It can be tough to know what to make of events as they happen on election days.
In New Zealand, the task of working out who is winning is fairly simple. Working out who will form the next Government is a matter of the party vote, one or two electorate results and taking a view on how post-election negotiations play out.
But working out who is ahead in a US Presidential election, on the day, is another matter entirely.
The arcane rules of the Electoral College system differ in each state. In effect, US presidential elections are really 50 state elections run simultaneously. If the race is tight in any of the six “swing states,” knowing who has the advantage at any moment is a headache.
This is where prediction markets help.
Throughout Wednesday afternoon and evening, as CNN’s Wolf Blitzer explained the minutia of county-level votes, live data from UK prediction market Betfair gave up-to-the-second forecasts of who will be President. It was a rollercoaster ride. Early votes favoured Trump, but later votes swung for Biden. At the time of this newsletter, Biden is 93% likely to be the 46th President, according to Betfair.
So how does Betfair work?
Betfair is based on the trading of digital “shares.” Each share pays $1 to its holder if a certain event occurs. For example, shares for Joe Biden pay $1 if he is elected President. If Trump wins, Biden shares pay $0.
The trading of shares between willing buyers and sellers produces a market price. That price is a prediction, the crowd-sourced wisdom of millions of people – not the result of any one person’s judgment. Shares in Biden are trading for 93c, meaning he is 93% likely to win.
Using markets to make forecasts might seem surprising, but the system works. Over time, prediction markets have been more accurate, on average, than polls. In these partisan times, decentralised prediction methods build in valuable protection against the biases that so plainly afflict the talking heads on CNN and Fox.
Manipulation can be a problem, but not in markets with very high liquidity. Turnover on Betfair for Next President shares is in the hundreds of millions of dollars. All that skin in the game helps tie the market to fundamentals.
As the US election process continues over the coming days and weeks, prediction markets like Betfair will continue to be a useful, real-time and down-the-middle guide to what is coming. No bets necessary.
If you would like to stay in the loop about our research and our public events, please feel free to sign up to our weekly Insights newsletter.
