Betting on the Presidency!

Trying to decide who should hold the most powerful office in the world can sometimes get a little abstract. So how do you bring such a momentous decision back down to earth? How else...?

Gambling!

I interviewed Vincent Shen, noted financial analyst, and occasional degenerate gambler, about his adventures in wagering on this past 2008, US Presidential Election.

Why gamble on the Presidential Election?

With a few infrequent exceptions, political elections are inherently easy to predict. Unlike sports events or casino games, there is no random chance element involved. Elections are decided by the collective wisdom (or stupidity) of millions of people, the aggregate result of which is measurable in advance. Unlike other election-style contests, such as the Academy Awards, political elections are also scientifically polled in advance, often on a daily, or hourly, basis leading up to the actual event. And if you understand the statistical methodology behind polling, you know that polls are, for the most part, accurate - at least 19 times out of 20.

It was for the above reasons that I went on the Internet this past fall and bet a significant amount of money on the U.S. presidential election. (By significant, I mean the approximate opportunity cost of a post-1990's used car). As expected, Obama won. And so did I.



So how do you do it?

If you look back in history, you will find that, barring some rare and major event such as world war or major scandal, the outcome of any U.S. presidential election generally boils down to three factors. And the party with more points on their side of the board is usually the winner.

1. The state of the economy: the party that is in charge during a period of economic decline usually will not win the next presidential election, all else being equal (e.g. Carter in 1980, George H.W. Bush in 1992, McCain in 2008). 


2. Charisma: the candidate with the more "likeable" personality will usually win the election, all else being equal (e.g. Kennedy in 1960, Reagan in 1980 and 1984, Clinton in 1992 and 1996, Bush in 2000 [arguable] and 2004, Obama in 2008).


3. Continuity: the party that has occupied the White House for two consecutive terms will generally not win a third, as people prefer change after eight years (e.g. Kennedy in 1960, Nixon in 1968, Bush in 2000 [arguable], Obama in 2008). If you're like me, then the first question you're asking is, "has someone devised a mathematical prediction model employing these factors?" And the answer is yes! (See here.) You'll also notice that promises, speeches, or events on the campaign trail generally do not factor into the final election results. (I will discuss why this is in a moment.)

Considering that Obama had all 3 of these factors in his favor, he was basically a lock, right? How does the wagering process actually work?

You can go online to the ‘political futures market.' I did, and purchased several hundred shares of Obama for about $6 each.

For those of you not familiar with how a political futures market works, when I buy a "share" of Obama for $6, what I'm really doing is entering into a contract with some anonymous guy in cyberspace to receive $10 when Obama wins the election, for a net profit of $4. If Obama had lost the election, anonymous cyber-dude would have had the right to keep my $6, and I would have received nothing. Another way to look at it is that the market is giving Obama a 6 in 10 chance of winning the election on that particular date.

Is this legal?

In North America, its legal for individuals to make bets, but not legal to operate a gambling site. That's why political futures markets are usually based in Ireland. 

Anything surprise you before you put your money down?

I was surprised to find that the market odds of an Obama victory were only 60% as of late summer 2008. Even on the day before the election, when it was clear that none of the GOP campaign smears had stuck and the polls were predicting a decisive victory for Obama, the odds on him winning were still in the low eighties. A very low figure, given that the statistical probability of McCain closing the polling gap in one day was basically zero.

Some might think Obama winning by 7.25 points was not exactly a decisive victory. After all, he got only 2.87% above the 50% majority mark. It still could have conceivably gone either way, right? But actually, no. A 7.25 point spread is quite large by modern presidential election standards. George W. Bush won his last election by only 2.5 points against Kerry. He "won" the election before that by negative 0.5 points against Gore (a razor-thin 0.009 points if you only count Florida).

If Obama had all these factors going for him, why didn't he crush McCain by a landslide?

The reality is that no matter what the state of the economy, and no matter how charismatic the candidate, around 40 percent of the electorate will always vote Republican and 40 percent will always vote Democratic. This is the nature of a divided electorate, and it's not a recent phenomenon.

