Prediction Markets and the Elections

"The 2020 presidential “election is a huge event.  It’s kind of the Olympics of prediction markets,” Sam Kazemian, co-founder of Everipedia, the creator of the prediction market PredIQt has stated.  Such prediction markets, in which individuals place wagers on the outcome of certain events, like who will win the White House on November 3, are increasing in importance, as the new prediction market Polymarket shows.

Polymarket with its slogan “Bet on your Beliefs” launched in Beta form on June 16 and has already claimed over $1 million in trading volume.  A recent $4 million investment will help enable Polymarket to improve upon prediction markets by eliminating their traditional large fees for betting deposits and withdrawals as well as trades in outcome positions.  Polymarket will also simplify technical procedures so that ordinary users with little technical knowledge can benefit from Polymarket’s complex blockchain and cryptocurrency technologies.

Polymarket’s widening and democratization of prediction markets seeks to realize the “wisdom of the crowd” in predictions and other evaluations.  The ancient Greek philosopher Aristotle first articulated this claim in his Politics.  The idea is that collective judgment is superior to any one individual, irrespective of expertise.

Real money wagers on event outcomes give these crowds vested interests in prediction accuracy and create prediction markets that can quickly react and resist manipulation. In a prediction market, purchasable shares have binary outcomes of paying either $1 if an event occurs, or zero if it does not.  Share prices reflect in cents adding up to $1 the designated probabilities of opposed outcomes.  For example, Polymarket shares for the question “Will Trump win the 2020 U.S. presidential election?” recently traded at “Yes” $.36 and “No” $.64, reflecting an estimation that President Donald Trump has a 36 percent chance of reelection, while Augur gives Trump a 55% chance.

As with stock trading, investors make money if their informed analysis reveals that market valuations are inaccurate.  Investors can buy or sell their prediction shares before they expire at the event’s outcome, thereby bidding up or down share prices, in order to maximize gains or minimize losses.  Alternatively, investors can wait for expiration in hopes of a full $1 payout.

former associate of the prediction market Predictit, Flip Pidot has explained online the legality of prediction markets.  They are not gambling sites but register under special futures market provisions, which cap prediction market investments for any one person at $850.  One justification for this framework has been the traditional connection between prediction markets and academic research, as shown by the University of Iowa’s Iowa Electronic Markets prediction market.

Pidot has praised prediction markets for their accuracy (as indicated by pollster Nate Silver’s 538 polling firm citing prediction markets) as well as for inspiring popular interest in civic issues.  Polymarket prediction markets, for example, correctly foresaw events such as Microsoft’s failure to acquire Tiktok and the Democratic vice presidential nomination of Senator Kamala Harris.  Prediction markets actually have a long pedigree, going back to when a group of Wall Street traders created a prediction market to foresee whether the Democrat Grover Cleveland or the Republican James G. Blaine would win the 1884 presidential election.

Yet prediction markets can be wrong, as Trump’s 2016 upset election embarrassingly showed for some prediction markets as well as more traditional pollsters.  Some studies have shown that prediction market participants can suffer from selection bias.  Prediction markets, for instance, draw their participants from cryptocurrency holders, who are 70 percent male, according to a Fortune magazine poll and tend to be white, middle-aged, and possess a bachelor’s degree or higher.

Trump’s 2020 reelection stakes exhibit similar uncertainty among prediction markets.  One of the oldest prediction markets, Augur, with a current betting volume of $65,000, recently showed a 55 percent confidence that Trump would win reelection.  By contrast, Polymarket founder Shayne Coplan has predicted that Vice President Joe Biden will win the presidential race, reflecting the odds at Polymarket. 

Win or lose, Coplan founded Polymarket to get people to “put their money where their mouth is,” as he stated in a recent interview.  In world of political commentators with no personal stake in an election, “at the moment there’s little downside to being wrong; this makes it really hard for regular people to discern what’s fact and what’s fiction,” Coplan added.  As he has stated before, “I don’t really know what to believe these days, and I haven’t for awhile.”

Polymarket is about “information markets,” Coplan explained in his interview, reflecting that he is “obsessed with markets, in all different types of facets.” Polymarket equals “missionaries for market-based journalism” who want to make a “perpetually accurate forecast about the future.”  He has previously argued that with a “market, it distills all the noise and the signal into one, into an unbiased signal.”

Thus called prediction markets a “giant experiment, designed to help people predict the future with a higher degree of accuracy,” an experiment which is also becoming “big business.”  One Financial Times study estimated that in modern presidential elections the average global betting turnover is around 50 percent of total campaign spending.  In 2016, the presidential campaign cost $2.4 billion total.

Such sums highlight the dual wisdom-wealth appeal of Polymarket’s claim that “you can use your insights to make money with the touch of a button.”  Particularly given the volatility that has surrounded Trump’s polls, there is ample room for savvy political analysts to buck the market and make a windfall.  As one Publish0x article noted, an “increasing number of people are choosing to spend their debate nights and election nights on Polymarket.  If things don’t go your way, you might as well get a nice chunk of change out of the deal.”  As John Phillips, CEO of the political consultancy firm Aristotle, has stated:  “Prediction markets are literally the future in politics, media, and finance.  They’re fun, social, viral, and shockingly accurate.”

Image: Polymarket

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