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The Betfair Prof: "So what's the issue? It's Electability, Stupid! Isn't it?"

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The Betfair Prof, Leighton Vaughan Williams, tells us how a simple calculation can turn a seemingly simple prediction market into something much richer, providing a real insight into the chances of having a President-elect Obama or Clinton come November. There is certainly more than meets the eye when it comes to prediction markets...

Both claim it, but do they both have it, and if so who has more of it? I'm referring to the candidates vying for the Democratic nomination for President of the United States, and their various claims to that most desirable quality in a candidate - Electability!

Barack Obama claims he is more electable than Hillary Clinton because he has won more states, more votes and more pledged delegates. Senator Clinton claims she is more electable because she has won the big states with the electoral votes which decide the outcome of the race. Moreover, her claim is based on the conventional arithmetic that a candidate needs to win at least two out of Florida, Ohio and Pennsylvania to win the White House. The former first lady points to her big wins in Ohio and (most recently) Pennsylvania, and her runaway victory (under 'no campaigning' rules) in Florida. She can also point to polls that show she is performing better in a hypothetical match-up against Republican Senator John McCain in the big swing states. Mr. Obama counters that he can put states into play for the Democrats that Mrs. Clinton cannot, and that he will be able to draw independents and disgruntled republicans into his camp by election day in a way that his Democratic opponent cannot.

The debate about electability is raging so furiously that the Democratic Governor and one of the Democratic Senators for Pennslvania recently took to airwaves in face-to-face combat over the issue, on the agenda-setting 'Meet the Press' programme. Governor Ed Rendell, for Senator Clinton, and Senator Bob Casey, for Barack Obama, fought it out to a standstill with no decisive victor.

Mark Mellman, a Democratic pollster, quoted on ABC news, sums up the 'electability question' thus: "The truth is unless you've been endowed with the gift of prophecy, it's a fool's errand."

Maybe so, but then again, maybe not! It all depends on how much faith one holds in the prediction markets.

One way to estimate the electability of a candidate using the prediction markets is to use what statisticians like to call 'conditional probabilities.' The basic idea is pretty simple. If we divide a candidate's chance of winning the keys to the White House by their chance of becoming their party's standard-bearer we have in effect derived a sort of 'electability index' for that candidate.

Last Thursday morning, a little more than 24 hours after Senator Clinton had given her victory speech in Pennsylvania, the Betfair markets had the odds at which you could back a Democrat to win the White House at [1.64] (61%). Simultaneously, the odds about Senator Obama winning the Presidency were [2.22] (45%) with a 79.4% chance of winning the Democratic nomination (odds of [1.26]). A simple calculation and you have that electability index. By dividing 45% (the chance of Obama winning the keys to the White House) by 79.4% (his chance of winning the nomination) we reach a figure of 56.7%. A similar calculation for Hillary Clinton (trading at odds of [5.8] for the nomination and at [7.4] for the Presidency) produces an electability index of an astonishing 78.5% (13.5% divided by 17.2%)!

Is this the ultimate post-Pennsylvania bounce or does it signify something more telling? Well, as I write the Monday after the week before, the Obama electability index stands at 57.1% while the Clinton index has slipped slightly but continues to ride high at 71.4%. So what's the issue? It's Electability, Stupid! Isn't it?

Professor Leighton Vaughan Williams is the Director of the Political Forecasting Unit and Betting Research Unit of Nottingham Business School, Nottingham Trent University, and Editor of the Journal of Prediction Markets

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