Even in the most lopsided elections in modern U.S. history (e.g. Johnson vs. Goldwater, Nixon vs. McGovern), the victor never garners much more than 60% of the vote. This means that the percentage of persuadable voters is historically around 20 percent.  Re-doing the math - bear with me here - if we estimate that 80 out of 100 voters (40 on each side) have already locked in their partisan votes, then a 53% to 46% victory means that 13 out of 20 of the remaining persuadable votes went to Obama, while only 6 out of 20 went to McCain - a more than comfortable margin compared to other recent presidential elections.

So who the hell were these people voting for McCain, then?

A few weeks ago, HBO recently released a documentary where Alexandra Pelosi (Nancy Pelosi's daughter) followed the McCain/Palin campaign across the country and interviewed random GOP supporters. Christian fundamentalist hate-speech aside (and, yes, there was plenty), the part of the documentary that struck me the most was not, to my surprise, the guy who openly declared that he'd never vote for a n***er. Nor was it the avuncular old man who felt that Obama's young supporters were no different than Hitler youth. Nor was it the soft-spoken gentleman who expressed his belief that Obama was the Antichrist.

Rather, it was the part when Pelosi asked a handsome middle-aged couple whether they only watched Fox News because it was just telling them what they wanted to hear. The man defensively responded no, while the wife immediately corrected Pelosi, saying that Fox was fair and balanced because it presented both sides.

Then it hit me. These are the kind of folks who would not only vote for McCain, but bet on him too. These are the folks who get up every morning and read the Drudge Report, accepting every word as fact. These are the folks who censor themselves from all media that do not adhere stringently to their worldview, and then are shocked when the outcome differs from their expectations. So convinced are they by the righteousness and infallibility of their positions, they cannot even contemplate the possibility of a loss - even to the point where they would risk their own economic well-being by engaging in online wagers.

In this YouTube video, Jonathan Haidt, a Social Psychology professor at the University of Virginia, describes what he believes are the psychological differences between liberals and conservatives. I recommend you watch the whole thing, as it is extremely interesting:



Permit me to draw your attention to Haidt's final slide, where he concludes that human minds, by reason of evolution, were designed to "unite us into teams, divide us against other teams, and blind us to the truth." In other words, it is in the natural progression of things for human societies to divide itself into "teams", and then subsequently duke it out. Whether or not this is true, I don't know. But it certainly makes sense, as history is rife with examples of otherwise similar groups that choose to fight with each other even when there is seemingly no pragmatic or beneficial reason to do so. For example: Catholics vs. Protestants, Liverpool vs. Manchester United, East-Coast vs. West-Coast, etc.

But the most important point on that slide, I think, is the one about "blinding us from the truth". Remember how I made the counterintuitive point that speeches, promises, and events on the campaign trail generally do not factor into the final election results? The reason, quite simply, is that political partisans only choose to listen to the voices that reinforce their positions. If you were a hardcore Democratic supporter, chances are that you limited most of your election viewing to Obama's speeches and MSNBC commentary.  If you were a hardcore Republican supporter, chances are that you limited most of your election viewing to McCain's speeches and Fox News commentary.

If, however, you were a non-ideological moderate (i.e. a swing voter), chances are that you frequented neither of these channels. You probably saw news of the economy tanking, and that was what augmented the incumbent-fatigue you were already experiencing. Or you probably saw one or two of the debates, and even though you didn't really understand what the credit crisis was or which of the candidates' solutions would be more effective in solving it. Or maybe you saw that one of the guys was more "presidential-looking" than the other guy. And that's probably the guy you went with in the end.

So in the end, with all these solid predictors, betting on elections is almost like free money?

Well, what a non-ideological moderate voter probably would never do is go online and put money on John McCain. No, that's something only the hardcore partisan contingent would have done, which is why I think Fox News is fantastic and hope it never goes away.

Because outlets like Fox News, Drudge Report, and Rush Limbaugh (and while I'm at it, MSNBC, DailyKos, and Air America), provide the medium, and, more importantly, create the atmosphere through which preconceived opinions can be reinforced, regardless of their correlation with reality. (Although I must add that, between MSNBC and Fox News, one of these channels does a much better job of correlating with reality than the other).

Broadly speaking, I suppose it's unfortunate for society as a whole that so many of us choose to listen to only one side of the story, or that people tend to seek evidence to support their conclusions, rather than the other way around. But as long as these flaws in the human condition continue to exist, I feel I have no choice but to continue to exploit them for personal financial gain. In these difficult economic times, we all need to find ways to supplement our income. Don't you think?