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How prediction market prophets bet on the wrong president

The election outcome shocked the world. Pollsters, pundits and prediction market traders overwhelmingly predicted a huge Clinton victory. There were, however, some dissenters. Economics correspondent Paul Solman explores how history and economic factors can shed light on the upset.

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  • JUDY WOODRUFF:

    Next Monday, the Electoral College meets to finalize the election of Donald Trump as president. His victory was a shock to many. Pollsters are asking if they need to rethink their methods for surveying the public. Betting markets had been a good predictor, but this year was different for them as well.

    Our economics correspondent, Paul Solman, explores what happened, part of his weekly series, "Making Sense."

  • PAUL SOLMAN:

    The race is over. The long shot won. And yet pundits, pollsters and punters in the prediction markets had all been so sure.

  • MAN:

    A lot of people have no idea that Trump is headed for a historic defeat.

  • REPORTER:

    Most analysts are saying Hillary Clinton is going to win in a landslide.

  • MAN:

    The odds are overwhelming of a Hillary Clinton victory on Tuesday.

  • PAUL SOLMAN:

    Sam Wang of the Princeton Election Consortium became famous for his forecasting acumen in the 2012 election. Now, prophets like Wang are eating crow, or worse.

  • MAN:

    Dr. Wang, you tweeted recently that you were so sure of the result, you'd eat a bug if Donald Trump pulled this thing out.

  • SAM WANG:

    See this? Here it goes.

  • PAUL SOLMAN:

    On the prediction markets, they actually bet money on the outcome. One of the largest, Paddy Power, an Irish bookie, paid out a million dollars to people who bet on Clinton 20 days before the election. That was just after, Skyped Paddy Power's owner, whose real name is "Paddy Power," the Access Hollywood tape surfaced.

  • PADDY POWER:

    The one where he was grabbing certain parts of women's anatomy, or boasting about that. And, and then we just thought that has to be it. We took an absolute conkers on it to be fair. We were left with our pants around our ankles at the end of it.

  • PAUL SOLMAN:

    An absolute conkers, pants around the ankles. On the other hand: a jackpot of PR.

    In the U.S., we have two betting markets, only legal because they provide results for academic research and limit bets to modest amounts. As late as election night, at the office party of one of them, Predictit in Washington, D.C., the consensus among traders: Clinton at 80 percent.

  • MAN:

    Everything's invested in Clinton winning tonight.

  • PAUL SOLMAN:

    Among America's academic prognosticators, however, there were dissenters.

  • RAY FAIR, Yale University:

    This is the website that I put all the results on.

  • PAUL SOLMAN:

    Economist Ray Fair first forecast the Democrats would lose in November of 2014!

  • RAY FAIR:

    The prediction I made two years ago was that the Republicans had a huge head start and were favored by quite a bit.

  • PAUL SOLMAN:

    His model is based on past history, period.

  • RAY FAIR:

    So, there's no polls, there's no surveys, this is all just fundamental economic events that you're talking about.

  • PAUL SOLMAN:

    Fundamental events, and to an economist, there's nothing more fundamental than the rate of economic growth.

  • RAY FAIR:

    A good economy helps the incumbent party, a bad economy doesn't. What the opposition party should do if the economy is poor is to keep hammering the economy.

  • PAUL SOLMAN:

    Fair's model considers just a few factors: if an incumbent is up for re- election, voters tend to give the president a second term. After eight years, voters tend to be itching for a change. But most important: the state of the economy in the four years before an election.

  • RAY FAIR:

    In the 15 quarters of the second Obama administration, only two quarters had strong growth, growth bigger than 4 percent at an annual rate. That's very low historically and the growth rate of this year, which counts a lot for the equation, was only 1.7 percent at an annual rate in the first three quarters of this year.

  • PAUL SOLMAN:

    By the end, Fair's model predicted that the Democrat would get only 44 percent of the two-party vote. Since Clinton beat Trump by 2 percent, and wound up with 51 percent of the two-party total, he thinks Clinton actually did much better than she should have, given the economy, and his model did much worse.

