Blog Posts by David Rothschild, Yahoo! News

  • Prediction markets leaning toward safe choice for Romney’s running mate

    With anywhere from days to weeks remaining in the long and tortured period of speculation over Mitt Romney's running mate, the Signal is increasingly convinced that either Ohio Sen. Rob Portman or former Minnesota Gov. Tim Pawlenty will get the nod. The prediction markets currently give them a 35 percent and 16 percent chance of victory, respectively. In other words, there's better than a 1-2 chance that Romney will opt for the safest choices available.

    You could be forgiven for needing a refresher on which of these two politicians is which. Portman and Pawlenty are both white males in their 50s with records as reliable conservatives, not firebrands. Either would provide Romney cover from the right while providing a sense of prudent sensibility to the rest of the country. These men both provide a moderate benefit, credibility with the right, with little potential cost.

    Running mate odds

    Sources: Betfair and Intrade

    From a strategic standpoint, the biggest difference between them is that Portman is from

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  • From now to the election, Obama’s economic record is set in stone

    After being battered by the Clinton campaign over bad economic figures in the first two quarters of 1992, George H. W. Bush's reelection campaign should have been relieved that things started picking up over the summer. The nation added 141,000 new jobs in August of that year, dropped off in September, and then resurged with 178,000 new jobs in October—some good news for the president just in time for the election.

    Of course, we know how things worked out for the elder Bush. The good news came too late to counter Clinton's "It's the economy, stupid" mantra, and Bush lost handily. In fact, research I've conducted with other economists suggests that job growth in the first and second quarters of an election year is far more important than the third quarter, which is announced days before voters go to the polls.

    June's tepid job growth, which led to no change in the unemployment rate, prompted the usual sour notes over for President Barack Obama's reelection chances. While the news is

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  • Is the healthcare decision a failure for Intrade? Maybe not

    The Supreme Court's decision to uphold the major components of the Affordable Care Act was a victory for Democrats and a defeat for all the people who went online to bet that the court would strike down the individual mandate. Going into the morning, the markets suggested that there was a 30 percent likelihood that the Supreme Court would affirm this central tenet of the law and about 70 percent likelihood it would strike it down.

    Prior to the ruling, there was no meaningful correlation between the healthcare decision and the presidential election. There was no discernible impact on Obama's reelection odds, for example, from the major shock in the likelihood of the Supreme Court ruling after the oral arguments. Now, we finally see that relationship: After the decision, Obama's odds of reelection ticked up a few points. The political markets—which are considerably more precise than the judicial pools—clearly see this a political victory for the White House, albeit a slight one that

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  • Supreme Court could disrupt prediction markets with nuanced decision on health care

    Many people have money riding on the Supreme Court's verdict on the Affordable Care Act, which is expected Thursday, from health care executives to 24-year-olds hoping to stay on their parents' insurance a few more years. But none has a more direct financial interest in the decision than those who have gambled on the outcome on Intrade.com. The price on the site currently rests at a 75 percent chance that the court will overturn the individual mandate provision at the center of the case. When the court issues its decision, those who placed bets will find out if they won or lost—probably.

    Situations like this test the strength of the online prediction markets in two ways. First, it can be tricky to define court decisions in a way that's precise enough to make it clear who won, particularly if the court takes a surgical approach to the law. Second, the crowd is less precise when it assesses the judgments of nine secretive people, compared to predicting the outcome of a popular election.

    First, there's the difficulty in deciding what to bet on. The Affordable Care Act consists of many different initiatives packed into one large law. At the core is the individual mandate, which requires that all Americans have health care or pay a tax. Several additional provisions stand out. The law requires that insurers make insurance available to people with preexisting conditions, expands Medicaid eligibility, sets up health insurance exchanges and allows dependents to stay on their family's health insurance through their 26th birthday, to name a few. It would be interesting to see how the wonkiest gamblers predict the fate of any of these provisions. But it would be a nightmare to write a legal contract in a way that would make it clear who won and who lost under the almost infinite possibilities available to the court.

