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.
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 90-percent likely to win. If, on the other hand, only a few pennies investment is required to win one dollar, users are saying the candidate is a longshot. Users from around the world act based on any information they have, including well-known central signals of upcoming events like polls and past results, as well as less obvious, more disaggregated indicators. Many academic papers have confirmed the value of prediction markets in forecasting upcoming events; for politics elections, prediction markets have proved been meaningful from late 19th and early 20th century elections through the 2008 election.
We have been tracking the race since December, and Hollande crystalized as the likely winner from the beginning. Only in the beginning of April, however, did he move much past 60 percent likelihood.
In American politics, we often see this pattern in elections with a high-profile lawmaker running for reelection. We call this the anti-incumbency bias: Incumbent candidates tend to poll worse a few months before an election than they do on Election Day. The reason is simple: voters reflect positive qualities on un-vetted challengers, making them appear more appetizing than the known incumbent. As Election Day approaches, they realize the challenger possesses flaws as well and the polls swing back up for the incumbent. After Hollande passed that vetting period without a major fall, the markets became more and more convinced that he will prevail.
Bayrou is the only other candidate who had a legitimate chance at the presidency at any point in this election cycle. We had him as high as 15-20 percent in mid-January, but since then it has really been a two-person race.
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David Rothschild is an economist at Yahoo! Research. He has a Ph.D. in applied economics from the Wharton School of Business at the University of Pennsylvania. Follow him on Twitter @DavMicRot and email him at firstname.lastname@example.org.
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