A key question in political circles over the last few days has been the effect of the death of Osama Bin Laden by the U.S. armed forces on the outcomes of the 2012 election. Indubitably, the event is beneficial to the Democratic party and President Obama in particular. Polls conducted in the days following the event gave Mr. Obama at 9 percentage point increase in approval. There are a few points to consider on the prediction market’s reaction to the event.
First, it definitely increased President Obama’s probability of victory in 2012. On average his probability of victory has gone from around 60% to around 63%. Second, both Intrade and BetFair, the two leading markets, took a surprising amount of time “digesting” the information. Today, seven days after the event, they are still moving sharply. Prior to Mr. Obama’s press conference announcing the death of Osama, the probability is relatively flat for weeks, but after the event there is a distinct trend in both markets that is still visible. Third, the two markets ultimately disagreed on the trajectory of the “digesting”. Betfair is digesting the news by moving even further in favor of an Obama victory and Intrade, from an almost identical position, is moving back toward the pre-Osama death probability of victory. I am not going to discuss here the true underlying value of Osama’s death, beyond the values provided by the markets, but I can state that in a few days arbitrage will bring these two markets together and we can have a clearer picture of what the markets feel is the underlying value of Osama’s death on the 2012 Presidential election.
There appears to minimal effect on the House. The probability of the Democratic party regaining the House remained flat through the last two weeks.Continue Reading