    Intrade encountered a similar quandary recently with its book on the control of the Senate. What everyone wants to know is which party will control the Senate after the upcoming election. But there is a non-negligible possibility that this won't be clear even after every election is decided, thanks to the role of independent senators. If, for example, Maine's Angus King is the swing vote in the Senate, how would one clearly define the outcome? What if he waffles on which party he will caucus with or refuses to state his choice officially until Jan. 2? Even if there's a general political consensus, it may not satisfy the language of the contract on which people placed money. In this case, prediction markets have three objective outcomes: Democratic control, Republican control, and neither, even though "neither" is very likely Democratic.

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  • Can Republicans take the Senate? The odds are in their favor

    With the unrelenting focus on every aspect of the fight for the White House, it's easy to forget that the Senate is also up for grabs on Election Day. In fact, it could be the presidential election that determines the upper body's control: If the Republicans win a net total of three seats, the Senate will be divided 50-50. In that case, control will go to the party that wins the presidency. (If you need an eighth-grade civics refresher, this is because one of the vice president's few official duties is to break a tie.)

    Currently, the Democrats control 54 votes: 51 Democratic senators, two independent senators who caucus with them, and one vice president. But the way the dice fell does not favor them: Democrats control 23 of the 33 Senate seats that are up this cycle, giving them much more territory to defend and many fewer opportunities to pick up seats. Of those 23 races, seven are open seats (i.e., the Democratic caucusing member is leaving the Senate), while four of the 10 Republican seats are open.

    The prediction markets are aware of this, of course, which is why the odds that Democrats will retain their majority currently rest at 41.5 percent. That's a major improvement for them since the beginning of the year, when their odds clocked in at 25 percent.

    The likelihood of the Democrats successfully defending the Senate has increased dramatically since the new year, however, a jump that is largely attributable to one person: Olympia Snowe.

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  • Gambling on war: The dark side of prediction markets

    Over and over, we've found that the political prediction markets offer accurate, real-time information on the odds of a politician's victory in any major contest. But there's a darker, less tested corner to some of the sites that allow people to wager real money on the outcome of world events. The gambling site Intrade, for example, is currently taking action on whether the regime of Syria's authoritarian president, Bashar Assad, will crumble before the end of the year. If that doesn't suit you, you can also gamble on whether the United States or Israel will bomb Iran in the same time frame.

    The reason the political markets are so useful for predicting election outcomes is that the people with money on the line have an incentive to gather as much information as possible about the odds of a politician's victory. In addition to polls, they can consult fundraising figures, news stories and a wealth of other data. When it comes to the fate of Syria or Iran, on the other hand, the universe of data is far less defined. But let's have a look and see how the market odds react to world events.

    Prediction market-based forecasts place the likelihood of a strike on Iran's nuclear facilities in 2012 by the United States or Israel at 33 percent. This likelihood of conflict in Iran is down in the last three months, which we expect to see as the number of days left in the year dwindles and the expiration of the contract approaches. The number should trend toward zero every day there is no airstrike and no new development in the conflict. The main jump in the odds appeared in early March, coinciding with information that Iran had increased its production of higher-grade enriched uranium. Those odds came down quickly as stalled talks with Iran resumed within days.

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  • Save the American Community Survey!

    When the U.S. Constitution became law in 1789, it made sense for the government to take a survey of its citizens only once a decade. The agrarian economy meant the population largely stayed put and grew at a much slower pace than it does today.

    The purpose of the census, as outlined in the Constitution, is ostensibly to allot House of Representatives members. But it also provides an essential snapshot of the population. In modern society, however, the demographics of the country change far too rapidly to capture adequately in a decennial survey. That’s why the Census Bureau also conducts an annual poll of a large sample of the population, known as the American Community Survey, to fill in the gaps in the data. Now, the House of Representatives is threatening to cut this essential product on the basis that it violates one’s privacy.

