Can we trust political betting markets?

A version of this article was first published in The Conversation UK

Election Betting

Records of the betting on US presidential elections can be traced back to 1868. Since then, no clear favourite for the White House had lost before 2016, except in 1948, when the 8 to 1 longshot and sitting president, Harry S. Truman, famously defeated his Republican rival, Thomas E. Dewey.

In 2016, the exception was repeated when Hillary Clinton, trading at 7 to 2 on (equivalent to a win probability of about 78%) as polls opened, lost in the electoral college to Donald Trump. In so doing, Trump defied not just the polls and the experts, but the “wisdom of the crowd” as displayed in the betting markets.

Trump achieved this by converting a near 3 million vote loss in the popular vote into a victory by 77 votes in the electoral college. In a larger sense, it might be said that crowd wisdom was trumped by the arcane US electoral system.

There was a similar consensus in the run-up to the 2020 election that Trump would lose – but the degree of confidence displayed by the markets and the models diverged markedly. To illustrate, Sporting Index, the spread betting company, announced it thought Joe Biden would win with between 305 and 311 electoral votes as the polls opened on election day, with Trump trailing on 227 to 233 electoral votes.

Taking the mid-points of these spreads, this equated to a Biden triumph by 308 votes to 230 in the electoral college – a majority of 78. Similar estimates were contained or implicit in the odds offered by other bookmakers, betting exchanges and prediction markets.

Forecasting Models

Meanwhile, other major forecasting models were much more bullish about Biden’s prospects. Based on 40,000 simulations, the midpoint estimate of the model provided by Nate Silver and FiveThirtyEight put Biden ahead by 348 electoral college votes to 190 for Trump, a margin of 158. The New Stateman model made it 339 votes to 199 in favour of Biden. The Economist’s model was even more lopsided in favour of Biden, estimating that he would prevail by 356 electoral votes to 182. Taking the unweighted mean of all three forecasting models, Biden was projected to win 348 votes in the electoral college to 190 for Trump.

The other go-to place for expert opinion with a long track record of solid performance (except in 2016) is Sabato’s Crystal Ball based at the University of Virginia’s Center for Politics. It was projecting Biden to win the electoral college by 321 votes to 217. The PollyVote project goes a step further, combining information contained in betting markets with forecasting models, experts and beyond. It forecast a Biden victory by 329 electoral votes to 209.

Last bets please 

When the dust had finally settled, literally and figuratively, Biden ended up with 306 votes in the electoral college to 232 for Trump. As such, the betting spreads were almost spot on. In fact, both these numbers were within the spreads offered on election day.

What this tells us is that the betting and prediction markets, which respond to the weight of money traded on each candidate, and are informed by considerable professional insight, recovered in 2020 a reputation dating back to at least 1868, and in the case of the Papal betting markets as far back as 1503.

Interestingly, a couple of weeks after declaration of all election results, Trump still merited a 7.8% chance of clinging on to office, according to the betting exchange trading. This factored in all the ways he might seek to reverse the declared results. January 6th was still a little while off. 

I asked at the time whether it was likely that he would prevail over all established custom and evidence. Not at all, I ventured. Was it possible? Yes, I thought it was. In the event, 7.8% was, at the time, probably about right.