Election Models Update

As I write, Sandy is pounding on us, so I will try to get this out before we lose power. During Irene, we lost power for five days. Ugh.

Here's how the pulse index looks:

And the cumulative...

(For an explanation of this, click here.)

It's worth noting there have been three large, definable trends during this campaign. First, a huge upswing for Republicans during the summer, something that went unnoticed by the MSM. This trend was stopped in its tracks by The Democrat convention, which erased fully half the summer's gains for Republicans (this was very much noticed by the MSM.) More recently, there was a Republican uptrend since the first debate. Interestingly, this trend appeared halting at first, but has actually picked up momentum very recently. If Dems can't reverse this soon, they will be very unhappy on election day. Arguably, the most important trend is the last one.

On the other hand, after Romney pulling even a few days ago, Obama has bounced back some in our Electoral College Model, and he now leads 283 to 255:

This is very odd, indeed. Two models, one based on polls, the other based on people making bets, seem to be telling us two different things. More thoughts on this to come.

SNL Nails It

SNL has summed up the Naked Dollar's view of undecideds nicely:

http://www.nbc.com/saturday-night-live/video/undecided-voter/1418227

Have Conservatives Warmed to Mitt?

All through the primaries, conservatives, including this one, kept searching for the anti-Mitt. Just about everyone got to take a cut, and in the end, Romney won a battle of attrition. But consider this: while 30% of the country is Republican, 40% consider themselves to be conservative. This is why Republicans tend to win base-driven elections (Reagan) and lose battles for the center (Ford, Dole, McCain).

Despite the word "extreme" ushering forth from every Democrat talking head, no serious analyst considers Romney to be ideologically conservative. Conservatives themselves certainly don't. And yet, my non-scientific observation is that they have embraced the governor. It would be tempting to say that this is a marriage of convenience, that conservatives would vote for a toaster if it meant dispensing with Obama, but no, I don't that quite covers it. I think there is genuine conservative enthusiasm behind Romney at this point. I feel it myself.

So, why? Is this a case of wishful thinking? It may be, but I think there's something else going on. Mitt Romney is being embraced not as an conservative ideologue, but as a problem solver. His entire background paints a picture not of a thinker but as a doer. Not as someone who views the world as a struggle between ideas, but as a series of problems to be solved.

Romney was a consultant, of course, and then an exceptionally successful private equity executive. Both jobs are about fixing things that are broken. Olympics? Another problem to solve. By all accounts, he even views winning the election as yet another problem to be broken down into component parts and solved. Define the problem, put a plan in place, execute.

Let me be clear that it is always a concern when the non-ideological Republicans are elected president. It gives us Nixons, Fords, and Bush 1s. Ineffective all, and a lack of philosophical bearing was a problem common to each of them. Romney himself had a problematic stint as Massachusetts governor, at least from a conservative perspective (Romneycare!). I'll go a step further and suggest that Romney would have made a poor president if he'd been elected in, say 1996. This is not a man you want for the good times. Left with no major problems, who knows where someone with no compass goes.

But now, the man and the moment might just be a splendid match. America's problems are acute and definable. Romney can see them, and he will attack them like the problem solver he is, and in doing so, will also be aligning himself with conservative economic priorities. I think this explains the new love affair between Romney and his former detractors.

No one planned it this way, but it's a good thing for Mitt it's working out like this. He won't win if conservatives don't show up next week, but show they will.

Independents Are Not What You Think They Are

Most independents have no idea what's going on. Okay, that's a controversial thing to say, but bear with me for a couple of minutes. It has something to do with cocktail parties.

Conventional wisdom is that independents control the tipping point of every election. Politicians ignore them at their peril! But who are these folks? It seems to matter, because the media gives us breathless reports on them almost hourly. The message I hear is that they are the thoughtful voters, the ones who carefully weigh every candidate on the issues, and then come down from the mount close to election time, brows furrowed with the weight of all that cogitation, to deliver their verdict.

What a pant load. 

