Prediction Markets Have an Elections Problem
Why doesn’t smart money drive out dumb money in election markets?
And now for something completely different - I’m in Asterisk Magazine this week with a very nerdy analysis of why prediction markets seem to do poorly when it comes to predicting political outcomes.
It’s different from the typical fare here, but if you read through it you’ll see some ties to how social media group think can lead to really weird stuff happening - even in supposedly logical and efficient markets.
Prediction markets are having a moment. The mainstream media is increasingly profiling them — see, for example, Bloomberg’s Matt Levine linking to a market on why Sam Altman was fired from OpenAI — and paying attention to what they have to say. Advocates claim that by providing a marketplace for bets on uncertain events, prediction markets give predictors a financial incentive to be correct. If you want a good estimate of what will happen, prediction markets filter signal from noise and cut past pundits with no skin in the game. Money talks and bullshit walks, and prediction markets force people to put that money where their mouth is.
Some of the largest and most notable prediction markets to date have been around elections. The only problem? Prediction markets simply aren’t very good at political predictions. Markets for major U.S. elections are some of the deepest prediction markets anywhere: billions of dollars bet, millions of daily trades, and huge amounts of press. In theory, the larger the market, the more accurate the predictions. But in the markets with the biggest spotlight, we see a lot of strange stuff. Predictions that don’t line up with common sense. Odds that seem to defy reality. Obviously noncredible market movements. To figure out why, we’ll have to explore the underlying mechanisms that make markets work, and why the typical user of political prediction markets may not behave in the ways we expect.
Check out the full article over at Asterisk Magazine!