Do prediction markets indicate that the media undercovers Ron Paul?

David Pennock

The libertarian-leaning digerati have been saying that Ron Paul is underhyped since at least 2007. That their cries have fallen on deaf ears has simply reinforced their conviction.

The news media's most recent and perhaps most glaring snub of the Texas congressman and Republican presidential candidate came last month, when Paul came a few votes shy of winning the zeroth contest of the Republican nomination process. In the Iowa straw poll, he finished a close second to Michele Bachmann and well ahead of every other candidate. Bachmann received plenty of ink (or perhaps pixels) for winning, and Tim Pawlenty's third-place finish was considered embarrassing enough for him to drop out of the race. Yet the news media largely dismissed Paul's showing as a non-event.

To some extent, all the talking about not talking about Paul—and the laughing about it—has been a breakthrough for Paulites. But is the news media right to dismiss Paul's candidacy as a sideshow? Was his near-win in Iowa really irrelevant?

One way to answer the question is to look at prediction markets like Betfair and Intrade. These sites are updated in real time by traders who are wagering on the likelihood of each candidate winning the Republican nomination. These traders are jockeying for an information edge as events and non-events unfold. If traders bid up the price of laying a bet on Paul immediately after the straw poll, they were calling it out as a noteworthy event for the candidate. If, on the other hand, his price barely budged, then the traders would be validating the news media's dismissal.

Before the straw poll, Paul's chances were holding fairly stable at around 2 to 3 percent. Immediately after the poll, they shot up as high as 5 percent in reaction, before settling in the 4 percent range. That's a 33 percent higher groove than before the straw poll, giving weight to the argument that his showing may have actually been worth something. Had Paul been given his due in the press, his bump in the markets might have been even larger.

But even after his 33 percent rise, Paul is still at only 4 percent in the markets, giving him a one in 25 chance of becoming the presidential nominee of the Republican Party. If we could somehow simulate the Republican nomination process 1,000 times under different possible scenarios, we would expect Paul to win about 40 of those times. Other candidates would win 960 times. That certainly qualifies Paul as a long shot.

On the other hand, only four candidate are currently rated more likely than Paul to win the nomination: Rick Perry, Mitt Romney, Sarah Palin and Jon Huntsman. Michele Bachmann's chances on the prediction markets have been steadily declining since July. Traders gave her candidacy little or no relief following her victory in the straw poll, even though she enjoyed four times as many stories in the news media as Paul from January 1 to August 15, according to the Pew Research Center's Project for Excellence in Journalism.

Despite the frequent portrayals of Bachmann as one of the leading candidates in the race after her win in the Iowa straw poll, the markets give Bachmann about the same chance as Paul to win: 4 percent.

Going strictly by the numbers, Paul may deserve a bit more news coverage than he is getting. But an even clearer message from the prediction markets seems to be emerging: Bachmann deserves less.

David Pennock is a scientist at Yahoo! Research in New York, where he leads a group focused on algorithmic economics. He has a Ph.D. in computer science from the University of Michigan. In 2005, he was named to MIT Technology Review's list of 35 top technology innovators under 35. One of his primary areas of expertise is the design and analysis of prediction markets.