Autopsy of a Miscalculation

Ever wonder why the doctors who accidentally kill patients aren’t allowed to perform the autopsies?

An article in Barron’s this week is a perfect example as to why.

The_gop_will_hang_on Back on October 23rd, Barron’s editor Jim McTague  (Survivor! The GOP Victory) — in a cover story no less — forecast a GOP sweep of the House and Senate; even the article’s "worst case scenario" was off significantly from what happened last Tuesday. Why was this forecast made just 2 weeks before the election so far off the mark?

McTague puts forth a weak mea culpa
in this week’s Barron’s that does not acknowledge any flaws in his methodology. Further,
in the original piece, he identified that the sole savior of his financial/mathematical approach would be if the economy was actually much worse than he previously
acknowledged. That possibility simply never entered his thinking.

Rather than simply call McTague a partisan — we at the Big Picture don’t roll that way — let’s instead look at the methodology that produced that incorrect forecast, and try to discern where he went wrong (its more educational that way). While the cover story got the election about as wrong as anyone possibly could, I want to focus on analyzing why.

That October 23, 2006 edition of Barron’s outlined the basis of the methodology employed:

"Our analysis — based on a race-by-race examination of campaign-finance data — suggests that the GOP will hang on to both chambers, at least nominally. We expect the Republican majority in the House to fall by eight seats, to 224 of the chamber’s 435. At the very worst, our analysis suggests, the party’s loss could be as large as 14 seats, leaving a one-seat majority. But that is still a far cry from the 20-seat loss some are predicting. In the Senate, with 100 seats, we see the GOP winding up with 52, down three.

We studied every single race — all 435 House seats and 33 in the Senate — and based our predictions about the outcome in almost every race on which candidate had the largest campaign war chest, a sign of superior grass-roots support. We ignore the polls . . ."

Why was even the worst case scenario significantly off? I can think of two explanations: First, an analytical error in the overall, and second, an economic one. Bad theory was compounded by poor recognition of the facts. Other than those two small items . . .   

Let’s start with the theory. This is the classic example of one of my favorite analytical foibles: Confusing *correlation with causation. This is one of the most common errors of deductive reasoning and logical analysis we come across — and one that can be easily avoided with a little forethought.

In the present instance, there is a presumption that the candidate with "the largest campaign war chest" will be the winner of the election because of that monetary advantage. There are at least three methodological flaws with this approach:

1) It fails to consider that the perception of likely victory is what may attract campaign donations to the eventual victor; It assumes a causative relationship where there may be none;

2) It ignore the advantages of incumbency — in raising campaign donations, as well as getting re-elected;

3) Voters can and do hold incumbents responsible for current economic conditions – and those economic conditions are less than ideal;

In other words, the McTague Methodology gets causation precisely backwards: People donate money to whom they think will win, in order to secure official favors, legislation, etc. This naturally leads to greater donations of money to incumbents, who traditionally have a 98% re-election success in the House of Reps. However, when incumbents appear more vulnerable, they may not get the main financial advantage — mo’ money — of incumbency.

And, when people feel finacially insecure — about their jobs, healthcare, assets, inflation — they may vote for change.

McTague even touched upon a weak spot in the war-chest thesis, economic nervousness:

"It’s true that our formula isn’t foolproof. In 1958, 1974 and 1994, the wave of anti-incumbent sentiment was so strong that money didn’t trump voter outrage. We appreciate that voters in 2006 are hopping mad at the GOP because of the war and because of scandal. We just don’t agree that the outrage has reached the level of those earlier times. The reason is that the economy in 2006 is healthier. And the economy is the only other factor that figures in our analysis

This is the first time in our memory that an incumbent party enjoying a strong economic tailwind suffered defeat." (emphasis added).

Perhaps that tailwind is less strong than Barron’s believed. As we noted prior to Election Day, It is Still the Economy, Stupid.

Indeed, some exit polling data supports just that view: 

"More than 80 percent of voters in an exit poll, conducted for The Associated Press and television networks by Edison Media Research/Mitofsky International, said the economy was a very important or extremely important issue. That percentage was the highest for any issue, including Iraq and terrorism.

