Election prediction? Don't just say it, bet on it!

Pundits (and anyone else with a bold prediction about Obama vs. Romney) should put their money where their mouths are. And they can.

By MSN Money Partner Nov 2, 2012 3:52PM

Dice on stock listings © Kate Kunz, CorbisBy Brett Arends for MarketWatch

 

A friend of mine bumped into two acquaintances earlier this week. They arehttp://www.marketwatch.com/ die-hard Republicans. They are serenely confident. “Mitt Romney has this in the bag,” they said. Other friends of mine, also Republicans, are in a similar zone.

 

Meanwhile, oddly enough, my Democratic friends are also confident. “Obama’s going to win,” they keep telling me. Liberals tend to be a pessimistic bunch, but not this time. Apparently they are sleeping easily.

 

It’s surreal. Normally, with an election this close, everyone’s on edge. This time everyone has already ordered champagne. Half of the country is going to wake up next Wednesday is a state of total shock.

 

If you think the amateurs are confused, look at the professionals. The election nerds. The numbers guys. For them, it’s spreadsheets at dawn. But they shouldn't just offer an opinion. They should offer a bet.

 

Models vs. models

First Nate Silver, the baseball numbers guy turned election numbers guy at the New York Times, launched a scathing attack on the methodology and reliability of the polling methods used by Gallup.

 

The back story was that Gallup has pretty consistently shown Mitt Romney about even or slightly ahead in recent weeks, while Silver’s prediction “model” gives Barack Obama about a 77% chance of winning.

 

After Silver’s attack, the conservative National Review responded in kind, calling Silver’s own model flawed . MSNBC’s Joe Scarborough joined in, calling Silver something of a partisan joke, and saying in reality Obama had no better than a “50.1%” chance of winning.

 

Enter no less a beast than Paul Krugman. The Princeton professor and Nobel Laureate suggested the attacks on Silver’s model were part of an ideological attack on reason , and an ominous foretaste of the future.

 

To all of these people, I have four simple words: Show me the money!

 

If only pundits were required by law to bet on their predictions. Voters, as well as investors, would be spared an enormous amount of misleading blather. There is a way to do this, too. I have a sporting interest.

 

The bet is in Iowa

By now most people have heard of InTrade, a betting exchange run from Dublin which offers a futures market on election outcomes. (Find my book about this.)

 

How does it work? Take a look at the Mitt Romney victory contract. If Romney wins, it pays out a dollar. If he loses, it pays out nothing. How much would you pay for such a contract? If you think Romney has a 50% chance of winning, logically you’d pay up to about 50 cents for it. If you think Romney has a 30% chance, you’d pay no more than 30 cents. And so on. People buy and sell these contracts all day, and it gives a rough approximation to where "the market" thinks the right chances are.

 

As I write this, betting at InTrade gives Obama a 63% chance, Romney a 37% chance. The numbers have been fairly consistent.

 

Alas, you cannot bet on InTrade if you live in the United States because our federal government forbids it in the name of "freedom." There is, however, one exception.

 

Since 1988 the University of Iowa's Tippie College of Business has had a waiver from the federal government to run a small election futures market, the Iowa Electronic Market, which is open to U.S. citizens. It runs the market as a nonprofit experiment on the alleged wisdom of crowds. You're limited to a $500 account, so it isn’t going to make you rich. But you can have some fun. I've had an account for a few months.

 

Today in the Iowa market, the only place in America where you are allowed to bet on the election, Obama is given a 62% chance of winning, Romney 37%.

 

The efficient market hypothesis crowd will therefore tell you this is the "correct" price, the same way, I guess, Groupon’s (GRPN) $20 IPO was the correct price for that stock. (One year later: $4.50). Such people should be treated with great skepticism.

 

Presidenty Hillary Clinton?

I remember in the summer of 2007 the betting markets (mainly InTrade) were giving Hillary Clinton a 80% chance of winning the Democratic nomination and a 50% chance of winning the White House. I wrote an article at the time calling such prices a "bubble." The efficient-markets brigade was outraged.

 

One of them wrote a long screed somewhere saying I had written "the dumbest article of 2007." And, of course, they were proven right. Hillary Clinton went on to sweep into office. (Can you remember the name of that skinny guy who ran against her? You know, the one from Illinois with the funny name? It’s on the tip of my tongue.)

 

The Iowa market has a respectable track record of predictions. A study by Iowa professors found that from 1988 through 2004 it was more accurate than opinion polls 74% of the time.

 

But it is like any market. It is a reasonable starting point, and it has a reasonable record, but it is far from infallible.

 

And Iowa’s predictions are also undermined by the betting in a second market at the same exchange, where instead of betting on who is going to win the election, you just bet on the share of the vote each candidate is likely to get.

