Prediction Markets Election Contest
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Over at the NYT’s economics blog, Economix, David Leonhardt is running a prediction market contest, looking at odds of various Intrade contests. Pick any 3 of the 20 questions to answer, and the winner gets showered with untold glory and fame.
The contest has an interesting twist: Its based upon the betting at Intrade. That makes the choices less obvious and the strategies for winning the contest more intriguing. David asked me to submit a “guest” contest post for the Economix blog, which I did. You will find it at the New York Tmes.
In addition to my post, David graciously invited all of you to participate, saying: “You have a lot of really smart readers. Let’s see how well they can do in the contest.” Challenge accepted. The contest runs til tomorrow morning at 6am. Go over to the prediction market contest and submit your best guesses.
My approach:
Let me begin with this (weasely) caveat: While I have spent many years studying markets, I am not remotely a political analyst. In fact, I dislike politics, and I especially detest how it has polluted economics.
Also be aware that my preferences in 2000 were the exact opposite of what actually occurred. My choices were McCain, Bradley, Gore, Bush – and that was pretty much the order they lost in.
And by way of full disclosure, I am probably best described as a Liberal Republican – low taxes, balanced budget, strong defense, no unnecessary overseas involvement, and no government involvement in personal matters (birth control, abortion, gay marriage, etc.) Liberal Republicans are now mythical creatures that no longer exist. I do not recognize the abomination that now calls itself the GOP. I guess that makes me an Independent.
OK, let’s move on to the contest, where whatever mathematical skill I may have could be of some small assistance battle of wits and luck.
My first thought: Picking the frontrunners and favorites appears to be a surefire path to the middle of the pack. To “win” this requires identifying which of the long shots really aren’t such long shots after all. In the markets, this is called variant perception – what the crowd (and the money they bet) thinks is an unlikely outcome, but is actually a higher probability result than most realize. (The best parallel company example is deep value stocks).
If this were actual money, I would most likely pick two favorites, and a single long shot. Something like:
9. North Carolina: Obama wins (1.9)
3. Obama’s electoral votes 379 or fewer (1.3)
11. Pennsylvania McCain wins (7.1)
[Tiebreaker] Winner popular vote share: 51.5%
That is the fiscally prudent thing to do, but that’s no fun. And since its not real cash, why not go for it?
What might be the variant outcome that most people think is very unlikely? I come up with 3: 1) A McCain victory; 2) A surprisingly tight race; 3) An Obama blowout. A McCain victory is (in my terrible political judgment) highly unlikely. The next variant perception scenario is either a very tight race, or an Obama blowout.
Looking at the questions, there are only a few that fit into this scenario. They are: Q2. Greater than 65%; 3. Obama’s electoral votes (out of 538) 380 or electoral votes more; 7. Obama wins Georgia; 10. Ohio McCain wins; 11. Pennsylvania McCain wins; 12. Virginia McCain wins; 13. Democrat-Republican breakdown 271 or more;
I don’t see McCain winning Ohio, Pennsylvania, or Virginia; He does have a good shot in Florida, but its not a great payoff (2.7 pts). Same with Obama winning Indiana (2.4 pts) and Georgia is a long shot.
That leaves the Obama blowout option the best odds (low possibility) relative to the points (highest points) So the picks I would make are:
2. Greater than 65% turnout;
3. Obama’s electoral votes (out of 538) 380 or electoral votes more
13. Democrat-Republican breakdown 271 or more.
[Tiebreaker] Winner popular vote share: 53.5%
While I give this a less than 20% chance of occurring, it’s the highest payout.
In an election where one of candidates ran many Hail Mary’s, it is only fitting.
One last caveat, so my clients don’t have a heart attack: This sort of low probability, high payoff is the exact opposite of how we run money in the office. It is why we’ve stayed out of trouble most of this year . . .
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Source:
Prediction Markets and the Election: A Game
David Leonhardt
October 31, 2008, 6:42 pm
http://economix.blogs.nytimes.com/2008/10/31/prediction-markets-and-the-election-a-game/
November 3rd, 2008 at 6:23 pm
Not much time left but you can earn some real money here if your election picks are correct:
Link
November 3rd, 2008 at 6:24 pm
Liberal Republicans are now mythical creatures that no longer exist
Not necessarily. Some call them libertarians, a word that might potentially fit yourself based on the views you described.
