The five minutes on my 15 minutes of WSJ fame.

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Coming from a politics-obsessed family, we (family and I) have been fans of predicting election outcomes for as long as I can remember. We are all conservative-libertarians of one hue or another, and I began writing “-wingnut”- screeds in eighth grade for my junior-high newspaper. What with the Florida Bush recount and 9/11, a superpoliticized era had dawned. My first forecast was 2002, and I got all the Senate races right but for one. Uncanny, I thought. Then came 2004, and I nailed that one too. Really uncanny–-but then again, every clock was right twice a day, and this being the high and higher tide of “-my side,”- my predictions didn’-t seem so uncanny in retrospect.

Fast forward to October 2006, and I was a junior in college with a mediocre academic record in finance and Chinese. An election was gearing up. I wanted to put my forecasting ability to the test. I also realized that, by blogging the rationales for my trades, it could become a valuable tool in my quest for a summer internship/job, to represent a side of me that my GPA didn’-t represent at all. Not exactly lacking confidence, I put $2500 where my mouth was, and soon afterwards plowed in another $1000. I shifted in and out of many positions, but the common denominator was (as I said on my own blog some days ago) that I believed the market was underestimating the intercorrelation between congressional races, and especially Senate races all over the country. In other words, I bet very heavily on the Democrats taking both houses.

Three or so weeks into my blog, I was getting scattered, but very positive feedback about my material. People in Tradesports threads began quoting it, and a major Tradesports speculator asked me for some further opinions regarding the direction of the 2008 US presidential nominations markets. (I told him not to do anything other than short Hillary, but to especially not short Barack Obama, until after the election, and I couldn’-t have any “-gut feeling”- until I had gauged what a Dem election victory would mean.) So I knew my material was good, but I was still pretty surprised, not to mention ecstatic, when WSJ reporter Jim Browning contacted me for information about election prediction markets. So I happily gave him everything he asked, and the superb WSJ article was the result. (That’-s the non-$$, Pittsburgh P-G version.) But as our conversations continued into election night, I begain to despair about my positions…-

In Virginia, George Allen had about a 12,000-vote lead with about fifteen counties remaining to vote. I knew they were in the pro-Webb counties (Fairfax, Loudoun, Richmond City…-) but those precincts ranged from barely better than even to 72-28 (Richmond). Webb would have required statistically…-.unlikely turnout and/or margins in order to win. A lot of people on DailyKos and other communities emotionally invested in a Webb victory, processing new updates literally seconds after they came, had given up on Webb. Harry Reid came on TV and his body language screamed, “-I don’-t think the Senate is in play anymore, even though I thought it was a couple of hours ago…-but that was too much to ask, anyway.”- Without Virginia, the calculations for the Democrats’- taking the Senate became very grim, very fast.

Final polls (which I had spent the previous weekend trashing) showed VA breaking for Webb, comporting well with my own intuition. As the returns came in, however, Allen seemed to have an insurmountable lead with about 96% of precints reported. I concluded that Allen would win re-election, barely. Michael Barone’-s forecast to the contrary, I noticed that the remaining precincts to report were healthy-majority Democrat (about 60-40, 65-35), but I didn’-t think that Webb would be able to cut Allen’-s lead in half–-well, maybe half, but not zero it out. (I learned only later that when Virginia says “-precincts reporting,”- it apparently does not include absentee ballots when it says that. Or it reported them before it started tallying up the actual votes from the voting booths on that day. Or something. But a bunch of absentee ballots flowed into Fairfax later that netted about 7k more votes for Webb.)
However, rewinding to that despairing moment, the Democratic machines in Richmond City, Fairfax and Loudoun had waited until all other precincts had reported before reporting. Now, I don’-t know about Virginia, but I know that in Missouri, the urban Democratic machines in STL and KC have a certain notoriety (in some circles, anyway) of waiting until every other precint has reported, and then releasing surprisingly high results (that usually imply incredible voter turnout–-certain STL precincts reporting 97%, 100+% turnout isn’-t unheard of), magically pushing the Democratic candidate over the top by a fraction of a percentage point. (I don’-t want to start a flame war here–-I think American politics is a blood sport, both sides have their different ways of playing dirty, and this was just something I didn’-t factor in.) And six to twelve months after the election, some low level Democrats get a year in jail for voting fraud. It happens like clockwork, except that this time around I don’-t think the MO Dems will need to resort to that. But I digress…-

