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Bad BetWhy were the political futures markets so wrong about Obama and Clinton?

By Daniel Gross
Updated Tuesday, Jan. 8, 2008, at 10:12 PM ET
Hillary Clinton. Click image to expand.

So, I've been watching the action in one of the political futures markets this evening, Intrade. And the action in this prediction market has reinforced my opinion that these are less futures markets than immediate-past markets.

The price movement tends to respond to conventional wisdom and polling data; it doesn't lead them. Throughout the day and into the early evening, while polls were still open, Democratic investors, mimicking the post-Iowa c.w. and polls, believed Obama was highly likely to be the Democratic nominee. The Obama contract was trading in the lows 70s, meaning investors believed he had a 70 percent chance of being the nominee, while Hillary Clinton contracts were in the 20s.

But between 7 p.m. and 8 p.m., as the Concord Monitor began to post early returns showing Hillary Clinton in the lead, the contracts started to move quickly. By 8:30 p.m., with about 14 percent of the returns in and Clinton up by a 40-35 margin in New Hampshire, Obama contracts had fallen to 56 (meaning investors believed Obama has only a 56 percent chance of winning the nomination) while Clinton's rose to 46. By 9:30 p.m., with Hillary ahead 39-36 with 37 percent of the results in, the spread between the two had narrowed further. Obama was trading at about 51 and Clinton at about 47.5.

At 6 p.m., this market had written Hillary Clinton's entire presidential campaign off. At 9:30 p.m., it was calling a dead heat. What caused investors to change their minds so drastically in the space of a couple of hours? A few data points that went against the day's prevailing conventional wisdom and polls. On the Republican side, where results came in largely along the lines of both the Election Day polling data and the conventional wisdom, there's been much less movement in the political futures.

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Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at . He is the author of Pop! Why Bubbles Are Great for the Economy.
Photograph of Hillary Clinton by Stan Honda/AFP/Getty Images.
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Comments from the Fray

Look at the volumes. The problem with Intrade etc. is that currently the volumes are low enough that you don't really have a liquid market. FGZMPLE Obama's volume today was roughly 2% of the total contract volume, (the same was true of HRC). Without liquidity, individual trades alter the price too much--essentially giving you the same sort of liquidity risk as penny stocks…

Note also that InTrade being newer than Iowa Electronic has lower volume. Mind you IEM also missed the NH predictions. What this tells us more than markets being trailing indicators is that politics is as susceptible to "bubbles" as various financial markets. In this case, the "bubble" was the "Obama Surge" which peaked in Iowa and then burst in NH.

--degsme

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The markets always go crazy close to an election point. At that time there is an instability in the system, people become irrational. The market tends to work as averaged over time. If you look at the graphs of the 2004 election you will see that Bush was leading the Iowa market most of the time, not all. If you average Bush's and Kerry's numbers over time you will see that Bush was winning. However, you have to disregard the last day.

Likewise in this cycle the Iowa Market for Democrats had Hillary Clinton leading by a large margin over most of the time. Based on that I think Hillary will win for the Democrats. If you look at the Republican Market Rudy was leading but it was not by much, and not that often, I think Romney will win.

I think people should wait until February 6 before disparaging the market system, which tends to be less volatile then the polls.

--AnnaS

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