On politics, pundits, and prediction markets

I don’t often like to delve into the day-to-day horserace politics of the presidential campaign, although I follow it just about as closely as anybody (one reason it is great being back in Washington.) However, I do feel compelled to make one observation, given the upheaval on all sides after Ms. Palin’s barnstorming speech at last night’s RNC.

Back in July, I wrote a tongue-in-cheek post about how buying Obama Presidency contracts in the prediction markets would be a ‘lock’. My observation was based on a number of presidential race forecasting models which, given our nation’s current perceived economic malaise and the unpopularity of the sitting Republican president, predicted a cakewalk for Mr. Obama. I don’t consider myself a particularly partisan individual, and I won’t explicitly endorse one candidate or the other until much closer to Election Day (though if you read regularly, you can probably tell which one I lean towards). But if you asked me right now from a financial standpoint, I’d still tell you that buying Obama contracts is a smart investment.

As in commodities markets, stock markets, or bond markets, prediction markets are driven by both long term fundamentals and day-to-day news. When it comes to Election 2008, unless you’re trading professionally, you probably don’t need to worry about shorting either candidate. What this means effectively is that you can ignore 95% of what the punditocracy says. Their livelihood depends on keeping their ratings up, which in turn depends on you watching their television shows and reading their articles. You’re much less likely to do this enthusiastically every day if it looks like one candidate is going to win handsomely. In other words, pundits have a personal incentive to make you think the race is closer than it is. Pundits’ careers also extend beyond this race, and they have a reputation to preserve. Even election managers are looking for employment in the next campaign: if for some reason Mr. Obama did lose, and they had been saying the race wasn’t even close, how does that bode for their future job prospects?

But that doesn’t mean you have to listen to them. By nearly any metric you care to use, the long term fundamentals of the election strongly favor Mr. Obama. Most strikingly: voters think the economy isn’t doing well, and the sitting Republican president has been in office for 8 years and is deeply unpopular. This election is Mr. Obama’s to lose. Don’t believe me? Check out the election map at Pollster, which depicts, in my opinion, a nearly impossible scenario for Mr. McCain.

My advice if this election is stressing you out? Take a birds-eye view of the campaign. Check in once every two weeks for a (weighted) national poll and polls in the swing states, check the monthly fundraising numbers, stay tuned for the big announcements, and watch the debates. Most of the rest is filler.

Oh, and maybe think about buying that Obama contract…

(Photo by jmtimage)