Prediction

Something’s Odd About the Political Betting Markets

Prediction markets took a lot of heat for their prediction on Brexit (holding steady with a predicted probability 25 percent during the week leading up to the vote while polls did not flip from “Leave” to “Remain” until the final day). Probabilistic predictions can and will “fail, ” but it is good to understand why this is happening. Prediction markets have a strong track record and people trust them. And that actually may be the problem right now.

Prediction markets are real-money exchanges that allow people to buy and sell futures contracts on upcoming events. They have a long and colorful history; $10 million was wagered on the 1916 election (about $220 million in 2016 dollars), or $12 per vote actually cast. Prediction markets lay dormant in the United States for a few decades before coming back with the Iowa Electronic Market (a small academic exchange), gaining fame with Intrade (an Irish-based exchange that lured U.S. traders before the Commodity Futures Trading Commission shut it down), and now carried forward by Betfair (a massive publicly traded company) and PredictIt (a legal U.S. exchange).