January 11, 2012 2:55 pm

Prediction markets point to Romney romp

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Notch up New Hampshire as another victory for the wisdom of crowds. The punditocracy, and the polls, both suggested that some kind of an upset was on the cards. Intrade, the prediction market, was never swayed.

Nobody publicly doubted that Mitt Romney would win, but the media handicapping system was in place. His comment that he liked being able to fire his health insurer was branded, rather tenuously, as a full-blown Freudian gaffe.

Mr Romney’s poll numbers were falling, those of his plausible rival Jon Huntsman were rising, and his opponents were ganging up to attack his record at Bain Capital. If he won with less than 30 per cent of the vote, the punditocracy began to decree, he could be fatally wounded.

We now know that Mr Romney held on to almost 40 per cent of the vote, that Mr Huntsman’s surge only brought him to a somewhat distant third place, and that Mr Romney can head southwards with both personal momentum, and a sense that the considerable opposition to him within the Republican party remains deeply divided.

Intrade, in which investors use real money to buy futures on possible outcomes, never betrayed much doubt. Mr Romney was the unwavering favourite in New Hampshire. And according to Intrade, his chances of victory in South Carolina next week, truly inhospitable terrain for him, are now close to 80 per cent. Victory there and he should wrap up the nomination without a long fight.

Prediction markets have a long history of uncanny accuracy. In the close-fought 2004 US presidential election, they successfully called the victor in all 50 states.

Romney nomination graphic

Why? The discipline of wagering money helps people reach great clarity about how they perceive probabilities. And prediction markets are focused on final outcomes. Mr Romney might have done better or worse than the expectations constructed for him by the news media, but realistically there was no way he would fail to win, and the markets reflected that. They provide a valuable discipline in allowing analysts of all kinds to step back from the fray.

Looking at New Hampshire, Intrade is surely right that its importance is minimal. Following the result, the probability that Romney wins the Republican nomination rose by one percentage point from 85.1 to 86.1 per cent; for the market, he is a virtual certainty. Other candidates may land the occasional blow, but it is hard to construct a scenario where one of them deprives him of the prize. If he survives South Carolina without incident, his odds should rise above 90 per cent.

As for November, the Republicans’ chances are unchanged at 46 per cent, while the Democrats’ inched up from 52 to 52.3 per cent. This is about as close as it gets. The market believes it will come down to the fate of the economy (and maybe some unexpected world events) in the next 10 months. As for what has happened so far in the Republican campaign, the market is surely right that it is virtually irrelevant.

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