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.

Veep Debate - Quick Analysis

The Naked Dollar's call (see previous post) was that both sides would come away thinking their guy won. I gave a slight edge to Ryan. Gotta say, we're 2-for-2. CNN has Ryan edging Biden 48-44.

This surprises me, a bit, because I thought Old Joe won the night. He was completely full of crap, of course, but he played the hand he was dealt well. It was his condescending behavior that cost him the night with viewers. You would think that after Obama's debacle with the split-screen, Biden would have been better prepped on that score, particularly since he was well prepped otherwise. All the smiles, sneers, eye rolls, and interruptions made him seem like a bullying ass on what was otherwise a good night for him.

I personally found this debate irritating to watch, a bit like one of those cable news shows where everyone talks over each other. It was interesting to contrast it with the debate between Joe Lieberman and Dick Cheney in 1999, a favorite of mine. Like last night, the two men sat at a small table, but that's where the similarities end. Cheney and Lieberman were just two smart men having a calm conversation. Both came out looking well.

The burning question is how last night went down with independents. The evidence, so far, is that it made no difference. In Luntz's focus group, no one was swayed. But, all in all, Joe did what he was supposed to do, which was change the national topic from Obama's horrific performance last week.

And on we go.

Calling the Veep Debate

Not being smart enough to quit while we're ahead after nailing the first debate, the Naked Dollar will take a stab at the Veep debate tonight.

The call: both sides will declare victory, and both will honestly think they've won.

I think it's almost a given that Ryan will perform admirably. While it's true he hasn't formally debated in a while, he has spent the last few years traveling the country, participating in forums, town halls, etc. He's used to being challenged, he doesn't shy away from it, and he knows his facts like nobody's business. Also, he has a likeable, non-threatening, mid-western persona.

Ah, Biden. We all know his shortcomings, the biggest of which is that he weighs in about 40 IQ points shy of Ryan. But I think he makes up for this in sheer political canny. This guy has been around, and he knows how to fire up a room.

After Obama's debate disaster, you can also count on Biden to be really aggressive, and this will be where everyone thinks their guy won. Remember, that as a long-serving member of the Senate Judiciary and Foreign Affairs committees, Biden was a serious attack dog, going after Republican appointees in the nastiest, sleaziest sort of ways. Tonight, this will cause Republicans to recoil in disgust but will be red meat for Chris Matthews groupies. How independents react will be key.

I give Ryan a slight edge, though, on two counts. The first is that Biden has been doing debate prep for six days now. I think we all know that's not Joe. Too many facts just won't fit in there, and it will stifle his natural flourishes. You might say, "Good, he gets in trouble when he's extemporaneous," to which I say, sure, but that's when he's at his best, too. Joe is Joe. Can't wave pixie dust and turn him into someone else in six days.

Secondly, Biden could be the greatest debater on earth and he still couldn't defend the last four years. This is why going nasty is his only option.

Pop some popcorn, grab a beer, and watch the zingers fly.

Conservatives Are from Mars, Liberals from Venus

I recently had two very illuminating experiences, three thousand miles apart.

First, at Yale, a talk given by Gaddis Smith, a prominent retired history professor who has become the unofficial historian for Yale itself. The talk was on the history of Yale's residential college system. For those not familiar, "colleges" are what Yale calls dorms but they are much, much more than just a place to live. Modeled on Oxford and Cambridge, they are the hub of your undergraduate life. Architecturally resplendent, they are a daily beehive of activities that range from sports to arts to social events. Each has its own, distinct personality and it matters which one you are in. It is a wonderful system. (Full disclosure: Gaddis was actually my own master in Pierson College, many moons ago.)

Gaddis's talk was entirely - and I mean entirely - about Yale's history of discrimination, at least as Gaddis saw it. He was viewing the history of the college system through the prism of gender rights, gay rights, etc. Now, Yale's not perfect, but like every other institution in the world, it has evolved. A lot. If your highest priority is the promotion of aggrieved groups, you should be ecstatic with where Yale is today. Over the moon.

But seriously, Gaddis, you couldn't find a single nice thing to say about the college system? Hey, Pierson won the beer chugging tournament when we were both there. How about that? Wooooot!

