THE European equity markets are modestly higher this morning in the wake of the US election. The most likely reason is a sense of relief that we are not headed for a repeat of 2000, when Florida and its hanging chads kept us on tenterhooks for weeks. But after several billion dollars of campaign expenditure, and almost a year since the first caucus, we have ended up with a Democratic President and Senate, and a Republican House, just as we did before. (In Britain, total campaign spending in 2010 was just over £30m ($45m) and it took three weeks; just a suggestion).  

Bond yields have fallen in the wake of the polls. There is some convoluted reasoning behind this. Yesterday, the FT front page lead wrote that

US government bond yields have fallen, as traders anticipate that a win for Mr Obama and further gridlock in Washington would shrink the chances of swift agreement on tax and spending.

So failure to sort out the deficit would be good for bonds? In a perverse way that reasoning may be right, since gridlock will make investors risk-averse, and thus head for the safe haven of the bond market. It is hard to see why the same reasoning would be good for equities, however (and indeed the Dow has opened lower since I wrote the opening paragraph). An alternative explanation is that the Republicans are very hostile towards Ben Bernanke and his bond-buying programme; it might have been difficult for the Fed to maintain QE with Mr Romney in office.

But the reason for the headline in this piece relates to the business of predicting elections. Various posts on this blog in the past have cited the Iowa Electronic Exchange and its prediction market; it was early in saying that Romney was a shoo-in for the Republican nomination and, since the start of this year, never really wobbled in calling for an Obama win this time (see the graph). Watching the results last night, it seemed that Iowa was better at reading the results than Intrade where Obama was still only trading at 70 by 8pm eastern time, even though the mood music on CNN was indicating an Obama victory. (John King on CNN also did an excellent job of showing how individual state results would be affected by the counties that had yet to declare, and would generally boost the Democratic total.)

And then there is Nate Silver and his model. As no doubt he will say, it is hard to tell whether a probabilistic statement is "right" if you judge it against a single event. If I tell you that the chances against throwing three heads in a row is 87.5%, and you then flip three successive heads, that does not mean the forecast was wrong; just that this happened to be the one-in-eight event. But he was right in stating that the state polls pointed to an Obama win and, in turn, a small majority in the popular vote. What was splendid about his blog is that he laid out all the polls for readers to judge for themselves, unlike Real Clear Politics which seemed to miss out quite a number of them.

This maths-based approach is to be applauded, if only because we have in the past given too much credence to the pundits and their views (dangerous ground for a columnist, of course). An excellent book by Philip Tetlock (Expert political judgment. How good is it?) conducted a series of tests on experts who were asked to assign probabilities to various outcomes. He found that

People who devoted years of arduous study to a topic were as hard-pressed as colleagues casually dropping in from other fields to affix realistic probabilities to possible futures

and that better-known forecasters - those most likely to be feted by the media - performed less well than their lower-profile colleagues. Worse still, Tetlock found that

Experts displayed both the classic hindsight effect (claiming more credit for predicting the future than they deserved) and the mirror-image hindsight effect (giving less credit to their opponents for anticipating the future than they deserved

A final thought. Although Wall Street has performed well under Democrats (much better than under Republicans), there may be many people who hanker for a pro-business party that is rather more liberal on social issues and not so hostile towards science. Will the Republicans find their own David Cameron, in other words? The defeat of what might be called the pre-Enlightenment senatorial candidates (Akin and Mourdock) might be an encouraging sign, and it is possible that the Republicans will reflect on their 11 point loss among females and their huge loss among Hispanics, the fastest-growing section of the US. But maybe they won't; having won the House and only just lost the popular vote, they may blame Romney for not being conservative enough. To go back to the British example. Labour had to lose four elections before it turned to the centrist Tony Blair and the Conservatives lost three in a row before turning to Cameron. So maybe it will be 2020 before there is a decisive shift.