Political prediction markets are exchanges where investors bet on the likelihood of a political event happening.
The markets are binary, and the price at which investors are trading reflects the probability that investors assign to that event. If an event is trading at $0.60 per share, investors believe that there is a 60% chance of that event occurring. If the event ultimately occurs, the share closes at $1. If it doesn’t occur, the share closes at $0.
For example, if Jane Socialist and John Capitalist are running against each other for dogcatcher, the price of Jane Socialist and John Capitalist will reflect the likelihood that traders assign to their respective chances of winning. If shares of Jane Socialist are trading at $0.55 and John Capitalist is trading at $0.45, the markets believe that Jane Socialist has a 55% chance of winning while John Capitalist has a 45% chance.
If a gambler believes that Jane Socialist will win and buys $100 worth of Jane Socialist shares, he will end up with $145 if Jane Socialist does, in fact, win the election. But if John Capitalist wins, the $100 investment will go down to 0.
Of course, the gambler is free to buy and sell his shares any time before the actual election. If a news report is published accusing John Capitalist colluding with Russia, share of Jane Socialist would probably increase, while shares of John Capitalist would decrease, giving bettors an opportunity to cash out or cut their losses.
Political prediction markets are of value not only to traders, but also to those who can analyze trends in the markets and leverage this information to gain a profitable edge.
The idea that political prediction markets convey information can be traced to Nobel Prize winning economist Friedrich Hayek. In a paper on “The Use of Knowledge in Society” Hayek observed that market prices reflect the combined knowledge of relevant facts that are dispersed among many people.
The insights that can be gleaned from political prediction markets—which is to say, the collective wisdom of traders with strong financial incentives to accurately forecast the future—are often more informative in making forecasts than other sources of information such as expert opinion or polls.
This site is intended primarily for three audiences:
- Those who are interested in making money from political predictions and are seeking information on the online market PredictIt;
- Those already trading on PredictIt who are looking for opportunities to increase their returns;
- Those who are interested in learning how to leverage and monetize information gleaned from political prediction markets.