Before I get into exactly why, let me say there are some smart, informed independents out there. Many of them have grown weary of one party or the other and have thrown in the towel, and I am somewhat sympathetic of this decision. But on the whole, I don’t think they are the enlightened bunch they are made out to be. 

I am on to them.

Here’s why. Have you ever noticed that when two people sit opposite each other, they tend to copy each other's postures? One leans back, the other leans back. One crosses their legs, so does the other, without conscious thought. This is a well documented phenomenon known among behavioral psychologists as postural mirroring.

The same precise effect happens with preference sets. People tend to gauge the viewpoints and behavior of others around them and modify their own positions accordingly. Over time, certain viewpoints or behaviors will become acceptable that weren't previously. Blogger Glenn Reynolds once pointed out, by way of example, the sudden appearance of American flags across our landscape (particularly on cars) post-9/11. Were people suddenly more patriotic? Probably not, but opinions and behavior are highly contagious. Once a few opinion leaders started waving the flag, others took this as an "all clear" signal that they could overtly display their patriotism, and they did. This is sometimes called a "preference cascade."

A year later, the flags were gone as the process reversed itself. Investment bubbles and fashion trends come and go in much the same way.

Nowhere is this phenomenon more acute than in the realm of politics and political issues. The explanation is rooted in the fact that most people don't pay much attention, but they don't want other people to catch on to this fact. No one wants to appear uninformed.

This is where my cocktail party theory comes in. 

I know this doesn't describe anyone reading The Naked Dollar, but let's pretend for a moment that you are that uninformed person, and you find yourself at a party. Suddenly, much to your horror, the conversation turns to politics. You very much don't want to look like an idiot. What to do?

The answer, short of staying silent, is to take a position as close as possible to those around you - the cocktail party center. No one will challenge you if you're agreeing with them. Disagree, however, and you might be forced to back up your opinion with facts or logical argument. That would be risky, especially since you don't know any. So, you gravitate to the views of those around you, and pretty soon you own those views.

This ends up being self-reinforcing: the more you observe and mimic others, particularly from your own social milieu, the more you end up truly embracing their opinions, and the more you, in turn, tend to then influence others.

In my own hometown, this phenomenon was rampant in the last presidential election cycle. Probably around 2005, it became unfashionable to voice support for George Bush. Not our kind, dear. Can’t even pronounce “nuclear.” I watched as the independents and more than a few Republicans quickly modified their views to reflect those of progressive opinion leaders, who were pumping up the volume at the same time that conservatives turned mute.

When Obama came along, the table was already set. Supporting him was "enlightened" and "sophisticated." Nod your head and watch your social stock rise.

Now, especially in the last few weeks, the process has completely reversed. Progressives (aka "liberals") are dispirited and conservatives are making the most noise. The prevailing view is that Obama has been a disappointment. "I voted for him, but he hasn't lived up to my expectations," is now the precise cocktail party center. The preference cascade has flipped, and Mitt Romney is the beneficiary. (With two weeks to go before the election, I doubt it can flip again.)

So, with regards to independents, I don't begrudge the uninformed. Okay, maybe a little. Okay, actually a lot. Some people want to live their lives and not spend hours figuring out the pros and cons of every issue and candidate. That's their prerogative. But hey, let's stop pretending they're Stephen Hawking.

Breaking News - Naked Dollar Electoral Model Shows Exact Tie!

After a comfortable lead all year for Obama, the Naked Dollar Electoral Model (NDEM) now shows the race at an exact tie in the electoral college, 269-269. Also, the Intrade Obama contract has plummeted to 56%. Naked Dollar readers should have made a lot of money if they read previous posts about the gross mispricing between the "big" presidential contracts and the state-by-state contracts. Interestingly, this arbitrage still exists because the state contracts (on which our model is based) say it's a 50/50 race, and yet the Obama contract is still at 56%. Look for further adjustment soon. Still a lot of easy money to be made on Intrade this cycle.

(To understand the NDEM, click here.)

Here's an historical view of Obama's contract. Note that the "price" can be interpreted as the odds of winning.