 

Right now, the betting at Iowa is predicting Obama will beat Romney by half a percentage point. The study by the Iowa professors found that from 1988 through 2004, in the final five days before elections, the market had an average margin of error of about 1.1%.

 

In other words, in terms of vote share the Iowa market is calling this nearly a dead heat -- yet simultaneously giving Obama nearly twice as high a chance of winning as Mitt Romney.

 

Silly.

 

Where I'm placing my bets

I am willing to stick my neck out and argue the markets are wrong -- and, unlike most pundits, I have put my money where my mouth is.

 

I happen to think Obama is slightly more likely to win next week than Romney. The prez has an edge. But it’s slight.

 

I’ve been active in the Iowa market since early September. At the time Romney was floundering, running the worst campaign in living memory, and yet the Iowa market was giving him a 40% chance of winning. I thought that was too optimistic. I bought up Obama contracts.

 

The market moved heavily toward Obama over the next few weeks. Then came the first debate. Ten minutes in I cashed out my Obama position at a small profit. The markets at that moment gave Romney a 31% chance of winning. I thought that was too low. I put all my money on Romney.

 

I could cash out today for another profit. But I still think this market is too low. I’d buy Romney contracts up to about 43%. I’d sell them if someone offered me over 50%. This means I happen to think fair value is about 46% or thereabouts. I may be right or wrong, but at least I’m putting my money on it.

 

(Paradoxically, I’m betting against my own interests. A Romney victory will do wonders for sales of my biography of the man, "The Romney Files." So I ought to be hedging my bets.)

 

Will other pundits? If not, why not? Thank heavens I spend more time writing about the markets than I do about politics. In the markets, all this blather is moot. Show me.

 

More at MarketWatch.com:

 

 

31Comments
Nov 5, 2012 9:59AM
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23 of 30 advisors and all of Romney's senior advisors on domestic policy and foreign policy are all former bush aid's and political hacks. Many of the surrogates are former bush talking heads. Much of his advise has come from bush thinkers and bush politico's. Much of his money comes from dark money bush supporters. Who would fill the positions in a Rom cabinet? former olympic staff? Mass government staff? Bain Capitol staff? the cast of seinfeld? guess who?

Nov 5, 2012 8:48AM
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Yes. I am better off than I was four years ago when I was collecting unemployment. I will be voting for OBAMA/BIDEN 2012. They care about the middle class.
Nov 5, 2012 2:00AM
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What did everyone expect, they seem to have forgotten Obama inherited a crashing economy, since he has been president never have I witnessed so much hate directed towards a President. We all knew what was going on, now hate has fueled peoples decision more than policies, which Romney clearly has not said anything but drill for oil, coal, and gas and lower taxes and cut spending.   

After experiencing the worse recession since depression and recovering in 4 years, and not 14, that is pretty good. History has shown us that Democrats have been cleaning up Republican mess since Reagan. Facts do not lie, since 1961 Democrats have produced double the jobs, by over 25 million, almost double the GDP, and the stock market has tripled. If you would have invested 100,000 during both parties, you would have mad 134,000 with GOP vs 1.3 million with DEMS. 
Nov 4, 2012 10:09PM
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I'm betting on challenged results, and a delayed official declaration for the winner.

Early results may be suspect. The first reports may turn out to be wrong.
Nov 4, 2012 7:37PM
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ALMOST ALL OF THOSE REPUBLICAN  CONGRESSMAN & SENATORS THAT WERE THERE DURING THE BUSH YEARS ARE STILL THERE. THEY CAN"T DO MUCH NOW BUT SIT AND SAY NO TO ANY THING THAT WOULD HELP WITH JOBS OR THE POOR AND MIDDLE CLASS. THEY'RE WAITING ON A ROMNEY SO THEY CAN GET ON WITH TAKING FROM THE POOR AND GIVING TO THE RICH AND SELLING MORE JOBS TO ASIA LIKE THEY ALWAYS DO. VOTE FOR THE ROOSTER AND SAVE THE COUNTRY FOR OUR GRAND CHILDREN. THEY WILL THANK YOU!

