Measuring election through the prediction markets

Economist David Rothschild tells the "PBS Newshour" that they're a pretty effective way of assessing the race. Rothschild's Predictwise website tracks the three major markets: Intrade, Betfair, and the Iowa Electronic Markets. As of Friday afternoon, the president is given a 64.1 percent chance of being reelected. Interestingly, that's very close to the 66.1 66.1 percent chance being forecast by the NYT's Nate Silver, who uses an elaborate modeling method. As you can see from the chart, these numbers are down substantially from just a couple of weeks ago. Breaking out the race state by state, Predictwise's percentages would seem to make sense. It gives Romney a 71.4 percent chance of winning Florida, for example, while Obama has a 64.1 percent chance of taking Ohio. Perhaps surprisingly, Virginia is given to Romney by a wide margin. Iowa is 60-40 for Obama and Colorado is about even. As with all predictions, these are snapshots subject to change. But when looking at a particular state, it's helpful to have a trend line: North Carolina, for example, would seem close at first blush because polls have put Romney in front by just a few points - certainly within the margin of error. However, he's held onto that lead throughout the campaign. At this late stage, it's very unlikely that's going to change. Same thing with Obama and Ohio (though with a little less certainty).

Paul Solmon: As between prediction markets and polls, which do you trust?

David Rothschild: I'm going to take prediction markets because prediction markets have all of this polling information available to them as well as additional information. They understand some things that will definitely happen that polls have not picked up yet. And I'm going to give you a good example: job numbers. We know that they're going to affect the trajectory of the election. They're going to be involved in the debates, they're going to be in commercials, they're going to help change donations. But unlike you and me, most people are not refreshing the Bureau of Labor Statistics website at 8:30 in the morning on the first Friday of every month. It's the prediction markets who know about these numbers before the polls do, and so that's what makes a difference.

PS: So prediction markets reflect more information because they are played by people with an incentive to stay on top of the information as opposed to react naturally to it over time.

DR: That's correct. Putting your money where your mouth is incentivizes you to go out there and gather as much information as possible and more importantly in some ways, to then reveal that information correctly. And so those kinds of things combine to provide a very high level of information in these prediction markets that you don't necessarily have in a poll that's a snapshot of today, versus a prediction market which is looking at what's going to happen on Election Day. People always ask me, "Well, how would prediction markets do if there weren't these polls? Are they just regurgitating these polls?" And the answer is, prediction markets do quite well, thank you.