“Ron Paul is 8.5 at 9 (9.3 last!) to be the Repub nom,” said an e-mail from a friend. In trader talk, as we’re both options traders by vocation, that means that on some political betting site, in this case intrade.com, gamblers were betting that Ron Paul has between an 8.5% and 9% chance of being the GOP nominee for the presidency in 2008, and that the last trade was actually at 9.3%.
As a professional trader and someone who thinks about electoral politics a lot, I thought my friend must be wrong, but upon further inspection he wasn’t. Not only is Ron Paul trading today just under 9%, but he’s trading above Fred Thompson (7.6%), John McCain (7.1%), and Mike Huckabee (6.4%). [Click HERE to see the latest intrade markets. The prices go from 1 to 100, with 1 representing 10 cents and 100 therefore being $10. Whoever becomes the nominee “settles” at 100, and everyone else “goes to zero. So, if you buy Ron Paul at 8.5, you can lose 85 cents or make $9.15, before commissions.]
I wondered if intrade.com markets were “outliers”, i.e. whether prices were different on other political betting sites, but a little digging shows more or less the same thing everywhere, (not surprising because people like me would find “arbitrage opportunities” if prices differed dramatically between sites.)
For example, CanBet.com (a publicly traded company in Australia) is paying $10 for a $1 bet if Paul wins, whereas Thomson pays off $11 and a McCain nomination pays $12. A large UK bookmaker is similarly structured. In the US, an active “play money” site (unlike the real money being wagered at intrade.com) has almost precisely the same prices as intrade. What I like particularly about intrade and similar sites which are “exchanges” rather than bookmakers is that the bids and offers are, like stock exchanges, coming from people who are trading against each other, risking real money, and theoretically coming to what is (at least at that moment) the market’s best guess for the “fair price”.
The idea of Ron Paul having roughly a 9% chance of becoming the GOP’s nominee strikes me as unjustifiably high, even with the news that Congressman Paul just set a one-day GOP fundraising record and a one-day online fundraising record, raising more $4.2 million on Monday. The idea that he has a better chance than Fred Thompson is even sillier. And yet it’s possible to bet quite a lot of money at these levels if one were so inclined and able.
Political betting has a very good record of predicting outcomes, such if you look at 2004 and 2006 election results as compared to betting site prices immediately before the election. According to one report, TradeSports (former home of intrade’s political betting) got 48 states right in the Bush-Kerry election in 2004. TradeSports bettors also got every Senate race correct in 2006 though TradeSports participants got Senate control wrong, with GOP retaining control trading over 50% until well into Election Day evening. (It sounds contradictory, but it’s similar to a football team expected to be a favorite in every game they play but still being less than 50/50 to go undefeated for the season.)
But the key to this astounding “accuracy” is that the statistics most frequently discussed are gathered by looking at the prices just before the election, i.e. at the point when the most poll data is out, when the largest number of people have made their decisions (and spoken to their friends about their decisions, and the most people are actually participating in the betting.
A recent study shows that while manipulations in these markets may be possible, such “attacks” tend to last only a few minutes. However, thinly traded markets can move wildly, emotionally, and beyond “reason” whether it’s a stock or a bet on a politician, and without it representing manipulation. For example, look at this chart of prices for Fred Thompson getting the GOP nod going from about 15 in May to 35 in July to 7.5 today.
Or the betting on Hillary Clinton to be the Democratic nominee, showing a decline in July (when Obama-hype was at its peak), and then a steady rally to the 70s, still lower than what I believe the real probability is.
In the charts, you can see volatile spikes in both short-term and medium-term trading. It is both these sorts of spikes and the ability of a contract to move substantially in price when “experts” don’t believe anything of significance has happened which makes these markets interesting. It also makes the reported “accuracy” of these markets today much less meaningful despite their good record very close to election time.
My guess is that Ron Paul’s high price on betting sites and his recent fund-raising feat represent a phenomenon we saw four years ago, well represented by a Village Voice headline: “Howard Dean, Internet Rock Star”. Just as Ron Paul’s web site is reported to get roughly nine times the “hits” of the second closest candidate for president (Sen. Clinton), Howard Dean used the internet to generate massive buzz…and massive funds. However, Dean came in third in Iowa, and then just one month after losing what seemed to be a huge New Hampshire lead following “the scream” he dropped out of the race, “rock star” or not.
Although one can’t re-live a parallel 2004 without the scream, I believe Dean would have faded anyway. People who are highly active on the internet are likely to be young and therefore less likely than other citizens to vote. Getting thousands of members in an online group and even raising real money from many online donors is not the same as getting people to the ballot box…especially in primary elections, where typically it’s the most highly motivated “base” of the party who votes.
Despite the impressiveness of his internet achievement, Ron Paul simply can’t get enough voters in GOP primaries to have any real chance despite the very real enthusiasm of his “online base.” It’s interesting that Paul, who has raised about $7.5 million this year, is dramatically increasing in betting price while Barack Obama, who has raised more than 10 times that number…also mostly online from far more donors than Paul has…is trading at his lowest price in a year.
My prediction: Ron Paul’s betting odds and presidential run will follow a similar trajectory to the two Democrat “internet rock stars”. And my money is where my mouth/keyboard is.