(Brief time-out...going back to non-sarcasm mode. 1, 2, 3....okay.)

A week later I found myself in Venice Beach, not a tweed jacket in sight. I was looking up a Yale friend that I hadn't seen in 30 years. Great guy, and it had been too long, but we're definitely on other sides of the philosophical fence. He was in the Peace Corps and designs sustainable architecture (Naked Dollar regulars probably know my feelings towards the word "sustainable").

He took me for a coffee shop that also sold surfboards and motorcycles. Piercings abounded. I asked for Splenda and was met with a disapproving glare. (We have agave nectar - it's delicious!)

We got to talking politics, of course. I don't think my friend runs into too many conservatives in the Venice Beach sustainable architecture crowd, because he periodically looked at me like some fascinating new species upon which he had stumbled. That's okay, we conservatives are used to it.

I made this comment: "If Obama is re-elected, the America we grew up with will be gone forever." My friend's face lit up and he said, "Good!"

I was taken aback. Seriously, you actually said that? 

But I wanted to understand. This is a nice guy, a decent guy, and smart to boot. I started asking questions, and answers came.

My friend uses the same prism as Gaddis. He was thinking entirely of progress America has made, as he sees it, in areas like women's, gay, and racial rights. Who'd want to go back to the 50s? I, on the other hand, was thinking (almost) entirely of economic issues, and how we will soon bankrupt ourselves. We had two entirely different perspectives, and it was a difficult gap to bridge.

Here's the thing, my liberal friends. None of those issues you care about is going to matter if we become Greece, and that is very much where we are heading. The path, and the mathematics, are clear. When our currency is destroyed and unemployment hits, say, 20%, you will long for the day when we could spend hours at a time debating things like gay marriage. I have serious qualms with your priorities.

Oh, liberals are vaguely aware of these issues, and if you pin them down they'll admit they're a problem. But they just don't care, at least not nearly as much as they do about cultural issues. I would argue this is an adolescent view of the world, one where economic issues are "boring," and best left to others - parents? - to worry about.

Most conservatives I know would give on virtually every social issue if we could just get the country on solid economic footing. Do I care about abortion? Sure, I have a view, but it's about 45th on my list of priorities. As one friend of mine put it, "I'll let them have gay marriage and everything else if we could just have a tax system that makes sense and a goddamned balanced budget."

Amen.

Election Model Updates - October 6th

Ok, sports fans, I finally found the time to update both models at once. If you want to learn how this is calculated, go here. First, the Pulse Index:

Obviously, this reflects what we know, which is a big momentum shift towards Democrats since the convention. Interesting to note that each bounce for the Dems (downward lines) has been bigger than the previous bounces. He's what the cumulative graph looks like:

While Republicans, overall, are still up since April, Democrats have manged to erase about two-thirds of their gains in just three weeks.

A couple of comments. First, these numbers do not yet reflect any post-debate polls. Check back in a few days to see if Romney's performance resonates up and down the ballots.

Second, you should not interpret this as a "who's going to win" model. It is only meant to measure short-term shifts in the national mood. Just because the Republicans are up, over all, doesn't mean they will do well. It simply means they have done relatively better than Dems, overall, since early April. If their starting point was poor, they could still theoretically get wiped out.

Even a last minute surge by either party isn't a lock, because it might not be enough. 1976 is a good example. Gerry Ford had a huge surge late in the game but fell just short. Had the election been one day later, Ford would have won.

On the other hand, The Naked Dollar Electoral Model is very much intended to predict the winner (of the presidential race only):

If you want to understand this, go here.

Right now, the call is 302 votes for Obama, 236 for Romney. In 2008, it was 365-173. 270 are needed to win. Note that this does include post-debate data, which means the prediction markets aren't as impressed by the debates as everyone else seems to be.

I find this curious, and not a little bit illogical. Is the diffuse, wisdom of the crowds seeing something that we don't see as individuals? Certainly, that's possible. The other possibilty exposes one of the flaws of these markets, which is that they aren't terribly liquid, and so they can be manipulted with a fairly small amount of money. In 2004, for instance, in the early afternoon, there was a huge surge in the John Kerry contract. Remember, on election days, there's basically no information available until later in the day. Did someone know something? Secret exit polls, perhaps?

