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.
The concept, pioneered by the Iowa Electronic Markets, involves letting “traders” buy shares in a given proposition. The proposition may be that the Seahawks will win the Super Bowl, or that Trump will win the GOP nomination.
In a winner-take-all market, the price of a share can rise or fall depending on the demand. If the prediction you’ve invested in comes true, you’re paid a specified amount – say, $1 per share. But if you’re wrong, you get nothing.
It may sound like Vegas betting, but economic researchers use the method to study how the “wisdom of crowds” can affect market movements. The concept has come into play in other settings as well, ranging from anticipating flu outbreaks to predicting whether a Microsoft project will stay on track.
For 20 years, presidential elections have provided valuable test cases for prediction markets. “It really does well in primaries, especially early,” said David Rothschild, an economist at Microsoft Research in New York City.
Former Florida Gov. Jeb Bush was an early favorite, based on the markets that Rothschild tracks at PredictWise.com (which does not reflect Microsoft’s views or predictions).
When Bush faded, the biggest beneficiaries were traders who invested in Rubio, a freshman U.S. senator from Florida. In November, Rubio’s backing translated into a perceived probability of 45 percent that he’d be the GOP nominee, while brash businessman Donald Trump was stuck in the low 20s.
Since then, however, Rubio’s fortunes have been declining while Trump’s have been on the rise. This week, the lines are finally crossing.
Trump’s chances for nomination are now put at 33 percent, with a derived market price of 32 cents on the dollar. That just barely edges out Rubio. Ted Cruz, a senator from Texas, is rated No. 3 with a perceived 22 percent probability of getting nominated.
The spread is even wider on PredictIt.org, a New Zealand-based website that lets bettors … er, traders … put real money behind their predictions. Trump’s shares are at 38 cents, compared with Rubio’s 30 cents and Cruz’s 23 cents.
The two candidates are tied at 30 percent on Pivit.io’s chart, which provides stats for CNN.
You could see this as a sign that skeptical political handicappers are waking up to the prospect that Trump might actually be the nominee, less than three weeks before the Iowa caucuses. But Rothschild strikes a note of caution: “Let’s not read too much into that,” he told GeekWire.
Rothschild said the GOP race was still in the realm of conditional probabilities: The markets suggest that traders expect the race to coalesce into an establishment vs. a non-establishment candidate. Will the non-establishment candidate be Trump or Cruz? Will the establishment candidate be Rubio or Bush, or someone else? That’s what many of the traders are trying to anticipate as they buy and sell shares.
“If one of the establishment candidates makes it out, Rubio has the best shot,” Rothschild said. He provided a detailed update on the state of the presidential race on Sunday in a blog posting.
Another leading website for electoral analysis, FiveThirtyEight.com, uses a different method. It rates Bush and Rubio as leaders in what it calls the “Endorsement Primary.” Trump isn’t even on the list.
So what do the markets say about what happens after the GOP nomination? The charts suggest that traders are putting their money on Hillary Clinton to win the Democratic candidate and the White House. But as is the case with the stock market, past performance may not be indicative of future results. PredictWise is showing a gradual uptick in Bernie Sanders’ stock price.
For what it’s worth, PredictWise points the Carolina Panthers as the winners of this weekend’s game against the Seahawks, and to the New England Patriots as this year’s Super Bowl champions. That’s consistent with the latest outlook from Microsoft Bing Predicts.
Meanwhile, FiveThirtyEight leans toward the Panthers as the winners of this weekend’s game as well as the Super Bowl. So go figure.