Prediction Markets / Mike Robb / 29 February 2008 / Leave a comment

What are prediction markets? Why use them? What do they mean to me? All your questions answered...

Hands up anyone who knows what a prediction market is. The Independent newspaper clearly does but for those who don't, Betfair is a prediction market with a strong record of picking the correct outcome in an election way before any opinion/exit poll or news outlet you'd care to mention.

How?
Betfair is a betting exchange where people bet against each other, not against us as a bookmaker. So just like any stock exchange, the market always decides. Just as the buyers and sellers on a stock market use external events to determine a price, on Betfair buyers and sellers use external events to determine what they think will be the outcome of the market (or event) that they are trading on.

Why does it work?
The science of why Prediction Markets work is well documented but in a nutshell it is this. If you have enough people, with diverse opinions, all operating independently of each other, then the collective 'wisdom of the crowd' is consistently more reliable than the opinion of any individual.

The samples in opinion/exit polls are too small (say 1,000 people) and those questioned don't have any extra motivation to be right - they are purely talking about what they want to happen. On their own, polls aren't accurate enough.

In a betting market or a stock exchange, many thousands of people have a vested interest in trying to be right and for that reason their nationality is irrelevant. They take their information from all available sources - some of those sources not available to the wider public - and their opinion is what they think will happen.

Example: The Independent, 27th February 2008

The numbers on the graph above indicate events as picked out by the Independent's editorial team. Number eight, for example, shows the moment Patti Solis Doyle resigned as Clinton's campaign manager and the resulting downturn in Clinton's chance of securing the nomination on Betfair.

There are numerous examples where Betfair's traders tell a different story to that of opinion polls and the media. Our customers were calling California's Democratic Primary as a win for Clinton a full 2½ hours before the US TV networks who were caught out by some early victories for Obama.

Similarly, on election night in 2004, while CNN were broadcasting exit polls showing Kerry leading Bush by 52% to 48%, the Betfair markets favoured Bush to win by 91% to 9% - and we all know how that turned out.

Betfair's markets often paint a very different picture. In this case it would have been a scoop for any news outlet to have presented a polar opposite view, one that in this case turned out to be emphatically correct.

What Betfair can offer is the Wisdom of the Crowd... And an 'on-demand' method to represent it visually.

The Betfair exchange has over 400,000 'experts' who actively put their money where their mouth is and our political markets see tremendous activity and liquidity. The Next President market has nearly £1m matched in it, the Democratic Candidate market has seen over £2.2m matched - more than enough for us to 'know' that the Presidential election will be between Obama and John McCain but...

...as everyone else knows, a week is a long time in politics. Anything can happen between now and then, and our market will react immediately (while Mr MORI and Mr Gallup are still tucked up in bed) and we can provide a visual representation of that data.

With the crunch Texas and Ohio Primaries coming up on Tuesday you can be sure the Betfair traders will be at it all night trying to maximise their return, resulting in some hot predictions. Will Hillary finally be finished off? Betfair will be the first to tell you.

And it's worth rememebring that what we offer extends beyond the US Presidentials - we will have the only reliable prediction market in the run-up to the London Mayoral Election in May. So while our competitors will be guessing, Betfair can say with certainty who's really ahead.

Contact Mike Robb for more information

Betfair Politics Zone

Tags: Barack Obama, election odds, Hillary Clinton, Independent, John McCain, Ohio Primary, politics betting, prediction exchange, prediction markets, Texas Primary, US Presidential elections