Some time ago I was thinking about the stock market and was amused to find all these elaborate mathematical formulae to predict motion of stocks. The problem with such formulae is that they treat the value of stocks (for the most part) as being unrelated to the underlying business, treating stock valuation as some predictable, regular natural phenomenon. Of course many found this out for themselves when they used formulae to buy into Lucent, for example, and the market reality completely destroyed the model's predictions.

There is also a secondary shortcoming, in that any model which attempts to predict human free will can, at best, be a vague approximation, as, even though many argue that human choice tends to map to a regular distribution, the existence of fads, panics, hysteria and other phenomena shows us that human action is not as orderly or regular as most statisticians would like us to think. Granted, 75% of the time it might follow a pretty regular distribution, but it is far more unpredictable than predictable, and even when there is a lack of any great mass movement, human choice is still subject to huge shifts no one anticipated. If this were not the case, if behavior was fully predictable in the aggregate, television and movie studios would never waste money on failed blockbusters and there would never be consumer shortages, of Cabbage Patch Kids, Jolt Cola or Tickle Me Elmo Dolls (among others).

However, the more I thought about it, the more I realized that economic model of stocks could be beneficial. Not in the way intended, but rather as a means of predicting what the big firms would do. You see, despite the increasing number of small investors, the market is still driven by a few large institutional investors, both directly, through their purchases and sales, and indirectly, by the large percentage of small investors who follow the lead of the big firms. And that could be used tot he advantage of a few smaller investors.

My thought was this. It is impossible to predict the direction a firm will take. However, as most firms use a handful of economic calculations to choose investments*, it might be possible to predict what investments the big firms will make. So, rather than playing the market, trying to predict what the market as a whole will do, which is impossible or nearly so, why not try to predict what the few big institutional investors will do?

I later abandoned this idea due to insurmountable problems. First, the difficulty in guessing which formulae were in use, and by what percentage of investors, as well as the difficulty in creating a mathematical model to predict investments made based on various investment strategies. However, with a lot more time and a little more information, I still think it may be a valid investment model. At least it seems much easier to model the behavior of a few large firms who follow known patterns of investment than to try to model the behavior of millions of investors influenced by economic news which must itself be included in the model**.

No, don't worry. I am not about to try to sell you a set of tapes for $499 plus shipping and handling. There is a political point to this. And a rather important one.

I believe the last election was won on a similar strategy.

If you think about it, it makes quite a bit of sense. Most people do not believe a word politicians say. Just think about Republican reaction to McCain. Even when he began to say the right things, his record worked against him and many did not believe he would change. Similarly, when Obama began to talk centrist, most of those on the right did not believe it was a sign of moderating views, but instead an attempt to get votes. No one believes the words of a politician mean what they say.

As a result, voters tend to try to decode politicians' words by creating analogies. They look at their words, and at their party, and maybe a few other factors, and they try to find an analogy among known politicians. It was why Thompson created such a stir for a short time, and also why he then failed. At first, his background as a Republican actor, coupled with rather hopeful, upbeat speech and simple homilies evoked a mental image of Reagan. However, when he later started to appear to be unsure of whether or not to run he no longer resembled the Reagan prototype, and, left without an analogous politician, voters were uncertain how to understand him and lost interest.

And the same phenomenon explains the reason Obama won, or at least helps to explain it.

First, there is the attempt to sell McCain as being the same as George Bush. To anyone who has followed the careers of both politicians, it seems absurd. Bush and McCain have been at odds for eight years. Yes, there are superficial similarities. Both are more open to big government than most conservatives, but where Bush is open to big social programs, McCain leans more authoritarian, supporting the speech restrictions of campaign finance laws and the draconian requirements of Kyoto. Both have also been strong on defense, but one need only look at debates on Guantanamo, supposed "torture" or other topics to see a vast gulf separating the two. Both also claim to be social conservatives, but while Bush is friendly with the evangelical wing of the party, McCain has been openly hostile to many social conservative groups. And finally, both claim to work across party lines. And Bush did try this for a time in Washington, but did eventually give up, once he found that "cooperation" to Democrats meant he would give on on every point. On the other hand, McCain, perhaps because of the praise the media gave him, had no problem with continuing to give in on point after point in the name of "compromise".

None of that mattered to the voters. Just as it did not matter that our financial problems were the fault of the Democrats. The crisis broke on Bush's watch, so it was Bush's fault. Likewise, McCain was an old white Republican, whose talk on defense and the economy hit the same notes as had Bush, so it only made sense to equate him with Bush. Granted, he also said many things that differed from the president, but Obama managed to play those down while constantly hammering on the similarities. And so, to the voters, McCain became a third term of Bush.

The biggest triumph of playing to voter expectations came in Obama's packaging of himself. I have already written about the brilliance of his content free speeches, how it allowed those who became enamored of him to read whatever they wanted into his speeches, but I did not realize just how clever it was until now. In the past, I thought that he would run into problems when it came to the general election, that all his vague promises would stop working and he would be forced to make concrete proposals, and thus alienate his left wing support.

What I failed to recognize was that he was playing on voter efforts to decode politicians' speeches. Rather than provide any sort of concrete platform, when he began campaigning for the general election, Obama continued in the same vein as he had during the primaries. And seeing a young Democrat, with little national experience, smiling broadly and constantly mentioning change, the voters looked into their pasts and immediately associated him with Clinton***. And so he did not have to make any specific promises, all he needed to do was continue to evoke the memory of Clinton and voters would make his promises for him.

