Intrade Was Right: Obama, Senate, House
Nov. 7, 2012
Polls: "All that money. So little usefulness."
Intrade betting for months has conveyed the same story: Obama would win, the Democrats would take the Senate, and the Republicans would take the House.
The Republicans had a chance in the Senate, but they blew it, big time. The reversal came with Todd Akin's bonehead statement about rape and pregnancy. The dominoes started falling. Intrade said the Republicans had a 20% chance to take the Senate on the day of the election.
There was the article on eight conservatives pundits who predicted a Romney victory. They look silly now. Peggy Noonan said Romney would win, based on "vibrations." She writes great speeches. As a political forecaster, she is silly.
The polls are silly.
The polls are economically useless when competing against Intrade and other betting sites.
Intrade knew. The polls didn't.
Once again, the law of large numbers works. The wisdom of crowds works. We have known this for over a century. It goes back to Darwin's cousin, Francis Galton. Wikipedia describes his discovery.
Galton was a keen observer. In 1906, visiting a livestock fair, he stumbled upon an intriguing contest. An ox was on display, and the villagers were invited to guess the animal's weight after it was slaughtered and dressed. Nearly 800 participated, but not one person hit the exact mark: 1,198 pounds. Galton stated that "the middlemost estimate expresses the vox populi, every other estimate being condemned as too low or too high by a majority of the voters"[24], and calculated this value (in modern terminology, the median) as 1,207 pounds. To his surprise, this was within 0.8% of the weight measured by the judges. Soon afterwards, he acknowledged that the mean of the guesses, at 1,197 pounds, was even more accurate.
But we don't believe him. We keep thinking that scientific polls are scientific, i.e., better at determining the outcome of a contest that betting is. That is bad science.
Drudge kept running poll results in headlines.
Polls are expensive. Intrade costs us nothing, as long as we do not bet. We ride on the findings of really silly people, i.e., people who bet money on outcomes for the sake of a game. They do not have to play the game, but they do. They put their hard-earned money on the line, when there is no need to.
But bettors serve a useful purpose. They let us forecast outcomes more accurately, especially head-to-head outcomes. The more bettors there are, the more likely they will forecast the outcome correctly. When the betting is tied to a non-game event, the information it generates is useful -- far more useful than an expensive scientific poll.
As you can see, I never doubted Intrade's results after the Senate fell from 53-47 for the Republicans to 20-80 against. There was no "margin of error" worth talking about in any of the three betting markets: President, Senate, or House.
There comes a time to face up to reality. The reality is this: the polls are no match for the accuracy of betting sites when a large number of people are betting. All of the money spent on polling was wasted. All of the emotion spent on assessing the polls was wasted.
One woman canceled her subscription to Tea Party Economist. She said I had a choice. Either I stopped predicting an Obama victory or she would cancel. I removed her name.
Reality intrudes with Intrade. She did not want reality. She preferred a week of fantasy dreaming. She would not allow reality to intrude.
This is common. Think of the present value of the unfunded liabilities of Social Security, Medicare, and Medicare: $222 trillion. The media do not focus attention on this reality. Congress ignores it. Of those few American families out of a hundred million who have heard of this statistic, most do not make systematic adjustments in the plans for the future in terms of that reality. They will not allow reality to intrude.
Reality will intrude.