Furthermore, electoral data and government economic statistics suggest that the economy played a role in the outcome: if your state wasn’t among the best economic performers in the last six years, judged by the growth of personal income, it appears that you were three times as likely to vote to throw the bums out." (emphasis added).

Putting all these factors together, we are left with but two conclusions:  The electorate voted both Guns AND Butter (but more butter than guns), and tossed out the ruling party for mostly economic reasons;   Secondly, the methodology of relying merely on a candidates war chest is flawed, as it asssumes a causation that is not there. If anything, the expected victors attract donations — not vice-versa.   


Correlation and Causation   Let’s more precisely define our terms: Correlation is the occurence of two (or more) elements, usually in the same time, location or event. They may be independent (or not), they might be coincidental  (or not). Correlated items can have no relationship other than their simultaneous occurence. Causation, on the other hand, refers to a specific relationship — one of authorship and creation. X caused Y to occur is a relationship of causality.



Anatomy of a Miscalculation
Barron’s, November 13, 2006

Survivor! The GOP Victory (free)
Barron’s, October 23, 2006

Maybe You Did Vote Your Pocketbook
NYTimes, November 12, 2006

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What's been said:

Discussions found on the web:
  1. barry Ritholtz commented on Nov 12

    Note: I’ve had plenty of boneheaded predictions in my day — but they are usually not for an event thats only 2 weeks away.

    When I am wildly wrong — and you don’t know the half of them — its often due to some intervening event.

    My Bearish forecast for this year has proven to be wildly off the mark; I thought after hitting highs this year we would roll over sooner rather than later; Amongst the many other reasons, corporate profitibility has remained stronger longer than I expected; I also failed to pick up on the significance of changes in GSCI quick enough.

    That was a forecast made a year ago — I cannot say I was ever that far off that close to an event occuring.

  2. Anonymous commented on Nov 13

    Mr. McTague obviously thought his democracy was bought and paid for in advance.

    I wonder if he feels the same in regards to financial markets.

  3. Craig commented on Nov 13

    Okay, I’m going to give Barron’s, and every other supply-side conservative a very large clue……..

    When all you have to brag about is a “strong economy” hailed by all who benefit from it and the warning that the big bad enemy will “raise taxes” and those you’re trying to convince are having difficulty making ends meet, much less have the OPPORTUNITY to pay capital gains or dividend taxes, you have NO ARGUMENT.

    The idiots that keep clammoring about letting the tax cuts expire on UNEARNED INCOME don’t seem to SEE themselves as the spoiled rich ass babies they look like to those paying taxes on EARNED INCOME and barely making ends meet.
    (and sending their KIDS and their FUTURE in the form of $3 Billion a week to Iraq.)

    Barron’s was simply as ideologically ignorant as Kudlow and Co. and almost 100% of the supposedly “liberal” press. Apparently the liberals in the press are rich ass babies too.

    Hopefully this will end in some retrospection and the idea by those able to scrape together enough to invest in a taxable account that in comparison to the average citizen, they do in fact enjoy much more benefit and should expect this imbalance to moderate to the mean.

    If you mention “class warfare” you don’t get it. The earned income class gets it and voted accordingly.

    There is no election war chest that overcomes financial reality for long.

  4. Larry Nusbaum commented on Nov 13

    “We ignore the polls . . .”

    They also ignored history which has proven that incumbents who hold less than 50% just prior to the election, usually spells trouble. Not one senatorial candidate was able to make up ground in the last two weeks.
    The biggest reason the GOP lost both houses: They violated most of the covenents contained in Newt’s “Contract with America” back in 1994….

  5. Josh commented on Nov 13

    When I received the original issue, I thought to myself, here is some guy that just read Freakanomics and now is making the bold prediction that since the GOP has more money, they will win.

    I’ve come to realize Barrons is not the end all be all, but they do have some good stories.

    I still don’t get why I can have a print subscription but would have to pay more to read the articles I already pay for online.

  6. kharris commented on Nov 13

    Given that politicians are experts at getting reelected, we should not ignore their willingness to scramble after money when we think about causation. Their behavior suggests they think money buys votes, so we should be open to the possibility it does.

