Blog Posts by David Rothschild

When Barack Obama announced his support for gay marriage on May 9, most commentators immediately turned to how this would affect his chances in the 2012 campaign. Now that a few days have elapsed, we can say with confidence that the effect was negligible.

The following chart illustrates the most accurate and real-time forecasts, derived from prediction market data, two days before and after the announcement.

Sources: Betfair and Intrade.

When we think about this political issue as an economic problem, as I like to do, the first thing to ask is what new information has been introduced into the system. For anyone who regularly follows politics, the fact that Obama privately supports gay marriage is not really news. He quietly supported same-sex marriage in 1996, and many assumed he never really changed his position. Massachusetts Congressman Barney Frank, a Democrat, called the president's revelation a political "nonevent."

Nor did his announcement represent any change in policy. The

There are many ways to keep score on whether Barack Obama or Mitt Romney has better odds of winning the general election, which is almost exactly six months away. Here at The Signal, we are fervent evangelists of the political prediction markets, where people place real money on the line to bet on the winner. These markets proved to be more prescient than polls in the Republican primary.

Many journalists prefer to stick to reporting on raw daily polls. While these surveys offer valuable information, it is dangerous to read too much into the daily fluctuations, especially this far in advance. Currently, Rasmussen has Romney leading Obama 49 to 44, while Rueters/Ipsos has Obama leading Romney 49 to 42. This disagreement is due to several common sources of error that occur on any poll. Averaging several polls to get an aggregate figure, as RealClearPolitics does, helps ameliorate these errors.

Upcoming work by Bob Erikson of Columbia and Chris Wlezien of Temple, recently presented at the Midwest Political Science Association conference, demonstrates a second problem with following the daily polls too closely. The researchers looked through past presidential elections, aggregated the national polls, and created the most effective forecast based on that data. They found that, even when properly aggregated and averaged, national polls do not have predictive power at this point in the cycle.

The following chart shows Obama's likelihood of victory, utilizing prediction market data, and two-party poll share.

Polls vs. Markets

Sources: Betfair and Intrade for prediction markets and RealClearPolitics for polls.

Anyone who commutes in to New York from New Jersey knows that the smallest glitch can throw the entire rail system into chaos, delaying 1,300 trains worth of people. Many argue that there is an urgent need for a new rail link between the two states, but viable plans to build such a thing have yet to materialize.

Here's the economist's outlook on the problem: While a new rail link would provide positive returns for society, neither private nor public institutions are properly incentivized to make it happen.

Traffic on the current rail links, two 100 year old tunnels, is at full capacity and demand will only increase over time. Lawmakers and analysts dispute the cost of building a new tunnel, but it's generally estimated to be in the neighborhood of $10 billion. It will take decades to recoup the investment. This type of massive-scale infrastructure is beyond the scope of any corporation, but not for the simple reason of scale. Consortiums of private institutions can raise massive amounts of money. But can you imagine anyone in the private sector investing in a project that may not earn money for several generations?

More important is that the project would have many positive "externalities," or societal benefits that no owner can capture and charge for. If 100 people need to get from New Jersey to New York City every day, society benefits from them sitting in a single train, rather than 100 automobiles: less pollution and less congestion. But the owner of the train or the tunnel it goes through cannot charge one person for the value of slightly cleaner air. Only a government can internalize the value of clean air for all.

While the government can value something like clean air, it is not good at valuing long term investments. In the same way that corporations are obsessed with daily stock prices and quarterly earnings, politicians are obsessed with monthly poll numbers and biennial elections.

François Hollande, the Socialist Party candidate for president of France, has an 85.3 percent likelihood of capturing the presidency from incumbent Nicolas Sarkozy in the upcoming election. At this point, the other three major competitors: Marine Le Pen (far-right), Jean-Luc Melenchon (far-left), and François Bayrou (center) have negligible likelihoods of victory. It is almost certain that the election will be decided in a run-off, rather than anyone gaining a majority in the first round.

Likelihood of Winning French Presidency

Sources: Intrade and OddsChecker

For French observers who are not familiar with the Signal, we frequently utilize prediction market data to determine the likelihood of upcoming events. A prediction market is a place where political handicappers back up their convictions with real money. The price is determined by how much money users are willing to invest up front in order to win back one dollar if they are right. If a 90-cent investment is required to win one dollar, users think the candidate is

Click image to see more photos (AP/Scott Applewhite, File)

Now that the race for the Republican nomination is effectively over, Mitt Romney's campaign is speaking publicly about who they might choose as his running mate. While the prediction markets we rely on for forecasting elections also take action on vice-presidential nominees, this is a different type of race, decided by a small council of insiders rather than an election or caucuses. The current frontrunner in the prediction market data is Marco Rubio, the first term senator from Florida.

A presidential candidate has two political priorities for his second-in-command: That the candidate helps and that the candidate does not hurt. For Romney, this breaks down as follows: A candidate can help by providing the former Massachusetts governor cover from the right, recruiting some votes from the center or left, or by helping capture the candidate's home state or region. A candidate can hurt Romney by overshadowing the campaign, either with questions about his or her fitness for the top office--see Quayle and Palin--or by causing a scandal of some degree. Reaching a bit farther back, one can recall Thomas Eagleton of Missouri throwing the 1972 McGovern ticket into total chaos when it was revealed he was treated with shock therapy for depression and possibly an alcoholic.

