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VEEPBEAT: The Prediction Market

July 31, 2008 11:32 AM

ABC News' Howard L. Rosenberg and Jan Crawford Greenburg report: Tim Kaine's stock is on the rise.  Literally.  In brisk trading on the prediction market---where investors buy and sell contracts that bet on the future fortunes of politicians---Kaine's price has skyrocketed in just the past few days.

"The movement in his odds is easily the biggest movement of anyone so far," in the race for the vice presidential nod according to Justin Wolfers, a business professor at The Wharton School of the University of Pennsylvania and an expert on predictions.  "I’m rather struck by the size of this shift," Wolfers says in his distinctive Australian accent.

Wolfers, a columnist for the Wall Street Journal, is an expert in so-called "prediction markets." These markets allow investors to buy and sell contracts with real dollar values and essentially bet on how events will turn out—from who will win an Emmy, or whether or not it will rain tomorrow, or who will be the nominees for vice president.  Wolfers, who has spent years studying the prediction markets, believes they more accurately forecast events of all kinds than polls, pundits, scientific instruments, surveys or educated guesswork.

"The relevant question is not whether prediction markets are always right," said Wolfers, "but whether they are 'more right' -- or more often right -- than alternative approaches."

In a matter of days, since Kaine’s name gained currency on many Obama vice presidential candidates’ short lists, the price of a Kaine contract on the prediction market InTrade has risen thirty points.

Wolfers explains that the market is indicating the "short lists" for both Obama and McCain appear to be coalescing around front runners. 

For Obama, the data indicates traders are betting on Kaine, Indiana Sen. Evan Bayh, Delaware Sen. Joe Biden and Kansas Governor Kathleen Sebelius.  As it’s become clear that New York Sen. Hillary Clinton is not under serious consideration, her stock has plummeted. 

Wolfers points out though, that the market has also provided a few hidden clues.  Kaine's rapid rise in trading should "have come at the expense of someone else.  But Bayh (and the price of his stock) is completely unaffected by what has happened.  Kaine's rise has not hurt Bayh at all."

Sebelius' stock is also on the rise and the price of a contract betting on Biden has taken a slight hit. 

A month ago, the best bet on either the Democratic or Republican side was on "the field," or none of the above.  If you examine the current field contract on the Democratic side it's trading at 46.  The two most important candidates missing are Sebelius and Kaine.  Between them, Wolfers explains, "they account for all of the other category."

"This is a sign," Wolfers adds cautiously.  "I feel uneasy about what the market is telling me.  But given my views, it's going to be Kaine, Bayh, Biden or Sebelius.  The market has not moved this dramatically before."

On the Republican side there's a lot less movement, much less trading on the prediction markets.  Part of that is likely accounted for by less media attention on the McCain campaign.  At the same time though, Minnesota Gov. Tim Pawlenty, a frequent short-lister, has had a good week.  His stock has gone up from 20 to 33.

Mitt Romney is the other potential VP whose stock has been consistently high, now trading even with Pawlenty. 

The surprise on the GOP side would be Alaska Gov. Sarah Palin, whose stock went from 12 to 20 this week.   

There's little trading in stock in former Pennsylvania Gov. Tom Ridge or the other dark horse possibility for McCain, Connecticut Senator Joe Lieberman. 

Wolfers says, on the Republican side too, it's a pretty good bet one of the leaders in the prediction market will be the nominee.   

But what’s the safest bet of all?  Well, political parties traditionally like to surprise the electorate to help gin up excitement and buzz with a vice presidential pick.  So again, the way to be sure you'll make money is to sell off contracts on individual leaders and bet on the field to include none-of-the-above. 

July 31, 2008 in Romney, Mitt | Permalink | User Comments (5)

User Comments

Posted by: dl | Jul 31, 2008 11:41:49 AM

Posted by: dl | Jul 31, 2008 11:45:25 AM

Posted by: Paul | Jul 31, 2008 1:42:32 PM

Posted by: disambiguates | Aug 1, 2008 1:22:29 AM

Posted by: Bonzai55 | Aug 3, 2008 9:47:27 PM

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