Arbitrage is the practice of making a risk-free profit by taking advantage of a price differential between two or more markets. For example, if it is possible to BUY the number of corners in a soccer match at 10 with one odds-maker (so that a profit is obtained for every corner in excess of ten) and to SELL the number of corners at 11 with another odds-maker, a profit will accrue whatever the actual number of corner kicks taken. Such examples of free money are in short supply, however, and a more realistic trading approach may be to employ what I first proposed and termed in 2000 as a ‘quasi-arbitrage’ or ‘Quarb’ strategy. The assumption underpinning this Quarb strategy is straightforward. It is that the average market opinion (where there is a range of opinions) is a better indicator of the truth than the outlier (or ‘maverick’) opinion. Take that number of corner kicks as an example. If there are four market-makers, say, three of which offer clients the chance to BUY at 10 and SELL at 11 and the fourth which allows you to BUY at 11 and SELL at 12, the average market price is the sum of the mid-points (10.5+10.5+10.5+11.5) divided by four, i.e. 10.75. If we take this to be the best estimate of the actual expected value of the outcome, a SELL at the ‘maverick’ price of 11 is a value bet. In other words, the ‘Quarb’ strategy advocates the aggregation and averaging of the range of forecasts, implied in the odds on offer from professional odds-makers, to identify the best possible forecast of the actual outcome.
PollyVote (www.pollyvote.com) is an election forecasting site which follows this principle of combining forecasts. By aggregating the vote-share snapshot contained in traditional opinion polls with a panel of American politics experts, a prediction market and a range of quantitative forecasting models, Polly provides a daily updated forecast of the share of the two-party vote that the Democratic and Republican Presidential candidates will obtain on polling day. For their polling input they use a variation of the RealClearPolitics average and for their prediction market they use the Iowa Electronic Markets, a research and teaching-oriented marketplace which allows small bets on a range of contracts including the Presidential vote-share. The panel is made up of respected political scientists and pundits and the quantitative models (based on an analysis of the likely impact of variables ranging from unemployment and inflation to incumbency and wars) draw on an array of different methodologies. Each of these forecasts is assigned an equal 25% weight and in 2004 generated an almost spot-on forecast of the actual respective vote shares.
Is the RealClearPolitics average the best baseline to use for aggregating the polls? Is the Iowa market the best choice of prediction market? Is the chosen panel and the way its views are aggregated the best way to assimilate the combined knowledge of the political intelligentsia? Is the range of forecasting models appropriate? Does the averaging of the four methodologies perform better than any one alternative forecasting methodology?
This debate will continue, and has been informed by how well Polly has performed over the elections from 2004 to 2012 in forecasting the vote shares of the candidates. The answer is very well indeed. In 2016 things went very wrong, but this was not the fault of the combining methodology but rather that all the separate methodologies failed. Having been fed the wrong food, the parrot suddenly got very sick. Time will tell whether it was a short illness or a harbinger of things to come.
The conventional wisdom for the last several days is that the betting markets are pointing to the re-election of the President while the polls apparently have it too close to call, or have Mitt Romney as the narrow favourite.
So what’s the evidence?
Certainly, a glance at the betting markets reveals a pretty strong consensus that President Obama has a strong edge with the bookmakers, the spread betting operators and the betting exchange, Betfair.com, each of these currently converging at a probability of re-election of about 75%. Intrade.com has it a bit lower, but still make President Obama the very clear favourite.
So what about the opinion polls? Here the idea that Mr. Romney is ahead is in great part derived from an inspection of the headline national poll findings published on the RealClearPolitics.com (RCP) web-site. RCP publish a selection of the latest polls and take an average of this selection to come up with their overall figure. This average had Romney leading by up to a point or so over the last few days, and currently has it about tied.
But is this what the opinion polls are actually showing? The answer depends on whether you look at all the published polls, as broadly available on Pollster, or whether you exclude the polls you don’t favour, a methodology favoured by RCP. Not only do they not include a number of these polls in their overall average, they do not recognize them at all!
Taking average of all the national polls still has it close, but close in the President’s favour.
More important than the national picture, as Al Gore found to his cost, are the state findings. An analysis of all the state polls shows that President Obama is rather more comfortably ahead, including in the key swing states of Ohio, Virginia, Wisconsin, Colorado, Iowa, Nevada and New Hampshire.
Combining the national and state polls, and awarding them a similar weighting, reveals Mr. Obama to be polling close to 2.5% ahead of Mr. Romney – more in the state polls and less in the national polls.
