Are Political Betting Markets Failing Or Gaining?

political-betting-marketsPolitical betting markets took a lot of heat for their solid prediction on the Brexit outcome – with a 25 percent predicted probability during the last week to the poll date, with the polls flipping from ‘Leaving’ to ‘Remaining’ on the very last day.

Predictions based on probability can and did fail and we need to look at why this happened to increase our chances in future. The prediction markets have heard a very reputable track record and people have come to trust and ever rely on them. Could this be the main source of the problem?

The thing is, political betting markets involve real money exchanges allowing any person above the age of 18 to buy or sell futures contracts on upcoming political events. This market has a long and rosy history. Perhaps the most memorable is the 1916 election where 10 million dollars were wagered, these translates to about 220 million dollars in 2016’s current value of the dollar.

In essence, a person can purchase a contract on the outcome like the democratic or Republican nominee to scoop the oncoming presidential election which is worth a dollar if the outcome is positive and 0 dollars if the outcome is negative.

The total price at which individuals are willing to purchase and sell such a contract is what is interpreted as the probability of the said outcome occurring. Political betting markets work because participants can access all the standard forecast data and other eccentric or dispersed data about the oncoming election and aggregate it with polling data and any other information that is relevant to the outcome, not forgetting their experience in the market.

Whether political betting markets are failing or gaining depends on what side of the coin you fall on. Are you on the winning or losing side?