Romney vs Obama: Since When Is Intrade An Efficient Marketplace?

Romney vs Obama: Since When Is Intrade An Efficient Marketplace?
White House (Pete Souza) [Public domain]

Today is the long-awaited Election Day, and for some undecided voters, they may seek out all sorts of different sources for a consensus. One popular one is Intrade, the online exchange that accepts bets on political outcomes.

Romney vs Obama: Since When Is Intrade An Efficient Marketplace?

Betters can choose to buy or sell on different predictions. This can include in addition to presidential politics, predictions for the Academy Award for Best Picture, gas prices reaching $4.50 per gallon, and where the Dow will close on various days.

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The site calls itself the “world’s leading prediction market,” and with one day to go before D-Day, “investors” give Barack Obama a 71.2% chance to be re-elected president, as of this morning.

It also has the electoral map, with Barack Obama taking 281 votes and Mitt Romney with 235.

But Intrade isn’t just for those looking for some trading fun and answers, Wall Street professionals look at the website too, which begs the question, why?

Sam Stovall, chief investment strategist at McGraw-Hill’s (NYSE:MHP) S&P Capital IQ said to Fox of the website, “It acts almost like Las Vegas. You get a feeling for the wisdom of crowds. There’s been uncertainty and policy risk in the past. But you just didn’t have the Internet available to you.”

Dan Greenhaus, chief global strategist at BTIG, also keeps his eyes on the website, reported Fox; he looks at it once a week minimum for an update on consensus thinking.

Back in June, Greenhaus wrote a client research note that exemplified the correlation of the S&P 500 to President Barack Obama’s re-election odds, according to Intrade’s measurements. He did say that site may be too green to rely on it for accuracy in predicting elections, but he believes “it is our best real-time indicator, other than polls themselves. It’s helpful to pay attention.”

But when one thinks about it, it’s even worse; Intrade is so easy to manipulate that it is hard to understand why investors would believe it can predict the future. Here is a good example from the Washington Post:

 On Monday night, after the debate, Barack Obama was leading Romney on Intrade by around 60 percent to 40 percent. But at around 10:00 a.m. on Tuesday morning, Romney had surged to nearly 49 percent.

The article accuses Mitt Romney supporters of manipulating The action caused a 23% increase for Mitt Romney within minutes. To make the S&P 500 go down or up 23% would take billions of dollars, and probably be very difficult to pull off logistically (additionally, it would trigger a circuit breaker on the downside). How much did it cost to have Romney go up 23%? Drumroll….only $17,800! If the average American wanted to take some of their savings, they could drastically manipulate the Intrade odds in a second. Barack Obama is likely to win, but for investors, who by definition believe that the market is inefficient, to think that a much smaller illiquid market can be efficient seems foolish. To reiterate, the odds are in Barack Obama’s favor due to the electoral college map, but Intrade is an extremely poor proxy.

Another example comes from Adrian Gray. Gray served as the Director of Strategy at the Republican National Committee from 2005-06. Prior to that, Gray was the National Director for Voter Contact in the 2004 presidential campaign. Gray tweeted this morning:

Again, another sign that Intrade is not a good proxy for predicting events.

But what if you don’t think Intrade is your thing to predict the presidential election?

According to a Bloomberg story by Whitney Kisling and Rita Nazareth, with market swings in the INDU for U.S. stocks hitting a low last seen six years ago, this represents that incumbent parties will keep the presidency.

And this encompasses data all the way back to 1900.

For 2012, the DJIA either gained or lost a daily average of 0.54 percent. This the sparsest fluctuation during an election year since 2004 when George W. Bush beat John Kerry, according to Bloomberg. Data has also shown that changes on a daily basis have fallen behind the Dow Jones Industrial Average (Dow Jones Indices:. DJI) average of 0.75 percent in 13 of 17 occasions when the incumbent was the winner, as compared to six of 11 times there was a loss. It is likely that the S&P 500 (S&P Indices:.INX) had similar numbers.

But volatility can’t necessarily pick a winner.

James McDonald, chief investment strategist at Northern Trust Corp. in Chicago, said to Bloomberg,“The incumbent tends to get re-elected when the market is doing well. If the market has done well, that means the economy is doing well, that means the incumbent has a better chance.” The correlation between the economy and market is not true, but that is a topic for another time. However, the market rising does help people feel better about the economy (whether the economy is in fact doing well is a different issue).

And then there’s the sports fans’ take on a winner. It’s appropriately called the Washington Redskins rule.

The rule goes that if the Redskins win their the last home game prior to the presidential election, the incumbent party also gets a win on that Tuesday, as well as vice versa.

If you haven’t read the sports pages today, you’ll need to know that the Redskins lost on Sunday at home to the Carolina Panthers, 21-13.

This means a Mitt Romney win.

According to the Los Angeles Times, this has held true in 17 of 18 elections, since the team had moved to Washington. The one exception? This came in 2004, when George W. Bush still won, while the Redskins lost.

The Redskins predictor obviously does not make sense logically. So if investors did want to pick between Intrade or the Redskins,  I would go with Intrade, but it is best to stick to the facts, also known as the polls.

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