Tuesday, November 04, 2008

Election Day

I made a snapshot of the electoral markets map at 5 PM Central time Monday to compare to the actual votes. Meanwhile you can continue to watch the markets aggregate rumors and results in real time at electoralmarkets.com.

I started a couple of different posts for today but nothing seemed to fit. This is an exciting day for America and possibly the world. If I was young and foolish I'd head down to Grant Park tonight for the big rally (as some of my younger colleagues will do) but now just plan to be at home sharing the experience with my family. Go vote if you can and let's watch history get made!


  1. Some observations on the predictions:

    - In the case of solid red/blue states there aren't enough incentives to push the price all the way to their true probability. E.g. does any one really believe that on the eve of the election McCain had a 3% chance of winning in NY as indicated by your map? Trading costs (or lack of willing traders on the other side) kept the price from being pushed to its true value of 99%+.

    - The error above, while small, when present in all 50 states on a close election leads to an underestimate of 10% and beyond on the probabilities of the winner. You can run the numbers or simply compare the 90% chance for Obama of ElectoralMarkets.com with the 98%+ of fivethirtyeight.com, where this bias was not present.

    - Surprisingly trading reflected heavy emphasis on "next quarter" performance (i.e. short term success/failure as opposed to long term business planning) just as in the stock market.

    To give an example, last night the price of Indiana contracts fluctuated widely with each swing in the polls, yet a simple extrapolation of the returns per county indicated that the outcome would be extremely close and as such the fair price should have been 50% pretty much all the way until near the very end of the ballot counting process.

    A second example of short term thinking was when McCain contracts went sharply up from the period right after the Republican convention until just before the financial collapse. How so?

    Let's use a mathematical example to illustrate the principle: consider two rather evenly matched poker players. The only difference is that one starts with $1000 while the other starts with $10. Every poker player knows that the odds are dramatically in favor of the guy with $1000, and would give very little weight to the outcome of any individual hand in handicapping the odds during the game. Essentially the odds should only change on the basis an inordinately long sequence of winning hands.

    Now back to the election, where
    Obama had the equivalent of a $1000 advantage, with Bush being the most unpopular president in history, two military quagmires in Asia, an economy which was already weakening, expensive gas prices, Obama being an extraordinarily gifted orator, the internal split within the republican party among the different camps (neocons, religious rights, mavericks, fiscal conservatives), etc.

    Yet, McCain contracts swung back dramatically right after the republican convention even though the Palin nomination was the equivalent of having won one or two hands in what still remained a very uneven contest.