Betting (or prediction) markets allow people to bet on the outcome of elections and thus aggregate people’s expectations of what will happen on election day.

Forecast accuracy of betting markets

Evidence on the accuracy of betting markets for forecasting elections is mixed. Evidence from different countries and elections shows that markets often provide more accurate forecasts than established benchmark methods such as polls, quantitative models, and expert judgment (Graefe, 2017a). However, an analysis across the four US presidential elections from 2004 to 2016 found that the Iowa Electronic Markets popular vote forecasts were less accurate than the RCP poll average, expert judgment, and citizen forecasts (Graefe 2017b).

Betting markets in the PollyVote

We are aware of two betting markets for forecasting the national popular vote in U.S. presidential elections, namely

  1. the Iowa Electronic Markets (IEM) and
  2. Predictit

PollyVote calculates the simple average of the daily forecasts from both markets to generate its betting markets component forecast.

History of betting markets

Betting markets are often thought of as a relatively new forecasting method. Yet, such markets have been around for at least half a millennium, long before the emergence of scientific polling. The earliest account of political markets dates back to 1503, when betting on who will be the next pope was already considered old practice. In the US, political betting was common in the 19th, where public bets on a candidate were considered a sign of support. However, the heyday of election betting was between 1884 and 1940, when large-scale markets on presidential elections were operated. These markets not only provided accurate forecasts of the election outcome in an era before scientific polling, they were also widely popular among investors and journalists alike. At certain times, the trading volume in these markets exceeded that in the stock exchanges on Wall Street and major news outlets such as the New York Times, Sun, and World reported the betting odds as forecasts of the election outcome on a nearly daily basis.

References

Graefe, A. (2017a). Political Markets. In Kai Arzheimer, K., Evans, J., and Lewis-Beck, M. S. (Eds.): The SAGE Handbook of Electoral Behavior, London: Sage Publications, pp. 861–82.

Graefe, A. (2017b). Prediction market performance in the 2016 US presidential election. Foresight: The international journal of applied forecasting, (45), 38-42.