From: John Conover <john@email.johncon.com>

Subject: Bush/Kerry optimal wagers

Date: 21 Sep 2004 05:08:20 -0000

I swore after the 2K election that I would not do this again, but here is the way you model the outcome of an election based on poll data; I got beat up when I predicted-5 days before the election-that the 2K Presidential Election would have an inconsistent popular and electoral vote: http://www.johncon.com/john/correspondence/001103172714.28588.html See: http://www.johncon.com/john/correspondence/020508170137.5425.html#appendixIII for details of the methodology, (using the California Gubernatorial recall as an example.) The recent polls say 46% of the voters, (in the popular vote,) would vote for Bush, 43% for Kerry. There are 43 days left to the election, and the polls move at about 1% per day, and are a zero-sum game, (in the simple/lay sense-what Bush gets in a poll on one day, Kerry loses, and vice verse.) What that means is that sqrt (43) = 6.5574385243% is the standard deviation of the popular vote poll data on election day-43 days from now-or there is a 14% chance that Bush's poll data will be above 46 + 6.5574385243 = 52.6%, and a 14% chance of being below 46 - 6.5574385243 = 39.4%. The numbers for Kerry on election day is a 14% chance of being above 43 + 6.5574385243 = 49.6% and a 14% chance of being below 43 - 6.5574385243 = 36.4. Since it is a zero-sum game, the winner of the popular vote will have to have more than 43 + ((46 - 43) / 2 ) = 44.5%, or a 1.5 / 6.5574385243 = 0.228747855 standard deviations. Referring to the CRC tables for the standard deviation, 0.228747855 corresponds to about a 59% chance for Bush, and a 41% chance for Kerry, to win-call it a 60/40 chance, 43 days from now. So, going long on Bush, one would optimally bet a fraction (2 * 0.6) - 1 = 20% of one's capital, (be it political, money, whatever,) on Bush winning. And, the expected returns would be 2%, per election, iterated over elections with similar statistical characteristics, from: http://www.johncon.com/john/correspondence/020213233852.26478.html#equation1.20 which is a 10% ROI in 43 days-not too bad, (that's equivalent to about 2X per year.) Of course, there is uncertainty in the poll numbers, and a strategy of watching the numbers to do a stop-limit, (e.g., betting on Kerry later to go short on the Bush wager,) may be advisable-just like in options, and possibly set up a no risk wager, (working backward on implied volatility.) John -- John Conover, john@email.johncon.com, http://www.johncon.com/

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