I doggedly take the outside view. When long-run trends say X, and the “latest news” says Y, I go with X. When Democrats won big in 2008, I saw good luck, not a new political regime. That’s why, in 2009, I bet my former co-blogger Arnold Kling that the Republicans would regain control of one branch of the federal government by 2017. I won in 2010.
I sometimes think that there are two major types of investors. Momentum investors say that “the trend is your friend.” Contrarian investors say, “if something cannot go on forever, it will stop.” The former investors look at short-term developments. The latter investors look at long-term averages. If the long-term average in U.S. politics is that no party dominates for extended periods, then I was making a momentum bet, which is not what a good economist should do.
Read Bryan’s post, which talks about superforecasters looking first to general statistics (what proportion of households own pets) and then to specific factors (what about this family suggests pet ownership?). Momentum investors probably are more likely to look at specific factors.
Dont forget the intercept?
In both of Caplan’s bet examples his counterparts accepted godawful terms.
What is funny is that we do have essentially one party democracy and are experiencing a new normal. Caplan just structured the bets so he basically couldn’t lose. What if you had figured out how to look at how monolithic government acts when it’s own interests are on the line or if Cowen had insisted on labor participation instead of the fundamentally flawed unemployment rate?
And, if only it were so simple. It turns out that people persistently underestimate the importance of new information, which means they underestimate the extent to which a recent new trend will continue, i.e., when the average is X and the new information says Y, people consistently tend to believe a return to X will happen soon – and are wrong. This is an anchoring bias, in behavioral economics terms. The return to X does happen, which is why contrarians tend to be right in the long term; but when there is first a deviation toward Y it tends to get bigger faster than most people expect, which is why momentum types tend to win in the short term.
However, you may be making the mistake of confusing political brands with political trends. The clear political trend is toward Progressivism, bigger government (tax as % of GDP appears to have discovered its peak long ago, but regulations continue to expand far faster than the economy, everywhere), and less free speech (if not less freedom all around). And because the Democrats’ brand is more closely associated with the Progressive trend, you may have expected that to favor Democrats. But the Republican brand moves too: it’s to the right of center, but far to the left of where it was, say, a century ago. So a political trend doesn’t necessarily give a permanent advantage to either party.