Things don’t look so good for President Obama’s chances in November 2012. According to Intrade.com, a site that makes prediction markets for hundreds of real-world events, investors believe that Obama currently has a 47% chance of being re-elected in 2012. This number marks a steady progression down from a peak of ~70% in May.
Why should one care about this outcome? It turns out that people are investing real money on these events. And people tend to be more thoughtful about their decision-making when being wrong means losing money.
Here’s how it works. If I believe Obama will be re-elected in 2012, I can buy 1 share for $4.70, which is 10 times the implied market probability that he will be re-elected. If he wins, my profit is $10.00 minus $4.70. If I am wrong, my profit is a negative $4.70.
Alternatively, I can short the outcome that President Obama is re-elected. If he loses, I gain a $4.70 profit. If he wins, I lose $5.30.
It seems the “smart money” is currently betting against Obama.