Let's look at who leads in the market and their individual potential for helping or harming Romney's chances.

Marco Rubio is 23.2 percent likely to gain the nod from Romney, an extremely high likelihood for a race categorized by uncertainty. He would provide cover for Romney from the right and he could possibly draw Latino supporters from the center or left (he's Cuban-American). On the other hand, he does not have much experience in the public spotlight and arguably has a few small skeletons in his closet that have come to light as the media has begun to scrutinize him. The Signal take on Rubio: Big potential upside with medium potential downside.

Rob Portman, also a freshman senator from another big swing state (Ohio), follows Rubio with a 12.8 percent likelihood. Of the people listed in this article, he is probably the least well-known. In endorsing Portman for the job, the Ohio Dispatch refers to him as "safe and sensible." Their argument is that he is a reliable conservative but does not scare moderates and liberals. He would provide cover for Romney from arch-conservatives and his longer track record of solid, non-confrontational public service should make him safe not to embarrass the campaign. Portman: medium potential upside with low potential downside.

Click image to see more photos. (AFP Photo/Sean Gardner)

Although he had vowed to stay in the race through the Pennsylvania primary, Rick Santorum dropped out of the Republican nominating contest Tuesday, effectively clearing the way for Mitt Romney to secure the nod.

While Santorum was still running, there was a lot of speculation as to whether Newt Gingrich's supporters would go to the former Pennsylvania senator if Gingrich dropped out, forming a more united anti-Romney front. (Polling suggests they were about evenly split on their second choice.) The opposite, apparently, is not true. Santorum's exit has provided no benefit to his two remaining challengers when it comes to winning the nomination, and just little when it comes to carrying a primary. Even when Santorum remained in the race, we had Romney with a large lead in Pennsylvania, with about an 88 percent likelihood of victory. That has since gone to nearly 100 percent likelihood, according to the political markets.

Gingrich is excited to be the last legitimate challenger to Romney, at least in his own mind, having told Justin Sink of the Hill that "there's a conservative, named Newt Gingrich, and there's Mitt Romney." But with Santorum out, Gingrich's likelihood in any given primary contest remains negligible.

In fact, it's Ron Paul who has an increased likelihood of carrying a state with Santorum out of the way. The market on Paul winning any primary (other than the disputed Maine) jumped to a 7 percent likelihood Wednesday. He has small but non-negligible chances in a few states, including Kentucky, home of his son, Sen. Rand Paul. Santorum dropping out will allow Romney to focus fewer resources on some small states with late primaries, giving Paul and his massive national organization the opportunity for a surprise win.

Click image to see more photos. (AFP/Paul J. Richards)

The future of the Republican primary hinges on Pennsylvania, where Rick Santorum must win his home state to hang on to his tenuous position in the race.

The political gambling markets that we watch so closely are extremely confident that Mitt Romney will ultimately win the nomination. This gives Santorum supporters in Pennsylvania an interesting choice when they go to the polls:

Option 1: Vote for Rick Santorum. By definition, supporters believe his positions align the closest with their own. Voting for Santorum sends a message to the Republican Party that the voter wishes the party would nominate a person with similar political philosophies.

Option 2: Hold your nose and vote for Mitt Romney. Presumably, the majority of Santorum supporters would prefer Romney to Obama in the White House in 2013. A vote for Romney helps him end the primary sooner and focus on Obama. Quite simply, it increases the likelihood that Romney wins the presidency in November.

[Related: Checking Santorum’s delegate math: Are Romney’s numbers really inflated?]

Here is how an economist like me would approach the problem: First, think about how different your political opinions are from those of Santorum, Romney and Obama. If you feel that the distance between Romney and Santorum is very far apart, and that Obama is not much further from your positions than Romney, then it would be rational to vote for Santorum and send a message of support for his positions. If you feel that the differential between Romney and Santorum is relatively small, and that Obama is much further from your positions than Romney, then it would be rational to vote for Romney and give him a boost in November.

Mitt Romney's odds of winning Wisconsin, which holds its primary alongside Maryland and the District of Columbia on Tuesday, have been very good for about 10 days, according to both the political prediction markets and the major polls. We are very confident that he will win Wisconsin, where his odds currently sit at 96.2 percent. Rick Santorum is just 4.3 percent likely to pull off an upset victory. Romney is also almost certain to carry Maryland.

Likelihood of Winning Wisconsin Primary

Sources: Betfair and Intrade for prediction market data and FiveThirtyEight for poll-based forecast

What the polls don't tell you is that contrary to his dismal numbers in mid-March, he's always had at least moderately favorable odds in the state. We should remember, however, that markets use polling data just like everyone else, and aggregate that information with other signals to produce their odds. The big jump we see in the odds correlates with the release of positive poll numbers for Romney.

Santorum and the other candidates now have negligible odds of winning the nomination. There is a small but non-negligible likelihood of a brokered convention, but Romney would likely emerge as the nominee, given that he will control the most delegates.