Prediction Markets: What happened on election night in 2004?

Prediction Markets / The Predictor / 15 February 2008 / Leave a Comment

The Predictor takes a look at Betfair's prediction markets at their very best - the US Presidential election between Bush and Kerry in 2004...

Click on the above image to see full screen shot

On the night of November 3rd 2004 George W Bush was fighting his re-election battle against Democrat John Kerry in what was a tightly fought race. The problems of exit polling that night have been well documented, with conspiracy theories branded about all over the shop - how could Kerry have had such large leads and gone on to lose?

The story of the night from a prediction market point of view, however, was that while CNN had Senator Kerry leading Bush, the Betfair market gave the incumbent president a 91 percent chance of victory. That's right, you read correctly... At 12.21am, the time of the above screenshot from CNN.com, the odds on Betfair gave an implied percentage chance of 91% in favour of Bush. That, in anyone's books, is a stunning difference in opinion.

But how did the market get it right? A criticism of Betfair's prediction capability in terms of American events is that since we do not accept customers from the US itself then the advantage of insider knowledge (ie, people involved in the goings-on first hand) is lost. Nevertheless, on this occasion in 2004 the market got it undeniably right before everyone else.

The polls themselves are often a key source of information that move the markets around, but on this occasion the markets were moving in direct opposition to what polling information was telling punters. The 8,000+ people trading on the market were getting it right to the most frightening accuracy.

This is, undoubtedly, one of the best examples of the power of prediction markets, but there are many more that we will discover in the coming weeks.

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