Depending on the statistical analysis used to convert polling advantage into probability of winning, current polling evidence would seem to give the President somewhere above an 8 in 10 chance of winning (based on national and state polls) to rather more than a 90% chance (based on the state polls alone). FiveThirtyEight.com and the Princeton Election Consortium (http://election.princeton.edu/) represent good examples of this sort of analysis.
So the betting markets, contrary to conventional wisdom, are in fact more conservative in their evaluation of Mr. Obama’s chances than are the polls.
Why so?
There are a number of possibilities, but I will highlight three of them.
First is the well-established favourite-longshot bias which occurs in most betting markets, whereby the markets tend to under-estimate the true likelihood of the favourite winning, and vice-versa.
Secondly, the markets may be allowing for the uncertainties a model can’t allow for them, such as some late surprise. The point is that volatility is the friend of the underdog, and the enemy of the favourite.
Thirdly, the markets may be wary that one of the outlier polling organisations might just possibly be right, and the overwhelming polling consensus might just possibly be wrong. This is what I call the ‘Rasmussen effect’, after the polling company that seems to have leaned Republican by a few points in its national and state polling for some time now (http://www.huffingtonpost.com/alan-abramowitz/the-rasmussen-difference_b_2030330.html?utm_hp_ref=@pollster.This) effect was particularly prominent in the 2010 elections (http://fivethirtyeight.blogs.nytimes.com/2010/11/04/rasmussen-polls-were-biased-and-inaccurate-quinnipiac-surveyusa-performed-strongly/), and this is the pollster that had Mr. Bush leading by nine per cent on election day, 2000, as evidenced by the National Council on Public Polling (http://www.ncpp.org/?q=node/20). That was about ten points out!
If Rasmussen is right, though, the race is very tight in the key states and Obama would be much less of a favourite than the polling consensus suggests.
So Rasmussen must be right and the other polls wrong, and Obama must lose Ohio, which Rasmussen is calling a pure toss-up, and he must not win elsewhere to compensate. All other routes are regarded as far more unlikely by the markets, though by no means impossible.
So what is the most likely outcome of this election? However you cut the data, the answer is the same. It’s a win for the President.
Polls don’t decide elections, however, and neither do the betting markets. People do, and that’s why anything can happen, and sometimes does!
When even a CNN poll, composed of a sample of debate watchers they freely admit to be eight per cent more Republican than the country as a whole, hands the debate to President Obama by seven percentage points, you know that Governor Romney has taken something of a beating. The win was also recorded by CNN’s focus group of uncommitted voters in Ohio, and was confirmed by the consensus of other instant polling, notably from Survey USA, CBS News, Battleground, Google Consumer Surveys and Public Policy Polling (PPP). The most interesting of these polls is perhaps the PPP survey of independents watching the debate in the swing state of Colorado. By 58% to 36%, these voters named Obama the winner.
Those who prefer to track the debate through the online betting markets, such as Betfair and Intrade, saw things no differently, as a flood of money came for the President through the course of the debate. Betfair traders piled their money into backing the re-election of the President, while Intrade ran a market exclusively on who would win the debate, deferring to the CNN instant poll as the final arbiter. The latter market started out marginally favouring Mr. Obama but soon attracted a growing tide of support for the incumbent, until by the end of the debate the odds implied a probability of an Obama win of more than 90%. Brave traders indeed, trusting to a CNN poll which had already heavily over-sampled Republicans in the Vice-Presidential debate. Either they were pretty sure that the President had won so handsomely that he could overcome a potential repeat skew, or they were unaware of it. Whatever the reasoning, the market got it right.
According to this evidence, Mitt Romney not only lost the second Presidential debate, he was bludgeoned out of it.
But will it make a difference to the election outcome?
For the answer to this we can turn to those all-important fluctuating price lines which represent the probability that one candidate or other will take the White House.
Interestingly, it was such a price line that signalled, during the first of the UK Prime Ministerial debates in 2010, the impending disappearance of the Conservative Party’s hopes of winning an overall majority in that year’s General Election. David Cameron’s performance in that debate mirrored perceptions of Barack Obama’s performance in the first of this year’s Presidential debates. Cameron’s performance in the second debate was substantially better, mirroring again Obama’s performance in his second debate.
Does this tell us something? The Conservative leader’s first debate flop almost certainly cost his party an overall majority in the House of Commons. His second debate performance helped him to Downing Street at the head of a coalition government. So are there any parallels we can draw for the US election?
