07 January, 2008

Political Prediction Markets

The reaction of the political prediction markets to events in Iowa has been fascinating. (A recap of how these markets work: you can buy a contract that pays you $100 if event X happens and $0 if it does not happen. Then the price of the contract is the market's "estimate" of the percentage probability of the event.) On the Republican side it is clear that Romney's loss was much more important than Huckabee's win. After winning in Iowa, Huckabee is only up 3 points. On the other hand, McCain's chances of winning the nomination are 10 points higher and even Rudy is up 4 points. Romney has sunk from a 25% chance of winning to a new low of 13%.

On the Democratic side, Obama has gone from 20% to 63% in the last four days, and Hillary Clinton has gone from 70% to 35%. Edwards dropped from 8% to 2%. Poor Hillary, it looks like the Obama landslide is in full force.

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