Prediction Markets
Never heard of a prediction market in your life? Look no further, all will become clear...
What is a prediction market?
A prediction market is something where predictions are formed by two sets of people trading against each other with real money at a certain price, with the percentage chance of candidate x winning changing as more money is traded at the given price.
In opinion polls those questioned are asked about what they will do, not what they think will happen, irrespective of what they do. In a prediction market or a stock exchange, many thousands of people have a vested interest in trying to be right - making money.
Thus, prediction markets and opinion polls are two very different things, and both add a huge amount to the process of predicting political events.
A look at 2008...
Betfair has over 3 million 'experts' who put their money where their mouths are. And where the 2008 US Election was concerned more than €41m was traded across a range of markets. More than €20m changed hands on the sole market regarding the overall winner, with millions more in other markets such as each individual state. Indiana alone traded more than €580,000.
Academic research...
The accuracy of these markets is well-documented by academic research. Professor Leighton Vaughan-Williams, Director of the Political Forecasting Unit of Nottingham Business School, said: "It is not a matter of opinion whether or not prediction markets are the most accurate predictor of political outcomes, it is a case of well-studied and proven fact."
At the very least these markets offer a different take on a situation and an exclusive angle from which develop any news story.
Example: How the 2008 Presidential Election was won
A: Obama wins in Iowa, propelling him into the lead for the Democratic nomination. (Jan 3rd)
chance: 47 Barack Obama, 15% John McCain
B: The lead is short-lived as Hillary Clinton pulls off a shock win in New Hampshire. (Jan 8th)
chance: 25 Barack Obama, 15% John McCain
C: John McCain secures the Republican nomination after Super Tuesday on 5th February. (5th Feb)
chance: 30 Barack Obama, 33% John McCain
D: Barack Obama finally looks to have secured his party's nomination following a primary win in North Carolina. (2nd May) chance: 56 Barack Obama, 35% John McCain
E: The 'Palin Bounce' starts a period of recovery for the McCain campaign. (4th Sept)
chance: 62 Barack Obama, 38% John McCain
F: This rise did not last long and from the day investment bank Lehman Brothers went bankrupt the gap got ever wider. (15th Sept) chance: 55 Barack Obama, 45% John McCain
Explanation:
We are able to overlay key events to show how our markets react to news as well as, in many cases, predict news before it breaks.
A particularly interesting insight in the above chart shows how the thousands of people trading in the Betfair market moved against John McCain on the same day Lehman Brothers went bankrupt. At the same time the media and polls were speculating as to what impact the event could have on the election, Betfair traders were betting in huge sums that it was the end of the road for McCain.
Our markets show the quickest reaction to events in this way by providing an active and real time measure of opinion.
For more information:
Barry Orr
barry.orr@betfair.com