With so much at stake in the US presidential election it's no surprise that a huge amount of attention is paid to any potential predictors of the outcome. Opinion polls have historically been relied upon to predict US election sentiment, but their track record is mixed. With the rise of online gambling, bookmakers are increasingly seen as the oracles for political markets, but can betting odds predict elections? What do US election odds represent?
Probability represents the likelihood of an unknown event - such as the winner of the US presidential election - providing a measure of the chance of the potential outcomes. Odds are derived from that underlying probability to answer the question - how often are those events expected to happen? This is why odds are offered as a ratio.
If US election odds for Hillary Clinton are 1:2 (1/2) this means that over a sequence of elections under similar conditions the bookmakers would expect her to win two out of every three; this gives her a 66% chance. Donald Trump at 2:1 (2/1) would be expected to win one out of three elections - with a chance of roughly 33%.USelections.bet is polling live odds from a selection of leading UK bookmakers to produce a live % chance of Clinton or Trump winning the presidential election. Probability can be objective - like a coin toss where the probability is known to be 0.5 or a 50% chance on either side - or subjective, where complex situational factors make knowing the exact chances impossible. Football matches are a good example of subjective probability, and given that they are also very entertaining, everyone has an opinion on the outcome, which makes betting - further increasing that excitement - so popular. Football matches are also ideal for bookmakers to set odds. They can rely on the increasing amounts of reliable data from previous results - known as 'form' - to help make their judgement on the probability. They then feed this into a computer model and turn this probability into odds to enable betting, and a margin for their efforts - the cost of a placing a bet.
Why elections aren't like football matches
The difficulty with setting the odds for political events like the US presidential election is that - unlike football matches - the dynamics of the campaigning and election process are too complex to model. Elections have very little meaningful form because they occur so infrequently, and the time-lag between elections means the situational factors are always in flux, making comparison meaningless. Though context can change in football matches - such as injuries - the model can account for this by for example assigning values to players' influence and these changes tend to be small in impact and isolated. By contrast, the context for an election can change dramatically at any moment with what is known as an 'Apocalypse Event'. This presents a real issue for bookmakers. An even bigger issue for bookies is that the key voters in elections are the undecideds.
Voting intent of undecideds cannot be known or measured; it can only be guessed, which is like not knowing which side a striker will be playing for until kick-off.These challenges don't deter bookmakers from setting odds. Despite the difficulties in understanding prospective chances UK bookmakers formed a unanimous opinion on the opening market odds for the 2016 US presidential election that from the beginning favoured Hillary Clinton's chances of winning. The important question is how did they reach that opinion and can the odds and their subsequent movement be relied on as a predictive tool?
Wisdom of the crowd
The principle of collective predictions - in effect what betting markets are - was established by Sir Francis Galton back in the early 1900s when he uncovered the Wisdom of the Crowd phenomenon. Galton was at a livestock fair watching a competition to guess the weight of a butchered ox. No-one guessed the exact weight but Galton calculated the median of guesses as being within 0.8% of the answer.
"The middlemost estimate expresses the vox populi, every other estimate being condemned as too low or too high by a majority of the voters." Sir Frances Galton, 1906.From Cows to Election outcomes
A betting market expresses the vox populi in the same way as the competition Galton witnessed; the best estimate of the underlying probability is reached by the average of odds bettors want to wager at. For this reason betting markets are generally very good indicators of underlying probability; however, the best-estimate approach is not universally accurate, and the circumstances that lead to its failure are especially prevalent in elections, referendums and sentiment-based markets.
A Big Enough Crowd
In Galton's example the accuracy of guesses of the ox's weight would be proportional to the number of entrants in the competition. So the number of bets is important, but more so the volume of the money wagered. Ten 5 bets on Hillary Clinton are not the same as one 1,000 bet on Donald Trump. This can be summed by the phrase 'Skin in the Game'. Importantly, the volume of bets cannot be discerned just by looking at advertised odds, and are only known to the bookmaker, but it can be inferred through the movement of the odds, which react to volume not bet count.
After 550,000 euro bet at 4/11, Hillary Clinton now 1/3 to win US election with Donald Trump at 5/2. #ClintonVsTrump-- William Hill (@sharpeangle) October 8, 2016
In relation to US-election betting, the concern of a big enough crowd can safely be ignored given the fact it is expected to break all records for political betting. However, the wisdom of the opinion demonstrated through those bets will be augmented by the experience and knowledge of those person placing them. If it is an experienced US-election bettor, or someone with access to privileged information, it has much more weight that a wealthy casual fancying a large punt. But is that the case here? It isn't widely known but the majority of modern bookmakers profile their customers. If a customer shows signs of being sophisticated or consistently winning, their betting limits will be severely limited or their account closed. This practice has the potential to diminish the collective wisdom of that betting crowd, as does diversity.
Ladbrokes' customer in Exeter has just a 100k bet on Clinton. Latest odds: 1/4 Clinton 3/1 Trump https://t.co/VEH8E684p0-- Ladbrokes Politics (@LadPolitics) October 10, 2016
A Diverse-Enough Crowd
Diversity is a key factor that can impact the accuracy of election-betting odds and is a critical factor in the US presidential election. For the average of opinions on the US-election odds to be truly accurate, those opinions have to be representative of the electorate. Though gambling is heavily regulated in the USA many states offer opportunities to gamble but none can legally offer odds on national or local elections (to avoid manipulation and rigging) and equally it is illegal for US citizens to bet outside of the US. This should mean that the betting activity driving the US-election odds is being driven by bettors from outside the population whose opinion won't count in the actual US election. That would naturally cast some doubt over the efficacy of this vox populi because the sample group - the voice being expressed - can't be assumed to be correlated to the voting behaviour of US citizens. The reality, however, is that despite large-scale prohibition, gambling is still thriving in the US with estimates for sports betting in 2015 put at $145 billion - with only a fraction of that within sanctioned onshore operations.