set of rankings in the presidential race, measuring candidates by five metrics, four of which are probably easy to guess. White House hopefuls are ranked by fundraising, Iowa polls, New Hampshire polls, and endorsements, each of which offers a helpful guide as to how a candidate is doing.The New York Times’ Upshot maintains a frequently updated
But then there’s the fifth metric: prediction markets. The Times explains, “When a campaign still has months remaining, prediction markets – in which traders bet on event outcomes – have a substantially better record than polls at pointing to the eventual nominee.
OK, but what’s a prediction market? Economist Justin Wolfers published an interesting piece on this several years ago in the Wall Street Journal, and the description holds up.
A prediction market is a bit like the stock market, except that you are buying shares whose value depends on the success of a political candidate, rather than the profits earned by a corporation. And just as stock prices are a useful barometer of the health of a company, so too the price of a prediction contract is a barometer of the health of a political campaign.Alternatively, for those schooled on the Strip rather than the Street, prediction markets allow you to bet on the election, just as Vegas bookies allow you to bet on a football game. And the uncanny ability of the betting line to predict football outcomes also holds in the political domain.
Wolfers argued at the time that these markets have “amassed a very impressive record, repeatedly outperforming the polls.”
I’ve been generally skeptical about prediction markets as a reliable indicator, but just for kicks, it’s worth noting that last week marked an interesting shift. Geek Wire published this report six days ago:
Although Donald Trump has long dominated coverage of the GOP presidential campaign, electoral prediction markets have been favoring Marco Rubio instead. Until now.The shift in support could be a significant signal, because over the years, prediction markets have chalked up at least as good a record as traditional political polling when it comes to handicapping elections.
There’s more than one prediction market, but two of the biggest (and most closely watched) are sites called Predict Wise and Predict It, both of which showed Marco Rubio as the dominant Republican candidate in the fall and early winter. Polls showed the Florida senator in third or fourth place at the time, but investors in the prediction markets ignored the polls and concluded Rubio would eventually be the nominee.
Last week, however, Rubio lost this advantage. As of this morning, Predict Wise has the Florida lawmaker trading at 30% – i.e., investors give him a 30% chance of winning the Republican nomination – down from 48% around Thanksgiving. Donald Trump, meanwhile, is now up to 37%.
Predict It has Rubio slumping to third place in its market, behind Trump and Ted Cruz.
Like polls – and the actual stock market – prediction markets can shift quickly, and those participating in this elaborate wisdom-of-crowds experiment can lose and gain confidence in a candidate at a moment’s notice.
But for months, these markets saw Trump as a pretender and Rubio as a contender. Previous assumptions are being reevaluated all over the place.