US Election –Introducing Intrade
Posted by Possum Comitatus on May 27, 2008
As the US elections inch closer, it’s probably about time we pulled our finger out and started to have a look at it.
There are two big problems with the US election when it comes to getting a psephological grip on it. Firstly, the Republicans and the Democrats have yet to appoint an official nominee – meaning that the system hasn’t properly been switched “ON” yet. As a result the polling and betting market data is polluted – however small – by multiple candidates being the focus. The head to clash hasn’t precipitated out fully yet and wont until each party holds their convention.
The second big problem is US polling. Due to the US having voluntary voting, polling results have a big extra dollop of uncertainty added to them. People that say they will vote a certain way not only produce the uncertainty that they might not actually vote that way in practice (the universal problem political pollsters have), but that they might not end up voting at all. Many firms use lists of registered voters in an attempt to overcome this problem, but with a candidate like Obama that is driving massive new turnout, and with parts of the Republican base getting apathetic and not bothering to turn up – this all gets a little problematic.
The other part of the polling problem in the US is that there are far too many shithouse polling organisations that couldn’t successfully poll what a family of 4 wants for dinner, let alone what the political intentions of 300 odd million people are at any given time. If you remember back to last years election, we poured big buckets of the smelly stuff over pollsters that used small sample sizes.
In the US, sample sizes of less than 500 are a regular feature.
At a later date we’ll whittle down the polling organisations to those that can be trusted and we’ll ignore these small sample tossers that give polling a bad name – that way we might be able to get ourselves some credible US polling goodness.
But in the mean time, I’ll introduce you to the data that we’ll be using most for the upcoming US election – a betting market called Intrade. Betting markets in the US have outperformed polls at every election since 1988 when the Iowa Electronic Markets came on-line. One of the reasons is pretty simple – polls aren’t predictive, they simply measure a snapshot of opinion at any given time. To make them predictive we have to take all those snapshots and build a forecasting model to project ahead into the future. Prediction markets like Intrade on the other hand are predictive by design – people bet on who they think the eventual winner will be.
Intrade isn’t quite like the betting markets we have in Australia which more closely represent laying a bet with a bookie – at Intrade, people buy and sell contracts based on what they believe will happen, so it removes any house manipulation and lets the market find it’s own natural equilibrium based on nothing more the price people offer to sell a contract and the price people are willing to pay to buy such a contract.
The beauty of this type of market, especially the way Intrade is designed in terms of the price limits they place on any single contract, is that implied probabilities of an event occurring like a Democrat becoming president for instance, is simply the Democrat “last price” divided by 100.
I used a start date of April 1st 2008 as the beginning of my Intrade data set, so to give an example of what the probabilities currently look like for the Democrats winning the presidential election, well use the contract value at the end of each day since April 1st right through to yesterday.
As you can see, at the moment, the Democrats have a probability of winning the US presidential election of 62%. Worth mentioning is that this result also has a built in implied probability of Obama becoming the Democrat nominee of 92%, as that’s what his current probability to get the Dem nomination is currently running at over at Intrade.
What’s noticeable here is the small surge that happened after the 6th May. Maybe someone could fill me in on the why’s of that?
Intrade have a whole lot of things they run contract markets on, Senate races, VP nominations, House election etc, including a market for the presidential winner of each US State. Because the US election winner is ultimately decided by who can get the magical 270 of the 538 Electoral College votes that are available, where each State has a set number of Electoral College votes to give, it’s worthwhile looking at the presidential election as a collective of 51 separate elections.
When we total up the current projected Intrade winner in each of those 50 State elections (plus the District of Columbia) and tally up the electoral votes associated with those States, we get a measure of how many electoral votes the Intrade market currently has each Party on.
We’ll call this figure “Intrade EV Win Tally” for it tells us who is actually ahead in the electoral vote contest and by how much – we’ll graph it in a minute.
The other thing we’ll regularly use here is a measure of how the broader support levels of each political party are changing through time . To do this we simply multiply the electoral votes that each state has to give with the current probability that a party will win that State.
So if, for instance, we take Colorado as an example – Colorado has 9 Electoral Votes to give. The current probability of the Democrats winning Colorado is running at 62.4% or 0.624. So we multiply the 9 Electoral college votes by 0.624 to get a figure of 5.616. When we do that for all the States and add them up, what we get is a probabilistically weighted estimate of the broad level of support for the Democrat party based in terms of hypothetical Electoral College Votes. We’ll call this “Total EV probability Sum” – shitty name I know, but I’m stuck for something better at the moment.
This might not seem that important today – but it will come in extraordinarily handy as the election progresses for all sorts of reasons that we’ll get to as the need arises.
So we can now graph these two things – the projected Electoral College votes using the State based markets which tells us who is currently leading and by how much, as well as the Total EV Probability sum which for now gives us a measure of broad support change.
We’ll just do this for the Democrats rather than for both parties as the Republican chart is just a mirror image of the Democrat chart, and we’ll use weeks rather than days just to knock out some of the volatility – again starting from the 1st April.
So what we can see is that currently, Intrade has the projected Electoral College Votes for the Democrats standing at 293, down 5 from early April when the probability of the Democrats winning Nevada and their 5 Electoral College votes fell from 51.5% to the 48.5% probability that the Dems have today of winning that State.
The magical number is 270 – so the Democrats are projected by Intrade at the moment to win the election by 23 Electoral College Votes.
The EV Probability Sum shows us that the broad level of support for the Dems in the combined State markets is slowly increasing. Doesnt mean much now, but it certainly will a little later on.
If you want to have a browse around Intrade, you can pop over HERE and have a squiz. Just follow the politics links.
UPDATE: There’s a new button at the top of the site called “Intrade Data”. “US Election”
It has time series charts of the three Intrade measurements that I’ll mainly be using for the US election, among a few other things and a spiffy map. They’ll be updated every Tuesday.
Two new bits added to the Intrade page – a chart that shows where each state stands on the probability spectrum along with the Electoral College votes they provide:
And probabilities done as a map – with blue for Dem and red for Republican (the darker the colour the higher the probability that the respective party will win it, 0.5 is white)