May the odds be ever in your favor
Editor’s note: This piece was originally written forÂ Tomorrow Magazine, whose first issue comes out this month. The articleÂ is being republished with permission.
On May 20, 2011, John Delaney awoke 550 meters from the summit of Mount Everest. Delaney, who founded Intrade, a website for those who love to predict the future, had been trying to get to the top of the world for years. His company invited users to bet on the news: Customers would calculate probabilities, assess risk, make a wager. On Everest, Delaney was doing much the same.
This close to the summit, he was on an area of the mountain known as the death zone, where the atmosphere is about three times thinner than at sea level. Cerebral and pulmonary edemasâthe leaking of fluid to the brain and heartâare increasingly likely at that altitude. Still, between 1921 and 2006, just 94 people died at this stage of the climbâabove 8,000 meters, but before the summit. Altogether, Everest claimed 192 climbersâ lives in that 86-year span, 1.3 percent of those who attempted a climb. The odds that Delaney would succumb to the mountain were low.
Back in Ireland, three days earlier, his wife, Orla, had given birth to a premature baby, though only 6 percent of babies born in Ireland are premature. She named her Hope.
But Delaney was too far from Orla and too close to the summit to be notified. At 7:30 p.m., he set out from camp, 8,300 meters above sea level. According to forecasts, the temperature was -7 degrees Fahrenheit, and winds blew as fast as 40 miles an hour.
Each of the eight climbers in the group had their own sherpa and oxygen supply. At 1:45 a.m., 50 meters from the summit, Delaney began to struggle. A guide came down from the summit and, with the help of sherpas, began to escort him back down the mountain. At 4:30 a.m., 100 meters from the summit of Everest, the guides pronounced Delaney dead. He would never know Hope.
âJohn and I were both very much aware of the risks involved,â Orla said at his funeral. Everest deaths were not unheard ofâthe statistics are publicly available. The Delaneys knew that something could go wrong; they just assumed that it wouldnât. Tragically, they made the wrong prediction. The man who made his living taking bets had succumbed to his own.
Delaney left behind his wife, three kids, and a company that has changed the way political junkies obsess about elections. Intrade, founded as a small, unassuming betting market in Dublin, became part of a new trend in American politics. Treating politicians like stocks, Intradeâs website offers markets for people to invest in their conviction that Mitt Romney would win the 2012 Republican presidential nomination. The result? Quantified publicÂ perception of the raceââconventional wisdom, plusâ as one academic told me.
Intrade wasnât the first to offer a political prediction market, but it was the savviest. Opened in 2001 as an online sports-betting market, the company quickly transitioned to politics when Delaney saw demand for its prop political bets. It had competitionâIowa Electronic Markets and BetFair, among othersâbut by opening itself up to the media and researchers, it became for political betting markets what Kleenex is to facial tissue. It proved irresistible to political journalists, for whom the horse race is stock-in-trade.
As Intrade came into its own in 2008, a geek emerged from the cornfields of baseball statistics to offer an alternative method of predicting the future. He was anonymous at first, one of the masses in the scrum at liberal blog DailyKos, username: poblano. But then he started his own site, fivethirtyeight.com, and outed himself. His name was Nate Silver, and he was ready to do for politics what statistician Bill James had done for baseball: Make statistics a force to be reckoned with.
Silver created models that predicted the winners of the 2008 campaign, just like Intrade. His predictions, though didnât rely on the wisdom of crowds, but on calculations. Amazingly, they were rightâsometimes even better than the polls they were based on. Silver became an oracle.
Four years later, Intrade and Silver are further entrenched in the national political conversation. Pundits cite Intrade market prices to prove their points, even if the market they cite is hopelessly flawed. In the first nine months of 2012, more than $124 million was traded on Intradeâs political markets. By August, the number of political bets had surpassed its 2008 peak by 2.2 million. By 2010, meanwhile, editors at The New York Times were so impressed with Silver they hired him to bolster the paperâs election coverage; Silver also signed a book contract with a reported $700,000 advance. TheÂ Signal and the Noise: Why So Many Predictions FailâBut Some Donât came outÂ in late September.
Silver and Intrade are vastly different touchstones in our new predictive era. One is democratic, the other technocratic. And yet their success springs from the same well: a human desire to forecast the unknown, and a modernÂ desire to do it with data. Good thing weâre overflowing with it.
Political prediction is a renaissance, not a revolution. American political observers were building betting pools as early as the Lincoln Administration, according to economists Paul Rohde and Koleman Strumpf. By the 1890s, Wall Street supervised the betting, and newspapers reported the latest odds in the next edition. âIn presidential races in 1896, 1900, 1904, 1916, and 1924, The New York Times, Sun, and World provided nearly daily quotes from early October until Election Day,â Rohde and Strumpf write. One hundred years before Nate Silver, the Times was reporting on election odds.
These markets were proto-Intrades. Adjusted for inflation, tens of millions of dollars were invested, topping out at an absurd $211 million (in todayâs dollars) for the down-to-the-wire Wilson-Hughes race of 1916. Moreover, the markets were quite predictive. âThe capacity of the betting markets to aggregate information is all the more remarkable given the absence of scientific polls,â Rohde and Strumpf write. Crowd-sourced wisdom didnât need formalized dataâjust gut feel.
