Huckabee and Trump Depart the Race

Within the past week, both Mike Huckabee and Donald Trump announced that they would not seek the Presidency in 2012. The prediction markets had plenty to say about these candidates both before and after they dropped out of the running. Both men's likelihood of winning the Republican nomination peaked at nearly 9%, but the markets show that the end of their campaigns came about under very different circumstances. Below is a chart of Mike Huckabee's likelihood of winning the Republican nomination, where the red line marks the moment when he made the announcement he was not running during his weekly Fox News TV show. One day before his on-air announcement, when rumors of an impending announcement on his campaign began to spread, this market tanked rather quickly. The market was reasonably quick to recognize that he was going to drop out of the race. However, it appears as though the market began to second-guess itself over the following 24 hours – perhaps due to conflicting rumors – and by the time of his announcement, the Huckabee contract regained about 1/3 of the value lost during the previous day.

Donald Trump's likelihood of winning the Republican nomination peaked just before President Obama released his long-form birth certificate on April 27, and began its precipitous decline just as Obama announced the death of Osama Bin Laden on May 1. The final drop on May 17 coincided with his announcement that he will renew his job as a television personality, rather than run for President. While Huckabee was an extremely viable candidate prior to his announcement, Trump had already been trending towards irrelevancy, even before his announcement.

I regret that we had not been tracking Jon Huntsman's chances until very recently, but the other two candidates who clearly benefited the most probability of victory with the Huckabee announcement were Mitt Romney and Tim Pawlenty. As I note in the first chart there are really two separate noteworthy events in Huckabee's withdrawal from the race. The first occured when rumors of an impending announcement were circulating and the second occurred a day later when his decision was announced. The first reaction of the market was to assume that Romney was going to really benefit from Huckabee's departure. After the rumors began, going into the formal announcement (where the red line is located), Romney had absorbed almost all of the Huckabee's total loss. Yet Romney gained little from the formal announcement while Pawlenty, who had already fallen back down to his pre-rumor level, got a nice boost from the actual announcement. One thing is clear from this analysis: the market is undecided on who benefited from the Huckabee announcement.

Death of Osama on 2012 Election

A key question in political circles over the last few days has been the effect of the death of Osama Bin Laden by the U.S. armed forces on the outcomes of the 2012 election. Indubitably, the event is beneficial to the Democratic party and President Obama in particular. Polls conducted in the days following the event gave Mr. Obama at 9 percentage point increase in approval. There are a few points to consider on the prediction market's reaction to the event.

First, it definitely increased President Obama's probability of victory in 2012. On average his probability of victory has gone from around 60% to around 63%. Second, both Intrade and BetFair, the two leading markets, took a surprising amount of time "digesting" the information. Today, seven days after the event, they are still moving sharply. Prior to Mr. Obama's press conference announcing the death of Osama, the probability is relatively flat for weeks, but after the event there is a distinct trend in both markets that is still visible. Third, the two markets ultimately disagreed on the trajectory of the "digesting". Betfair is digesting the news by moving even further in favor of an Obama victory and Intrade, from an almost identical position, is moving back toward the pre-Osama death probability of victory. I am not going to discuss here the true underlying value of Osama's death, beyond the values provided by the markets, but I can state that in a few days arbitrage will bring these two markets together and we can have a clearer picture of what the markets feel is the underlying value of Osama's death on the 2012 Presidential election.

There appears to minimal effect on the House. The probability of the Democratic party regaining the House remained flat through the last two weeks.

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.

Libya and Gaddafi

The dotted line you see here represents the exact point in time that the UN passed its resolution for a no-fly zone over Libya. The interesting thing about this line is that the price for a contract on Gaddafi not being in power past the end of the year reached a local peak as it passed, not after. The reason is that Intrade did a good job here incorporating the information about the UN and the actual passage became a fete-de-complete. More important, the price has been impressively stable even as events swirl back and forth on the ground in Libya. The contract is for the end of the year and I take the stability as a sign of a mature and liquid market, where Intrade had, in the past, had issues with dramatic volatility in similar situations … Finally, what most people really care about, I would translate the current price (at 1:00 PM EST on Thursday, March 31) into a probablity of 85% that Gaddafi does not make it into the New Year as the ruler of Libya.

Mrs. Palin's Political Trouble from Saturday's Massacre

Immediately in the aftermath of Saturday's assassination attempt on Congresswoman Gifford, that resulted in the death of six people including a federal judge and a nine year old girl, the media began speculating on the political fallout to Sarah Palin's 2012 Presidential aspirations. In March she had put out an advertisement with a target on Congresswoman Gifford and then told asked that her followers "Don't Retreat, Instead – RELOAD!" Thus, after the massacre people began to discuss her contribution to both the specific target and the general heated atmosphere in politics; regardless of her complicity, and thus far there is no direct evidence the assassin followed Mrs. Palin, talk of it has political consequences. As several blogs have already noted, the market for her 2012 Republican nomination responded immediately … on Intrade. She lost over 1/3 of her probability in the immediate aftermath of the massacre. Yet, the movement a different market, Betfair, was much smaller, as it was already trading lower for Mrs. Palin; Betfair has consistently had less confidence in Mrs. Palin's viability as the Republican nominee. The chart is below:


Obama and the 2012 Nomination …

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.