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Sunday, September 2, 2012

Election Update (One More Time)

It's time to revisit the upcoming national elections. Since March I have argued that as long as the European debt crisis or rising oil prices didn't cause the U.S. economy to go into the tank, President Obama should be reelected (or at least win the popular vote). Nothing that has happened over the summer has changed my mind on this account. The economy isn't terribly strong, but it's probably strong enough to keep President Obama in office.

Currently, prediction markets have Obama as a favorite to win (around a 58-63% chance of winning as compared to Romney's 37%-42% chance). As I've noted in previous posts, prediction markets are speculative markets created for the purpose of making predictions, and they  tend to be quite accurate (see the chart from Scientific American to the right -- I shared this same chart in a post in June). People make money by buying low and selling high. For example, currently the price of a President Obama share sells for around $0.58, which means that if he wins, the holders of Obama shares will get $1.00 for each share that they own. People who invest are in such markets are interested in making a profit, so they attempt to take into account a variety of factors (e.g., the economy) in making their decisions. The one thing they don't try to do is bet on  a candidate just because they want him or her to win.

The following graphs from the University of Iowa Electronic Markets (IEM) illustrate the rise, fall, and rise of Obama's prospects. The first graph indicates the probability of either the Democrat candidate (blue line) or Republican candidate (red line) winning the election. As you can see, back in the Fall, the red line was actually above the blue line for a little while, but then once 2012 arrived and the prospects of a healthier economy became real, the market shifted in back in favor of the Democrat candidate until May when worries about the European economy began to take a toll on Obama's prospects. As those worries subsided, however, shares for Obama climbed back up, and now you can buy a share of the Democrat candidate for $0.63 on the IEM and around $058 on the Intrade prediction markets.

This graph should not be interpreted as indicating that Obama will receive around 60% of the vote. Rather it merely attempts to capture the odds of him winning. There are markets that seek to predict the vote share, however, and the following graph maps the results of one such IEM market. As you can see, here the red and blue lines are a lot closer, and while it is difficult to read, they indicate that currently, it appears that around 53-54% of the vote.

On other fronts, the Republicans will almost certainly retain control of the House and have a very good chance (around 54%) of seizing control of the Senate although it is possible (around 20%) that neither the party will control it when the dust settles in November. In short, although things look good for the Democrats in the Presidential election, they look even better for the Republicans in the Congressional races.

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