So I figured VA was lost when it wasn’-t, and I puked up all the SENATE.GOP shorts. At one point, over 50% of my entire principal was gone. Then, after despairing for about ten minutes, I went back to the TS markets intending to try and make back what I could. Then I realized that Webb had magically jumped into a 2200 vote lead in VA with 100% of precincts counted. I had already looked at the counties and their turnout/margin statistics and figured that couldn’-t have happened, but it had. So after losing over a couple grand…-not to mention feeling like a complete idiot for throwing away $8000 by buckling at the last possible second, I hopped back on the SENATE.GOP train and rode it down to zero, and made back that entire original investment, plus about $150 left over.

So a lot of lost hair, Wheat Thins, NoDoz, bad grades and exhaustive political analysis later, I felt pretty vindicated, even though I had managed to squander 90% of the potential compensation. (I did indeed lose hair.) I had staked 1,000 shorts against SENATE.GOP.2006, well against the majority view of the market. As I recall, total volume going into the election was 35k or 40k trades, but because some significant fraction of that was the same positions being flipped back and forth between a stagnant pool of traders before I’-d arrived, it was probably closer to 5% of outstanding positions. If my money hadn’-t buttressed the market-minority’-s view, the price would have been even more inaccurate–-before election day, the price hovered around 70 percent, and without my heavy position on the “-minority”- side, it would have been closer to 80-20 in favor of the GOP holding onto the Senate. Plus, going into the election, I had stuck by my calculations even as the market had continued to erode my investment. Having that kind of confidence and analytical precision vindicated meant much more to me than $8-9000 in potential winnings lost.

–-Alex Forshaw

P.S. On that non-mercenary note, I’-m seeking an internship this summer involving event derivatives trading/research or options trading, either academia- or finance-based. If you’-re interested, please e-mail to: alex.forshaw@gmail.com

Speculating (and hedging?) on US presidential prediction markets would have social utility. Dixit Robin Hanson.

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If Deep Throat is right and the CFTC has indeed already given its stamp of approval to presidential prediction markets, then HedgeStreet and USFE would be well advised to listen to professor Robin Hanson’-s idea with great attention:

Using data from a site like Tradesports.com to forecast who will win an election is just scratching the surface, said Robin Hanson, associate professor of economics at George Mason University in Fairfax, VA, and one of the founders of the field of prediction markets. Although the economic incentive is high for picking a winner, Hanson would like to see prediction markets forecast the consequences of a candidate getting into office. Will unemployment go up or down? Will we have more or less trouble in Iraq? Will we decrease or increase the deficit? “-The social value of telling people who’-s likely to win is questionable. The social value of telling people the consequences is arguably far higher,”- said Hanson.

My Question To Professor Robin Hanson: The prediction market that would be interesting would be the one featuring the elected candidate (the so-called “-President-Elect”-). But the expiry of the other prediction markets, featuring the defeated presidential candidates, would be impossible to judge, since these presidential candidates by definition won’-t take office and have any power on the US government. And if the game is murky, you won’-t find any traders willing to risk his/her shirt on those kinds of US presidential prediction markets.

Addendum: Robin Hanson has posted a comment, and I republish it here for everyone to see…-

Let U = the unemployment rate, D = Democrats win, and R = Republicans win. An exchange rate between “Pays $U if D” and “Pays $1 if D” gives an estimate of E[U|D]. Similarly, an exchange rate between “Pays $U if R” and “Pays $1 if R” gives an estimate of E[U|R]. We can compare E[U|D] and E[U|R] to see which candidate is expected to have a lower unemployment rate. And we know how to pay off all of these assets, no matter what happens.

Robin Hanson would like to see prediction markets forecast the consequences of a candidate getting into office. – REDUX

BetFair: Which of these parties will have more seats in the US Senate following the 2006 US Senate Elections?

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Republicans: 49%

Democrats: 53.8%

Ex-BBC News Mike Smithson (of the Political Betting blog) wonders whether BetFair will count the two Independent U.S. Senators (Liberman and Sanders) in the Democratic camp.

