Pollsters and Politics Are Great Bedfellows

Early in my career I read great advice for surviving the world of financial prediction: “Give them a date and give them a number, but never give them both at the same time”. The profession of making business predictions is a graveyard for professionals who almost got it right.  The business world demands reliability and creates high accountability for paid prophets. Most do not survive their sophomore year.

Political Prophets Have another Standard

I simply cannot understand how the whole industry of political prediction can thrive when its recent batting average on major events like the surprise conservative victory for David Cameron in 2015, Trump 2016, Brexit 2016, Romney’s Presidential campaign in 2012, and almost all global warming predictions is hovering around the Mendoza line or what Miguel Cabrera is batting against Indians’ pitching this year, around .155. How can these highly credentialed university academics and pollsters with every resource on the planet including social media, the internet, robocalls, exit polls, snail mail and endless algorithms get it wrong so often when so much is riding on their predictions?

I can only answer that question with another three questions:

1. Who is interpreting the prediction?
2. Who is benefiting from the prediction?
3. Who is paying for the prediction?

Academics and the British Tote Board

Take Brexit; The pollsters and the bookies diverged in the weeks leading up to the vote. The media was fixated on the bookies expecting that the tote board, how people are betting their money, was a better indication of the result than what people told the pollsters they were going to do. In turn, financial markets sided with the bookies and signaled ironclad confidence in a “STAY” outcome. So the capital flows measured by bookies and brokers prophesied a certainty of NO Exit. That was good enough for academic experts like Stephen Fisher and Rosalind Shorrocks from Oxford University who predicted only a 39% chance of EXIT one week before the polls and 11% as the polls closed one week later. The Washington Post in an article by Chris Hanretty on June 24 reports them being blindsided.

According to Chris Hanretty’s article “Here’s Why Pollsters and Pundits Got Brexit Wrong”, various factions saw the vote unfolding differently: “None of these methods saw a Leave outcome as the most likely outcome. Ordinary citizens came closest, putting the probability of ‘Brexit’ at 55.2 percent, closely followed by an average of polls at 55.6 percent. The least accurate forecasting method was to infer probabilities from betting markets. Fisher and Horrocks, on their morning of poll update, reported an implied probability of just 23 percent. Ninety minutes after the close of poll, this market-derived probability had fallen to just 11.3 percent.”

So the people and the pollsters said that there was a greater than 55% chance that Britain would EXIT the EU.  That needed to be re-interpreted by Oxford academics, Stephen Fisher and Rosalind Shorrocks, by divining the British tote board and the financial markets. Mr. Hanretty suggests that academic pros were relying on tracking referendum forecasts that were a special brew of people, pollsters and betting markets. Two of those three said go and only one, the bookies, said stay. The academics went with the tote board which turned out to be as accurate as my childhood Ouija Board that predicted I would be a priest.

The rest of The Washington Post article talks about the academics learning something new about campaign dynamics in referendums called “status quo reversion” which is the well supported tendency that undecided voters are more likely to choose the status quo (REMAIN) than the uncertain future (EXIT) and that was proved by the betting book and the financial markets.

Hedge Funds Probably Made a Killing

I have another suggestion for The Washington Post. The real smart guys (think George Soros) might have encouraged wholesale media endorsement of the REMAIN outcome because they had a big bet on the more likely EXIT result. Soros would believe the people and pollsters and he could easily manipulate the academics’ Ouija Board.

Think about a multi-billion hedge fund with currency trading skills that is making small, but timely and influential, bets for REMAIN on all the tote boards in London but large last minute (market timing) Exit bets in the currency markets when the odds start to become really good. The pollsters are saying EXIT, the people are saying EXIT but the betting line is 10:1 for REMAIN based on The Washington Post’s and media’s ringing endorsements (backed by Oxford Academics) of the betting markets belief in status quo reversion? Seems to me some hedge fund (think George Soros again) made a small fortune. The reason I suggest George Soros is because his voice was loudest at polling time (after he may have shorted the Sterling) about what would happen if Britain exited the EU. My explanation, while pure conjecture, is just as plausible as the “status quo reversion theory” not working in close referendums?

Support for my hedge fund theory comes from an article published by The Economist on June 24^th as well. Among other things, that article investigated the composition of the Ladbrokes betting book on Brexit: “How did the wisdom of crowds fail so spectacularly? One theory holds that the Brexit market was swayed by a small number of big bets by optimistic “remain” voters, who tended to be richer than those who supported “leave” (indeed, Ladbrokes, a bookmaker, has said that the majority of individual wagers were placed for “leave”). But while political-betting markets could conceivably be small enough to demonstrate such inefficiencies, currency markets most certainly are not, and they displayed the same pattern as the bookies.” Maybe “richer”, in this case means institutional money that was trying to manipulate the tote book to influence the currency markets?

Going back to pollsters and predictions and remembering my three questions, you have to be pretty skeptical about political predictions:

1. Who is giving the prediction or interpretations of the prediction? It is usually some branch of media or independent research sponsored by some venerable institution of higher learning.
2. Who is benefitting from the prediction? Some branch of media is usually incented to predict close elections because it leads to massive ad campaigns.
3. Who is paying for the prediction? Usually one or more affiliates of a political organization who have commissioned a study or the media itself who simply views it as an investment in creating future ad inventory?

Based on my three questions I think the 2016 Presidential election poll right now is either 60/40 for Hillary or 60/40 for Trump, but you will not hear that from the pollsters because a dead heat (within the margin for error) encourages fundraising that buys advertising. I only wish the pollsters would call it straight and avert the pain of the endless media onslaught that will start soon.

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