Wednesday, September 10, 2008

Sarah Palin: Game Changing Decision

To people afraid of math, the beginning of this post is going to feel like you are studying for the SATs again. Stay with me. Imagine you are on a game show and there are three doors in front of you. Behind one of the doors is $1,000,000 and behind the others is nothing. You pick door number 1. At this point the cheesy host opens door number 2 and show there is nothing behind it. He then ask if you want to stick to door number 1 or switch to door number 3. Should you switch?

The answer may surprise you. You double your chances of winning if you switch. I'll skip the geeky explanation--check out this explanation for what is known as the Monty Hall problem.

The point of this preamble is simply this: When you gain more information, the game changes. What you thought you knew has to be reevaluated in the face of these changes. In the game show example above, the new information is the host showing you one of the loosing doors after the fact. In the context of the current election, the new information is that Sarah Palin was picked by McCain to be his VP running mate.

All across the web and on the TV and in the newspapers you see people analyzing the election as it was before this decision. Analysts will bring up statistics on how Obama did in the primaries. Editorials will warn of conservatives' uneasy acceptance of John McCain. Comparisons will be made to previous, recent presidential elections. All of these lines of thinking need to be adjusted in the wake of the Palin decision.

This is true whether or not your are conservative, liberal, or in between. This is true whether you are ecstatic that Palin is doing well or horrified that she even has a chance. This post isn't about partisan politics; it's a (hopefully dispassionate) realization that when studying politics there are some events you can't ignore.

This does not mean that Palin guarantees the Republicans will win this fall. It certainly does not mean that they deserve to win. James Pethokoukis at U.S. News & World Report has an article that compares the current presidential campaign to economic markets. He postulates that Obama's meteoric rise in popularity can be likened to a economic bubble such as was seen with internet stocks in the late 1990's. And just as the internet bubble burst, he wonders if Obama's bubble is bursting. Similarly, the popularity of Palin could be another bubble--one that is just as likely to burst as any unsustainable increase in an economic market.

On the subject of economics being a surrogate for political analysis it is interesting to consider prediction markets where people put real money on the line to predict future outcomes. Since people can make a profit by leveraging their expertise or knowledge in an area, prediction markets are often more accurate than more traditional polling.

One of the large prediction markets is available at intrade. As recent as early August, intrade had Obama as a 70-30 favorite to win the presidency. The market is now dead even at 50-50. Here are graphs of the last month for Obama:

and McCain:

The fact that is tied (by definition) offers no prediction at the moment on who is likely to win in November. But look at the change in the last week. The addition of Sarah Palin into the race has changed the game. Whether you consider that good news or bad depends on your hopes and your biases. Palin has changed the game. Analyzes that ignore this fact are doomed to be inaccurate.

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