Justin Wolfers is an economist at the University of Pennsylvania whose outspoken support of prediction markets has made him the public face of the field. To him, these markets are a practical use of economic principle. There are buyers, there are sellers, and their exchanges tell us about the world, no matter the era in which the action is taking place. âPrediction markets were extremely accurate 100 years ago,â Wolfers says. âThe HTML around them have changed, but the underlying economics havenât.â Likewise, Silverâs models arenât novel. Theyâve been hiding in academia for decades. âNateâs doing a few things that are clever, many of which were in political science literature, all of which make sense,â says political scientist Simon Jackman, who developed prediction models while Silver was still in college.
If the Silvers and Intrades of the past faded, why have they reemerged, and why do they feel so new? By World War II, betting markets had all but disappeared. Spooked by the potential for people to rig the election with their bets, New Yorkâs state government cracked down on electoral gambling. By the time Gallup polls established themselves in the late 1930s, electoral bets were out of the papers. They wouldnât reemerge with anyÂ popularity until the 21st century.
Jackman has a theory about the undulating rise and fall of political betting markets: People only bet their money when they think they have a chance of winning. When youâre betting on information, you want to make sure you have just as much as everybody else. In the early 20th century, betting markets were âdemocratic because there wasnât much [information],â he says. Once scientific polling began, information becameÂ undemocratic. You never knew if somebody had access to a poll you didnât, so why take the chance?
Now markets are once again open for all âbecause weâre drowning,â Jackman says. Drowning in information, in data, in input. Thereâs enough noise for all of us to sort through and find our own signal. The web lets us all access the same public opinion polls, subscribe to the same breaking news Twitter accounts, and see the same GIFs of Barack Obama slow-jamming the news. In the gaping maw of a nonstop news cycle, weâre finding more and more data (Iâm using that term loosely) to fill the void.
âWe face danger whenever information growth outpaces our understanding of how to process it,â Silver writes in his book. If only there were someone who was willing to demystify the polling, tell us who to trust and who to dismissâand, well, just tell us whoâs going to win.
Silver doesnât think what he does for a living is complex, which is why he compares it to rocket science. âEven rocket science is trying to coordinate a bunch of relatively simple things,â he told me.
Silverâs list of simple things includes aggregating every poll thatâs released, weighting them according to their trustworthiness (defined by past performance), combining those polls with various indicatorsâeconomic statistics, a candidateâs incumbency, the stateâs demographicsâand using it all to calculate whoâs going to win the presidency. As he said, simple.
Silver graduated from the University of Chicago with a degree in economics in 2000, then whiled away a few years as an economic consultant for an accounting firm. Bored, he surreptitiously created a spreadsheet that forecast baseball playersâ futures based on statistical measurements of similar players. After it was purchased by Baseball Prospectus, a clearinghouse for baseball stats, he quit his job to play online poker, at oneÂ point netting $400,000.
He first caught the attention of political junkies when, still anonymous on DailyKos, he predicted the results of the 2008 Democratic primaries not by interpreting polls, but demographics and past votes. His model predicted Barack Obama would win by 17 points in North Carolina and lose by 2 points in Indiana; pundits predicted that heâd win Carolina by about 7 and lose Indiana by about 4. He won Carolina by 14 and lost Indiana by 2. Silver had proved his bona fides.
Since then, his method has evolved. For a few cycles, sites like Pollster.com and RealClearPolitics averaged the glut of polls to present a reliable snapshot of the race. But it was just thatâa snapshot. Silver wanted to do more. He wanted to take pictures of the future. After the North Carolina experiment, he started to blend economic and demographic indicators with polls to create a new type of prediction model.
Mark Blumenthal, the founding editor of Pollster.com, was, in many ways, the Silver of 2004, a guy who came out of nowhere to help the general public better understand the quantitative side of politics. But now heâs concerned about where Silver has sent the discipline.
âI donât want to make it sound like I think Silverâs evil, though with a couple of beers I probably could,â he told me, admitting that as a competitor, he might be biased. All of Silverâs extras, Blumenthal argues, donât do much more than Pollster.comâs average because the base of Silverâs model are the same polls. Nevertheless, Blumenthal says with a resigned laugh, âitâs certainly sophisticated. Itâs certainly complex.â
Blumenthal is concerned that Silver is mixing punditry with his polls, and that readers aren’t savvy enough to see it that way. “People out there email that the best poll out there is Nate Silverâs FiveThirtyEight, but itâs not a poll,” he told me. Silver, remember, decides what goes in his model and what stays out. That comes with the territory, reallyâthe model canât make itself. It needs a creator. âThe numbers have no way of speaking for themselves. We speak for them,â Silver writes in his book. âIt is when we deny our role in the process that the odds of failure rise.â
The details of Silverâs models are crucial, but most readers canât be bothered with them. (Silver told me he wishes he could provide complete methodologies, he just doesnât have the time.) For the mainstream reader, Silverâs final probability score is all thatâs rememberedâit doesnât matter what itâs made of. Still, even Sam Wang, a Princeton neuroscientist and political modeler who Silver describes as âone of my most frequent critics,â says Silverâs quantified analysis âis missing from most political commentary, which is statistically not sophisticated. The mass media needs more people like him.â
In the wake of John Delaneyâs death, Intrade has no icon to rival Silver. Itâs just four people in a Dublin office, managing a system that draws more than 2,000 trades a day. It hasnât stopped growing since it transitioned to news bets. In 2004, 2 million political shares were traded; in 2008, 8 million; with two months to go in the 2012 presidential election, there were 12 million.