By the way, New York Times and media darling Nate Silver still has the president at a 68% probability of winning. In Silver's defense, he nailed the last election, but he's really out on a limb this time. In 2008, he looked smart because he thought Obama would do better than did just about anyone else, pretty much where he is today. But does he simply have a liberal bias? It's hard to look at the totality of what's going on and conclude that Obama is a 68% favorite right now. Silver is making a HUGE reputational bet.

Let's check in with the Naked Dollar Pulse Index:

And the cumulative...

A lot of volatility lately, mostly favoring Republicans. It remains true that while Romney gains momentum, the same cannot be said for Republican candidates nationwide, at least since the Democrat convention.

(To understand the Pulse Model, click here.)

More Polling Nonsense in Ohio

See, this is what I'm talking about. Today a CBS News/Quinnipiac poll was released for Ohio showing Obama up 50-45. Bad news for Romney, right? Hmm, maybe not. Here's the sample they used:

Republican      26%
Democrat        35%
Independent    34%
Other/DK         5%

CBS outsampled Democrats by 9%. In 2008, Democrats had a 7% turnout advantage in Ohio. Is there anyone on the planet that can make an argument that 2012 turnout will be better for Democrats than 2008?

In 2004, Republicans and Democrats were evenly split. In 2010 it was the same. As I argued previously, you could make the case that this year might be something like D+2. So, what happens to the CBS survey if you adjust it for this assumption? Here's what you get*:

Romney       48%
Obama         47%
Other/DK      5%

With Romney's huge lead among independents, I would argue he might get the lion's share of the "Other/DK" also.

This is some serious polling malpractice, something CBS/Quinnipiac has been guilty of this whole cycle. Here's a prediction: look for their samples to get much more reasonable at the very last minute, because the last poll is the one you're judged by.

A second poll came out today by PPP, a Democrat polling firm, that shows Obama leading Ohio 49-48. Seems reasonable, right? Sure, until you get to the fine print. PPP used a D+8 sample. I'm not the only one squawking about this stuff, and it's easy to dismiss as partisan whining until you lift up the hood and do the analysis for yourself. These pollsters have a lot of 'splainin to do.

*Assumptions: all Republicans vote for Romney, Dems for Obama, independents split +8.5 for Romney, consistent with recent national polling.

Election Models Update - October 21st

First, the Pulse Index:

And the cumulative view:

To understand this, click here.

Up is good for Republicans, down for Dems. Quite choppy of late. Interestingly, while Romney's poll numbers have been improving, which tends to push the chart up, this trend has largely been offset by somewhat weakening numbers for Republican Senate and House candidates. On the Senate side, this could have profound implications around Obamacare. We will examine this in more detail in a subsequent post.

Our Electoral College Model shows the race getting incredibly tight, but with a slight edge still in place for Obama:

(To understand this, click here.)

The current score: Obama 276, Romney 262. 270 needed to win. This is the closest the race has been since the numbers began. Interestingly, the "Obama to win" contract on Intrade remains at 61%, despite the state-by-state markets telling a different story (my electoral model relies on data from the state markets). The arbitrage opportunity I alluded to in the last post is still intact.

Intrade, Ohio, and the State of the Race

This is meant as a follow up to my previous post where I suggested that Obama's odds on Intrade seemed rich relative to the existing poll numbers (it's worth reading first). Yesterday, Obama was trading at a 64% probability for re-election. Today, he's off a bit, at 61.5%. National polls are a dead heat, and swing states are essentially a toss up as well, the one exception being Ohio, where Obama has a slim but definable lead (up 2.4% in the RCP average).

Looking at things on the surface, Obama's lead in Ohio could arguably justify a slight advantage on Intrade, but 64%? This seems illogical. Interestingly, once again, the Buckeye State is shaping up as the state-of-states. It was once thought Romney couldn't win without it, but now, with Virginia, North Carolina, and Florida solidifying for him, it looks like neither candidate can win without it.