In one sense, the parallels are limited because the US Presidential election is winner-takes-all. But there is another sense in which a parallel does exist. If we consider control of the Senate and House of Representatives as being in some degree linked to the performance and popularity of the President, what is sometimes called the ‘coattail’ effect, we might just have witnessed a performance outstanding enough in the context of the two debates to hand the White House and Senate to the Democrats, but perhaps not enough for a full sweep of Congress.
Is this the way it will eventually turn out?
We shall see!
A pretty good way of finding out where things stand during the course of any event on which money is traded is to track the state of the in-play markets, and in particular the betting exchanges like Betfair. This is a particularly useful guide when it is not always easy to gauge all the variables, such as in Formula 1 racing, where there are pit stops, tyre degradation, in-race penalties and so much more to factor in. So when I watch a race led on the track by Lewis Hamilton in the McLaren but led in the markets by Fernando Alonso, it is to the Spaniard in the Ferrari that I will look to take the chequered flag.
It’s pretty much the same in a Presidential or Vice-Presidential debate, when the analysis of all those who are willing to venture their money to support their judgement comes together in the shape of a market price or prices. These fluctuating price lines represent variables such as the probability that one or other party will take the White House.
It was such a price line that, during the first ever UK Prime Ministerial debate in 2010, alerted analysts to the end of the Conservatives’ hopes of winning an overall majority in that year’s General Election. Before that debate, the likelihood of an overall Tory majority was significant. After the unexpectedly good performance in that debate by Liberal Democrat leader, Nick Clegg, and the unexpectedly bad performance of Conservative David Cameron, it was not. So much for those who say that debates don’t matter!
So what can we learn from the in-running markets about the debate between Vice-President Joe Biden and Congressman Paul Ryan? It is in fact possible to visualize the shape a contest is taking by simply following the flows of money tracing their way through the relevant markets. Interpreting the patterns of price lines to paint a picture is more science than art, but in truth it is a bit of both.
So what picture did the markets paint? It was a picture of the sort you would expect in a boxing match, when one boxer broadly dominates a round, with a mixture of penetrating jabs and controlled hooks, while his opponent blocks and parries to good effect, preparing to regroup in the next round. In this picture, it is the Vice-President throwing the telling blows and the Congressman adopting the well-rehearsed defensive stance.
And then it came to the judges to score the round. One of the judges was CBS News, whose poll of undecided voters gave the round decisively to Vice-President Biden by 50 points to 31. The other was CNN, whose poll of debate watchers appeared to give the edge to Mr. Ryan by 48 points to 44. Only later did we learn that the CNN scorecard had been tampered with, courtesy of a sizeable over-sampling of Republicans. By then, though, the narrative had been re-defined. The referee called it a draw, and the markets settled down again to where they were before the bell had sounded for the round to begin.
Who would he select as his running mate? It was the question observers of the American political scene had been asking ever since Willard Mitt Romney became the presumptive Republican nominee for President of the United States. Would he follow the 2008 Republican precedent in selecting a risky potential game-changer, or would he instead plump for a safe, established, mainstream choice?
Well, what would be the rational decision? That depends on whether you think you’re heading for the rocks or whether you believe you’re set fair if you just don’t rock the boat. In the first instance, a safe but unexciting choice might mean losing by less. In Presidential politics, however, there are no prizes for limiting the size of the loss. There is no such thing as keeping the deficit to manageable proportions. If you lose by one electoral vote, you may as well lose by a hundred. Put another way, in a state of the world where you are likely to go down by three or four points, volatility is very much your friend. It’s a state of the world where it’s rational to shake the dice. And for Governor Romney, it’s a state of the world which he currently inhabits. This is reflected in the betting markets which overall give him barely a one in three chance of taking the White House, and most sophisticated forecasting models, which tend to rate his probability of evicting President Obama even lower.
The problem for Romney, however, is that most of the dice he has to play with are loaded against him. All potential game-changers those with the purse-strings would allow him to select from are fraught with huge downside risk. And money has never mattered so much since the 5-4 decision of the US Supreme Court to allow so-called super PACs to allow billionaires and corporations to spend unlimited sums of money helping or hindering individual candidates, to the massive advantage of the Republican Party in general, and Mr Romney in particular.
