Election ’08: Markets and Models

It may be surprising to learn that one of the leading scholars studying U.S. politics is in fact a Swedish economist. But the advantage of this unusual state of affairs is that during my recent trip to Stockholm, I had a chance to catch up with David Strömberg.

David and I spent an interesting afternoon exploring data from both political prediction markets, and his own econometric model for forecasting elections. The Strömberg model is, in my view, the leading quantitative election-forecasting model — both parsimonious and sophisticated. By building up forecasts state-by-state based on a slew of economic and political factors (details here), his model can not only predict who will win, but also the likelihood that each state will be pivotal. In turn, this makes David’s approach ideal for campaigns trying to figure out where to direct campaign resources.

We have written up our findings for my latest WSJ column.

The headline: Prediction markets currently give the Democrats a 63 percent chance of winning; the Stromberg model puts the odds at 65 percent, reflecting the fact that “the Democrats are likely to win 51 percent of the popular vote, and to win the Electoral College 294-244.”

The reason: “In turn, this Democratic edge reflects the combination of a weak economy and incumbency effects in the wake of an unpopular Bush presidency, which are likely to disadvantage Sen. McCain. Weak local conditions and liberal swings in the electorate suggest that Democrats are likely to do well in key states, such as Ohio, Pennsylvania, and Michigan. Prediction markets are less bullish about the Democrats’ chances in Florida.”

An insight: “For all the attention paid by pundits to opinion polls, our analysis suggests that, at this point in the election cycle, they simply aren’t very informative. As such, we give them very little weight. But as the election gets closer, polls … will warrant greater weight.”

What we ignore: Strömberg’s model “excludes those themes that have dominated recent media coverage: the personalities, age, race, and gender of the candidates, as well as their former preachers, and possible VP candidates. Vague concepts like ‘electability’ don’t figure into the equation.” Even so, the model matches prediction market prices pretty well, “suggesting that markets are more informed by economic and political fundamentals than broader campaign narratives.”

A nailbiter: “The Strömberg model also suggests that there is a one-in-four chance that the 2008 race will come down to the decisions of less than one-in-100 voters in just one state, a situation that would be similar to Florida in 2000, or Ohio in 2004.”

Where to look? “Which states are likely to be decisive? Our list of battleground states are headed by the usual suspects [Florida, Ohio, Pennsylvania, and Michigan], but campaign strategists take note: Beyond the big four, a few surprises emerge. Colorado, Virginia, and California are next-most likely to determine the election.”

You can read the full article here.