Lieberman won re-election as the “Connecticut For Lieberman” party candidate – an independent political party he created after losing the 2006 Democratic primary election to Ned Lamont. He has said he will sit as part of the Democratic Senate caucus in the upcoming 110th Congress.

Sanders won yesterday in Vermont as an independent but will caucus with the Democrats and it is said will be counted as a Democrat for the purposes of committee assignments.

The problem that Betfair will have to resolve is that neither ran as a Democrat although they will be attached to the Democrats in the Upper House.

To add to the complication Nick Palmer, MP, posted this on the previous thread at 1.34pm – “I have it in writing from Betfair that they will count the two independents as Democrats. (I asked them a month or two ago before I put a tenner on.) If you have opposite advice in writing, they should be embarrassed!”.

Addendum: From one commenter…-

The question was “Which of these parties will have more seats in the US Senate following the 2006 US Senate Elections?”

The options were Republicans and Democrats. The result is 49-49 with two independents.

It’s a draw- I can’t see how anyone can see otherwise.

Addendum 2: From Yahoo! News (whose data are provided by the Associated Press)…-

Liberman (CT) and Sanders (VT) are counted as Democrats.

Addendum 3: From the Washington Post frontpage…-

Editor’-s Note: Independent members of Congress typically caucus with the Democrats.

Addendum 4: From the New York Times…-

Full Senate Results —- Republican: 49 —- Democratic: 50 – Includes independents who align with the Democratic caucus. —- [CFM's NOTE: Virginia is still in play at the time of writing.]

Addendum 5: Mike Smithson…-

So punters who are tempted into this market are risking money on how they think Betfair will settle the market.

OPEN LETTER TO THE COMMENTERS OF THE MARGINAL REVOLUTION BLOG

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Hello Professor Tyler Cowen and all the commenters,

#1. Professor Lance Fortnow made a specific point: taken one day before Election Day, the TradeSports’-s prediction markets of the individual races for the US Senate were accurate (provided that Virginia and Montana go democratic).

#2. Professor Lance Fortnow DID NOT SAY that the TradeSports’-s prediction market for the control of the US Senate was accurate. Please, don’-t put words in his mouth.

#3. Analysis reports from economists and statisticians are coming, but, please give them time to digest the data…- once the dust has settled.

Thanks for your attention,

Chris Masse

Odds of GOP Retaining Congressional Control

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A recent comment to yesterday’-s Citibank Panic/Euphoria discussion led to this post being inserted in the weekend linkfest:

According to Tradesports, the odds of the Republican Party retaining control of each Congressional House in the 2006 Mid Term Election is mixed.

In the Senate, only one third of the 100 seats are up for re-election. Votes are staggered, so every 2 years a different third of the 6-year term seats come up. The odds strongly favor GOP retention of the Senate. The Democrats would need to capture 6 seats, something previously viewed as rather unlikely —- not impossible, but unlikely.

Although several races have tightened, this remains a long shot for the minority party. The MSM is, as always, focused on the horse races but not the issues. See Race for Senate control tightens for example.

When we go to the most recent betting on the outcomes, the senate appears to be rather safe. Using trend or technical analysis, we see the GOP retention of Senate has been consistently above 70%- It has recently dipped as Tennessee and Virginia —- formerly “-safe seats”- —- have become competitive. But it would take a significant break of 70 to suggest this was anything but a long-shot.

Senate Trading

Ts_senate

via Tradesports

When it comes control of the House, however, the prediction markets present a very different picture. All 435 seats are up for grabs.

Its also one that lends itself even more to TA:

Ts_house

via Tradesports

From last November til today, we see a fairly well maintained down trend. Recently, that was almost reversed on an increase in volume since hitting lows of 40% in September. That was most likely the result of a 30% drop ingasoline prices, a 20+% in Crude Oil prices, and a strong post summer rally in the stock markets.

However, the Foley/Page scandal has now reversed that. On even bigger volume, the downtrend has been maintained, and the House odds are once again near low 40s.

If the election were held today, the Senate would stay GOP, while the House would shift to the Democrats.

~~~

There is one additional note: I have long complained that the relative thinness of these markets —- the number of traders and the dollar amounts at issue —- can make their results somewhat suspect. For more on this, see our 2004 critique, Iowa and Prediction Markets.