Nov 4, 2012 7:04PM
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The Republicans keep talking about a ficical clift.  What could be worse then 2008? Republican policys bankrupted not only this country, but almost every ali and friend we have. How could anyone ever vote for another republican again in your lifetime????
Nov 4, 2012 6:48PM
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Consider this, there's a good reason why you see Bill out campaining and talking about his term inoffice almost every day with pride and saying Obama has it right. Compare that to Bush sitting home hiding his face in shame. You could vote that groupe of thiefs back in. Not Me.
Nov 4, 2012 5:56PM
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Obama says vote for revenge.  Romney says vote for love of country.  We are at the tipping point America.  Over 16 Trillion in debt, another major war looming in the middle east with Iran, that could possibly spread.  The real unemployment rate is over 20% if you count discouraged workers and those who have given up looking for work.  Check out shadowstats.  The IMF says if we go over the Fiscal  Cliff, the GDP will sink 3%.  Expect unemployment to rise to a real rate in excess of 25% if that happens.    59% of minorities age 25 and younger are unemployed.  I don't know why they vote for Obama.  Only 58% of the workforce is employed full time.  50% of college graduates can't find jobs.   Fewer people employed now than since 1984.   I am 60 years old and have never seen anything this bad in our country.   Obama is the ony President in the history of America to support same sex marriage.  Biden critisizes Romney for wanting to abolish Planned Parenthood, yet 50 million babies have been murdered in the U.S. since 1973.   Ben Stein, warns America about abandoning God.   Obama appears to be a socialist who follows his father's anti-colonialist beliefs.  Everything he does points towards a  desire to down-size America and reduce its leadership and prestige in the world. He has been America's most destructive President, and there is nothing to stop him from completing his mission if elected for the next four years. I hope that you voters will think long and hard about where we are today and who is best qualified to lead this nation. A governor with a successful history as a businessman or a former attorney with a community organizer background.






Nov 4, 2012 9:28AM
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If Obama wins there will be one good thing happen. We will have a good count then on how many idiots there are in this country!!
Nov 4, 2012 1:08AM
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IMPEACH OBAMA NOW !!!    OHIO FOR ROMNEY !!!  GO AHEAD AND BET YOUR HOUSE ON OBAMA !!!    YOU WILL END UP IN PAIN LIKE THOSE POOR FORGOTTEN PEOPLE IN NEW YORK AND NEW JERSEY !!!    ROMNEY IN A LANDSLIDE !!!  YOU CAN NOT STOP THE MOVEMENT !!!

WE WILL TAKE BACK THE SENATE, TOO !!!      SEMPER FI

Nov 4, 2012 12:30AM
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Even after losing, Romney will say he won. He can't help being a liar. He's damaged goods. 
Nov 3, 2012 7:48PM
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Economy goes down. Government prints money. Stock market goes up, then down in Dec, War in middle east starts. Some banks will close. Unemployment goes up after 1st of year. Housing goes flat. Big storms in east.  
Nov 3, 2012 6:22PM
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Won't be that close, it's all about the electoral votes and the 9 swing states remaining. Obama is ahead in 6 of the 9 swingstates including Ohio so unless something dramatic changes in the next 3 days and like it or not, Oboma will win with at least 290 electoral votes of the required 270. Politico web site has the best breakdown on the web averaging the latest polls. If you are a betting man, Oboma is the pick for sure. 
Nov 3, 2012 10:59AM
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1. Is it realistic to expect Mr. Obama to clean up 8 years of Bush's mess in 4 years?

I think another year or two might be necessary to complete the cleanup.

2. Is it realistic to expect 4 more years of Republican "leadership" to lead to anything other than increased income disparity, less regulation of markets which have proven their ability to fail with depressing regularity*, and probably another war or two?

No, it isn't.

I'll take Mr. Obama; even if he isn't a speed demon, at least he's leading this country in a better direction than Romney would. And I'm going to see if I can get some of those Obama contracts :-)

*since Reagan: 1987 market crash, S&L debacle, Enron, Tech bubble, 2008 financial crisis... see a pattern yet?
Nov 3, 2012 7:51AM
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I have voted DEM. since B.Clinton's first campaign, not this time. People know what's affecting them inside their own front doors.  As of now, it's a no-brainer.  ECONOMY!
Nov 3, 2012 4:30AM
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1. The average mentality of the American old enough to vote is twelve years old. You can't run for president unless you have a very good looking head of hair. Consider all of the elections since Eisenhower was in office. Romney has the same hairstyle as Superman even to the point where he has the curl hanging over his forehead every now and then. People, and mostly women, will associate Romney with Superman (because of his looks and stature too) and vote for him.

2. People are fed up with the treatment they get from federal and all governmental employees and they will hold that against Obama. They will also hold the secret service/prostitutes incident (tip of the iceberg) against Obama and believe that Obama does not have the control over federal employees the way he should have. The people are not getting their money's worth from governmental employees; in fact some governmental employees make things difficult for people when they don't have to.

3. Joe Biden has displayed arrogant, rude, and emotionally disturbed behavior. You don't want him a heartbeat away from the presidency and you don't want his manic depressive fingers anywhere near intercontinental ballistic missiles or near the buttons which can uncork a nuclear device. The people don't like Joe Biden. Joe Biden has to go.

Bottom Line: Romney - 51.5%    Obama - 48.5%


Nov 2, 2012 8:45PM
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Romney might win the popular vote but bet on Obama for the electoral edge.290 votes

Obama and Romney 248.Vote on a partial recount.Romney won`t be man enough to

admit he lost.

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