Yet he is himself a very cautious politician by nature who would never have made John McCain’s mistake of choosing a maverick running mate with the potential to run out of control. For that reason, he was always likely to plead with his backers to be allowed a known quantity, unlikely to create any mayhem. That pretty much ruled out Governor Chris Christie of New Jersey, but just about pulls in Representative Paul D. Ryan of Wisconsin, the darling of Fox News, the broadcasting arm (in all but name) of the Republican Party.
So what is the downside risk with Mr Ryan?
It’s not difficult to state. He is simply the architect in chief of RyanCare, which is pretty much the idea that Medicare, Medicaid and Social Security should be slashed to the core to save money, which can be used instead to cut taxes on the richest in the country. It’s a policy which all the polling shows is overwhelmingly unpopular, and the more that people understand it, the less they like it. By raising Mr Ryan to the national stage, the presumptive Republican nominee has just ensured that RyanCare will be all too well understood by the American people by the time of the election.
More generally, various statistical measures (such as the well-recognised statistical system DW-Nominate) peg him as way to the right of even Dick Cheney and certainly the most conservative Republican member of Congress to be picked for the vice-presidential slot since at least 1900. He is also ranked as more conservative than any Democratic nominee was liberal, meaning that he is the furthest from the centre of the political spectrum.
So can Mr Ryan help win his home state of Wisconsin? That’s not impossible, but his net favourable rating in his home state is, according to the polling, just five points.
So what does he add?
He adds money, lots of it, from those with most to gain from RyanCare. And he adds spice to the Fox News cheerleading bandwagon. These are factors not to be under-estimated. Without them, Romney would be already sunk with no hope of re-surfacing.
It is probably a chance that Mitt Romney thinks worth taking, the best among the limited choices his backers would allow him. With hindsight, it was a choice which became almost inevitable as soon as the Supreme Court opened the floodgates to allow unlimited flows of money to the political stage.
Is it a strategy that will work? Can money buy any office, even the highest elected office of all? In November, we shall know the answer to that question.
The cross-party Commons Culture, Media and Sport Select Committee has now published its much anticipated report examining the way in which gambling is and should be regulated in the UK, under the title, The Gambling Act 2005: A Bet Worth Taking?
In short, the Committee recommends that any local authority be able to make its own decision as to whether or not they want a casino, rather than the decision being made by way of what they call “central diktat” – what others might call national planning. The Committee does recommend a role for central regulation, however, to ensure high standards of protection for the vulnerable, particularly children.
As John Whittingdale, the Chairman of the Committee, told the BBC Radio 4 Today programme, they still want national rules governing such things as the age-entry requirement for casinos, the number of machines and limits on stakes and prizes.
The Committee also recommends that the Department for Culture, Media and Sport should develop an information campaign on problem gambling, to be made available outside gambling premises. Moreover, the Committee argues for more research on problem gambling, particularly with regard to children, and a greater emphasis on discovering the most effective ways of educating children about the risks of gambling.
So far, relatively uncontroversial, one might argue. After all, why should one local authority be barred by national diktat from having a casino which the local residents broadly favour while a different local authority is allowed to have five? After all, the Committee is not in favour of abandoning national guidelines on the age of entry to these establishments, or even the number and type of machines they are permitted to house.
Much of the rest of the report also looks pretty uncontroversial. For example, they highlight the failure of the Department for Culture, Media and Sport to work with the Treasury and set remote gambling taxation at a level at which online operators could remain within the UK and be regulated by the Gambling Commission. This is pretty much common sense.
So is the report a pretty uncontroversial set of common sense recommendations? Broadly speaking, I would agree.
Where the Committee has pushed the envelope, though, is in its recommendations on the number of a certain type of machine allowed in betting shops and casinos. At present, high street betting shops are allowed a maximum of four B2 (FOBT) gambling machines, which offer a maximum £500 prize. The Committee says that casinos, the most highly-regulated sector, should instead be permitted to operate up to twenty B2-type gambling machines. Actually, they already are, it’s just that they usually prefer to use up their quota of machines with so-called B1 machines, with a much higher jackpot.
The Committee also found that limiting the number of B2 machines in betting shops has encouraged them to cluster in some high streets in order to satisfy customer demand. Local Authorities should have the power to allow betting shops to have more than the current maximum of four B2 machines per shop, the Committee argues, if they believe it will help to deal with the issue of clustering.
The reason this is so controversial is that there is a view prevailing in certain quarters that these particular machines are dangerous and highly addictive. They have been dubbed the ‘crack cocaine’ of gambling by certain newspapers, a term first coined by Donald Trump to describe a bingo-style game which offered competition to his casino portfolio.
