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Forecasting elections and polls

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William Gamble | 19/11/2012 11:10 AM | 

All sorts of financial information are produced by polls, including PMI, Consumer Confidence, etc, and not just in the US but around the world. So for the investor what appears to be a credible prediction may be anything but...

The American presidential election is over to the great relief of most of the electorate. Over $6 billion were spent in this election, an amount that is greater than the GDP (gross domestic product) of about 46 countries. The pain was particularly acute in the so-called battleground states. For the uninitiated the battleground states are about nine states where neither party reliably wins elections. Due to a quirk in the US Constitution left over from its origins in the 18th century, winning these states is exceptionally important. So the money spent in these states is far greater than in other states that consistently vote for one party. 
One would think that the election was important for investors in the US. The reality is that it probably did not matter much, because it did not change the balance of power in any meaningful way. So the bitter partisan divide will continue until the next election in two years time. There were two very interesting results. The first was the effect of the continuing demographic shift. The second and more important was the inaccuracy of the polls. 
The US population and voters used to be overwhelmingly whites of European origins. This has changed dramatically. Over the past 20 years, this group of whites has gone from 76% to 63.4% of the population. As the number of African American, Latinos and Asians has grown, so has their voting power. They voted overwhelmingly for Obama: 93% of African Americans, 71% of Latinos, 73% of Asian Americans, and 58% of other minority voters voted for Barack Obama and the Democrats. The Republican Party, in contrast, finds its base consistently shrinking. As one of its leaders, Senator Lindsey Graham said “We're not generating enough angry white guys to stay in business for the long-term.” 
From an investment point of view this is positive. The great economist, Mancur Olson, explained in his book “The Rise and Decline of Nations” that major changes like technology advances, war and demographic shifts lessened the control of entrenched power groups. Freed of distortions the economy becomes more efficient. Still such a fundamental change in the ethnic and political make up of the country is deeply upsetting and helps explain the depth of the rift.
The divide might also help to explain the failure of many predictions about the election’s outcome. Seven of the eight national polls released in the final week forecast the race as a dead heat. The same was true for polls in the all important battleground states. In contrast to the polls’ predictions, the final result was anything but. President Obama won by 51% with over 3 million more votes. It was hardly a landslide, but nowhere near as close as the 2000 election when neither candidate won over 50%. The Republican vice-presidential candidate Paul Ryan said afterwards that he was shocked by the result and a famous Bush presidential advisor, Karl Rove, refused to believe the numbers.
Part of the problem was the methodology used by polling firms to conduct their surveys. The polling firms that concentrated on landlines did poorly since the one-third of Americans who rely exclusively on mobile phones tend to be younger, more urban, worse off financially and more likely to be black or Hispanic. Polling with the internet with firms like Google Consumer Surveys, was more successful and missed the final result by only 0.3%. In contrast the Gallup poll, which has been forecasting presidential elections since 1936, has had three poor performances in a row. Part of the problem with many of the polls is that they are unaware of the biases that they introduce into the process.
The most successful prediction processes were the prediction markets. These markets allow participants to trade options on the outcome of any particular race. There are two famous ones—Intertrade and the Iowa Electronic Market (IEM). Before the election Intertrade gave Obama a 72% chance of winning compared to only a 28% probability of winning for Mitt Romney. Intertrade was also very accurate in predicting the outcomes of the Senate and House of Representative races. They correctly predicted that the Democrats would control the Senate and the Republicans the House insuring continuation of the status quo. 
Although trying to guess the outcome of an election might help some investors, the impact is probably slight. The real conclusion from the inaccuracy of the polls has to do with the inaccuracy of financial information created by polls. For example the United States Labor department conducts the all important unemployment survey using a poll. They are not alone. All sorts of financial information are produced by polls, including PMI, Consumer Confidence, etc, and not just in the US but around the world. So for the investor what appears to be a credible prediction may be anything but.
To read more articles by the same writer, click here.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)

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