Before we delve further into Ohio, let's just step back and make some strong generalizations about this race:

1. Democrats, with few exceptions, will vote for Obama
2. Republicans, with few exceptions, will vote for Romney
3. Independents will divide their vote, but right now are polling Romney +8.2

This last number is an average of the last dozen national polls, and it's a biggie. To put it in perspective, Obama won indies last time by the same amount - there's been a 16 point swing.

So, here's the game: you tell me who's showing up on election day, and I'll tell you who's going to win. If it's precisely the same electorate as four years ago, Obama wins by 2.4%, versus 7.2% in '08. (The change is entirely due to independents). But we all know that's not going to happen. Republicans were dispirited in '08, and Democrats had found their messiah.

What if the electorate is the same as 2010? In this scenario, Romney wins 51-49. But that was an off-year election, and we all know that's not going to happen either.

So, you tell me. Who's going to show? I would argue that the mood of the electorate is closer to 2010 than 2008, and certainly that's what the "intensity" polls say, but that still makes for a tight race. Really, there's no way to look at this thing and see Obama at 61.5%.

When analyzing polls, it's illuminating to see what party breakdown pollsters use. You see, pollsters don't just take all the answers people give and add them up; the data gets demographically massaged. Most importantly, the pollsters make assumptions about what the makeup of the electorate will be. The "electorate" is defined as the people who actually show up to vote. Here are some recent national breakdowns:

                                  Democrat     Republican     Independent
2010                               36%              36%                 28%
2008                               39                 32                   29
2004                               37                 37                   26

Even when you look at more elections, 2008 was a total outlier.

Which brings us back to Ohio. If some smart money knew something about Ohio that favored Obama, then the big Obama advantage on Intrade becomes plausible. So let's do a bit of a deep dive in Ohio to see what all the clever traders might know.

Obama won Ohio by 5 points. The breakdown of the electorate was 38-33-29, or D+5. In 2004 it was R+4 and in 2010 it was R+1.

So, what's the right mix for this time? Would you say it's D+5.4? No? Well, that's what the pollsters are using. That's the average of the last seven Ohio polls (hat tip to Numbers Muncher). They are actually assuming that Democrat turnout will be stronger than 2008! There is zero evidence to support this, and it deifies common sense.

A more reasonable assumption might be D+2. If I'm right about this, Romney wins 50.14% of the vote (assuming independents cut his way by the national average of 8.1%). That sure sounds like a toss-up to me. which means that the entire election can viewed the same way. This is not my view, mind you. I think Romney going to win by a surprising margin, and I've been on the record as such for months. But a cold, dispassionate look at the numbers says this thing's a toss-up.

Given this, it appears that the Intrade market is off by 10 points or so. Shorting Obama right now is a great trade. Not necessarily because he's a lock to win, but because the market should merge with the polling data soon. When it gets near parity, unwind, unless you just want to be a punter.

Is Someone Manipulating Intrade?

As Naked Dollar readers know, I love prediction markets. I love them because they have a highly successful record of predicting political outcomes with greater accuracy than polls. It's real people betting real money. This will be the third presidential election in which I have utilized the Naked Dollar Electoral Prediction Model (see here for explanation), and it has a great track record.

But I have to say, I'm confused right now. The top-line presidential contracts current place Obama's odds for re-election at 64%. I look at the polls, and the RCP average has Obama actually down by about a point nationally. The most recent Gallup poll actually has Romney up by seven points. Shouldn't Romney have a slight edge on Intrade? (Note: Intrade.com is the most popular site for prediction markets.)

Okay, I know what you're going to say next, it's about the electoral college. I know. So what does Intrade have to tell us about the swing states versus the polls? Let's take a look at Romney's numbers for each state:

                                 RCP Avg.                  Romney Intrade Odds      
Colorado                     +0.8%                               50.9%
Florida                         +2.5%                              64.5%
Iowa                            -2.3%                                41.5%
Michigan                     -4.4%                                12.1%
Nevada                        -3.3%                                34.0%
New Hampshire           -0.8%                                37.5%
North Carolina            +4.7%                                75.1%
Ohio                            -2.4%                                41.5%
Virginia                       -0.8%                                53.6%
Wisconsin                    -2.0%                                33.5%

Frankly, these numbers don't look that off to me. Maybe I would say Mitt should trade a bit higher in New Hampshire and a bit lower in Virginia, although Virginia probably reflects the fact that the most recent polls show Mitt with the momentum there and there's talk of Obama scaling back in the state.

