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OpEdNews Op Eds    H4'ed 10/23/16

Can betting odds predict the US election outcome?

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Message Edmund Dante

A simple Google search returns a plethora of options of US citizens, but the issue of diversity doesn't then disappear; it simply takes a different dimension. Are the kind of registered US voters who also gamble in this grey market representative of the electorate as a whole? There is no definitive answer to this but the most reasonable assessment is probably not.

US-election betting as a loss leader

Modern bookmakers make most of their money by attracting sports bettors and encouraging them to play in the casino. The risks associated with casino games are fair easier to manage so, despite the challenges associated with setting US-election odds, bookmakers may offer them and not be concerned if they lose money. Bookmakers know there is a huge demand and may be seen as a loss-leader to attract in new customers who will then be enticed with more profitable products. The accuracy of the odds in that situation is, therefore, less important than their job in acquiring new customers.

Information Cascade & Anchoring

A betting market has to start somewhere. The opening odds - sometimes referred to as the 'tissue price' - are decided by the bookmaker. The importance of this opening assessment and how it is calculated are another reason to be cautious of the accuracy of the US-election odds. They are called tissue for a reason, because they are so fragile. As mentioned above, a bookmaker would normally look to the available form and a suitable mathematical model to help work out the underlying chances. Though there are some reliable patterns to elections - such as a natural inclination for voters to look less favourably on parties serving multiple terms in office - alone, they aren't enough to calculate a probability. The next best guide after historical results is opinion polls, but there is plenty of reasons to doubt the accuracy of polls, not limited to:

    • Statistically insignificant samples
    • Unrepresentative samples
    • The increasing irrelevance of land lines (for phone polls)
    • Biases in the kind of people likely to answer polls
    • Context - polls reflect opinion at that time only
Beyond opinion polls the bookmakers will look to financial markets, which will build in the financial implications of differing outcomes in national elections, but the specific influence of the election outcome has to be isolated from all the other factors moving the markets and quantified. What this means is that bookmakers have to choose from a number of potential indicators - none of which are necessarily accurate - as reference points for the assessment of the opening odds. Importantly, bookmakers don't act unilaterally. Many modern bookmakers are actually getting their odds from a third party and simply adding their preferred margin, and those that set their own odds will naturally watch what their competitors do. This provides a potential risk of what are known as Information Cascade and Anchoring.

An Information Cascade takes place when inaccurate data is passed onto others who may have reason to disagree, but simply assumes it to be correct. Given the huge number of stakeholders and vested interests - not just bookies but hedge funds and governments - the Information-Cascade theory maybe hard to countenance especially with hedge funds often commissioning their own private polls, but the sub-prime mortgage bubble of 2008 (the effects of which we are still feeling) had large elements of information cascade. Why couldn't the same happen in political-prediction markets? Our separate Brexit case study gives very good ground to support that idea. The problem for the hedge funds and the bookmakers may have been that the information they sought - the voting sentiment of undecided or first-time voters that proved so crucial - was not known and perhaps could not practically have been known. It may have come down to timing.

Timing - Voter Uncertainty & Intent

The behaviour of bettors is not necessarily equal to that of voters. Bettors are making their opinion known for months even years, but many US-election voters will make up their mind at the point of casting their vote. The betting markets cannot not know what the waverers may do, so when that group is large enough, the odds can be wrong. This is exactly what happened in the 2015 UK general election when a huge number of voters decided on the day, so their intent could not have been factored into the odds. This issue of timing is a crucial drawback in betting markets but so is intent. Bettors may have simply seen a binary question - who will win the presidential election, Trump or Clinton - but a large number of voters may actually vote in protest of a wider issue of disenfranchisement and disillusionment in the value of Washington. Taken together, the issues of timing and intent could be key omissions from the betting odds.

The Favourite Doesn't Always Win

The last and perhaps most important comment to make on the accuracy of betting odds in predicting elections is a simple one. Sometimes the favourite doesn't win. Imagine the outcome of the US election is decided by picking one ball from a sack of 100 balls. Seventy are blue (Democrat/Clinton) and 30 red (Republican/Trump) - these correspond to the current implied chance as of October 1st. It makes it easier to conceive that the underdog can win without the proportions/odds being wrong. All of this doesn't mean that betting odds cannot provide a useful indication of potential outcomes of elections, it just means that they should be treated with caution.

Read more on www.uselections.bet

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Edmund Dante Social Media Pages: Facebook page url on login Profile not filled in       Twitter page url on login Profile not filled in       Linkedin page url on login Profile not filled in       Instagram page url on login Profile not filled in

I write about prediction markets and in particular the accuracy of betting odds in predicting elections, and referendums. See more at www.uselections.bet
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Can betting odds predict the US election outcome?

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