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Follow the money to find White House winner, betting expert says

Eric Gay / AP

President Barack Obama, right, and Republican presidential nominee Mitt Romney discuss a point during the third presidential debate at Lynn University, Monday, Oct. 22, 2012, in Boca Raton, Fla. (AP Photo/Eric Gay)

After Monday’s presidential debate, public opinion polls still have Republican nominee Mitt Romney and President Barack Obama in a very close race to win four years in the White House. But you don’t have to wait until Nov. 6 to know who the likely winner of this year’s election will be.

On Monday night, as Romney and Obama were duking it out over foreign policy issues, vast amounts of cash were moving through online betting markets to back the probability that Obama will take the White House again this November.

“Obama has 3 percent more chance of winning the election than he did before Monday’s debate,” said Leighton Vaughan Williams, a professor of economics and finance at Nottingham Business School and director of the school’s Betting Research Unit and Political Forecasting Unit.

Vaughan Williams has spent 12 years studying how well efficient betting markets -- also known as prediction markets -- forecast the outcomes of U.S. elections, starting with the Bush vs. Gore election in 2000. His research has demonstrated that when millions of dollars are wagered on events such as elections, the odds offered by betting websites tend to be far more accurate real-time forecasters of election outcomes than political pundits or public opinion poll.

Vaughan Williams has watched closely this fall as millions of dollars have moved through Internet betting markets such as Betfair.com or Intrade.com to wager on one candidate or another winning the White House this November.

Obama was always the market’s favorite, he said, but money has flowed toward Romney at key moments in the race. Obama’s lackluster performance in the first presidential debate increased Romney's odds of winning the election, and just before the vice-presidential debate, on Oct. 11, Obama’s chance of winning was down to 62 percent from a post-convention high of around 80 percent, Vaughan Williams said.

Obama had enjoyed boosts from moments such as President Bill Clinton’s well-received Democratic National Convention speech and Romney’s much-criticized comment at a fundraiser that 47 percent of Americans are too dependent on government and see themselves as “victims,” he said.

Bookmaker markets allow players to place bets on specific election outcomes. If Betfair.com, for example, showed Obama with a 6 in 10 chance of winning the election, the payoff on a $60 bet would be $40 (a player would risk $60 to win $40, with their initial $60 stake returned). Due to U.S. regulations, many sites such as Betfair.com do not accept bets from the U.S., so most of the wagering is by overseas bettors.

Following the third debate, Vaughan Williams put Obama’s chance of winning on Nov. 6 at 68 to 70 percent — up from 65 percent before the debate. He compiles his odds from an average of all the betting websites and bookmakers’ odds he monitors, allowing for possible inaccuracies and market manipulation. Vaughan Williams also takes into account how accurate these betting sites have been in past elections.

Vaughan Williams says betting websites offer a far more accurate prediction of electoral outcomes than opinion polls because the average voter doesn’t have any incentive to tell a pollster the truth about their voting habits, but when they are betting their own money they will tend to think hard about the choices they make using the best information available to them. The more money involved, the more efficient and accurate the market, he said.

“This is people’s real money,” Vaughan Williams said. “People who know the most bet the most, but people who know only a little tend to bet only a little. So with this very liquid market you can be pretty confident that the market is giving you an accurate insight into what is going on.”

Although Americans have bet on elections since 1868, or even earlier, according to Vaughan Williams, the first serious market for betting on elections was the Iowa Electronic Markets (IEM), which came to the fore during the 1988 Bush vs. Dukakis presidential election.

However, the online futures market, operated by the University of Iowa, is an educational and research project. Betting websites where individuals could bet “real” money on elections came to the fore during the Bush vs. Gore election in 2000. Since then, they have grown to large enterprises where millions of dollars are wagered on national elections, and also local and state voting.

The downside of these sites is they are open to manipulation. In the months leading up to the 2008 presidential election, traders reported unusual fluctuations in bets on John McCain to win the election, which appeared to be someone trying to artificially inflate his odds.

Thomas Rietz, a finance professor at the University of Iowa who sits on the steering committee for the IEM, notes that, unlike on Intrade.com and Betfair.com, the Iowa market limits individual account sizes to $500. That’s a small enough sum in relation to the money flowing through the market to prevent any one player from moving the market too much in any one direction.

He also notes that on IEM, punters bet on a potentially different outcome to the one they bet on when using Intrade.com and Betfair.com — which candidate will win the popular vote, as opposed to which candidate will win the presidency.

“We can compare vote shares, and it turns out we’ve been very accurate,” Rietz said. “The average amount of difference from the actual outcome is 1.2 percentage points.”

Vaughan Williams says recent figures show London-based Betfair.com has taken in some $15 million on the 2012 U.S. presidential election. The very close presidential race and the media scrutiny surrounding it could mean that some $100 million could potentially be spent on betting in this year’s White House race, he said.

Betting sites have proved prophetic outside the U.S. In the British general election of 2010, the first ever U.K. prime ministerial debate thwarted the Conservative Party’s hopes of winning an overall majority in government after good performance in that debate by Liberal Democrat leader Nick Clegg and an unexpectedly bad performance by the leader of the Conservatives David Cameron.

After the debate, betting websites clearly showed a shift in betting patterns that suggested few believed the Conservative Party would secure an overall majority in that year’s national election.

With few events as major as a debate between now and Election Day, Vaughan Williams said online betting sites will likely focus on the early voting returns, especially in key swing states such as Ohio.

“There’s just one report due to come out on the Friday before the election, but unless it’s astounding I doubt it will have much impact,” he said.

However, any indication of how early voters are behaving will have a major influence on the markets between now and the election, he added, “especially people trading with large sums of money.”

NBC's Chuck Todd reports that the third and final debate between President Obama and Governor Romney was a clash in styles, with an aggressive president met by an opponent who seemed to search for areas of agreement.

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