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Since the beginning of human history, people have made wagers with one another on events. Organized and impersonal betting markets have a long history. Just as prices from markets for products inform us about the relative degree of scarcity, data from gambling contracts tell us about what people are thinking about important events. We can imagine a lively market in ancient Egypt about whether and when the Pharoah will allow the Hebrews to leave!
A modern version of such markets is the various online political-event markets. Who will be the Democrats’ vice presidential nominee? Suppose you think it will be Transportation Secretary Pete Buttigieg. At the time of this writing, you can buy a contract for 5 cents that will pay you $1 if the former South Bend mayor becomes the vice presidential nominee. On the other end of the bet, someone is paying 95 cents that the Democratic Party will nominate someone other than Buttigieg, and the bettor will receive a $1 payout if that occurs. The online provider extracts a 10% fee on the winner’s gains, so you will only get 90.5 cents if you win.
Thousands of these $1 contracts change hands every hour, and the price of the contract rises and falls depending on the bids of buyers. Suppose presumed presidential nominee Kamala Harris indicates she wants someone representing the LGBTQ community to be a running mate. We’d expect the Buttigieg contract to soar.
So why would the price of these contracts be of interest? It goes back to the “wisdom of the crowd.” In a famous example in England in 1906, individuals could enter a contest guessing the slaughtered weight of a fat ox. Although most individual guesses were wrong, the middlemost estimate was less than 1% from the actual weight.
While we were writing this column, President Biden dropped out of the presidential race. Did this improve or reduce Donald Trump’s chances of winning the presidency? A Trump “win” contract sold for 64 cents three hours before the Biden announcement. The hour of the announcement, it dropped to 61 cents (on a large volume of trade!) and hovered around 60 cents the next day.
Of course, some think it is untoward to bet on democratic outcomes, and some see gambling as a vice that should be prohibited. However, data from prediction markets gives us information. We’d love to see what the frogs did to the ancient Hebrews’ odds of the Exodus!•
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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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