Subscriber Benefit
As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe Now
With another election just around the corner, political junkies want tools to predict winners. Pre-election polls are a traditional crystal ball. Unfortunately, they are becoming less reliable. Most all the polls missed Donald Trump’s upset victory over Hillary Clinton in 2016. The slow death of land-line phones makes it easy for likely voters to evade pesky pollsters.
However, there is another source of information: online event markets. In an event market, those who think they know the future put their money where their mouth is. Participants place real bets on election outcomes.
Here is how it works: Suppose you are convinced that Governor Bladermaus is certain to be re-elected. You go online today and buy a Bladermaus-win contract that pays you a dollar if Bladermaus prevails. The price you pay for the contract depends on what other bettors are willing to pay for Bladermaus-win and Bladermaus-lose contracts.
If the price of a Bladermaus-win contract is 56 cents, you pay 56 cents. You are aligned with another bettor who pays 44 cents for a Bladermaus-lose contract. The event site collects a total of a dollar from you and your counterpart. After the election, the site pays the dollar to whichever one of you wins, minus 10 percent of the winner’s gain. If Bladermaus wins, you collect $1 minus 4.4 cents, or 95.6 cents. Winners’ commissions pay for the operation of the site.
Now suppose Bladermaus falls flat on her face in a debate with her opponent. The willingness of bettors to offer Bladermaus-win contracts at 56 cents evaporates and the price of those contracts falls. The magnitude of the decline in the price is an indication of just how poorly she performed. Prices of Bladermaus-win contracts constantly adjust as new information relevant to the race is digested by event-site bettors.
On election night 2016 at6 p.m., one could buy a Clinton-win Pennsylvania contract for 86 cents. Trump ended up winning the Keystone State. Major news organizations didn’t make the call until 3:06 a.m., but the Clinton-win contract began declining after the Pennsylvania polls closed at 10 p.m. The Clinton-win contract was at20 cents by 11:30 p.m. and2 cents by 1 a.m.
Event sites give the political junkie a continuous pulse on the likely outcome of an election. More to the point, they are probably more reliable than the talking heads who clutter the airwaves.•
__________
Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
Please enable JavaScript to view this content.