Polls pundits and pollsters

My article on this topic, from Thursday’s Fin, is over the fold. It benefitted from earlier discussion here. Feel free to comment more

Politicians routinely say ‘the only poll that counts is on election day’, particularly when they are behind, though that doesn’t stop them paying very close attention the results. But polls are not the only basis for predicting election outcomes. Economists including Andrew Leigh and Justin Wolfers have made a strong case that betting markets provide a more accurate guide than polls. And opinion pages like this one allow pundits to make their own predictions on the basis of information or insights presumably not available to the average punter or poll respondent.

Most of the time, these indicators all point in the same direction. In 2007, however, polls, pundits and punters have given very different predictions of the likely outcome of the election due later this year. Ever since the election of Kevin Rudd as Opposition leader, the polls have given Labor a commanding lead, stable for some time at 58 per cent of the two-party preferred vote, plus or minus the sampling error of 2 to 3 per cent.

Most pundits and political insiders have until recently dismissed these poll results and predicted a resurgence for the government and John Howard. Over the last weekend, however, there seems to have been a sudden collective shift, with a string of pundits suggesting that the government is on the ropes, and Howard himself dramatically playing the underdog card. The trigger for this change of view seems to have been the absence of the much-predicted ‘budget bounce’ in the polls, though in the past such bounces have been the exception rather than the rule.

By contrast, there has been no real shift in the odds set in betting markets. The Coalition is still virtually even money to win, though, thanks to the house spread, the odds on Labor are slightly shorter.

The slowness of pundits to believe the message coming from the polls reflects the experience of the 2001 and 2004 election campaigns, when Howard came from behind to win. It might be argued that such a small sample is not a good basis from which to draw conclusions. After all, back in 1987, Howard seemed to be in a winning position, but was unable to recover from the ‘Joh for Canberra’ fiasco.

That leaves the markets. The idea that markets can provide better predictions than surveys or expert opinions is an example of the general claim that financial markets give the best available estimate of the value of financial assets such as shares. This claim is called the efficient markets hypothesis.

The efficient markets hypothesis comes in several versions, commonly called ‘weak’, ‘semistrong’ and ‘strong’. The weak form says that investors efficiently use all the information available from observing past share prices. In the current context, this says that the betting market should get the outcome right at least as often as someone who bases their judgement on past election results. The most obvious strategy of the latter kind is one of betting on the incumbent government to win, as has happened in 19 of the 24 federal elections since the current party system emerged with the foundation of the Liberal party in 1944.

The ‘semistrong’ form of the hypothesis states that the market makes the best available use of public information, such as opinion polls and the published judgement of presumably expert commentators. The polls have done a pretty good job of picking the changes of government, and most pundits correctly predicted the outcomes in 1972, 1975, 1983 and 1996. On the other hand, at least some of the time, polls and pundits have predicted changes of government that didn’t happen. The most obvious case is 1993, when John Hewson was also a short-priced favorite in the betting markets as well.

The most controversial, strong form of the efficient hypothesis states that market prices reflect both public and private information. It was this idea that led to proposals, rapidly squashed by public outcry to establish futures markets in terror attacks and other political crises.

Tbe current divergence between the results of polls, and those of betting markets, provides what may be a crucial test. If Labor loses, it would be hard to see the point of continuing to report poll results, except in the period immediately before an election. It would seem better just to watch the betting markets.. On the other hand if Labor wins the victory long predicted by their surveys, the pollsters can celebrate.

In the end, though, there is still only one poll that counts.

11 thoughts on “Polls pundits and pollsters

  1. I think the fundamental difference between the polls and the betting market is this: Polls predict the outcome of an election ‘if held today’ (at the time of the poll) whilst betting market is aimed at the future. Therefore, polls are simply measuring people’s current thinking whilst the betting market is measuring the expectation of people’s voting intention at election time. This means that the punters (the betting market) are taking into consideration all the factors that we know are relevant as we get closer to an election i.e. heavy government advertising, benefits of incumbency, economic contentment and the better-the-devil-you-know factor. In a well-functioning economic environment these factors are even more pronounced.

