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Herman Cain’s star is rising–everywhere but in the prediction markets

Herman Cain is rising in the polls of Republican primary voters, but prediction markets are not buying into the Cain surge. On Wednesday evening, MSNBC led its web page with the breaking news that the network's latest poll showed Cain atop the GOP presidential field, with 27 percent support; Romney was a close second at 23 percent, and Rick Perry placed third with 16 percent. (The survey's stated margin of error is plus-or-minus 5.35 percent for questions involving Republican primary voters.)

This is the latest in a string of strong polls for Cain, but in an aggregation of recent polls, Real Clear Politics still puts Cain in second place behind Romney. In RCP's poll summary, Cain has 19.3 percent to Romney's 22.0 percent, and Perry trails behind the pair with 14.2 percent. So, while one poll does not mean that Cain is now actually leading the Republican field, an aggregation of many polls convincingly shows that he is currently near the top of the GOP race.

Yet the prediction markets, where users can buy and sell contracts on who will ultimately win the Republican nomination, are still very skeptical of a Cain victory. The real-time markets assessing the likelihood of the Republican nomination still have Romney enjoying a commanding 65.7 percent lead, with Perry trailing at 12.5 percent and Cain at 10.1 percent. Here is a look at how the leaders have progressed over the last few weeks:

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Likelihood of Republican Nomination for President (Oct 13)

Why are prediction markets so skeptical about Cain's prospects for winning the nomination?

Cain is still relatively unknown, but the markets are concerned about what Republican voters will learn. His new "9-9-9" economic plan, is yet to receive significant vetting from economists, and the initial reviews are extremely skeptical from all sides. Among the early high-profile 9-9-9 naysayers are the Atlantic, a former Reagan and George H.W. Bush adviser Bruce Bartlett and anti-tax activist Grover Norquist. All but six Republican House members have signed a pledge to Norquist to follow his lead in tax policy, so his stamp of approval carries great weight within the GOP While Norquist is concerned about the 9-9-9 plan's viability, Bartlett is harsh. "Even allowing for the poorly thought through promises routinely made on the campaign trail, Mr. Cain's tax plan stands out as exceptionally ill conceived," Bartlett writes. And Cain can expect plenty more critical scrutiny in this vein as the media and his rival candidates begin treating him as a serious contender for the nomination.

As a sort of corollary to the prediction markets bearish view of the Cain candidacy in prediction markets, these same remain fairly bullish on Perry's chances, even in spite of his recent lackluster showing in the GOP debates and his sustained slide in the polls. What's the basis for this enthusiasm?

The short answer is: the money primary--and specifically, just how much money the campaigns will be able to spend on advertising. That's because prediction markets consider the state of the race as it will be on Election Day, while polls are more focused on that the race looks like today. And as the race inevitably narrows and intensifies between now and Election Day, ad outlays will be an ever more significant force in the battle to shape voter opinion.

And judged in terms of available ad money, Perry still shapes up into a serious contender. He raised more than $17 million in the third quarter; Romney raised about $14 million over the same period, while Cain was closer to $2 million. What's more, both Romney and Perry have much more cash on hand than Cain.

There is an important caveat here, though: Fundraising totals may not have as much predictive power as they formerly did, since this is the first presidential contest in the wake of the U.S. Supreme Court's 2010 Citizens United ruling, which opens the door for enormous infusions from corporations and individual donors who do not have to fund campaigns directly. Thus, we can only speculate on how much money anyone has. As Stephen Colbert showed, you can now raise unlimited funds and spend it anonymously; the only restriction is explicit coordination with the campaign. Perry's super PAC even believes that it can raise and spend more money than the actual Perry campaign will.

Both types of money are more likely to flow to Romney, as the "insiders' choice" and, to a lesser extent Perry, who has extensive fundraising connection s stretching back across many election cycles in the wealthy state of Texas. As the campaign moves closer to Election Day, advertising plays an ever larger role in disseminating information to voters. The irony here, of course, is that as a former CEO for Godfather's Pizza, Cain is certainly no stranger to advertising appeals--but the peculiar fundraising rules that govern the campaign world could well mean that he will remain on the margins of the main action in the money primary.

Nor is campaign advertising the only realm in which money looms large. In close or uncertain primary battles, "get out the vote" efforts can be critical to get candidates over the top. And get-out-the-vote operations are sustained on massive infusions of cash--like virtually every other feature of contemporary politics.

Correction: The original version of the chart showed a small downward blip in Romney's likelihood of attaining the Republican nomination on September 27. That was a coding error, not a real blip. The change does not affect the any of the main arguments of the article.

David Rothschild is an economist at Yahoo! Research. He has a PhD in applied economics from the Wharton School of Business at the University of Pennsylvania. His dissertation is in creating aggregated forecasts from individual-level information. You can follow him on Twitter @DavMicRot and email him at PredictionBlogger@Yahoo.com.

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