In Politics, Alpha Matters More Than Beta

Lawrence Lindsey makes the case for Anybody But Romney by pointing out that "safe" candidates--"low-beta" candidates, he calls them--have a poor record in presidential elections. It's a cute idea. If you're behind, take a chance. Lindsey reckons Obama has the edge, other things equal, in November (the net effect of incumbency, which helps him, and the bad economy, which doesn't). So the GOP should gamble on a high-beta candidate who will shake things up.

With subpar growth, but no recession, President Obama might normally be expected to win narrowly, say by 1 percentage point.

If that model is right and the Republicans ran a "zero-beta" candidate, one with absolutely no variability around the "normal" result, he would perform quite respectably but lose. To be precise, he would lose by one point, 50.5 to 49.5. A very low-beta candidate, say one with a variability equivalent to half a point, would have an equal chance of producing a "tie" or losing 51-49. A high-beta candidate, with 10 times the variability of that very low-beta candidate, would have an equal chance of winning 54.5-45.5 or losing big, by 55-45. But if a party really wants to win--and doesn't care about how badly it might lose--it should pick a high-beta candidate.

Lindsey reviews the history and finds that safe candidates do badly against incumbents: zero-for-five in the post-war period, he reckons. High-beta candidates (Goldwater, McGovern) may get thrashed. But sometimes (Reagan, Carter, Clinton) they win. If your party's trailing, you're better off taking the risk.

This is not to say that it can't be different this time--Romney, the obvious low-beta candidate, could win. As they say in markets, "past performance is no guarantee of future results." But it is certainly not the case that, based on history, he is obviously the most "electable." Statistically, he may be the least electable.

Interesting: the capital-asset pricing model applied to politics. Bearing in mind how hard it is to write anything new in election commentary, I ought to just say I enjoyed the article and leave it at that--but here's why it's nonsense. In finance, you are interested in alpha (underlying return, after allowing for risk) as well as beta (risk). You might say the same of politics, with the difference that in politics the underlying quality of your investment is easier to judge. Lindsey doesn't even mention alpha.

In politics, beta isn't the important parameter. Mitt Romney is not just low-beta, he's also low-alpha. His problem isn't that he's safe, it's that he's weak. As for his rivals, yes, they might have higher beta than Romney--maybe--but one can say something else with more confidence: Gingrich, Santorum, Perry, and Paul have less general-election alpha than Romney. (Huntsman could be an exception, a point worth considering if he does well today.)

Lindsey's notion of political risk is not really beta in the CAPM sense anyway. If it were, he would have to believe that Goldwater's chances (or McGovern's) of overperforming relative to a generic candidate were about the same going in as his chances of underperforming. If he thought that, he might believe that Sarah Palin against Obama in November would have as much chance of shaking things up--in a good way, I mean, for the GOP--as of being a disaster. Statistically, I'd say the odds were against it.

I suppose it's true that if you're likely to lose anyway you might as well take a flier: you've nothing to lose. You don't need the CAPM to reach that conclusion. But the GOP is hardly in this position. It isn't about beta. What Republicans need is a good candidate.