If they are as dangerous as dubbed, of course, then they should not be allowed at all. Would we allow crack cocaine to be sold in supermarkets, as long as it is limited to just four shelves? Of course not! Casinos are in any case already allowed twenty much higher-prize machines than the B2 machines which the Committee is talking about.
So what is the evidence? The Gambling Commission has published a number of expert reports by leading experts in the field and the truth is that the evidence is just not there to ban these machines.
If we are not to ban them outright, how many should we allow? Is four the correct number that should be allowed in a casino or a betting shop, or should it be three or five, or two or six? If clustering is indeed taking place, as the Committee indicates may be the case, the current regulations might actually be leading to more B2 machines in total than would be the case if the rules were relaxed in terms of machines per establishment.
This is not to say that we should drop our guard with regard to the potential dangers from unregulated gambling, particularly unregulated online gambling. Australia is another example of a country where easy access to big-jackpot machines in the high street combined with complementary access to alcohol has created a culture of gambling we would be wise not to emulate. But the Committee is not recommending that we wander down either of these routes.
Before rising to cast stones at the recommendations of the Select Committee, therefore, we should pause to consider what they are saying. Whether we agree with all of it or not, ultimately we need to base our conclusions on the evidence, not on emotion.
It is a little over a week since the US Supreme Court delivered its landmark judgment on President Obama’s signature policy achievement in office so far, the Affordable Care Act, which extends medical insurance coverage to additional tens of millions of Americans as well as covering those with pre-existing conditions. It was an achievement made in the face of almost universal Republican opposition, and which at the time of its implementation was believed by almost every respected constitutional lawyer to be fireproof in terms of the law and the constitution. In modern America, however, what the courts, and in particular the Supreme Court, decide is lawful or constitutional has become increasingly unrelated to what mainstream legal and constitutional scholars would consider to be the case, and increasingly closely related to the political and partisan prejudices of those serving on the bench. To this extent, it is as if the modern US Supreme Court is made up of politicians dressed in legal robes. It is the reason that so many decisions which divide Democrats and Republicans in the Congress and the country so often end up split 5-4, between the five conservative justices and the four more liberal justices. Law decided on party lines! It was never made so obvious as when the Supreme Court in 2000 voted 5-4 to halt the recount in Florida and award the election to George W. Bush over Vice-President Gore. In that case, one of the justices, Antonin Scalia, had to perform the equivalent of legal gymnastics to explain why he was overturning the right of Florida’s Supreme Court to continue with the count while championing state rights to decide such things in every earlier case. When queried, he told dissenters to “get over it!” More recently the Court voted 5-4, in the Citizens United case, to allow corporations and other vested interests to spend as much as they liked to promote and attack the causes of particular candidates, a decision hugely beneficial to the Republican Party. As expected, the vote went 5-4 along usual party lines. So it was taken in many quarters as a given that the Supreme Court would go the usual 5-4 route to overturn the will of the President of the United States, the Senate and the US House of Representatives and vote to rule the whole of the health care reforms as unconstitutional. On Intrade, the betting market, the likelihood was trading at around 80% the day before the decision came down. In the event, the decision was 5-4, but to the anger and shock of a Republican Party accustomed to having the referee on their team, it went the other way. Chief Justice Roberts, an arch-conservative appointee of George W. Bush, voted to uphold the Affordable Care Act as constitutional, siding with the more liberal members of the court, albeit determining it legal only on the basis of the principles of the Government’s right to taxation, an apparent sop to the campaigning arm of the Republican Party. So why did he do it? Was it a decision based on a great respect for doing the right thing in terms of the law and the constitution? On past evidence, unlikely. Was it a growing concern that the Court was on the verge of at last being rumbled by the general public as the judicial arm of the Republican Party, in the same way that Fox News was a while ago rumbled as the party’s broadcasting arm. Perhaps. Was it because he thought it would energize the Republican base to come out in force to overturn the Act by ousting the President and his Democratic allies in Congress. More likely. Or was it because he feared the revenge of a re-elected Democratic President and Senate when the time should come to replace a number of the ageing justices on the court, maybe as many as three in the next four years. Most likely! In fact, the decision has so far served to boost the President in the post-judgment polling and betting. We now look forward to seeing how this plays out! It will be interesting.
Professor Leighton Vaughan Williams 