Everyone agrees that Donald Trump was the big loser last night. The candidates he endorsed lost. The candidates he attacked won. The secretaries of states who were big election deniers mostly lost. As early as midnight, a tsunami was building among Republicans who were demanding that the party move on from Trump, pronto.
But you know who else lost big? Betting markets. Here is Rick Maese of the Washington Post just a couple of days ago:
With control of Congress at stake in next week’s midterm elections, political observers and polling data both suggest Republicans have a strong chance of retaking the House, while the fight for the Senate is considered extremely competitive. The election betting markets, however, see less ambiguity, already essentially handing the House speaker’s gavel to Rep. Kevin McCarthy (R-Calif.) and giving Republicans about a two-thirds chance of controlling the Senate.
....Political observers study the ever-changing markets to assess candidates’ chances of winning. While traditional polling data might gauge voter sentiment from a specific period in the recent past, researchers say the betting markets offer more of a real-time snapshot as bettors react to events, endorsements and gaffes.
Hmmm. Here's a betting market on control of the Senate:
That sure changed on a dime within a day of the election! Here's the House:
That looks a little better on first glance, but it doubled between November 8th and 9th. Not so great! Here's another one:
Ordinary pollsters were a whole lot closer than this.
You can find a bunch more like these if you feel like googling for a few minutes. Nate Silver obviously has a personal interest in all this, but nonetheless here's his explanation for why betting markets aren't really that great:
One weakness of these markets is that they tend to follow the media narrative about the race more so than they do the underlying evidence. The source for this claim: yours truly, because I’ve been doing this for a very long time.
....The other weakness in these prediction markets is that the traders don’t have a lot of technical sophistication about election forecasting....There are some questions for which actually going through the process of building a model helps a lot, such as in determining how much an election forecast should shift in response to a modest but noisy shift in the polls.
I agree. Say what you will about betting markets, but the bettors themselves are mostly just talking to their friends and reading the same stuff everyone else does. Even aggregating several thousand of them doesn't average out their systemic bias toward whatever their favorite call-in show is saying.
Yep. Betting markets are just the conventional wisdom or herd instinct translated into wagers.
The real problem is that no one really bets enough on these market to make doing true fundamental analysis worth it. Regular financial markets tend to be pretty efficient because at least a few full-time analysts are looking at every company trying to get them priced correctly.
Unless you go to London, the markets aren't deep enough to trust.
On the other hand, if you think they are so far off then there is easy money to make.
After the fact, it is easy to say the Stock Market didn't price things well. On the other hand, few people beat the market consistently.
When you find me someone who made bets and made a lot of money then you can claim the markets aren't very accurate.
Since NOBODY has come out and shown they can consistently beat Predictit then it seems to me that the betting markets are better than any pundit.
Unless you go to London, the markets aren't deep enough to trust.
On the other hand, if you think they are so far off then there is easy money to make.
After the fact, it is easy to say the Stock Market didn't price things well. On the other hand, few people beat the market consistently.
When you find me someone who made bets and made a lot of money then you can claim the markets aren't very accurate.
Since NOBODY has come out and shown they can consistently beat Predictit then it seems to me that the betting markets are better than any pundit.
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One of the problems with prediction markets is that they do a decent job of aggregating the knowledge of the sort of people who use prediction markets. (Disclosure: I'm close to being that sort).
Currently prediction markets have trouble with regulators because the regulators see them as isomorphic to online gambling, so they try hard to push back against that image.
I think they should lean into it instead, and make the markets *explicitly* gambling-like, then work towards legalizing online gambling instead. That would get a lot more participation from both normies and Big Money.
The inaccuracy is primarily due to bet limits. On predictit, the bet limit is $850 (the federal government has to approve predictit's bet limit request and doesn't want it higher). The many nonexperts can each bet just as much as the few experts. In regular markets like the stock market, experts accumulate (or are assigned) much more money than nonexperts, and bigger bets move the price more. A similar behavior happens for non-horse sports gambling where the bet limits are not as low as predictit (the intent of such bet limits in sports gambling is to prevent adverse selection from someone smarter than the bookie).
You mean the wisdom of crowds is bullshit?
Please, no one breathe a word to James Surowiecki.
On November 7, fivethirtyeight placed the odds of Republicans gaining control of the Senate at 59%. The prediction market placed the probability at 67%. For the House, fivethirtyeight placed the odds at 84% whereas the prediction markets placed the odds at 88%. Assuming that Republicans end up controlling the House but not the Senate, the takeaway is that the prediction markets are more confident in their predictions than fivethirtyeight is, both when they are right and when they are wrong. I don't see a basis for claiming that the prediction markets performed worse than fivethirtyeight.
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