Betting Markets Mean Hillary Is Still The Overwhelming Favorite
Increased attacks are always greeted as evidence of fear during a political campaign. This is especially the case when a so called favorite is “attacking” an underdog.
As a Hillary Clinton supporter, my increasing criticism of Bernie Sanders is apparently evidence of my fear of him according to his supporters. This is in spite of me correctly predicting Iowa very early on in the primary process and New Hampshire.
My confidence in Hillary and scorning of Bernie is because of the delay of the inevitable that are causing the party and our presumptive nominee to burn through precious resources and take unnecessary hits. This surety in Hillary is not due to history,endorsements nor conventional wisdom. Though illicit by society’s standards, it derives from a much more concrete basis not often recognized by pundits and journalists.
Studies show betting markets tend to be better at predicting elections than polls. The reasoning includes bettors taking into account more important factors besides polls. Unlike pundits, bettors put their money where their mouths are. People involved in the event tend to trade on the event before news breaks publicly. Finally, in an era where the public and people are regarded as unintelligent or easily led, the wisdom of crowds is overlooked.
The “Wisdom of Crowds”
The Navy learned about this principle 40 years ago when the nuclear attack submarine Scorpion became lost in the North Atlantic. The search was unsuccesful until a Navy man named John Craven assembled a large group of people, from deckhands to captains, and asked them many different questions that would help predict the location of the lost submarine. He didn’t just ask them what they thought, he asked to them to bet on it.
Craven gathered those bets and created a map of the ocean floor. The submarine was just 220 yards away from where the highest concentration of bets said it would be. It wasn’t anywhere near where the Navy had been looking. More recently, officials in the Department of Defense wanted to use the same principle to set up betting markets that would predict where and when the next terrorist attack would take place but were rebuffed.
Robust Efficient Markets Are Leading Indicators
The best betting markets have a lot of trading in order to demonstrate efficiency of the market. Overseas, regulations are less onerous, and many betting markets don’t accept American traders due to strict regulations; however, PredictIt.org has been allowed by the Commodity Futures Trading Commission.
Markets have candidates’ shares traded just like stocks in the market, and the prices that result tell you the probability. Bookies are similar, but the prices are not set by a market. This makes them more random as oddsmakers often are only willing to take one side of the bet, and the “cut” is generally greater. Again, the key is having enough trading to give reliable odds?
Precision of Odds
The average bid-ask spread is roughly 1%, meaning that a difference of less then 1% should generally not be viewed as significant. For example, John Kasich may have a “bid” price of “50” and an “ask” price of “25”. In other words, the bid is (1/50)=2% and the ask is (1/25)=4%. It seems logical that the implied chance is the average: 3%.
When liquidity is very low, normally for a candidate whose chance is so low that almost nobody is bothering to trade on the person’s chances, you might see a wide bid-ask spread. In the most extreme possible case, the bid might be 1% and the ask 99%. In that case the average would compute as 50%, which would be pretty clearly misleading for a candidate so obscure that nobody bothers to trade.
To solve this problem, electionbettingodds.com, in cases where the bid-ask spread is greater than 10%, uses the bid alone because it provides a solid lower-bound. In cases where the bid is greater than 50% and the bid-ask spread is greater than 10%, the ask alone is used. (These cases are extremely rare; the average bid-ask spread is around 1% and nearly all the time all of the candidates’ spreads are well under 10%.)
You may disagree with these predictions, but odds are that the crowd is right. My criticism of Bernie and his followers are only because they are making things harder for Democrats in an election we should easily win as we have by far the strongest candidate. As it stands, as of the time of publication, bettors still see Hillary as the overwhelming favorite to win the Democratic nomination and take the presidency. I’ll take that to the bank.