In the past few weeks Romney has dropped from 70% to under 50% and Gingrich has rocketed to 40% on the prediction markets. And in this time Obama for President has barely budged from its 50% perch. As someone pointed out on Twitter (I forget who, sorry) this is hard to understand.
For example if you think that in this time there has been no change in the conditional probabilities that either Gingrich or Romney beats Obama in the general election, then these numbers imply that the market thinks that those conditional probabilities are the same. Conversely, If you think that Gingrich has risen because his perceived odds of beating Obama have risen over the same period, then it must be that Romney’s have dropped in precisely the proportion to keep the total probability of a GOP president constant.
It’s hard to think of any public information that could have these perfectly offsetting effects. Here’s the only theory I could come up with that is consistent with the data. No matter who the Republican candidate is, he has a 50% chance of beating Obama. This is just a Downsian prediction. The GOP machine will move whoever it is to a median point in the policy space. But, and here’s the model, this doesn’t imply that the GOP is indifferent between Gingrich and Romney.
While any candidate, no matter what his baggage, can be repositioned to the Downsian sweet spot, the cost of that repositioning depends on the candidate, the opposition, and the political climate. The swing from Romney to Gingrich reflects new information about these that alters the relative cost of marketing the two candidates. Gingrich has for some reason gotten relatively cheaper.
I didn’t say it was a good theory.
Update: Rajiv Sethi reminded me that the tweet was from Richard Thaler. (And see Rajiv’s comment below.)
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December 13, 2011 at 4:02 am
Rajiv
Jeff, the tweet was from Thaler and I responded to it in the following post:
http://rajivsethi.blogspot.com/2011/12/price-coherence-on-intrade.html
If the GOP follows the so-called Buckley Rule (nominate the most conservative candidate that is also electable) and sets the electability threshold at 50% you’d get this price behavior endogenously.
Look at it this way: if Obama’s prospects become dimmer, more conservative candidates become electable and hence become more likely to be nominated. The fall in Obama’s price that would be caused by the first effect is mitigated by the second effect. Obama’s price remains even, while Gingrich rises.
December 13, 2011 at 5:42 am
foosion
Perhaps voters vote based on the economy and other such factors, rather than the candidates positions or campaigns.
December 13, 2011 at 11:53 am
Mort Dubois
Maybe the market isn’t deep enough to conform to theory. Or the theory is wrong.