    A common mistake is to focus on just one link in a causal mechanism. Switching one’s focus from whether money works in bringing votes to whether incumbency works to draw money doesn’t resolve the issue of whether money works to win votes.

    There has been some work done (sorry, no link) that suggests a discontinuity in the relationship between money and votes. Up to a point, money does wonders. Then, diminishing returns set in. Given how much was spent in this cycle, it is not a stretch to susepct that diminishing returns were reached in lots of races. That could give the impression that the link between money and votes is not strong, when in fact the link is very strong, up to a point.

  7. spencer commented on Nov 13

    Please remember the way the dividend tax cut is suppose to work is that because your after tax income is higher the market is worth more so that the market pe rises.
    This lowers the cost of capital and leads to stronger investments.

    But there has been no increase in the market pe or a drop in the cost of capital under bush.

    So why should anyone think the tax cuts played a role in increaing capital spending– which by the way is the weakest this cycle of any cycle since WW II. Even Jimmy Carter saw much larger capital spending then Bush.

  8. Mike commented on Nov 13

    There are two hilarious aspects to the money in politics game. The first is the delusion offered by Barons that money wins elections. It just plain and simply doesn’t. And when that changes, we wont’ live in a democracy anymore. People that give money to campaigns on the theory that money is what matters are doing one of two things. They are either actively participating in the downfall of democracy by buying into the idea that money =victory, or attempting to manipulate specific legislation for their personal advantage. Which brings me to secret number 2: up until Bush II most of the money spent to influence legislation was money down the drain, and even now it’s very, very expensive to buy legislation. If you aren’t the biggest shark in the pool you are almost certainly getting suckered in that effort — just ask the Evangelicals.

    If, and it is a huge if, I had been reading that Baron’s article, when he wrote “based our predictions about the outcome in almost every race on which candidate had the largest campaign war chest, a sign of superior grass-roots support.” I would have broken out laughing and patted myself on the back for not being stupid enough to pay for such drivel. One way you can tell the ruling class in this country is in trouble is by the sycophantic and absurd things that their supporters say. They have manipulated things for so long that they think their own echos are the truth. Candidates have ‘the biggest war chests’ by sucking up to the rich and powerful, not by appealing to a broad swath of ordinary americans — which of course is exactly why the Repuglican party advocates the policies it does, and has the money it does. A more honest statement by the writer would have been: “we believe the one who shakes down the wealthy best deserves to lead and so we have decided to promote their campaigns for free because we are so sycophantically in love with power” The wealthy, and their bought political operatives find that behavior quite enjoyable, if more than a bit funny

  9. tt commented on Nov 13

    after all’s said and done , of the 435 House seats up for election , the Reps lost them by a total of 70,000 votes ……. legislation and bipartisanship will be just as insane over the next 2 years of this lame duck

  10. Kevin Price commented on Nov 13

    On campaign finance, kharris makes a good point. But diminishing returns is only part of the story. The real key in making a race competitive is not how much the incumbent has raised/spent/on hand…it’s how much the challenger can raise. Skilled challengers raise enough money to run serious races, and, in turn, their plausible candidacies attract smart (political) money, which doesn’t want to be wasted on hopeless candidates.

    Once a challenger has enough money to run a serious race (thresholds will vary widely by state and district), other factors determine election outcomes: local issues, scandal or other incumbent weaknesses, national forces, &c. This year, of course, the national impulse flowed in favor of the Democrats. And very appropriately so, in my view.

  11. Kevin Price commented on Nov 13

    Um…tt…The Dems won more than 53% of the national House vote. So the gap was a heck of a lot larger than 70,000 votes. And they won roughly 55% of the Senate vote, taking key Senate races in nominally “red” states.

    I don’t think the Democrats have all the answers, but it was an accountability moment in American politics, and the system functioned reasonably well. If not for the grotesque gerrymandering of House districts over the last couple cycles (a crime against democracy perpetrated by both parties but recently taken to greater excess by the GOP), the Dems would have won a still-larger share of House seats this year.

