Another way to express this is as follows: if someone had bet that Trump would lose all eleven states on Super Tuesday at the prevailing prices, they would have secured a substantial positive return, approximately doubling their money, even though he actually won seven states. Each bundle of such bets, one for each state, would have cost about $2 and paid out $4 for a 100% return. On the other hand, if they had bet that Trump would win all eleven states they would have lost money, paying about $9 per bundle to get back $7. And there was enough liquidity available to scale up these bets quite substantially.
The pattern repeated itself on March 5: betting on Trump losses across the board would have made quite a bit of money, betting on him to win everything would have been a money-losing proposition. This was true even though he won two of four states, since betting on him to win was much costlier in the aggregate than betting on him to lose.
Yet another way to say this is that the markets were not terribly well-calibrated. But this ought to be a temporary phenomenon as wealth is transferred across accounts and traders update their beliefs after each outcome realization.
It’s election day again tomorrow, which gives us an opportunity to see if such a correction has in fact occurred. Four states are in play on the Republican side, with Trump heavily favored to win Michigan and Mississippi:
If he fails to win either one of these states it would suggest to me that the biases previously evident have not yet been eliminated.
As far as the other two contests are concerned, Cruz is favored in Idaho, with Rubio (marginally) favored in Hawaii:
How do these predictions compare with more traditional
poll and model based forecasts? On the Republican side, all we have is a Michigan forecast from FiveThirtyEight:
This is in substantial agreement with the prediction markets, so the outcome will not help adjudicate between the two approaches. Similarly, on the Democratic side, there is negligible difference in forecasts: the prediction markets and FiveThirtyEight both agree that Clinton is heavily favored to win Michigan and Mississippi.
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We project that Hillary Clinton will defeat Bernie Sanders in Michigan.
— Decision Desk HQ (@DecisionDeskHQ) March 9, 2016
So we still have little to choose from when comparing markets to poll-based predictions, with Kansas being the only state called differently (correctly by markets and incorrectly by FiveThirtyEight).
I suspect that there is a non-negligible probability that Rubio may exit
the race before Florida to avoid humiliation there, while Cruz and
Kasich survive to the convention.
There’s been a lot of chatter about this possibility over the past couple of days, and it seems increasingly likely to me. A Rubio exit before Florida could tip Ohio to Kasich and set up an interesting and unpredictable three-person race going forward. Ohio will also be critical for the continued viability of Sanders. It’s a fascinating election cycle.
