Tuesday, March 27, 2012

Re-Introducing the Electoral Forecasting Model

In 2004, I introduced a model that I built to predict presidential elections. More specifically, it predicts the outcome of the electoral college, which is all that matters, after all. So far, the model has worked out pretty damn well: in 2004, it hit the electoral count on the nose, and in 2008 it got the winner right, missing the actual count by only 21 votes, or roughly the value of an Arizona swinging from one candidate to the other.

The model is built on "prediction markets," like intrade.com, where they have real-world betting on each state's outcome. Betting is continuous, and from it we may infer a real time, state-by-state, probability. I then multiply this probability times the number of electoral votes available in that state for the probablity-weighted outcome. It is understood that one cannot win part of a delegation (excepting Maine and Nebraska), it's all-or-none. Still, for predictive purposes, you don't want to hand 100% of, say, California's electoral votes to Obama just because he has a 95% of winning those votes. You give him 95%. It's effectively a small hedge against something dramatically unexpected happening.

It's time to roll out the 2012 model. Right now, it has Obama winning comfortably, 312 to 226. In 2008, he won 365 to 173.

There are caveats.

First, since the election is eight months out, the data is pretty thin (i.e. the state-by-state markets are very thinly traded right now - some haven't even traded at all, in which case I relied on the closing data from 2008).

Second, when I cited the model's accuracy, what I was really referring to was the last snapshot before each election. During the months-long run-up, there will be plenty of fluctuation, but it will still tend to be the best indicator at any point in time. Obviously, as circumstances change, so does the forecast.

Why does this work better than polls? Because it's real people betting real money, not people answering polls on the phone where their responses could be shaded for any number of reasons.

I will start to graph all this and post more frequent updates as the election draws nearer. Personally, I think the forecast is way, way off, at this point. As you know from my previous post, the math for Obama's re-election is highly problematic. If you agree, you should be placing bets on intrade!