I’ve previously posted Bob Erikson and Chris Wlezien’s paper arguing that polls, once properly discounted, actually outperform prediction markets. Here, again, is their paper’s argument:
bq. We argue that it is inappropriate to naively compare market forecasts of an election outcome with exact poll results on the day prices are recorded, that is, market prices reflect forecasts of what will happen on Election Day whereas trial-heat polls register preferences on the day of the poll. We then show that when poll leads are properly discounted, poll-based forecasts outperform vote-share market prices. Moreover, we show that win projections based on the polls dominate prices from winner-take-all markets. Traders in these markets generally see more uncertainty ahead in the campaign than the polling numbers warrant—in effect, they overestimate the role of election campaigns.
Justin Wolfers, who is an advocate of prediction markets, has discussed these issues with Erikson on Andrew’s blog (here and here). Wolfers has a new Wall Street Journal op-ed (here, gated) in which he discusses features of Erikson and Wlezien’s analysis that suggest Obama’s current lead in the polls is overstated:
bq. At this point in the race, [Erikson and Wlezien] find that around half of any lead should be discounted, as early advantages tend to dissipate…Profs. Erikson and Wlezien point to another reason to be wary of Sen. Obama’s early polling lead: On average, the voting public tends to be more strongly anti-incumbent three-and-a-half years into an administration than they are on Election Day. Based on patterns in previous cycles, the professors suggest that this exaggerated anti-incumbent feeling is boosting Sen. Obama’s lead by around three percentage points.
This leads to a bet, discussed here on the Freakonomics blog. Wolfers picks Obama; Erikson picks McCain, albeit with reservations because he finds that “polls are slow to reflect economic conditions” and after adjusting for this, Obama should be the betting favorite. At stake is some wine.
Besides the polls and the prediction markets, we also have the forecasting models (see this previous post). Currently, Doug Hibbs and Ray Fair both predicts that McCain will receive about 48% of the two-party popular vote. Currently, state-by-state projections based on polls show an Obama victory in the Electoral College as well.
We’ll see if his lead lasts as the campaign continues. It may not.