Intradeâs most-trafficked markets, by far, are the ones about U.S. politics, even though U.S. banks donât allow customers to bet on Intrade markets. If an upstanding American wanted to wager on whom Mitt Romney would choose as his vice president in July, heâd need to find a workaround, often by using a wire transfer to a foreign financial institution. Nevertheless, three-quarters of new accounts originate from the U.S.
The problem is that Intrade markets can sometimes be, well, totally useless. Barry Ritholtz, a financial writer, has been on a crusade against the platform for years because of its willingness to let people predict things they have no ability to predict. âThe traders as a group have no correlation to the decision-makers,â he wrote on his blog after Intrade confidently forecast that the Supreme Court would rule Obamacareâs individual mandate unconstitutional. Intrade is also afflicted by a longshot bias, a phenomenon common to all markets in which bettors overvalue the chances of a dark horse. And sometimes, there simply arenât enough traders to produce a full picture of events. The market on the Missouri Senate race between Claire McCaskill and Todd Akin, for example, was woefully inactive until Akin made his âlegitimate rapeâ comment. All that means is that sometimes, Intrade makes the wrong forecast.
âEvery time something happens where an underdog wins I get calls from six journalists saying Intrade said it wouldnât happen,â says Wolfers, the economist with the prediction penchant. But, Wolfers argues, prediction markets are probability markets. The upsets arenât jarring, theyâre just black swans, unlikely events come to fruition. If Obamaâs stock is trading at 60 out of 100, say, thatâs not an ironclad decree about whoâs going to win. Itâs a probability, just like Silverâs calculations. Obamaâs 60 percent stock really means heâs going to win the election 60 times out of 100.
David Rothschild, an economist who specializes in data-based forecasting, compared Intrade and Silverâs performances in 2008 and found Intrade was just as good, if not slightly better, than Silver in close races. In the presidential race, Intradeâs predictions were regularly more accurate than Silverâs weeks earlier in the cycle.
That doesn’t mean Rothschild thinks one is definitively better than the other. âIt doesn’t make any sense to be a partisan of one set of data or another,â he told me over a beer in Manhattan. Intrade can be an invaluable snapshot of rapid reaction to breaking news, while Silver performs the kinds of calculations no Intrade investor has the time, skills, or assets to do and presents them in a way that people can easily understand. Together, theyâre a buddy-cop squad from the future.
But both share a weakness: their trust in polls. Intrade and Silver rely on the same set of public-opinion surveys to give a snapshot of todayâs opinions. Pollsters, though, are increasingly threatened by budget cuts and the high cost of cellphone polling.* If the accuracy of their surveys is weak, then the machinesâ final product will be, too. âI live in fear but also the recognition that one year weâre going to have the polls way off,â Silver says. At some point a future president is going to channel Harry Truman, gleefully holding up an iPad with FiveThirtyEightâs mistaken forecast on display.
The nation’s prospects seem far more uncertain than John Delaneyâs Everest climb: Unemployment and student debt, a never-ending culture clash at home and abroad, climate change. Uncertainty is literally blamed for our economic problems. Amid all this, we look for signsâdataâthat can help us predict what might happen. What might happen politically matters more than nearly anything else.
In his book The Victory Lab: The Secret Science of Winning Campaigns, Sasha Issenberg writes that campaigns have been doing this for years, using data to calculate how likely a person is to vote or canvas for a candidate given past behavior. They arenât trying to divine the future, theyâre trying to connect the dots. âThere is less ambiguity,â he says about the campaign efforts, âthan there is in predicting something thatâs going to happen.â
Nevertheless, Issenberg reports that the Obama campaign reached out to Silver in 2008 for âa little external validation that what we were seeing is what was actually going on,â as one adviser put it. No matter how democratic information becomes, experts like Silver are still in demand to synthesize it for the masses. The free flow of probability in the wild can be senseless and terrifyingâlook at Intradeâs volatility after a big news day, or Delaneyâs tragic fate.
Only on rare occasions, like Election Day, do we allow the voice of the many to crowd out the oracular few. Thatâs one reason, perhaps, weâre so focused on trying to understand the results in advance. But when the voters turn out, theyâre not predicting anything, theyâre decidingâuntil next season, when the forecasters start their climbs anew.
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CORRECTION: Because of an editing error, this piece originally referred to Pollster.com’s budget being cut. It should have read that pollsters budgets are being cut.