    So the surprise is not that there is a difference between the polls and the betting market, it is that the betting market still believes that Rudd has a (better) than even chance of winning.

    Just a thought!

  2. Another angle on this might be the polls noted in The Australian (proudly at war with science) today, where a majority of those polled now believe that Labor will win. Will we now see the betting odds shorten, or do we have two sources of information reflecting samples of popular belief that are different?

    On another tack, I believe the best way to look at how markets use information is to treat them as complex systems and to contrast structure, dynamics and behaviour with how the broad set of complex systems behave. This would suggest that if the market is operating within a specific set of rules, then information will be efficient. If the market switches between one state and another, information will be less useful until the operating rules of the new state are understood. Where “deep uncertainty” is operating, the market has every chance of being wrong, unless the information correctly identifies and accounts for that uncertainty.

    To draw a long bow, the Latham effect was as much to counteract the Lazarus effect of Howard as anything. It backfired, because Latham was so non-linear that chaos beckoned. Howard’s Lazarusness is definitely information that the pundits have taken into account. We now have a new dynamic, we might call it the Energizer effect and think of the latter day Andre Agassi. He kept hitting the ball back and back and back, stepping up a gear if the match got tough. His post match press conferences were mannered and respectful. It may be a new dynamic.

  3. Thanks for this comparison. It is very interesting and only time will tell which theory will carry the day.

    The other aspect of polls is how they actually affect the result.

    This could be that people vote the way that they believe everyone else will as they like to pick winners. It could also be that if the polls are very positive towards a party people vote the other way as they don’t like to have such a power imbalance.

    The latter is the way John Howard wants us to think and which Tony Abbott has hammered this week.

    The reason that the pundits are struggling is that many have been producing work which is running counter to the views of their readers. There is a new dynamic at work – people getting their information and doing their discussion on line and in private emails forwarded to their family and friends. The blogs on the Australian website have for weeks been running in favour of Rudd. The Australian pundits have probably picked up on this which is why the tone changed last week.

    Whilst Howard does appeal to some women – the numbers are declining as more and more expect to see the kind of approach to women that Kevin Rudd has shown this week.

    To draw a comparison with Andre is fair. Agassi’s tenacity showed when the other player tried to out hit Agassi with killer shots, but he sent them back a winner, as his racquet carried the momentum created by the opponent, to create an unbeatable shot. Agassi also gave up graciously when he began losing after being at the top for many years. He knew when it was time to quit because his age was against him. The score today is probably 5-7. 5-7, 5-4 at the moment.

  4. RE Last weekend’s turnaround by the pundits: Mungo had some thoughts on this…

    But Kelly, instead of correcting [Rod] Cameron, took his misdirection as an excuse to pontificate at his most pompous.

    ‘Labor is deluding itself on a huge scale,’ he thundered. ‘It has misread the public mood, created a false sense of political reality, fooled itself into thinking that people don’t want a flexible labour market and fallen into the trap of an alliance with the trade unions on IR policy.’

    Hang on minute: has he read the opinion polls lately? Labor’s IR policy is precisely the reason people are flocking to Labor in droves. Private polling by both parties has revealed the WorkChoices name is political poison; voters may not be great fans of the unions, but the mere mention of WorkChoices scares them rigid.

    Howard realises this even if Kelly doesn’t: last week the word went out that the name is to be expunged from the vocabulary of the government and all its servants. The new term is to be ‘Workplace Relations,’ nice and neutral. The excuse for this piece of semantic acrobatics is that since Howard’s flipflop it wasn’t really WorkChoices anymore but something still more wonderful: the red gold has been gilded and the lily painted white.

    Whether the punters will be fooled is yet to be seen, but it is another illustration of just how far Labor’s IR policy has put it in front. If Labor has misread the public mood so has Howard, in spades; but neither seems to think so.

