Never mind opinion polls suggesting Tuesday’s U.S. presidential election is a dead heat. People who have bet money on the outcome have already decided: Barack Obama wins.
Three election exchanges and one popular Irish bookmaker all have the Democratic incumbent ahead of his Republican challenger, Mitt Romney. Ireland-based betting service Paddy Power PLC has already called the election and covered its Obama bets, dishing out roughly £400,000 ($640,000) to Obama bettors on Sunday.
“Rather than waiting for the election results, we are so convinced he is going to win that we’re actually paying out now,” company spokeswoman Claire Davies said. She said the company made the call because most of the recent betting has gone toward Mr. Obama and punters are good at predicting results.
It’s a cocky move considering that, if Mr. Romney wins, Paddy will have to honour all of its Romney bets and pay out an additional $320,000. That’s potentially close to a $1-million hit.
Paddy’s confidence isn’t misplaced. As of late Monday afternoon, the Iowa Electronic Market and Intrade also have Mr. Obama in front. The IEM gave Mr. Obama a 75.4-per-cent chance of winning, while Intrade had him at 67.3 per cent.
Both exchanges operate on a winner-take-all basis. Here’s how it works. If an investor believes Mr. Obama will win, he or she purchases an Obama contract. If Mr. Obama does win, the investor receives $10; if he loses, the investor gets nothing.
The price of the contract varies, depending on investor sentiment. On Monday afternoon, Obama contracts went for $6.70 (U.S.) on Intrade and Romney contracts sold for $3.31. So if Mr. Obama were to win, the profit on the Obama contract would be $3.30 and the loss on the Romney contract would be $3.30.
The IEM runs another exchange based on the popular vote results. As of Monday afternoon, that exchange had Mr. Obama receiving 50.9 per cent of the popular vote and Mr. Romney 48.7 per cent.
These exchanges have proven remarkably accurate. A 2008 study by researchers at the University of Iowa found that the IEM’s popular vote exchange was 74-per-cent more accurate than regular opinion polls during each presidential election between 1988 and 2004. The study also found that, on average, traditional surveys had a margin of error of 3.37 percentage points, compared with 1.82 percentage points for the IEM.
“I think these markets are pretty accurate,” said Peter Loewen, an assistant professor of political science at the University of Toronto.
“What election markets are good at doing is letting people who know something about politics take [polling and other] information, add information to it and make, in the aggregate, more accurate predictions.”
Putting down cash also makes a difference, Mr. Loewen added. “To the extent that there is misinformation in the market or the market is wrong, people who think they have better information have strong incentives to put a lot of money in to correct the price,” he said.
Mr. Loewen not only follows these markets closely, he has also participated and bet money on numerous elections. His best call came in 2006, when he took long odds on Stéphane Dion to win the federal Liberal leadership race. He bet on Mr. Romney early in the U.S. election campaign, but now believes IEM and Intrade are correct.
“I think if someone has got a little bit of money right now on Obama they are going to do fine,” he said. “It’s possible [Mr. Romney] could do it, but it’s unlikely.”