an overall snapshot at a given point in time of the nation’s political mood. However, the nation’s political mood doesn’t elect presidents; the electoral college does. While the race may appear to be close nationally, once you do the math state-by-state, you get a very different picture. This information is provided by the intrade political futures contracts, since they represent unbiased bets on the electoral college outcome. While information on overall popularity amongst registered voters is not without interest, the election obviously will come down to who actually turns up to vote, how the undecided segment is swayed, and how all this is is distributed on a state-by-state basis. These important subtleties are implicitly captured by prediction markets prices but are completely lacking in the national polling data.

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