    Some of this may have dawned on Kelly during the week, because on Saturday he tried to claw his way back to relevance by inventing a new theory of the cosmos. There were, he explained, two competing realities at work. One was the ‘inside the beltway’ (whatever a beltway was supposed to be) reality where everything was going swimmingly for the government and the opposition was floundering. This was the world according to Kelly. But in the ‘outside the beltway’ reality the voters were deserting the coalition for Labor.

    ‘These two political realities are both valid,’ Kelly blustered. ‘Within the engine room of politics the Coalition is now dominant but abroad in the nation Labor has a commanding grip. The truth, however, is that only one reality will prevail. Only one version can triumph on election day 2007. Either the logic within the beltway will take the country or the mood in the country will overwhelm the beltway’s logic.’

    There is just one problem with this scenario. The two realities were not equivalent. One is grounded in actuality and involves facts, measurement and analysis. The other exists only in Paul Kelly’s head. Public opinion may indeed change, but if it does it is unlikely to be just because Paul Kelly thinks that it should.

  5. An interesting article from Dennis Shanahan in the Australian yesterday discusses polls. He states that only 30% of those polled pick a win for the coalition and only 39% of coalition supporters think that the current government will retain government.

    He compares it to 2004 and notes that there is a great difference. It will be interesting to see if this difference translates to the betting market.

  6. Markets are a great way to collate all information – and in that sense I believe in the ‘strong theory’ – but all information is not equal and so markets are not always right.

    Take a horse race and think about how the odds on the TAB get set. Everytime a bet gets made the total pool of money increases and the odds for each of the runners adjusts. Each bet can be considered a new piece of information about the likely outcome of the race. Bets are made by lots of different people with differing levels of knowledge. They can be made by absolute mug punters betting because they like the name of the horse, an informed punter who has been following the form or an insider who owns or trains one of the runners.

    The final odds when the horses jump will thus represent the average outcome of every piece of marginal knowledge about the runners. It doesn’t mean that the market will be right – it could well be that the odds are swamped by the mug punters…. and of course, that must be the case otherwise how could professional punters make a living if they didn’t have a long term edge against the market?

    It’s the same in the share market – a share price represents the average of all the information available (public and private). The market is not always right. Look at Qantas – trading at $3 nine months ago and completely unloved… today it’s trading at record levels depsite the failed APA bid and everybody loves it. Was the market wrong nine months ago or wrong today?……. hmmm… better call my broker with a sell order.

    Bottom line – don’t bet against the market unless you have better quality information than the average. Study the horse form, do your stock research….. I’m not sure what the equivalent in politics is…. be a political pundit?

  7. John, thanks for the generous mention. As you point out, strong-form efficiency is hard to test (when no-one really believes a 60% 2pp number, is it the prevailing piece of public information?).

    Regarding 1993, do you recall which bookie, and whether any newspaper reported the odds? Justin and I are presently trawling the world for any available election betting markets, and we’d love to add in a few more Australian elections if we could.

  8. Andrew, I’m not sure if I’ve mentioned this idea before, but a Granger causality test on polls and betting markets would be potentially more powerful than a comparison based on observations of elections. The latter is a weak test since most of the time, polls and punters both get it right on the day.

  9. John, we looked in our last paper at whether past polls could predict future betting market prices.

    Panel D presents a specific test of semi-strong form efficiency: Can we predict today’s price changes on the basis of publicly available polling data? We implement this test by taking the weighted average of the last seven days of published polls. In the case of Betfair data, the small and statistically insignificant coefficients suggest that the market prices this publicly available information efficiently. For Centrebet, the coefficients are jointly significant – indicating some lag in the incorporation of polling data – but sufficiently small that they are unlikely to yield profit-making opportunities from normal movements in opinion polls.

    Did you have something different in mind?

  10. I had in mind going the other way. Under strong and semi-strong efficiency, given that polls usually converge to the correct outcome, markets should predict polls

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