  • RAY FAIR:

    Had the Republicans nominated some mainstream person, they probably, most people would think, they probably would have done much better than they did.

  • PAUL SOLMAN:

    But Fair did get the winner right, unlike so many of the pros.

    Why did the prediction markets do so badly?

  • RAY FAIR:

    I think they overestimated the polls and underestimated the fundamentals about the economy.

  • PAUL SOLMAN:

    So pretty humbling for those of us who follow the prediction markets, no?

  • JUSTIN WOLFERS:

    It was a humbling for a lot of us in a lot of different ways, yeah.

  • PAUL SOLMAN:

    Economist Justin Wolfers studies the prediction markets, and swears by them. Neither the polls nor the markets were really so far off, he told me by Skype from Michigan.

  • JUSTIN WOLFERS:

    Remember the Chicago Cubs were two games behind in the World Series and betting markets said that there was only a 30 percent to win the World Series.

    As history now records it, they went on and won the World Series. Well, betting markets pretty much said the same thing about Donald Trump.

    So, we were surprised, but we should have been no more surprised than we were when the Cubs won the World Series.

  • PAUL SOLMAN:

    "The New York Times" Upshot was another prediction site on which many relied. It expressed Clinton's odds of losing in terms of an NFL kicker missing an easy field goal.

    When I first began to think that Donald Trump had a real chance was when "The New York Times" Upshot made that field goal analogy, and my favorite kicker missed field goals from a shorter distance than the odds were of Donald Trump winning.

  • JUSTIN WOLFERS:

    One of the things that we learn here, and this is a lesson for both the media and for social scientists, is how difficult it is to communicate clearly about probabilities.

  • PAUL SOLMAN:

    David Rothschild tends the website PredictWise, which tracks the prediction markets and makes forecasts of its own, as on election night.

  • DAVID ROTHSCHILD, Economist, Microsoft Research:

    Right now, we have the presidency at about 89 percent for Hillary Clinton.

  • PAUL SOLMAN:

    So, every day, I went to your site and I was certain that Donald Trump was going to lose and I told everybody who asked me, you misled me.

  • DAVID ROTHSCHILD:

    Look, the website PredictWise had a bunch of different data up there, and it was important to take the best available historical data-based approach and that really is the prediction market data and that's what we led with the top line numbers for, because that is what we know has worked historically.

  • PAUL SOLMAN:

    But Rothschild also had a model based on the economic fundamentals.

  • DAVID ROTHSCHILD:

    It showed the Republican candidate getting 282 electoral votes for a narrow Electoral College victory. I'm not going to sit here and tell you I was right because I like everyone else who looked at the idiosyncratic information coming out from the election and said look, "This is a year in which the fundamentals were going to be off."

  • RAY FAIR:

    And that's why I didn't want to talk to people like you.

  • PAUL SOLMAN:

    One last time, Professor Fair:

  • RAY FAIR:

    Because it was kind of embarrassing to come in and say Trump looks like he's going to win and this and that when I — that's what the equation said.

  • PAUL SOLMAN:

    Were you surprised by the outcome?

  • RAY FAIR:

    Yes.

  • PAUL SOLMAN:

    So you didn't have the courage of your own conviction.

  • RAY FAIR:

    I didn't have the courage of the equation's prediction, OK?

  • PAUL SOLMAN:

    And so, even Professor Fair didn't heed the simple punch line of his model, of this story, and perhaps of this election.

  • RAY FAIR:

    "It's the economy, stupid," would be the very simple answer to that.

  • PAUL SOLMAN:

    Oh by the way, the prediction markets like Paddy Power are now giving odds on Donald Trump's re-election.

  • PADDY POWER:

    Four to one odds to be returned next time so that means he's got like a 20 percent chance of retaining the presidency next time around. When Obama was elected for the first time, it would have been more like a 50 percent chance of him getting reelected. So, we're still underestimating the man.

  • PAUL SOLMAN:

    Unless, I suppose, the economy tanks in the interim.

    In New York, for the "PBS NewsHour", this is economics correspondent Paul Solman, who lost $200 to the producer of this story, it went to charity, and a bottle of very good sherry I still owe someone by following the prediction markets.

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