Many conservatives may be asking why on earth anyone would want to be associated with Clinton, but some of that confusion comes from looking at history through partisan lenses. Most people do not involve themselves deeply in politics. To them a politician is judged mainly by what happened on his watch, whether he caused it or not. So Bush gets blamed for economic policies started years before his term, and Clinton gets credit for a strong economy partly created by Reagan's tax and economic reforms. And so, most voters, forgetting that Clinton actually inspired the 1994 Republican revolution, recall only that the 90's were a period of peace and prosperity. And so, by playing on voter's efforts to equate politicians, Obama managed to evoke positive feelings by simply saying "change" often enough.

Of course, that appeal to the voters' expectations, managing to equate himself with Clinton was not the sole reason for Obama's victory. He obviously inspired a massive turn out among black voters simply by being  a black presidential candidate. In addition, among the more politically active and astute, the words he spoke managed to send a bit more clearly left wing message, though still light on specifics, which inspired a quite ardent following among the left-leaning voters. And we cannot discount the utter lack of enthusiasm among many conservative voters, though dislike of Obama managed to somewhat mute that factor.

But, in many ways, Obama really did win by playing to voter expectations. Rather than trying to tailor his message to the independents, he simply created an image which, when they tried to interpret it, would lead them to equate him with a president they had supported. Just as I had planned to play the stock market by anticipating others' strategies, he played the electorate by anticipating their efforts to interpret political messages.

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* Granted, many firms use forumlae they developed in-house, but those in-house forumlae were developed by people who had trained in traditional economics classes, and used these well known forumlae as a basis. So though there may be some small variations, the traditional formulae do a very good job of predicting what institutional investors will do. The only problem I had was in doing it prospectively. It was easy to look back at market movements and see how they fit the models, it was not so easy to find ways to anticipate what the models would suggest before it happened.

** That is in a nutshell why I say modeling stock prices i a fool's game. Economic news can cause sudden, unexpected movements. So can sudden investor panics or enthusiasms. So, not only do you have to model the entire economy, but also model the behavior of every investor and the interaction of the two. It is simply far too complex to do. And, if you could just model the economy itself, you could then play the futures market without loss, so why bother with the other half just to switch over to the stock market?

*** Many Democrats would like to claim Obama evokes images of JFK, or maybe Martin Luther King, but the truth is not so grand. King made very careful pronouncements, full of both noble rhetoric and specifics. Obama does not. Similarly, King tended to speak in strongly biblical language, Obama does not. On the other hand, JFK was a strongly confrontational leader, especially when it came to the USSR. Obama's talk of constant negotiation and brotherhood in no way evokes Kennedy's defiant language directed toward his foreign foes, nor his calls for sacrifice from Americans themselves. Much as it may upset some Democrats, Obama was clearly running on being the next Clinton, a theme he continued to emphasize through his cabinet appointments.

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POSTSCRIPT

Some may ask how this differs from a standard political stump speech, where words are chosen solely to elicit positive responses from the voters. And while it is similar, in that it is just a more clever form of manipulation, there are also significant differences.

Let us take two examples, a traditional lying politician and more modern politician. If universal health care has become a hot topic, the traditional politician will promise to provide universal health care. Some may accept him at face value, and give him their votes. Others may think it merely campaign rhetoric and decide whether to support him or not based on other issues. However, in making this promise, he has obligated himself to at least making a show of supporting universal health care. Clearly, like many politicians, he can put it off, or simply break his promise, but he does so at a cost, as broken promises tend to upset voters.

Now, let us look at a more modern politician. Rather than actually promising universal health care, he finds politicians in the past who supported universal health care, and he positions himself to evoke memories of them. It could be explicit, such as appointing advisors who were either explicit proponents or who had been involve with Hillarycare, or it could be implicit, such as using phrases people associate with those advocating universal health care. However he chooses, the key is to make no explicit promises, which will likely be disbelieved, and will create an obligation, and instead to anticipate that voters will try to "decode" political promises, and try to create an image that voters will interpret in a desired manner. (Universal health care is probably  bad example, as it has not been a hot topic long enough to have created a "champion" yet. Other topics are much easier.)

And so, rather than "lying politicians" making promises no one believes, we could someday find ourselves surrounded by "acting politicians", with conservatives trying to evoke memories of Reagan or Goldwater or Newt and liberals trying to resemble FDR or Johnson or McGovern or Cesar Chavez. Of course, as there will still be those more involved in politics candidates will still need to adopt some positions, but as this sort of vague political campaigning becomes more and more prevalent, I worry that the bones thrown tot he politically astute will become less and less frequent and more and more campaigning will be done in this nebulous, impressionistic manner.

Spellcheck Note: I haven't complained about my spell check in some time, but it has once again shocked me by not knowing a very simple word. In the past I complained that it only allows one spelling of "Muslim", rejecting "Moslem" which I think a more common spelling. I was also annoyed that it insisted i spell "advisor" and "adviser" and that it would not allow "indices", but did allow the abomination "indexes". (I also forgot to mention it at the time, but apparently analysis has no plural, as it won't allow "analyses", and I can't think of how one can form a plural other than that.) However, it now has decided that the plural of "formula" is not "formulae" but "formulas". Who programs this thing?