Election Odds

Statistically speaking, the 2012 U.S. elections will be tight. There’s a significant likelihood that the outcome could be anything from the Republicans gaining control of all three branches of government to the two parties maintaining the current balance of one and a half branches each.

How significant? We can make some calculations by looking at the year-end data from prediction markets, including Betfair and Intrade. A prediction market is a place where political handicappers buy and sell contracts on whether an upcoming event, such as President Barack Obama’s re-election, will occur. The market price reflects how much money users are willing to invest up front in order to win back one dollar if they are right. This price is a meaningful indicator of the probability of the event occurring.

Obama has a 51.2% likelihood of winning re-election, with a 41.0% likelihood of facing Mitt Romney. At this time, Newt Gingrich is Romney’s greatest threat, with a 39.5% likelihood of winning the GOP nomination. The Republicans have a 25% likelihood of retaining the House, while the Democrats have a 25% likelihood of retaining the Senate. (Democrats control 23 of the 33 open seatsĀ  in the Senate.)

Here is a look at how the most important predictions have moved during most of 2011. Events such as the death of Osama bin Laden and the Republican debates have shifted the likelihoods you see below.

Heath care will play a key role in 2012. The Supreme Court will rule in June on the constitutionality of the individual mandate from Obama’s landmark health-care legislation. Prediction markets determine a 40% likelihood that the justices will strike down the mandate, effectively disabling the law. Obama championed and signed the law, but Romney is heavily invested in it as well, as his Massachusetts health-care law was the basis of the federal law.

Taxes and budgets, tea parties, and Occupy Wall Street protests will also be prominent in 2012. Occupy Wall Street has helped redefine the political discourse in just the past few weeks, energizing references to the top 1%, income inequality, and the regressive or progressive nature of different tax policies. This will make a difference in 2012, as the nation will talk about these issues, along with the super committee’s likely failure to reach a budget agreement, the threat of massive budget cuts, and the return to pre-Bush tax rates. The economy, and inequities therein, will hang over Congress and the president all election cycle.

In foreign policy, the United States committed to withdrawing from Iraq by the end of 2011, and the operation in Libya is over, but more may be in store for 2012. There is a 22.8% likelihood of a U.S.- or Israel-led airstrike on Iran by the end of 2012. Politicians in the United States are talking a lot about Bashar Al-Assad from Syria, who has a 47.5% likelihood of losing power before the end of 2012.

David Rothschild is an economist with Yahoo! Research Labs in New York. Rothschild writes for The Signal, which is a collaboration between Yahoo! Research and Yahoo! News that is dedicated to using objective data to explain the world as it was, is, and will be.