November 3rd, 2008 at 6:28 pm
I was thinking about Libertarian vs. Liberal Republican over the weekend (reading a bit on Rockefeller Repubs).. I think the key difference comes down to government vs. individual liberty… Libertarians view empowering government (especially central government) as innately damaging to individual liberty, and view problems created by too-little government as better than problems posed by too-much government.. Libs can get just as fractious and insular as hard-lefties, and they engage in their own purges and tribal intrigues, which is why folks tend to be turned off by the Libertarian Party..
Liberal Republicans, OTOH, view government as a necessary evil, and something to be done ‘well’. They’ll err on the side of embiggening government power, and tend to be of the sort of old-school noblesse-oblige rich (or their sympathisers). Methinks what Liberal Republicans remained after Reagan got nudged over into Centrist Democrats, whilst the blue-collar Democrats were drawn to Republican ‘family values’ (down-home Jacksonian stuff, not the sort of highfalutin’ stuff you’d find in Bar Harbour or the UES)..
My concerns with government tend to be related to how to reconcile the original republican form of government espoused in the pre-amendment Constitution with the continuous encroachment of direct-democracy.. Adding direct election of Senators (de jure) and Presidents (de facto) has changed the system into some bastardized combination of republican and parliamentary, and I think there are structural flaws resulting from that which cause no end of grief..
November 3rd, 2008 at 7:04 pm
If the link is free for a contest fine but gambling is always a loser in the long run.
Better off on stocks where at least you have a good chance of beating the house if you are smarter than 95% of the other people in the market.
November 3rd, 2008 at 7:09 pm
Wow intrade takes a whopping 5% commision per trade. This won’t take long before they make this illegal unless it’s already on an exchange?
The maximum profit with intrade would be 90% because you lose 5% on the buy and 5% on the sell. That’s worse than most stock option trades.
November 3rd, 2008 at 7:13 pm
WHOA! I knew Ritholtz loved my tired and old “as a registered Republican” diatribe that I have constantly repeated like a broken record. You love me, don’t you, Ritholtz? You should put CNBC Sucks on your damned blog roll. Or would that be detrimental to your appearances contract with CNBC? [BR: What contract?] I get you, buddy, it’s OK.
Yes, folks there are such things as liberal Republicans. We don’t think government is the answer for everything. The last thing we want is wasteful government. But that’s exactly what the Grand Old Party has given us over the past 8 if not 28 years, combined with tax and fiscal policies that have built up a ponderous national debt, undermined the dollar, and weakened the foundation of our society, the middle class. But by the same token, we liberal Republicans are not pompous intellectual wannabe Libertarians. We have actually had dates and gone to parties, and we think that government does have a role to play, even in curbing the excesses of capitalism. Those of us who are liberal Republicans recognize that capitalism can be its own worst enemy. We want to make a lot of money (and I mean, more than even Kudlow, Luskin, and the little Ewok), but not have it come crashing down precipitously in financial, economic, and energy crises brought on by greed, stupidity, and short-sightedness. We believe in thought, hard work, and sustained and real economic progress.
I guess I should have summed it up by saying: It’s not that we want to be fair for the sake of being fair – which is Democratic ideology – it’s that we think being fair is essential to sustain an economic system that will make us wealthy.
November 3rd, 2008 at 7:21 pm
Oops let’s correct that. Jeeze now I get the asshat award for 3 posts in row. Should have considered what I was reading mathmetically more carefully. Intrade takes 5 cents per trade commision. All trades are within the range of 0 to 100. Therefore the minimum commision is 5% and maximum commision is 100%.
That’s significantly higher commision than options trading and you’ve limited yourself out of major potential upside since the maximum upside on these contracts is 666%. If you bought a contract at 5 cents and paid 5 cents commision you are break even at 15 cents on the contract (counting the buy and the sell).
Playing contracts like this is a very quick way to lose lots of money considering if you make a bad trade you’ve lost 10% of your money at minimum.
November 3rd, 2008 at 8:27 pm
another poll: http://bespokeinvest.typepad.com/bespoke/
November 3rd, 2008 at 8:33 pm
The big question is, how does the party of Lincoln [!!!] free itself of the trailer trash bimbos, replete with knocked up teenage daughter, who currently hold in such thrall. How does the GOP [sic] rid itself of simple minded knee-jerkism?
