The Signal

As expected, markets congeal around Romney after big ‘enough’ victory in Michigan

David Pennock
The Signal

Strictly by the numbers, Mitt Romney's narrow victory last night in his home state of Michigan was modest. He won only 3 percent more votes than second-place finisher Rick Santorum and, because the primary is not winner take all, the two candidates will split the real prize -- Republican delegates -- nearly equally.

In his victory speech, however, Romney was clearly more concerned with the symbolic victory. "We didn't win by a lot, but we won by enough, and that's all that counts," he told supporters in Novi, Mich. While it's unlikely Romney was watching the prediction markets as closely as we do before he took the stage, he would be pleased to know that they agree. Within an hour of Michigan's outcome becoming clear, Romney's likelihood of earning the Republican party nomination jumped to 80.9 percent, up 8.3 percent from Tuesday evening. (No one likes a gloater, but we did call that.)

Some commentators still question whether Romney's win in Michigan gives him sufficient momentum leading into next week's crucial Super Tuesday contests, including the politically crucial Ohio. Prediction market traders, who have millions of dollars at stake on accurately predicting elections, have their answer: a resounding yes.

Romney's prospects rose last night in every upcoming Republican primary through Super Tuesday, including an 18.4 percent boost in neighboring Ohio (where the candidate is now) and a 16.5 percent jump in faraway Washington, which holds caucuses Saturday. Nearly all of Romney's gains came at Santorum's expense. Santorum's likelihood of winning Ohio and Washington dropped by 18 percent overnight; he lost ground by smaller amounts in nine other upcoming races. The Table reports how these two candidates' chances of winning the next 11 primaries changed between 7 p.m. ET last night and 6 a.m. ET this morning.

State Romney Santorum
before after change before after change
Ohio 38.3% 56.7% +18.4% 60.6% 42.6% -18.0%
Washington 35.8% 52.3% +16.5% 60.3% 42.1% -18.2%
Alaska 52.2% 67.0% +14.8% 31.3% 22.5% -8.8%
Idaho 82.6% 95.2% +12.6% 9.5% 1.8% -7.7%
Georgia 6.6% 14.1% +7.5% 25.4% 20.0% -5.4%
North Dakota 32.5% 39.8% +7.3% 65.3% 64.0% -1.3%
Tennessee 11.9% 15.1% +3.2% 74.5% 63.5% -11.0%
Oklahoma 10.9% 13.6% +2.7% 79.5% 73.0% -6.5%
Vermont 90.6% 93.1% +2.5% 10.8% 10.7% -0.1%
Massachusetts 96.5% 98.8% +2.3% 4.5% 1.2% -3.3%
Virginia 90.7% 92.0% +1.3% 2.6% 2.1% -0.5%

Sources: Intrade and Betfair

As of this writing, Santorum is still leading in many national and state polls and has a commanding 8.3 percent lead in Ohio. The polls will take several days to update (polls are still too expensive to run continuously) but most observers expect them to move in Romney's direction. This highlights the main advantage of looking to prediction markets immediately after events: They react to news almost instantly. In contrast, forecasts based on polls will by necessity update more slowly.

While it's perfectly reasonable -- even common -- to expect a poll to change in a certain direction (for example, we know that a newcomer's approval ratings will generally decline as he or she is vetted), it's a contradiction to expect a specific movement in an efficient market price. If, for example, everyone expects Romney's price on Intrade to move up tomorrow, some opportunistic trader would go ahead and buy it today, moving the price up now. So in an efficient market, the current price is always the most up-to-date forecast available.

David Pennock is a Principal Research Scientist at Yahoo! Research. Follow him on twitter @pennockd.

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