February 9 Betting markets and the genius of punters
Centrebet is paying $1.90 for a Labor win and $1.80 for a Coalition one. These (I think) are shortest Labor odds (ie longest Coalition ones) since around September/October 2001. Andrew Leigh has a lot to answer for. This “the betting public is better at predicting election results than opinion polls!” shtick has become a standard roll-out for journos and commentators; SMH today two pieces on or alluding to it. (See also Simon Jackman’s take.) You know, the punters, who had the Coalition at over $3.00 in early 2001, but changed their minds when the government took the lead in opinion polls later in the year. Not too bright in early 2001 (or for most of the 2005 WA campaign), were they? Or the dills who on New Zealand’s election day in 2005 had the Nationals winning? All these positions were based, mainly, on whatever the polls said at the time. The punters are sheep who reflect the current received wisdom, which is usually correct, but sometimes wrong.Â B-a-a-a-a-h. I’ll follow my own judgement, thanks.
Justin Wolfers and I have two papers now in which we show that in Australia, the betting markets are better predictors of election outcomes than the polls. Internationally, others have published maybe two dozen papers showing the same thing. The betting favourite doesn’t always win, particularly when the two parties are closeÂ (the answer to the NZ 2005 example is simple: a party with a 45% chance still wins about half the time). But I am aware of no paper that finds that the polls outperform the betting markets as a prediction tool (which is what you’d find if betting markets just followed polls).Â
Moreover, experts do even worse than the polls. The Sunday prior to the 2004 election, the Sunday Tele surveyedÂ 10 electionÂ experts, and found thatÂ three thought Latham would win, while seven thought Howard would win, but with a smaller majority than in 2001.Â None forecast the true result â€“ a Howard victory with an increased majority.
Given what I regard asÂ overwhelmingÂ academic evidence in favour of betting markets as a prediction tool, perhaps I should turn the question back on those who think that newspapers should give more prominence to polls andÂ expert forecastsÂ thanÂ betting odds. Is your position based on faith, or is there evidence beyond what we’ve so far produced that would persuade you to change your mind?
* I would’ve made this point on Peter’s blog if it allowed comments.