  12. SINGER commented on Nov 13

    the people with money who make most of the predictions couldn’t be further out of touch with what the average person is thinking feeling or doing……

  13. angryinch commented on Nov 13

    The numbers game cuts both ways. If the Dems gathered 77,000 more votes in specific key House races, they would have picked up an additional 17 seats to add to the ones they did capture.

    The power of incumbency, gerrymandering and Repub deep pockets prevented what might have ended up with a 50-seat Dem majority instead of just a 30-seat margin.

    Overall, the Dems captured 53% of the House vote nationally and 55% of the Senate vote. That’s not a landslide, but close enough for gov’t work. Certainly puts to shame the faux Bush “mandates” from 2000 and 2004.

    Perhaps the most cynical thing to come out of the wrong-way Barron’s piece was this sentence: “We based our predictions on which candidate had the largest campaign war chest, a sign of superior grass-roots support.”

    What on earth does an edge in corporate fund-raising have to do with “superior grass-roots support”?

    The Repub war chest was unable to overcome the Dems much stronger “grass-roots” local enthusiasm this year. Rove thought he could pull out the old 2004 playbook and pump tons of late money into key races and engage in SOP voter suppression efforts. But there were just too many holes in the dike.

    The Dems were able to raise a lot more money this year as well. But it was the local grass-roots (and net-roots) efforts that made the difference this year. And to Barron’s chagrin, that wasn’t just about the money as much as they wished it were so.

  14. dave commented on Nov 13

    True, the folks who bought the DOW in 2001 are finally making a profit and there are help-wanted signs in every Taco Bell and Pizza Hut window, but I think many of us recall three dollar/gallon gasoline and drove past numerous ‘For Sale’ signs in our neighborhood on our way to the polls last Tuesday.

  15. Bob A commented on Nov 13

    This was a case of wishful thinking/”optimism” turning into delusion.

  16. Larry Nusbaum commented on Nov 13

    Except for a two month run after May 11th, the bears have had an awful year. Being bearish and acting on it has cost them a ton of money.
    “The markets can stay irrational longer than one can stay solvent”

  17. ari5000 commented on Nov 13

    Hey — the economy is growing “forcefully” according to the Fed. Can’t argue with that.

    I bet when the defaults start happening — the banks will be “forcefully” kicking people out of their homes, too.

  18. ECONOMISTA NON GRATA commented on Nov 13

    Assumptions, especially the inherited kind, are what kills us….. Some of us live in a well and some in an ocean.

    I am a Cuban political refugee. I arrived here in 1960 at the age of 8. One of the phenomina that I have noticed is that, the ones who feel the most reesentment to the “socialist” government in Cuba are the ones who were betrayed by that very same movement, the ones that spit on me and my family as we walked through a gauntlet at Havana International Airport on our way to our new home in the U. S. these are the same people that you find are ridiculously anti Castro.

    I use this example only to emphisize the fact that we live in an ever changing world that requires adjustments in our “empirical” formulas.

    Perhaps, we, and by we, I mean our collective Psyche are looking for someone to solve the problems that have no solutions. If that’s the case, Ouch….!

    Best regards,


  19. Kirk Spencer commented on Nov 13

    Angryinch points out that the Democrats ‘only’ (implied) picked up 53% and that it thus wasn’t a landslide.

    I would point out in response that the Republicans didn’t pick up all the rest. “Other” accounted for between 3 and 4 percent, leaving the Republicans with between 43 and 44% of the total. The Democratic margin over the Republicans was in the vicinity of 10% – which, given the strong effects of gerrymandering and the margins demonstrated over the past decade, is a very strong showing.

    If 51-47 is a mandate, then 53-43 is a landslide.

  20. brion commented on Nov 13

    Good post Mike. W’s tax-cuts really were only meant to cement that “permanent Republican majority” Rove used to rave about. Supply side “voodoo” (as Daddy Bush called it) is, and always has been, just a seamy little quid pro quo Republicans & the elites engage in with a wink to the electorate about boats/rising tides and job creation….(i get a lump in my throat just thinking about it…or is that lunch trickling up?)

