Could team Obama be rigging predictions markets?

Elections are about enthusiasm. We saw this in 2008 when most of the undecideds broke for Barack Obama. There is a so-called bandwagon effect in which people who identify with the side that’s perceived to be winning become enthused and follow through by showing up at the polls to vote for their guy. The opposite is also true; supporters on the perceived losing side become demoralized and don’t show up. We see this in the sports world all the time. Basking in Reflected Glory (BIRGing) is what some researchers call the bandwagon effect. Winning teams sell out their stadiums and arenas. Cutting of Reflected Failure (CORFing) is what followers of losing teams do. They don’t attend or watch the games, they distance themselves psychologically from the failure of their preferred team.

In this cycle Obama’s reelection campaign (aided by the media and pollsters) has gone to great lengths to maintain the appearance that Obama is winning in order to rally their own supporters and demoralize Romney’s. At Real Clear Politics Sean Trende explains how Obama has “defied gravity” thus far by spending money on advertising and changing the subject throughout the election cycle to keep his poll numbers above where any reasonable person would expect them to be given the “facts on the ground” such as slow economic growth, persistent high unemployment, decreased real household income, and several scandals such as Fast & Furious and the terrorist attack on the American consulate in Benghazi, Libya.

We’ve also seen Romney get a large bump in the polls after the first presidential debate. In fact, the Real Clear Politics average of polls turned in Romney’s favor despite the fact that many of the polls are still a showing significant advantage among Democrats in their likely voter models, a situation that no objective observer expects to be the case on election day.

But what about Intrade, which bills itself as “the world’s leading prediction market”? A quick primer on how Intrade works is available here. Briefly, the share prices (which range from $0 to $10) are supposed to reflect the percent chance of something occurring. For example, as of this writing the share price for Romney to be elected president is $3.85 which represents a 38.5% chance that he will be elected president. About three weeks ago when Romney was down in the polls and the media was riding that story for all it was worth, Romney’s Intrade numbers were down too. The closing price for Romney shares was $2.11 (21% chance of him winning) on September 29th.

Since the debate Romney’s chances of winning the election have close to doubled but still remain below 40% despite the momentum Romney is seeing in the polls, even in swing states.

We can accept Intrade at face value and believe that investors are legitimate people who are betting based on all the available information and thus Intrade is an accurate reflection of the state of the race. If true, it means that by and large the Intrade investing community still thinks Romney will lose.

But what if, as part of the “defy gravity” strategy, the Obama campaign (or people sympathetic to it) are participating in the Intrade market to pump up Obama’s numbers and deflate Romney’s? Intrade markets have proven to be extremely volatile because of the relatively low volume of shares traded. It wouldn’t take much activity to influence the markets. Intrade is based in Ireland as this kind of “investing” is not permitted in the United States. In order to open an Intrade account you have to wire money overseas or send a check.

I have no evidence that Obama (or anyone) is manipulating Intrade but my opinion is that it wouldn’t take much to do it. To illustrate the importance of Intrade, Real Clear Politics even provides real time Intrade quotes just below their poll averages. The New York Times, The Daily Beast, and Politico have all mentioned Intrade recently. The value of having your candidate appear to be winning would far exceed the cost that it would take to manipulate the market. Remember, both campaigns have raised hundreds of millions of dollars, not to mention wealthy donors and PACs that have an interest in this election. In the case of Obama, there’s already reason to believe he’s cashing in on illegal foreign donations.

In 2008, Nate Silver raised the specter of McCain’s campaign (or people sympathetic to it) rigging Intrade. In the end nothing was proven but given the Obama’s campaign single-minded focus on controlling the narrative to communicate “we’re winning” it wouldn’t surprise me if they at least tried.

My advice to observers is to discount Intrade as a method to predict the outcome of the race and my advice to voters is to go vote for your candidate regardless of what the polls or the pundits say.

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