If you award each state to the Intrade favorite, Obama wins 281-257, a helluva close race. Flip Ohio and Romney wins. Failing that, you could flip two other states such as Wisconsin and New Hampshire. Does all this add up to a 64% chance of winning overall, particularly with national polling numbers trending clearly in Romney's direction? Doesn't seem like it to me. What I'm suggesting here is that there seems to be an arbitrage opportunity between the national presidential contract and the state-by-state ones. Go long Mitt on the big contract and short him in the state contracts.

But why should such an opportunity exist? One possible explanation is that someone is supporting Obama's odds on the national contract because that's the one that everyone looks at. I had a dispirited friend call me last week bemoaning Romney's seemingly long odds. The point is, people look at this, including the media and the Twitterverse.

So, what would it take, hypothetically, if someone wanted to distort the market? There are two contracts that you'd have to manipulate, one for Obama and the other for Romney (they are essentially the inverse of each other). The open interest on these two markets is 2.2 million contracts. This works out to about $11 million in money currently at stake.

There are two ways one needs to look at this: short-term and long-term. To move the market intra-day is no big deal. Right now, for instance, you could bump Obama two percentage points for about $7000. That Intrade has been manipulated in this way is almost certain. On election day 2004, for instance, John Kerry futures shot inexplicably higher. This was, mind you, in the middle of the afternoon when no one knew anything concrete. If I recall, they rose from about 50% to 75%. The move was quickly reversed by traders, but it caused a buzz, which was likely the point. I calculated at the time it required an investment of about $10,000 to move the market that much. Ten grand for some media buzz on election day, when there's no other news? That's got to be the best deal on the planet!

Watch for this to happen again this year. Why? Because in the age of social media, particularly Twitter, it will be an even better deal. #election #obama Holy cow, Obama at 80% on Intrade! Retweet, share, repeat. By the time the contract reverses, the meme will have reverberated through the social graph. Mission accomplished.

Influencing presidential contracts for longer periods of time is a much bigger commitment. Daily dollar volume on each contract is roughly $125,000. What percentage of daily volume would one have to be to keep the price, say, 10% off the true market? For the sake of argument, let's say half the vol would do it. This would require a dollar commitment of roughly $7.5 million over the last 60 days of the campaign.

Remember, though, $7.5 million is the amount you'd have at risk. Should your candidate actually win, you make money on the scheme. For instance, assuming someone is currently manipulating in favor of Obama, there would be a profit of $4.2 million. The correct way to think of the cost is the amount by which you overpaid for the contracts. In this example, we assumed 10%, so the "true" cost is $750,000.

That's starting to sound like a better value, especially in the context of a billion dollar campaign, but the problem is the outcomes are binary, and one would probably have to budget against the worst case. Thus, I doubt is long-term manipulation going on.

What are the implications of this? If I'm right, it either means that:

1. Prediction markets are currently mispriced, or
2. Prediction market traders know something the polls don't

We will look at these possibilities in my next post.

Election Models Update - October 12th

To understand this model, click here.

We can now see the effect of the first debate in the data:

Republicans are experiencing a pronounced rebound, and while it has only erased about 50% of what Democrats gained post-convention, we don't yet know where the bounce will end. Note that the model's volatility has increased in recent weeks.

Here's the cumulative view:

And here's the electoral college model:

To understand this model click here. 

Obama stands at 283 votes (19 fewer than last week), Romney 255 (19 more). 270 are needed to win. The market has moved considerably towards Romney, as I predicted a few weeks ago.

Incidentally, the election model guru everyone seems to love these days is Nate Silver who has a NY Times blog. Nate's at 290 to 248. His model relies on polls whereas we rely on prediction markets, i.e. the wisdom of crowds. Who will win, the crowds or the intellectual? History says the crowds.