    I don’t agree with you that “most of the money spent to influence legislation was money down the drain, and even now it’s very, very expensive to buy legislation” at all.. THE most bang for corporate buck can ONLY be found in the well-placed campaign offering. Nothing else comes remotely close…..

    i.e. the “Energy Bill”

    Cheney’s energy task force and spent four long years
    leaving grease-tracks on every set of palms in the
    Capitol before finally becoming law in 2005.
    Crafted with virtually no input from the Democrats, who were
    excluded from the conference process, many of its provisions were more or less openly for sale, as in the case of a small electric utility from Kansas called Westar Energy.

    Westar wanted a provision favorable to its business
    inserted in the bill — and in an internal company memo, it acknowledged that members of Congress had
    requested Westar donate money to their campaigns in
    exchange for the provision. The members included
    former Louisiana congressman Billy Tauzin and current
    Energy and Commerce chairman Joe Barton of Texas.
    “They have made this request in lieu of contributions
    made to their own campaigns,” the memo noted. The
    total amount of Westar’s contributions was $58,200.

    Keep in mind, that number — fifty-eight grand — was
    for a single favor. The energy bill was LOADED with
    them. Between 2001 and the passage of the bill, energy
    companies donated $115 million to federal politicians,
    with seventy-five percent of the money going to
    Republicans. When the bill finally passed, it
    contained $6 billion in subsidies for the oil
    industry, much of which was funneled through a company
    with ties to Majority Leader Tom DeLay. It included an
    exemption from the Safe Drinking Water Act for
    companies that use a methane-drilling technique called
    “hydraulic fracturing” — one of the widest
    practitioners of which is Halliburton. And it included
    billions in subsidies for the construction of new coal
    plants and billions more in loan guarantees to enable
    the coal and nuclear industries to borrow money at
    bargain-basement interest rates.
    Favors for campaign contributors, exemptions for
    polluters, shifting the costs of private projects on
    to the public — these have been the specialties of this Congress.

  21. kharris commented on Nov 13

    Is it not the case that Democrats have pulled in more votes that Republicans, across all House races, in most years since 1994? The problem for Democrats is that the average “safe” Democratic district has something nearing 70% Dems, while the average “safe” GOP district has something closer to 60% Republicans. Gerrymandering has intentionally ghettoized Democrats in order to create a lot of districts that are in the 55% range for Republicans. That, anyhow, is what I read.

    With more governorships and statehouses now in Democratic than Republican hands, I would guess the next round of gerrymandering, due just after the end of the decade, will redress this imbalance in many states. Losing state elections may do more harm to the notion of a permanent Republican majority than the poor performance of Bush’s policies (for the non-rich) and the poor morals of Republican office holders in Washington.

  22. advsys commented on Nov 13

    they made it a cover story no less!

  23. Ron Sen commented on Nov 13

    1. Everyone wants less government for the other guy, and more government for themselves

    2. Generalized anger more than money determined the outcome of this election

    3. Why can’t we get the best representation possible in Washington? Because most of the 535 men and women up on Capitol Hill, and many of the governors will do NOTHING to pre-empt their chance of occupying the Oval Office someday. Only those who don’t care about being President can show the political courage to do WHATEVER is RIGHT instead of POLITICALLY EXPEDIENT. That will never change.

  24. muckdog commented on Nov 13

    I think that the perception of the economy is that we’re in the worst mess since the Great Depression. There is a perception that the 4.6% unemployment rate is really closer to 20%. There is a perception that only a few percent have health coverage. And even though the lines at Costco, Walmart, Home Depot and the like are long, the perception is that consumers are charging everything and unable to make monthly payments.

    Democrats were able to create this perception that everyone is in soup lines and sleeping in back alleys because the economy is so poor, and the GOP wasn’t able to counter it.

  25. DavidB commented on Nov 14

    I thought Ross Perot already proved once and for all that money can’t buy votes.

  26. Troy commented on Nov 14

    Overall, the Dems captured 53% of the House vote nationally and 55% of the Senate vote. That’s not a landslide

    55% is halfway between the 51% “mandate” of 2004 and and reelection 60% “landslides” of 1964, 1972, and 1984.

    As for the Bush economy, we’ve seen wages flat since 2000, housing prices double, outstanding mortgages double , and a negative savings rate for a while.

  27. tt commented on Nov 14

    i go to a soup line on Beekman Place every morning

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