November 3rd, 2008 at 9:11 pm
WHO IS A LIBERAL REPUBLICAN?
My God. Ritholtz declares himself a “liberal Republican” and in merely 5 blog posts I have “other liberal Republicans” associate that label with everything from libertarianism to yellow and blue dog democrats. I am even (inevitably) led back to poor old Rockefeller.
Forget it guys; I am the last of the Liberal Republicans. You all are just desperately grasping for a label that saves you from a connection with Bush. You can’t steal the trademark: You Starbucks Conservatives, East Coast Elite Republicans, White Stocking Effete Snobs, and Supporters of the Vast Not-quite-right-wing Conspiracy.
Slightly more seriously, there are at least two fundamentally different kinds of “liberal Republicans”: Eastern Whitestockings and Western Cowboys (no, definitely NOT the Brokeback Mountain type).. I grew up and remain one of the latter, being from the mountains of Oregon who idolized Senator Jackson of Washington( the Cold War Democrat who unfortunately begat many of the recent NeoCons), Mark Hatfield of Oregon (the ultimate Liberal Republican who sacrificed greatly in opposition to that damn Vietnam War) and my hero Senator Wayne Morse of Oregon who changed parties no less than three times becauase they couldn’t get it right — and did much to oppose the Vietnam War.
Many would-be Liberal Republicans identify with Rockefeller — especially in opposition with Goldwater, somehow considered the block-headed, radical Conservative. Why? In my opinion this was the ultimate contest between Western and Eastern Liberal Republicans. How many remember that Goldwater was pro-Civil Rights, pro-environmentalist and pro-choice. His view: Cut taxes, balance the budget and let people decide how they want to live. Maybe that is libertarian or maybe it it is just Western Liberal Republican.
The problem with us Liberal Republicans is that we have no hero, no messenger, no message, and no home. Like McCain, I love being an underdog and a house without a home.
November 3rd, 2008 at 10:10 pm
I am a Democratheist – I don’t think there is such thing as a political party. As a Democratheist, I also believe in evorevolution – as to build a plank in a party would take Intelligent Design, and there is adequate proof that no intelligence is to be found in politics.
November 4th, 2008 at 8:21 am
Does the WSJ come across as even more spitting rabid right wing than ever before to anyone else besides me? About 1/2 of the first section is almost unreadable now. Facts appear optional if they conflict with right wing dogma or the propaganda of the moment. The TV version of their writers have looked like professional liars for a long time, and their infection is taking over the print version.
Even if I see an editorial I think is interesting, I catch myself and dismiss it as manipulative crap that is lying about enough to make it another shill piece. When Obama wins, will they become a print version of Rush Limbaugh, who will probably devolve into a caricature?
I’m seriously thinking of canceling my subscription and will certainly not renew if I don’t cancel. Besides, I can get enough good news for free now on the internet from a lot of sources, all conveniently bookmarked. Even some of the pieces that aren’t yet corrupt in their rag are available for free.
Is the pay version of the FT worth the extra money?
November 4th, 2008 at 9:10 am
d h,
no, you’re not alone, the WSJ is rapidly consuming whatever ‘goodwill’ they’ve developed over their History. In the Financial Newspaper fold, the FT is the last one worth more than the paper itself.
though, that said, due to it’s, still, large circ., it’s, the WSJ, somewhat helpful to understand what’s on the DeLuxe Prole Feed Menu du jour..
I only wish they’d, the FT, pay more attention to their home delivery, here, it comes via USPS, and then, not every day–leading to doubles and triples, in some deliveries..
November 4th, 2008 at 2:04 pm
Interesting example of these prediction markets being completely illogical and imperfect at predicting probabilities…
McCain wins contract (At time of post was 8.1%)
http://www.intrade.com/jsp/intrade/common/c_cd.jsp?conDetailID=376101&z=1225824600400
Non-Democrat wins AND US Govt Debt increases (At time of post was 8.7%)
http://www.intrade.com/jsp/intrade/common/c_cd.jsp?conDetailID=565197&z=1225825201155
Simple probability tells us that this is mathematically impossible, since the second is a compound probability including the first…
Probability of B = Probability of A * Probability of a debt increase under a non-Dem (<= 1)
So, mathematically, the probability of B could be equal to A or 8.1%
Given the various threads on here about these sites and the (non)wisdom of crowds, just thought this was interesting.