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US Politics

Sep 13, 2008

US Election – The Rational Realignment.

Something has always struck me as a little absurd about the Democrat's Intrade probabilities - they never quite matched up with their polling. There was always this whiff of a bull mark


Something has always struck me as a little absurd about the Democrat’s Intrade probabilities – they never quite matched up with their polling. There was always this whiff of a bull market, an Obama bubble, pushing the Democrat prices higher than their polling levels would ordinarily justify.

It wasn’t absurd in terms of being irrational – far from it; the Democrats were expected to do well and the polling was expected to catch up and reflect that. But as the campaign has worn on, and the time available in the future for these expectations to precipitate into reality has become shorter, those expectations have suddenly become T-boned by the sudden necessity to pay much more attention to the present conditions on the ground, rather than relying on hopeful postulates of what will happen just around the next corner – especially as the corners left on the journey to 538 have become substantially fewer in number.

No, the absurdity came from the unidirectional nature of these inflated expectations, the uber-confidence that the only alternative possibility to the current political reality at any given time in the previous six months was a pro-Democrat one.

Since the conventions the Obama bubble, the Democrat bull market, the assumption of the only alternative political reality being a pro-Democrat reality has not quite been swept away, but a great rational realignment has certainly imposed itself on the US political system.

If we look first at how many Electoral College votes the Intrade market had given to the Democrats over time as well as the headline “Democrat as President” Intrade probability, we can clearly see the post-convention wake-up call.

The probabilities and the ECV’s on the Intrade markets have walked pretty much in lockstep. But to see how the expectations have deflated, and how high they were for the Democrats previously, we only need to compare the Democrat margins in the Gallup daily tracking poll to the probabilities of victory they had for any given time.

In May, Obama was trailing McCain by a larger margin than he is currently – but the expectations that it would turn around kept the probabilities high. Likewise, the dead heat of mid August in the polling was still expected to be of only marginal relevance.

Yet post convention, suddenly margins matter.

The Democrats are still given the benefit of the doubt – if all things were equal on the expectations front, a zero margin would equal a 50% probability of victory. The Democrats are behind by three points in the polls, but less than 1 point behind in the headline probability and still two and a half points ahead according to our State market simulations.

The market still expects the Palin led Republican bounce to fade, but those expectations are now much more firmly based in reality. Since August 31, I’ve been tracking the Intrade markets daily and we can see how the rational realignment played out and how the polling reality suddenly became important.

This time, for the first time, as the Democrat polling margins fell, expectations alone could not keep the Intrade probabilities up in either the headline market nor the State markets. We can also see that the Republic bounce has seemingly peaked, and that the markets still expect that the polling margins will come back toward Obama – but these expectations are now much more firmly based in the reality on the ground, rather than the hope driven expectations of the past.

For our Intrade market analysis – finally it is Game On.


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