Elections | Above the Market

As reported by The New York Times, film critic Pauline Kael expressed shock at Richard Nixon’s landslide victory over George McGovern in 1972. “I live in a rather special world. I only know one person who voted for Nixon. Where they are I don’t know. They’re outside my ken. But sometimes when I’m in a theater I can feel them.” Even after the votes were in and counted, Kael wanted to believe her lyin’ eyes. This year, it’s Republicans who have fallen prey to confirmation bias and rejected the data in favor of preconceived ideological commitments and intuition.

Source: xkcd

Stats wizard Nate Silver has been at the center of a controversy this election season as his data-driven presidential election analysis, outlined at his FiveThirtyEight blog, contradicted the desires of Republicans and pundits who did not want a clear victory for President Obama (albeit for different reasons). Silver created a forecasting model that was uncannily accurate in 2008 (49 of 50 states) and which consistently predicted that President Obama was a clear favorite over Mitt Romney, angering conservatives in the process. When the President won a clear victory last night (the extent of which is still being determined as I write this), Silver’s method and approach were vindicated.

Silver critics such as Politico’s Dylan Byers (“Nate Silver could be a one-term celebrity”), David Brooks of The New York Times (“The pollsters tell us what’s happening now. When they start projecting, they’re getting into silly land”), Morning Joe‘s Joe Scarborough (“Nate Silver says this is a 73.6 percent chance that the president is going to win? Nobody in that campaign thinks they have a 73 percent chance — they think they have a 50.1 percent chance of winning”), The Washington Post’s Michael Gerson (“Silver’s prediction is not an innovation; it is trend taken to its absurd extreme”) and Politico’s Josh Gerstein (“Isn’t the basic problem with the Nate Silver prediction in question, and the critique, that it puts a percentage on a one-off event?”) have all demonstrated that, consistent with my warnings, we simply do not deal with probability very well. More fundamentally, their data-deficient “analysis” has been weighed and found wanting.

With respect to probability, as Silver warned Byers, one shouldn’t confuse prediction with prophecy. As Zeynep Tufekci proclaimed at Wired in his careful defense of Silver, this “isn’t wizardry,” but “the sound science of complex systems.” Accordingly, “[u]ncertainty is an integral part of it. But that uncertainty shouldn’t suggest that we don’t know anything, that we’re completely in the dark, that everything’s a toss-up.” Here’s the key:

What his model says is that currently, given what we know, if we run a gabazillion modeled elections, Obama wins 80 percent of the time…Since we’ll only have one election on Nov. 6, it’s possible that Obama can lose. But Nate Silver’s (and others’) statistical models remain robust and worth keeping and expanding — regardless of the outcome this Tuesday.

Wa-Bam. The probabilities were clear. Governor Romney could have won, but it was unlikely.

With respect to data, Ezra Klein ‘s Wonkblog at the Washington Post offers a detailed defense of quantitative analysis as well as Silver (more here). Had Silver’s model been wrong, it would have been because the underlying polls — lots of them — were wrong. Silver’s model is a sophisticated form of poll valuation and aggregation together with demographic and voting trend analysis.

As my Above the Market masthead proclaims, I believe in and strive to focus on “data-driven analysis.” Because Silver’s work is quintessentially that, it was easy for me to rely upon it in making my prediction of 303 electoral votes for the President (Silver predicted 313). The pundits, however, were all over the map. Data must override ideology, punditry and feelings whether we’re talking about elections, markets or anything else. Data wins. If you want to oppose what the data suggests, it can only be done via better data or better analysis of the data.

To be clear, my prediction (like Silver’s) could have been dramatically wrong. Again, it was based upon data and probabilities rather than certainties. The electorate could have defied the odds (in much the same way that a longshot can win the Super Bowl). Silver, in his fine new book The Signal and the Noise, urges us to “stop and smell the data — slow down, and consider the imperfections in your thinking.” Those of us who work in the markets should do exactly as he suggests.

I’m a big fan of Peggy Noonan. But here’s her pre-election analysis:

There is no denying the Republicans have the passion now, the enthusiasm. The Democrats do not. Independents are breaking for Romney. And there’s the thing about the yard signs. In Florida a few weeks ago I saw Romney signs, not Obama ones. From Ohio I hear the same. From tony Northwest Washington, D.C., I hear the same.

Is it possible this whole thing is playing out before our eyes and we’re not really noticing because we’re too busy looking at data on paper instead of what’s in front of us? Maybe that’s the real distortion of the polls this year: They left us discounting the world around us.

Her writing is still lovely but her lyin’ eyes were wrong and that form of punditry (and market analysis) is d-e-a-d.

We’re all in sales.

The sales process isn’t necessarily concerned with transactions in goods for a fee (and/or a commission). More broadly, it’s about convincing those you seek to convince and gaining market share in your chosen endeavor. Bloggers try to sell readers. Lawyers try to sell clients and juries. Presidential candidates try to sell voters.

Which brings me to my current topic.

The Sunday news shows yesterday were awash in discussions of whether or not Mitt Romney and/or Newt Gingrich are “flip-floppers.” In essence, a flip-flopper is seen as someone who doesn’t have solid convictions and thus changes positions to suit the politics of the moment (see below, from here).

This is seen as a very bad thing. We want our leaders to be tough, strong and principled. We don’t want them to pander to us. But even though we may admire a principled opponent, we aren’t likely to vote for one — which often leads to major quandaries as well as to the temptation to flip-flop.

We are generally “sold” on account of clarity — a position that is clearly stated and which makes sense — and conviction — the passionate conviction of the proponent. That’s good sales technique. Ask a question at a political “debate” and the responses (not answers) will generally be clear and passionate soundbites (Rick Parry notwithstanding), perhaps tangentially related to the question.

On the other hand, we aren’t usually sold by humility and on positions which change based upon new evidence or better arguments, even though truth is very well served by them. As per the scientific method, we should always hold our view of the truth lightly and tentatively, subject to more and better information and arguments. Flip-flopping for those reasons (as opposed to mere expediency) is a good, useful and desirable thing. Granted, political candidates aren’t generally known for their careful review of the facts and precedents. Neither are they often benefitted by changes in position, no matter how justified or nuanced (except for certain moves leftward, which don’t generally help conservatives at the ballot box but which may result in glowing profiles in The New York Times pontificating about how they have “grown”). But a flip-flop for good reasons is to be applauded.

As Keynes rightly put it (maybe), “When the facts change, I change my mind. What do you do, sir?” So here’s my (qualified) endorsement of flip-flopping. May we see more of it…for good and principled reasons.