Data Aggregation – More Nate Silver’s are coming!

Who is Nate Silver?

Nate Silver, is a fellow blogger who set up a website called fivethirtyeight.com.  Nate and his blog became famous during the presidential election by aggregating data from all the national polls, running this data through his algorithm and extrapolating election results in a clear, simplistic manner – and it helped he and his math were right!  This website was the “must go to” site for me during the last few months of the presidential campaign.  Apparently, I wasn’t the only one.  On the Monday before the election, November 5, fivethirtyeight captured 20% of the daily New York Times web traffic.

This blog is NOT about Nate Silver the person nor his website – the web is full of information about Nate and his background.  As always I want to blog about something different, hopefully something that makes my readers think differently.  I want to write about Nate’s business model.  Why?  Because Nate and I have the same business model, and if Nate and I can figure this out then others will sure follow.  Or more importantly you yourself can create the same business model in other industries or perfect what Nate and I have done with a more accurate algorithm.  Who knows?

My Observables of Nate’s and Model Price’s Business Model

1.  Nate gave relevancy, meaning and accuracy to a fragmented profession of polling.

Polling and elections go hand in hand.  In this past election the news of the day seemed to be a poll indicating Romney took a 4-point lead over Obama.  The mainstream media seemed to jump all over this one data point with national exposure.  Believe it or not 11 to 13 national polling firms were each giving their results at various times leading up to the election – certainly defining noise in a statistical sense.  Mr. Silver not only tracked each poll over a period of time but also used all the national polling firms data together to give context and relevancy to all the data points.  Stated another way, Mr. Silver used what I call data aggregation, taking data from each national polling firm, aggregating the data, running this data through his algorithm and producing a result more relevant than the original data points themselves.

Here at Model Price and ModelPrice Guy we calculate model price or fair market value for every stock in our database.  We take published earnings estimates, selected items from the company’s balance sheet, and interest rates and run this information through our algorithm to calculate model price.  Obviously this data changes on a daily basis so we perform our calculations daily.  Like Nate, we take data already available and produce a result hopefully more relevant than the original data points themselves.

2.  Input data is Transparent.

The right wing media tried, the in waning days before the election, to discredit Nate and his analysis.  But think about this for a second.  Nate was using all pollsters including Rasmussen Reports, which consistently had Romney ahead in the polls until just days before the election.  He was intellectually honest in his data points that arrived at a mathematical result after going through his algorithm.  Transparency of the input data and relevancy of the results matter, the public and myself don’t really care about the algorithm in between just as long as it works.

Like Nate, we have no interest in the data itself just as long as the data is correct.  There are no individual biases to our work and I’m sure Nate feels the same way.  We are not favoring one company over any other.  We can provide total transparency of all of our mathematical inputs and obviously our outputs as disclosed have to make sense.

3.  Political pundits from this election forward will be reduced.

Experts get paid well when there is great uncertainty especially when the question of who is next president of the United States.  Mr. Silver’s algorithm has just placed all but the very best in the unemployment line.  Certainly myself, Peggy Noonan, of the Wall Street Journal took a credibility “hit”, in my eyes, when she predicted a Romney victory blind to the odds that were obvious to Mr. Silver and the website Intrade.com – the online betting site – where Obama had a 68% chance of winning by people betting with cold hard cash.  In other words why waste your time on any television channel listening to pundits spin and weave the polling numbers.  Mr. Silver’s algorithm will do the work for you in terms of probability of electoral success.  I would even say Intrade survivability in terms of politics is a question as more people visit Nate Silver’s site.  I haven’t performed an exhaustive analysis however at the time of my observation Intrade was mis-pricing an Obama victory.  When Nate was predicting over 80% of victory, Intrade was trading at 68% chance.

I have long given up on financial television and newspapers giving anybody any relevant information that maybe useful in making financial decisions.  We are all consumers and when we purchase a product or service we know the value of that service.  Not so with financial markets.  With our model price calculation you can see the fair market value of the security with which you are interested in.  And like any other product the cheaper the product from its calculated worth the better the deal for the consumer.  Once consumers have this information in their hands the know-nothing talking heads will be unemployed like the political commentators spinning the latest poll numbers.

4.  Nate Silver’s Payoff

I’m sure when Nate was designing his algorithm, if anybody was interested, I’m sure people asked him about his payoff – just as friends and colleagues ask me all the time.  Really?

Let me list the ways Nate has and will enriched himself that I know of.  First there was a reported $700,000 advance for a two-book deal with a publishing house.  Nate’s first book was released this past September (see here).  His blog, fivethirtyeight.com, which originally was independently produced, is now located on the New York Times website.  I’m sure there is some sort of revenue sharing occurring between these two parties.  Fivethirtyeight.com has advertising on the site, another source of revenue.  There will be speeches, conferences and guest appearances all providing additional revenue sources.  Nate’s algorithm itself has accrued substantial value since it has been discovered and went viral.

In other words Nate’s payoff is huge.  Welcome to the new economy.  And believe me when I say the majority of people really don’t get this.  Hopefully you do.

Model Price and ModelPrice Guy we are putting in our 10,000 hours.  We have created a whole different way of looking at finance that is NOT in any finance textbook.  We are going up against MBA’s and CFA’s with their established dogmas of “Cap M” and efficient market frontiers.  The good news for you, and me even with all their education they haven’t produced an algorithm that does what we do.  At least that I know of publicly.  I’m sure Nate and I would welcome anybody who would want to try.

5.  Usually “Change” comes from the outside.

What we are finding out in this new economy is industry change occurs from the outside the industry itself.  Established interests want to perpetuate the status quo, because innovation from within can reduce revenues and shrink market share.  Change agents, usually outsiders, can disrupt established players with internet platforms like – Facebook, Twitter and blogs – more easily then ever before.  Certainly, in the case of Nate Silver’s fivethirtyeight.com, no polling firm, which probably exists in a silo of its own data, would ever think about aggregating data from all the polling firms and producing a probability for the election as a whole.  And even if they did, would they give this information away for free!

Now, I know what you are going to say.  I’m an industry insider.  I work in the finance industry therefore how can I change the industry.  True.  But I’m going to try.  Like Nate I’m giving my stuff away free aren’t I.  Hopefully this business model can takeover my day job.  I guess we will see.

6.  “Information is cheap, meaning is expensive” – No longer

In my initial blog I quote George Dyson with the above quote.  Nate Silver has placed meaning in polling results for everyone to see free of charge with a huge payoff to himself.  What if “meaning” in the above quote were free instead of expensive with huge payoffs for individuals creating algorithms for the world to see the output.  Meaningful output.  Millions of people would be helped by distilling numerous of pieces of data into readily understandable concepts and knowledge – free of charge.

Conclusion

I tip my hat to Nate’s viral discovery and will certainly purchase his book.  Nate’s business model is a lesson for all to learn from and who knows how many of us are working in obscurity, working on our craft, waiting to be discovered by helping millions of people decipher data into knowledgeable actionable information that have the same business model.

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