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Ever since Rick Perry announced that he was running for president, the Texas governor has consistently topped the previous presumptive GOP frontrunner, former Massachusetts Gov. Mitt Romney, in every poll. In early polling, Perry has enjoyed leads over Romney that range between 4 and 19 percentage points.
Yet the prediction markets have recently, and consistently, begun to favor Romney. It's now more expensive to buy a contract that pays $1 if Romney wins the nomination than it is to buy a contract that pays $1 in the event of a Perry win. I mentioned this trend briefly in an earlier post, but here I'd like to go into a bit more depth to explain why this is happening and what it means.
The chart below plots one line showing the collective poll results for Perry in the wake of his announcement alongside another showing how the prediction markets have behaved over the same time:
The political handicappers who take part in the prediction markets are not saying that Perry would lose a primary election to Romney today. Rather, they are betting that Romney is slightly more likely to win when the primaries are actually held in a few months.
Perry and Romney combine for about 47 percent of the total GOP primary vote, on average, across the polls; that number has held steady over this timeframe. That means a slight majority of Republicans--approximately 53 percent--now either intend to vote for another candidate or are undecided.
So the relevant calculation in assessing the outcome in an actual primary is this: When other candidates drop out (or if their supporters peel away), which leading candidate is likely to get more votes? And will Romney or Perry claim the edge when the roughly 16 percent of GOP voters who still say they're undecided make up their minds in an actual polling booth?
There's one important caveat, though, in sizing up such prospects for Romney and Perry: The race is about more than just Romney and Perry. In the early primaries, some defecting or undecided voters may gravitate to one of the two lead candidates. But with Perry and Romney still accounting for less than half of polled support in the race, other candidates can still surge, or events may overtake the top two candidates in ways that we're now unable to predict.
You can see a reflection of the still-fluid state of the race by looking more closely at the numbers for Romney and Perry. In the last five polls, support for Perry has shifted between 23 and 31 percent, while Romney has moved between 16 and 24 percent. If you look across a longer time frame, as candidates have come and gone, the volatility is amazing; one day 19 percent of poll respondents would say they would vote for Trump and 19 percent for Huckabee, and a few weeks later the support was somewhere else.
A lot of things are going to happen in the next few months--just one-third of the overall time that candidates are spending in primary-campaign mode has elapsed so far. The markets are assuming that the information that the Republican voters will acquire over the next few months will favor Romney enough for him to close the gap with Perry.
If you are reading this blog post about the election several months before the first primary, you probably know a lot more about these candidates than the average Republican voter does. Here's a quick sample of this knowledge gap:
• You know about Perry's record and strong support for state sponsored executions, but the average Republican voter will learn a lot more about that and specific decisions over the next few months.
• You know about Perry's support of the HPV vaccine to help prevent cervical cancer, but the average Republican voter is not likely to have heard details about the controversy.
• The average Republican may know that Romney created a new health care plan for Massachusetts, but as health care becomes an issue they will learn that Massachusetts has the lowest rate of uninsured and Texas the highest as this map shows.
• You know that there are concerns about how Perry made so much money as a public servant and that Romney was a very successful businessman--but even political insiders are only starting to hear details about Perry's business success.
• You know about Texas's unemployment rates during the Great Recession, but does the average Republican? Some people are concerned about his job records in Texas; there is some controversy. But Republican voters like policies of low regulation and oil drilling, so will they care about these concerns or marvel at his success?
Republican insiders are supporting Romney and they can use the major media sources to help spread his message over the primary season. However, Perry has a strong fundraising capability, which he will use to get his message across just as intensely. Republican voters are going to learn a lot about both candidates in the coming months.
The markets think Romney will gain on Perry as more information about both rivals comes to light. The stakes in this knowledge battle are high: While Romney and Perry combine for less than half of the projected primary vote in the polls, they combine for 78.7 percent of the likely Republican nominee in the prediction markets. There is, in other words, is a much smaller chance that another candidate will gain over this time and leave both Perry and Romney behind. When you weigh the statements of various prognosticators in the 2012 election cycle, you're on much firmer ground if you keep in mind what you know, what the average Republican voter knows now--and how the polls will look when the average Republican voter learns more of the things you know.
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.