    Eliminating the ACS would be devastating to the economy. Just as political operators use polling data to guide the deployment of resources, governments and

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  • The rational case for why Obama supported gay marriage when he did

    When Barack Obama announced his support for gay marriage on May 9, most commentators immediately turned to how this would affect his chances in the 2012 campaign. Now that a few days have elapsed, we can say with confidence that the effect was negligible.

    The following chart illustrates the most accurate and real-time forecasts, derived from prediction market data, two days before and after the announcement.

    Sources: Betfair and Intrade.

    When we think about this political issue as an economic problem, as I like to do, the first thing to ask is what new information has been introduced into the system. For anyone who regularly follows politics, the fact that Obama privately supports gay marriage is not really news. He quietly supported same-sex marriage in 1996, and many assumed he never really changed his position. Massachusetts Congressman Barney Frank, a Democrat, called the president's revelation a political "nonevent."

    Nor did his announcement represent any change in policy. The

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  • Pay no attention to the pollster behind the curtain

    There are many ways to keep score on whether Barack Obama or Mitt Romney has better odds of winning the general election, which is almost exactly six months away. Here at The Signal, we are fervent evangelists of the political prediction markets, where people place real money on the line to bet on the winner. These markets proved to be more prescient than polls in the Republican primary.

    Many journalists prefer to stick to reporting on raw daily polls. While these surveys offer valuable information, it is dangerous to read too much into the daily fluctuations, especially this far in advance. Currently, Rasmussen has Romney leading Obama 49 to 44, while Rueters/Ipsos has Obama leading Romney 49 to 42. This disagreement is due to several common sources of error that occur on any poll. Averaging several polls to get an aggregate figure, as RealClearPolitics does, helps ameliorate these errors.

    Upcoming work by Bob Erikson of Columbia and Chris Wlezien of Temple, recently presented at the Midwest Political Science Association conference, demonstrates a second problem with following the daily polls too closely. The researchers looked through past presidential elections, aggregated the national polls, and created the most effective forecast based on that data. They found that, even when properly aggregated and averaged, national polls do not have predictive power at this point in the cycle.

    The following chart shows Obama's likelihood of victory, utilizing prediction market data, and two-party poll share.

    Polls vs. Markets

    Sources: Betfair and Intrade for prediction markets and RealClearPolitics for polls.

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  • Is the New Jersey tunnel project too big to succeed? The economist’s view.

    Anyone who commutes in to New York from New Jersey knows that the smallest glitch can throw the entire rail system into chaos, delaying 1,300 trains worth of people. Many argue that there is an urgent need for a new rail link between the two states, but viable plans to build such a thing have yet to materialize.

    Here's the economist's outlook on the problem: While a new rail link would provide positive returns for society, neither private nor public institutions are properly incentivized to make it happen.

    Traffic on the current rail links, two 100 year old tunnels, is at full capacity and demand will only increase over time. Lawmakers and analysts dispute the cost of building a new tunnel, but it's generally estimated to be in the neighborhood of $10 billion. It will take decades to recoup the investment. This type of massive-scale infrastructure is beyond the scope of any corporation, but not for the simple reason of scale. Consortiums of private institutions can raise massive amounts of money. But can you imagine anyone in the private sector investing in a project that may not earn money for several generations?

    More important is that the project would have many positive "externalities," or societal benefits that no owner can capture and charge for. If 100 people need to get from New Jersey to New York City every day, society benefits from them sitting in a single train, rather than 100 automobiles: less pollution and less congestion. But the owner of the train or the tunnel it goes through cannot charge one person for the value of slightly cleaner air. Only a government can internalize the value of clean air for all.

    While the government can value something like clean air, it is not good at valuing long term investments. In the same way that corporations are obsessed with daily stock prices and quarterly earnings, politicians are obsessed with monthly poll numbers and biennial elections.

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