The Signal

Pay no attention to the pollster behind the curtain

David Rothschild, Yahoo! News
The Signal

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.

View photo

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Polls vs. Markets

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

So what information are prediction markets aggregating at this point beyond the polling? We don't know precisely who is gambling, but the reason we trust these figures is that the market rewards people who have the most sophisticated understanding of politics and elections. Beyond what they can glean from polls, the best investors are probably paying attention to the larger seismic forces, like economic growth, that go into determining elections. The Signal's election model includes many of these factors. (More details here.) These models, based on factors like quarterly economic growth and presidential approval, provide a useful supplement for forecasts when polls are not yet meaningful.

Follow along in real-time with PredictWise.

David Rothschild is an economist. He has a Ph.D. in applied economics from the Wharton School of Business at the University of Pennsylvania. Follow him on Twitter @DavMicRot and email him at thesignal@yahoo-inc.com.

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