October 21, 2004

The Revenge of the Efficient Markets

We've posted a number of theories on whether political operatives were trying to influence the Tradesports presidential futures markets, particularly during the debates. I'm pretty convinced that was taking place.

But a funny thing happened once Glenn, Luskin, your Llamas, and others started writing about this: a large number of people saw it for the opportunity that it was---the prices were depressed because they reflected what some large speculators wanted to happen, not what they believed would happen. Why? Because they were hoping that no one would notice the high volume individual sales trying to drive the prices down, trying on each of the nights of the debates to create the appearance of spontaneous public support emerging for the likelihood of Kerry's election.

But guess what? A lot of folks saw that instead as an opportunity to take money from the Donkey speculator(s), and as efficient market theory would hypothesize, the price for the Bush reelect contract has shot right back up, and the Kerry elect contract has begun to settle.

But what matters, of course, is the Electoral College, and what we find when we parse the numbers is that Bush's support has stayed constant not only from last week, but from last February.

Looking at today's numbers gives us the following:

The "Bush wins the electoral votes of state X" is trading above $80 in 27 states worth a combined 227 electoral votes. This is an improvement over last week, with Colorado (9 EVs) is at $82; Nevada (5 EVs) is at $81.9; and Missouri (11 EVs) is at $81.

The Bush wins the state contract is trading between $55-$79 in 3 states worth a combined 57 electoral votes: Florida (27 EVs) at $63; Ohio (20 EVs) at $58; and Wisconsin (10 EVs) is at $57.7. No states that were in this trading band last week dropped out.

The markets anticipate a high degree of confidence that Bush therefore will win 284 electoral votes, a number which has held constant since the late winter.

What's in the close range? Iowa is trading at $54.9, Cow Hampshire at $45, New Mexico at $40, Minnesota at $38, and Pennsylvania at $30.9. All these (with the exception of the Granite Noggin State) all went blue last time.

How does this impact strategy? Look for the Chimperor to put the chips on these states that are somewhat long shots for him like Minnesota and Pennsylvania, but are ALL must wins for Kerry. If he can do this while also covering the bases in in the $79-$55 states of Ohio, Wisconsin, and Florida, it's going to work.

What's fun about this is basically taking the approach of "moneyball" and using it in politics.

UPDATE: Is the Times even hedging its bet?

Posted by Steve at October 21, 2004 11:03 PM | TrackBack
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