The Manufactured Election

Posted by Jeff Carter
on November 5th, 2012

Who do you believe when it comes to the numbers? A lot of that is based on your political persuasion. If you are a liberal, you are much more likely to listen to the MSNBC’s of the world than FOX-and vice versa if you are conservative. If you are liberal, you take a CNN poll with a +11 skew to Democrat turnout and say the race is tied. If you are Republican, you say the +11 is bullshit, even though you know there are always more Democrats than Republicans in the world.

The polls are so screwy this time around it furthers the head spinning. Reading through countless pieces on polls, poll methodology, how the sample looks, sample sizes and eyes begin to glaze over. Polls are one persons statistical judgement. For a discussion of why the polls might be wrong, I suggest a full thorough reading of this blogpost.

Normally at election time, the media polls favor the Democrats in big numbers in order to starve money from the Republican candidates. This works because undecided voters will be reluctant to give political donations to a candidate they think might lose. You want a pay off on your investment right? Well, the polls all say the Democrat is going to win, so….

Then, just before election day, the polling companies realize that they will be judged by their accuracy. None of them want to risk another 1980 fiasco—the worst day in polling companies’ collective history. Right into the election, they were calling it for Carter; in fact, it wouldn’t even be close.

Knowing deep in the gut that markets are better predictors of outcomes rather than one soothsayer, we turn to the only thing we currently have; The Iowa prediction markets and Intrade.

Intrade’s market has Obama winning. It may be right. But, Intrade isn’t like trading cattle at the Chicago Mercantile Exchange ($CME). There are a lot of constructs in the way of setting up an Intrade account. First, money needs to be wired out of the country. How many people are comfortable with that? How many people want to take the time to do that? Second, it takes 2-8 days to set up the account. You can’t use your credit card if you are an American. That means most of the trading for Intrade is done by non American citizens. Anecdotally, most non US citizens aren’t too fond of Republicans. I recall a lecture I heard in Singapore where the professor said he “shed tears when Bush was elected” because American’s were dooming the world. This lecturer was no fan of Reagan either. My gut tells me that the Intrade market is a bit skewed because of the constructs in the way of actually making a trade. I also think the volume is low. Low volume is less predictive of a stock price than high volume. Don’t traders always want “confirmation”?

We know simply from economic theory that Europeans are more like Democrats than Republicans. Look at the EU finances, labor laws, and union power for evidence. They resemble my home state of Illinois more than a state like Texas. Many of my European friends did receive an MBA from the University of Chicago. But they believe in the Chicago School of Economics about as much as Austan Goolsbee and Obama do. Which is not at all.

In the great corn country of Iowa, they have Iowa prediction markets. Have you heard of them? Not too many people have. In that market, Obama is up 50-48 on Romney. But the Iowa market isn’t a wide open free market either. It restricts access by charging a set up fee. Then, limits the amount you can wager to $500. There just isn’t enough volume there to be predictive.

Understandably, there are powerful forces lined up against the establishment of a true prediction market for politics in the US. That would be the pollsters, advertising production companies, television, lobbyists, and the politicians themselves. People that don’t understand free markets are suspicious of them. There is so much money spent on all these things they all have a vested interest in keeping the charade going.

Instead, we should figure out a way to set up regulated prediction markets. If we had an actual futures market, listed on a regulated futures exchange with open access and a clear settlement process, the pollsters would be irrelevant. Markets would take all the noise out of the system. All anyone would have to do to see how a candidate is doing is look at the daily settlement price of the relevant market, check the volume numbers to see how much has traded, and check public position reports to see who is trading and accumulating positions to find out if the market is being manipulated. Once there was a settlement price, an options market could crop up around the prediction market and participants could hedge even more precisely. For a company that would be adversely affected by a certain politicians election, it might make a useful tool.

Markets instantly convey meaningful information. You don’t look at the Dow Jones each day and say, “That number is false”. It is what it is, and everyone knows all publicly available information is priced into the Dow each and every day. Instantaneously, you get a feel for the underlying macro economics of the economy are great, good, fair or dire based on one number and the net change you see. If you want to delve deeper, you can, but one number allows you to monitor progress. If you think the number is out of whack, there are plenty of ways for you to hedge, or take the other side of the number. Free markets are the most powerful information source known to man.

Until we set up an easy to access, open, prediction market for elections, the only real free market we have is the actual voting booth. With no voter ID, and the nefarious ways in which political machines try to steal elections, the voting booth itself is sometimes corrupt. Sorry for my cynical view of voting, but I grew up in Chicago. Can’t wait to see David Axelrod at Manny’s without a mustache. I am pulling for an upset in Michigan or Pennsylvania. Not so confident about Minnesota.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.