Photo (cc) by Iman Mosaad
Nate Silver is a statistician who writes The New York Times’ popular FiveThirtyEight blog, which forecasts by state the outcome of every national race in the Nov. 6 election. He thinks political pundits who hype the race as “too close to call” all the way till Election Day are full of it – and put his money where his mouth is by challenging MSNBC’s Joe Scarborough to a $2,000 charity bet on Twitter last week.
.@JoeNBC: If you think it's a toss-up, let's bet. If Obama wins, you donate $1,000 to the American Red Cross. If Romney wins, I do. Deal?— Nate Silver (@NateSilver538) November 1, 2012
He later upped the stakes, and donated $2,538 to the Red Cross before the outcome was decided. But Silver knows something about gambling. He recently published a book on probability, and once made a living as an online poker player earning six figures. In 2008, his model got every U.S. Senate race and 49 states’ presidential picks correct. And his current model put Barack Obama’s odds at above 85 percent the weekend before the election. Is he right to be so sure?
There’s reason to think so, both because of how his model works – he pulls in polling and economic data from many sources on a daily basis – and because of how other gamblers are calling the election. On the online betting market Intrade, for instance, the odds of Obama’s re-election are around 2 in 3, and Romney’s 1 in 3: that’s a lot different than the neck-and-neck race we hear about daily on the news.
So who’s better at predicting the outcome of elections: gamblers or pollsters? According to a 2008 University of Iowa research study, gamblers as a group are better, hands-down.
In the video below, Money Talks News founder Stacy Johnson explores why. He talks with the director of the Iowa Electronic Markets, another virtual gambling market which began for research and education but, like Intrade, uses real money. Check it out, and then read on for more about how these popular trading sites work.
Over the weekend, the prices at IEM suggested Obama’s re-election chances were around 75 percent. And as Joyce Berg mentioned in the video, these real-money markets beat the polls 75 percent of the time.
On Intrade, the majority of gamblers correctly guessed the winner in every state for the 2004 presidential election, and only missed two in 2008.
So what makes gamblers so smart?
There are whole books covering this subject, including Silver’s and “The Wisdom of Crowds” from 2005. But here are four simple reasons it makes sense…
1. Polls ask for opinions and personal preference. Polls raise questions, such as: who do you want to win, do you agree with the candidates’ stance on issue X, and so forth. Their outcomes can often be radically influenced by the way the questions are phrased. Bets, on the other hand, are made to win money, not express personal views. Gamblers have an incentive to set their feelings aside.
2. Randomness doesn’t ensure informed responses. Pollsters rely on random sampling and an adequate sample size to get accurate results. But when randomly selecting participants, pollsters will inevitably end up with many people who are uninformed about the candidates and issues. Even though pollsters try various techniques to weight responses and avoid bias, they can’t match the obvious incentive (money) gamblers have to know the facts and objectively take them into account.
3. Gamblers are tuned in. When in 2011 Texas governor Rick Perry totally blanked in a Republican presidential primary debate on the agencies of government he said he wanted to abolish, his odds of winning the nomination dropped by half on Intrade within a couple of minutes. (You can watch Perry crash in this YouTube clip.) People randomly polled over the next couple of days may have missed the debate, or just caught the highlights. People who are invested – emotionally or financially – are the ones closely following the campaigns.
4. Markets have more data. People putting their money on the line look at all of the polls and everything else they can – debates, the economy, political history, the latest scandals – anything they can use to get an edge. That’s why Silver’s forecast model incorporates almost every national poll, and economic indicators such as stock market performance, the consumer price index, and employment rates.
In short, those putting their money where their mouths are will typically be better informed than the general population.
How it works
On Intrade, contracts are put out on yes-or-no propositions like “Barack Obama will win re-election in 2012.” Shares are priced somewhere between $0 and $10 depending on what the market believes is the likely outcome at the moment – prices will react to new events and information just like the stock market does.
When the outcome is determined, the market settles at $0 (if it didn’t happen) or $10 (if it did) and the money is paid out. You have to keep enough money in your account to cover potential losses. So if you buy 10 shares at $5 a share, you’re betting $50 with even odds. If you win, you’ll get $100, for a $50 profit. You can also profit (or cut losses) by selling shares before an outcome is determined as the share price and the odds shift. The minimum amount to start an account is $25. For the risk-averse, there’s a “play money” version of Intrade too.
On Iowa Electronic Markets, the account minimum is $5 and is capped at $500. Shares are also priced between $0 and $1 based on the odds.
Is it legal?
The Iowa Electronic Markets are. They got a “no-action letter” (PDF) back in 1993 from the Commodity Futures Trading Commission, which essentially means that agency won’t take action against this market as long as it’s maintained for academic purposes and the operators of the exchange don’t make a profit.
With sites like Intrade, it’s more complicated. Intrade is based in Ireland, where this form of gambling is legal. According to the Justice Department, however, the Federal Wire Act prohibits U.S. citizens from gambling on the Internet. To read more about this potentially sticky wicket, check out this article from Slate.com. But if you’d rather be safe than sorry and really feel the need to bet real money, stick to the Iowa markets.
There’s still time to take the longer odds on Romney. But whether you gamble or not, if you’re interested in the outcome of elections – and who isn’t? – it’s good to know there’s a probably more reliable indicator than the latest poll you saw on the evening news. Want to look at polls and other information? Here are some links to get started…