In reality, the surge made no sense unless someone was trying to create an air of inevitability around a Kerry victory. I figured whomever it was spent about $10,000. A pittance in the scheme of a presidential election.

No, I doubt this is what's going on. I just think the market has been buying into the media narrative that, until a couple of days ago, had Obama winning in a walk. There's some easy money to be made right now on Intrade.

Debates, Round One - Naked Dollar Sticks It

I don't need to add to the chorus of analysis after the first debate, but I do get to crow a little bit: The Naked Dollar called it right, and for the right reasons (see the post beneath this one). The rest of the media world is catching up. I also have to say it was fun watching Chris Matthews have a near-aneurysm on live TV.

Perhaps the one remarkable thing, as noted by JPR in the comments, was that it wasn't even close enough to spin. Someone else had previously posted that it didn't matter how well Romney did since the media would just tell the story they wanted to anyway. Yes, that's true, except for one scenario, one in which the debate was so demonstrably one-sided that media knew they wouldn't get away with it. They still care about their credibility, I think, sort of.

65 million people were watching. Can't spin something that everyone sees with their own eyes.

Why Romney Has Several Debate Advantages

In my days as a Yale undergrad, I was surrounded by smart liberals. It is the nature of the place. As a conservative, you had to be totally on your game, and you had to understand your adversaries. If you didn't come out of Yale with a full understanding of the liberal mindset, you were sleeping for four years. In fact, just last month I was at a small gathering of Yale professors and administrators. One professor made a crack at the expense of George Bush, and the room erupted in laughter, everyone safe in the knowledge that no one could possibly not find it funny.

To be intellectually sharp, it is necessary to have a lot of exposure - direct exposure - to people who don't think like you. Bill Clinton was an excellent debater in large part because he was a liberal from Arkansas. Ronald Reagan was a conservative from California and the entertainment industry (and a reformed Democrat). These men understood the philosophies they opposed.

Barack Obama has spent his life in a pleasant echo chamber, one where conclusions can be glib and rarely challenged, and where knowing nods are exchanged in the faculty lounge. From Harvard to Columbia to Chicago, to his radical family members and his youth in Hawaii, I seriously doubt Obama ever had a five minute conversation with a conservative in all that time. If a fellow student or faculty member had ever taken issue with him, concerns for political correctness would have been more than enough to ensure their silence. He certainly never spent any real time with anyone who might have given conservative views the slightest bit of credence. Conservatives were likely dismissed as dumb southerners and religious zealots. Nothing for any person of real intelligence to waste any time pondering.

I have known a lot of people like this in my life, and in my experience they wilt easily when confronted with rational arguments that don't conform their belief systems. The result is usually petulance and name calling. (Fascist!) Obama, for his part, still doesn't understand conservatives or their ideas. He recently said he prefers watching the TV show Homeland to the Republican debates.

Obama is also out of practice. This matters, because debating is an acquired skill. Obama has been spending time on The View and David Letterman where he has to answer tough questions like, "Is it hard for you that not everyone understands your brilliance?" Yesterday, Obama said debate prep was a "drag." Does this surprise anyone? Hey, going to fundraisers, chilling on The View, and playing golf are so much more fun. John Kerry is playing Mitt Romney in the debates. John Kerry, a liberal from Massachusetts. Do I have to say it?

More broadly, can you think of a time in his life when Obama has ever been seriously challenged, about anything? His political races have largely been cake walks, and John McCain was practically offering to run and get Obama a latte during the debates four years ago. Those times he is challenged, he gets prickly. Prickly doesn't play well in debates.

Lastly, four years ago Obama was a complete unknown with virtually no legislative record in the Senate or the Illinois House, so he had nothing to defend. He could say whatever he wanted, attack without being attacked. Now, he is the 100% owner of four years of miserable performance. It is a target rich environment, to say the least, and Romney won't be shy about going after him.

Mitt Romney went through nineteen debates in the primaries. More broadly, he is a conservative (kind of) who has spent most of his life in liberal precincts. Does anyone think he's not ready for this?
 
One big, giant caveat: Romney still faces his biggest challenge, which is connecting with people on a personal level. If he loses, this will be why. Stay tuned.