## Prediction Markets Working Well on Republican Nomination

Three recent polls have come out in regard to the Republican Presidential Nomination. These polls by CNN, Fox, and NBC have Donald Trump in first, third, and second respectively. Further, they have Mitt Romney in fourth, second, and first respectively.

Imagine that there is three types of information about the current field of Republican candidates: first is known to the average Republican voter, second is known to political informed people, and third is unknown. An example of the first type of information for Trump is that he is a popular TV personality and for Romney that he is a former governor of Massachusetts. An example of the second type of information for Trump is that his business affairs and personal life are very rocky and for Romney that he was an extremely successful businessman. The third type of information is all of those things that will happen between now and Election Day, for which is unknown.

In short, differences between poll-based and prediction market-based forecast of who will ultimately win the Republican nomination hinge heavily on the second type of information: information that political informed people in the prediction market know and the average Republican voter does not know now, but will know on Election Day. In this situation, that type of information is generally neutral or positive for Romney, Tim Pawlenty, and Mitch Daniels, but negative for Trump. That is why although Trump is trending second in the polls of today, the self-selected politically informed people who gamble in the prediction markets have Trump as the fourth most likely person to get the Republican nomination. They are betting that the public will learn what they know about Trump and then become less likely to vote for him, relative to the other candidates.

## Volatility in Baseball Probabilities

Let me pose a question that address in further as this blog progresses: What is the appropriate level of volatility in an efficient forecast? Here is the forecast of the World Series winner for the three most probable teams: Phillies, Yankees, and Red Sox, based on BetFair prices. The probabilities cover the first week and a half of the season. Useful volatility represents new and meaningful information, un-useful volatility is just random movement. While the starting pitching has been a little less than amazing, the Phillies (7-2) are basically achieving at expectation and their probability remains essentially flat. Having to make the playoffs and then win three rounds, it is essentially impossible for them to move much beyond 25% this early in the season, even if they win every game. The Yankees (5-4), just dropped 2 of 3 from the Red Sox (2-7), but remain slightly up and the Red Sox slightly down from the start of the season. Does it seem reasonable that the Red Sex have a 13% of winning the World Series? Does going 0-6 in a 162 game season mean they are 25% less likely to win or does it provide minimal new information? The Yankees are clearly moving upward in because of the probability of making the playoffs the AL East winner increases their chances of doing well in the playoffs, but is that putting too much weight on the first step? These are questions I will address in later posts …

## Government Shutdown

The table is now not as useful as a chart of the evening. The deal was struck at 10:30 PM and the probability derived from Intrade's prices moved just as the deal was being announced. That being said, it was generally moving in that direction as some information was dispersed. At 10:30 PM HuffingtonPost and others were still giving very neutral headlines, while Intrade was in its steady march downward towards no shutdown.

Watch this number as we approach midnight! It is currently at 55% with 6 hours to go …

## NBA Playoffs

My local NBA team has left us, so I do not follow basketball as closely as I did in the past, but it is hard not be interested this year. The Heat are a huge news story and the playoffs will generate a buzz not felt in years. Below is the chart of how of the price of \$1 contract on the Heat winning the NBA championship and, for comparison, the Lakers are on the chart as well. The first thing to notice is how dramatically high the price was for the Heat in the early part of the season and how far it has fallen. The second thing to notice is that it has actually fallen well below the Lakers as the season nears its end.

Below is a second chart, that shows the next three most probable teams. First, look at the two West teams, notice how they mirror each other (the Mavs, not shown, have held steady at a very consistent \$0.04 to \$0.05). Second, compare the Celtics and the Heat early in the season and the Bulls and the Heat late in the season and you can see that the two teams mirrored each other for parts of the season, while the third team was relatively stable.Yet, despite the that mirroring, the sum of West teams (Lakers, Spurs, Mavs, and Thunder) has been moving slowly upward and the East teams (Heat, Bulls, Celtics, and Magic) has been moving slowly downward.

What this all means is that the market is now assuming that winning the championship, once your team gets there, is basically a toss-up, while midseason the East champion was much more likely to win the finals. Still, the main driver of the indivdual team prices are a reflection of their relative strength within the conference … right now the Lakers are looking so strong, not because they are necessarily any better than the Heat, but they have a much easier path the NBA finals.

## Repeal of "Don't Ask, Don't Tell"

The Senate votes today on the repeal of the "Don't Ask Don't Tell" law.  News of the vote caused PredictWise's likelihood of repeal to skyrocket to 88%, implying that the controversial law is very likely to be over-turned today.

## Obama and the 2012 Nomination &#8230;

When you think about 2012 Presidential nominations you are likely thinking about Palin, Romney, and the Republicans. But, as the year comes to close and the 111th Congress end on December 17th or so, I urge you keep an eye on the Democratic ticket. An editoral in today's Washington Post urges a Democrat to run to the left of the President to force him to hold firm on taxes, war, and social issues. First, it would be difficult for Biden to do that from within the adminstration and Clinton is not that person, thus for this to happen it would have to be an outside option. We will make sure to add that person, and you will see it coming with Obama falling. Second, notice the discrepencies between Betfair and Intrade  on Hillary and Biden.

The probability of Don't Ask Don't Tell being eliminated by the end of the year tanked to just above 10% after the Democratic defeat on Election Day. But, today brought good news to those trying for repeal, the Democrats are making a top priority in the lame duck session …

## Welcome to PredictWise.com

Welcome to PredictWise!

This site is the outgrowth of my dissertation work in individual-level expectations, forecasts, and decision making. Working with my good friend Andrew Leonard, we have created this site to serve several functions:

1) Provide probabilities of upcoming events created with the latest antilogarithms. These will frequently include aggregated individual-level responses from polls, predication markets, and (once we build up a big enough community) users of this site.
2) Test the latest methodology of capturing individual-level expectations. In plain English, this is online laboratory for experimental polling and users get to play along … it is fun, I promise!
3) A blog that encourages an ongoing discussion of the latest experiments in polling and prediction markets.

Please comment on tables, polls, anything … but, most of all, enjoy!

Thank You!
David Rothschild, PhD Candidate
University of Pennsylvania's Wharton School