Business and financeButtonwood's notebook

Should we have faith in the predictive power of gambling markets?

GAMBLERS seem to think Donald Trump is a 3-1 outsider to win the election on Tuesday. The Predictit market has Hillary Clinton on 77% (where 100% is certainty). But what does that really tell us? On June 21, two days before the British referendum on the EU, Betfair was implying odds of 75% for Remain and 25% for Leave. This was despite quite a large number of polls that showed Leave ahead. As we know, Leave won 52% to 48%.

The idea of looking at betting markets is that “smart money” can assess all the information far more efficiently than opinion pollsters or newspaper columnists. It’s efficient market theory for politics. But what are the gamblers assessing? They are looking at the same poll as everyone else. in the EU referendum, some people seemed to believe that despite the polls, a status quo bias would ensure that Remain won (such a thing had been seen in previous referendums). But that wasn’t the case. Instead, as I feared in my Continue reading

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