Understanding the US 2012 Presidential Election Result: How Models Triumphed over Big Data

by quantellia 17. November 2012 16:04

Today, opinions of what happened in the 2012 presidential election are beginning to settle.  Since history is often written from the perspective of the winners, many commentators have attributed the American right’s pre-election false confidence to a sort of blindness or group-think.  But there’s another truth.  Given what was known ahead of the election, the prediction that Romney would win was more defensible than the prediction that Obama would be re-elected.
The video above shows why.
The reason is simple. Take a look at this graph, reflecting data published by the social science data analysis network (SSDAN).
As you can see, the percent of African Americans who voted in 2008 is a clear departure from the historical trend.  It’s reasonable to assume that Republicans concluded that the pattern would revert to historical levels, which given the overwhelming amount of data going back over 30 years, is a completely rational, “big data” conclusion.  (Read Nobel laureate Daniel Kahneman’s “Thinking Fast and Slow” for a clear and deep analysis of this phenomenon, which is called Regression to the Mean).
An alternative explanation, of course, is that in 2008, something exceptional happened. And that pattern continued into 2012.  Predicting the future requires an additional ingredient, beyond simply projecting historical trends:
The Future = Historical Trends + Unique events and decisions happening today
Nassim Taleb defines a “black swan” as an event that is 1) a surprise, that has 2) a big effect, and that 3) history rationalizes with hindsight:  “of course the right was ignoring the obvious”.  The reason Black Swans happen: ignoring the second half of the above equation.    Taleb describes dozens of historical events like this one, where misunderstanding exceptions to historical rules has led to disaster. 
Simply put, the future is not always like the past.  It is essential to know when it is, and isn’t.
Obama’s win qualifies on all three Black Swan criteria.  Since such a high percentage of blacks voted for Obama, this miscalculation can be seen as having misled many Republicans to believe in Romney’s guaranteed election, and perhaps even to have caused the loss through leading to an inappropriately small focus on the needs of blacks and other minorities. What’s missing is the ability to clearly analyze the right-hand side of the equation: how do we know when something new is unique enough that it changes the course of history? 
It is clear that the Democrats were masters of this “secret sauce”.  They built an on-the-ground voter turnout operation to bump the curve upward from its expected value in exactly the places that would affect the Electoral College result.  By being able to focus their resources on exactly where they would contribute most towards achieving victory, the Democrats effectively out-modeled the Republicans. 
Before the book is closed on this election, all who chronicle its history should ensure that the modelers on both sides are appropriately acknowledged.  Because from now on, close elections will be won by campaigns who base their strategic decisions on models that are better than those of their competitors.

Want to know more about how great models can drive value for your organization? Drop me a line at lorien.pratt@quantellia.com and/or visit http://www.quantellia.com to learn more.

 

Tags:

General | Politics

Under the Hood: How to reach Agreement in Tax Policy and other Important Presidential Matters

by quantellia 30. October 2012 15:59
Instead of "he said, she said" or failing to convince the opposing side based upon an appeal to history or other countries, we can now have an intelligent conversation about the"engine" of the economy: what makes it tick, and the best way to fix it.

A few weeks back, my sister, visiting from Michigan, was driving my car here in Denver.  It's an old  blue Ford Contour, with mileage well into the six figures.  The car began to hesitate.  "Something's wrong for sure", I said.  No, my sister reassured me, "everything's OK".

 

The Contour sputtered to a halt on the side of Route 6, and we were left arguing.  "I think there's something very wrong here, probably the fuel pump," I said, "I've felt this before".  "No, I think it's the spark plugs." said my sister.

 

We're smart enough that we didn't debate much further, and left it to the experts at my local shop to open the hood and diagnose the problem.

 

As we waited for the tow, Faith and I chatted about the economy.  That first argument about the spark plug and fuel pump felt like some political debates we've heard lately: lots of discussion about what's under the hood, without actually taking the time to understand the engine.  Because of that, we end up going around in circles.

 

Under the Hood

 

What do I mean by the "engine" when we're talking about political disagreement?  Well, the discussion is often about the economy, tax policy, unemployment, the deficit, and the like.  Usually, we assume this is too complex to understand, and we leave the details to the experts: economists and others.  Not so, with modern tools, which go beyond mind mapping to full simulations on the desktop.  We can be more informed, we can understand the underlying mechanism.   

 

To begin, we can start by agreeing with our opponents on some basic parts of the systems that drive our world: how do businesses affect governments?  How do governments impact spending?  Where is the fan belt?  How's the starter motor doing?  How is it all connected?

 

 

I think that we can use the World Modeler software and the Decision Engineering approach to mapping complex systems to take these arguments to the next level.  Instead of "he said, she said" or failing to convince the opposing side based upon an appeal to history or other countries, we can now have an intelligent conversation about the "engine" of the economy: what makes it tick, and the best way to fix it.

 

For an easy introduction, watch the video below:

 

Useful Arguments

 

So here's the process:

 

  1. Build a simulation model.  Formerly a world restricted to economists, this is now much easier and faster using modern tools.   Sign up to get a free trial copy of the tool to use to do this at: http://www.worldmodeler.com .
  2. Include your favorite policy in your model. Show how it works.
  3. Send it to your friends and adversaries.  If they disagree, ask them to change the model and the data to show how they see things working instead. And, by the way, this is where "big data", analytics, and machine learning can make their greatest contribution: in helping us to understand the mechanisms inside complex systems like the US economy.  Without understanding the system, focusing on data alone is like diagnosing a car by watching the pattern of leaking fluid on the pavement.
  4. Repeat step (3) until you reach agreement, or at least until the disagreement has been clarified to an assumption that can be tested (for example, my model might assume a certain level of spending amongst wealthy people: something we can measure). 

 

 As for the model itself, the video shows three basic parts of an economy:

  1. Businesses
  2. The government
  3. Consumers

Connecting the Pieces

At the simplest level, these are connected in the following ways:

  1. The government receives revenues through taxes, and loses money through spending.  Taxes come from businesses and consumers.  Spending is money that goes to businesses (as the government buys things) and consumers (some of whom it hires).
  2. Consumers earn money through investments, government sources (like Medicaid), and wages.  They spend money on goods and services provided by business.
  3. Businesses lose money through taxes, through buying parts from other businesses, and through wages.  They earn money by selling to consumers and the government.

Using a simulator, we can experiment, for instance, with the impact of various tax policies.  These play out over time and impact important factors like unemployment and GDP. 

 

This is just a starting point.  I invite you to join an important new discussion. Sign up for more information at http://www.worldmodeler.com.

 

Tags:

Economics | General | Politics

Disclaimer
The opinions expressed herein are my own personal opinions and do not represent my employer's view in anyway.

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