July 2012

Tight presidential election enters August

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The last two weeks has been relatively quiet in regard to the race for the presidency, but expect some more noise soon. The two most serious events of the last two weeks have been the mass shooting in Colorado and Romney’s foreign adventure. Neither candidate appears prepared to make gun control an issue in the election. It is also unlikely that foreign policy will be an issue in the election, as domestic social and economic policy routinely dominates foreign policy for most Americans. Currently Obama is 59.2 percent likely to win reelection.

Sources: Betfair, Intrade, HuffPost Pollster, RealClearPolitics, etc., (all noted here on PredictWise)

Romney’s path to victory includes picking up Ohio and Virginia, currently leaning towards Obama, and one additional state; that assumes he holds Florida where he is currently 70.8 percent likely to win. First, both Ohio and Virginia are razor tight races and, if anything, have closed slightly since we released our state-by-state model two weeks ago. Second, the most likely extra state for Romney continues to be Iowa, where Obama is 56.6 percent likely to win, after New Hampshire briefly flirted with the title early this week.

Movements will be more frequent in the coming weeks. First, despite the declining marginal value of economic indicators as we approach the election, there will still be a lot of noise around the July job numbers that will be released on Friday morning. The current expectation is somewhere around 100,000 new jobs. Second, the Republican national convention kicks off less than four weeks, if Romney chooses to release the vice-presidential pick prior to the formal nomination, it will be soon. Despite recent talk of Marco Rubio (9.2 percent likely) and Condoleezza Rice (5.9 percent likely), we continue to provide over 50 percent likelihood that the vice-presidential pick will be a more conservative choice of either freshmen Ohio Senator Rob Portman (29.1 percent likely) or two term Minnesota Governor Tim Pawlenty (23.7 percent likely). Second term South Dakota Senator John Thune, with similar credentials and demographics as Portman and Pawlenty rounds out the top five with 6.7 percent likelihood.

Follow the state-by-state and national presidential predictions in real-time here on PredictWise.

In February, when, on the the Signal, we first unveiled the model for predicting presidential elections, we wrote that, "while campaigns and candidates matter, they don't matter all that much. Despite the varying quality and positions of the campaigns and candidates over the last 10 presidential elections, variables beyond their immediate control describe the outcome very well."

At the time, our model predicted that Barack Obama will win reelection with 303 electoral votes. In the past five months, as the campaigns have spent tens of millions of dollars on advertisements and fought tooth and nail for the smallest advantages, the model has remained steady. Only Virginia has switched columns at any point, wavering between camps as our predictions show and incredibly tight match there. At the moment, we have Obama eking out a victory in Virginia, keeping him at 303 electoral votes. Should he lose the state, he would retain the presidency with 290 votes to Mitt Romney's 248.

Click Here for the Full Text on Yahoo!'s The Signal

A response to David Leonhardt's "When the Crowd Isn't Wise"

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David Leonhardt wrote an excellent piece in the New York Times on both the effectiveness and limitations of prediction markets.

Mr. Leonhardt was inspired to write his column after prediction markets, notably Intrade, predicted that there was a 70 percent likelihood that the Supreme Court would overturn the Individual Mandate, which ultimately did not happen. This led to an explosion of criticism of Intrade on Twitter and elsewhere, with most commenters concluding that Intrade being "wrong" in this sample size of one proves that it isn't a useful tool for prediction.

We have a few points to add to this discussion, both in agreement with Mr. Leonhardt and in defense of markets.

First, we wish that Mr. Leonhardt had mentioned one of the primary advantages that prediction markets have over experts: while experts generally forecast a binary outcome for an event ("will happen" or "will not happen"), markets provide a probability of each outcome. Forecasting with probabilities versus binary outcomes provides a lot more information, but it is nuanced. For any given prediction, the only way that a market (or expert) can be easily understood as right or wrong is if it predicts with 100% certainty that an event will happen and then it does, or with 0% certainty that an event will happen and then it doesn't. This binary framework is easier for us to grasp, but it is not reflective of reality.

For those willing to consider the nuances, we can more accurately judge a probability forecast on two different rubrics: its calibration (i.e., percent that come true versus probability) and its precision (i.e., how far towards 0 or 100 percent it goes, while maintaining its calibration).

Calibration can be a tricky concept to grasp, but here's a simple example: If Intrade has markets for 10 different events and predicts a 90% likelihood for each of them to happen, 9 out of the 10 events should happen. Importantly, 1 out of the 10 should NOT happen. If all 10 happen, the markets were mis-calibrated, just as they were mis-calibrated if only 8 happen.

As for precision, as Mr. Leonhardt correctly pointed out, in times of low information the market should be less precise. This is certainly the case when it comes to a Supreme Court decision. To some extent, the market itself recognized that this was a difficult event to predict, and responded accordingly. That is why the markets stalled at 70 percent likelihood on the Supreme Court ruling rather than going up to 80 or 90 percent. The ex-ante information (and, to an extent, the ex-post information backs up the ex-ante) pointed to a likely overturn of the mandate, but the market was not willing to move into 'certain' territory. Further, the market also revealed a key indicator of low information on top of the low precision forecast. When the 'spread' of a contract - the difference between what people are willing to pay and what people are willing to sell for - moves past 5 percentage points, we consider the market to be illiquid. It did that prior to the Supreme Court ruling.

For markets with more information (such as the upcoming presidential election), we can expect far more precision, and as the sample size grows (such as the numerous markets for state-by-state Electoral College, senatorial, and gubenatorial elections) we can expect far better, and easier-to-understand, calibration.

We also wish that Mr. Leonhardt mentioned one other advantage: prediction markets update in real-time while experts update at will. Markets are always the most recent aggregation, and are available whenever you need the data. Providing easier access to this real-time data was one of the primary motivations for us to create PredictWise.

Mr. Leonhardt's conclusion, if we may paraphrase it, was dead on: prediction markets aren't perfect, especially for certain types of events, but they are still a very useful - perhaps the most useful - tool for prognostication. We agree with his suggestion that the future of predictions is to find innovative ways to combine the data gleaned from multiple sources (markets, polls, experts, etc.) to create the best possible predictions. That is our long-term goal at PredictWise.

In the coming weeks we will start providing state-by-state forecasts of the Electoral College, senatorial and gubernatorial elections and these predictions will reflect much more than just raw prediction market prices. The predictions will first debias prediction market prices and then combine them with forecasts derived from debiased-voter intention polling data and fundamental data. In theory, prediction markets should be perfectly efficient and should include all of the polling and fundamental data (i.e., they should not need any corrections or combine with other available data to form more accurate predictions). But, empirically, with extensive academic investigations, we know that is not the case.

Stay tuned.
-David & Andrew


June's tepid job growth, which led to no change in the unemployment rate, prompted the usual sour notes over for President Barack Obama's reelection chances. While the news is unquestionably bad for the president, the big picture is better for him than it may seem. In 1992, the economy added 379,000 jobs in the first half of the year. In 1996, when Clinton won reelection, the economy added 1,439,000 jobs in the first two quarters, and in 2004 it added 1,183,000 jobs in the same period. The economy has added 902,000 jobs in the first six months of 2012-not has high as Clinton or the younger Bush, but well over twice the growth during the first Bush's reelection campaign.

For the Obama campaign, this is a mixed blessing. While the President's economic numbers are not as bad as they may seem, his record is also largely set in stone. If history is any guide, neither a collapse or an economic miracle at this point will make much difference with an electorate whose mind is increasingly made up.

Click Here for the Full Text on Yahoo!'s The Signal