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Think Politics Is a Game? This Is How You Gamble on the 2016 US Presidential Election

If you want a better read on who is likely to win the presidency next year, disregard the blizzard of polling data. Political prediction markets are your best bet.
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We're at the point in the US presidential campaign where it can feel like everyone, from your grandmother at the holiday dinner table to the people on your Facebook newsfeed, has a strong opinion about who is going to win next November. But those who have bet money on who will be living in the White House in 2017 are not looking at the latest poll numbers — they're looking at prediction markets.

"Prediction markets have proven to be much more accurate in terms of predicting the ultimate outcome, rather than just today's flavor," said Dr. Emile Servan-Schreiber, a leading expert on the subject and founder of the prediction market Hypermind.


Online prediction markets work like commodity futures trading, with investors wagering money on the likelihood that a future event will take place, political or otherwise. By buying and selling "yes" or "no" shares, they can bet on anything from whether Obama will close Guantanamo by the time he leaves office to who will win the Republican nomination for president. If the event comes true, all the "yes" shares you bought pay out at $1, and all the no shares at 0. Corporations use them to forecast sales. The US Department of Defense even once suggested using a futures market to predict terrorism following the 9/11 attacks. (The Pentagon quickly scrapped the proposal after it provoked widespread criticism.)

The lure of prediction markets for politics seems pretty clear, given that they've been shown to be accurate forecasting tools. The prediction market Intrade, for instance, correctly called the outcome of the 2008 presidential election. In the 2012 presidential election, it got 49 out of 50 states right.

Servan-Schreiber explained that the accuracy of prediction markets comes from the theory of the "wisdom of the crowd," which holds that collective knowledge aggregated from a group of people is likely to be more correct than that of a single person.

Just as on Wall Street, the price of a candidate's stock fluctuates in real time as people buy and sell shares in response to outside events. Think Carly Fiorina did really well in that last debate? Buy up her shares! (You might want to think twice about that, though, since she's currently trading at a measly $0.01). Think Trump's racist comments are going to hurt him with primary voters? Sell, sell, sell!


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The disparity between prediction markets and polling data is stark, especially in an election as unpredictable as this one.The most recent national Qunnipiac poll shows Donald Trump leading the Republican pack by double digits. But the latest prices on Predict It, which Politico dubbed the "stock market" for politics, show Marco Rubio in undisputed first place, with his stock currently trading at $0.44 compared to Trump's $0.21. This suggests that Rubio has about a 44 percent likelihood of winning the Republican nomination while Trump has a 21 percent chance. Predict It shows Ben Carson currently trading near the bottom at $0.03, with a three percent chance of winning the nomination, even though Qunnipiac ranks him third.

The considerable gap between poll numbers and prediction markets is because the latter shows the outcome that is most likely to happen, rather than simply reflecting who people say they might vote for. In other words, Servan-Schreiber says, prediction markets "make you think with your brain, rather than respond with your heart."

But because online gambling is illegal in the US, prediction markets that use real money exist in a hazy legal zone. The federal government cracked down on political prediction markets in recent years out of concern that they could influence electoral outcomes through sheer force of money. The US Commodity Futures Trading Commission outlawed prediction markets in 2012, arguing that political prediction markets could "have an adverse effect on the integrity of elections" by "creating monetary incentives to vote for particular candidates even when such a vote may be contrary to the voter's political views of such candidates." Intrade, then the biggest exchange, was shut down shortly thereafter.


Most prediction markets that use real money are based outside the US and don't allow American to participate, but two notable exceptions exist that are subject to heavy restrictions, including age limits, identity verification, and caps on the number of people who can place bets. US traders can bet on Predict It, which is run by Victoria University of Wellington in New Zealand, but are limited to a cap of $850 per bet. They can also use Iowa Electronic Markets, an exchange run by the University of Iowa that is subject to a similar cap of $500 per bet. Some sites, like Predictious, have attempted to skirt regulations by operating with bitcoins or having participants use fake money and then awarding prizes for winning bets.

Prediction markets are increasingly attracting individuals who don't necessarily fit the mold of a political insider. Zach Long is a 24-year old financial analyst and former derivatives trader who is betting on who will be the Republican presidential nominee using Predict It. Long, like many people who bet in prediction markets, is no political expert. He sees it mostly as the latest form of online poker or fantasy sports betting. "I have very little directional political views," he said.

Miles Markstein, a 28-year old bartender in New Orleans, is also wagering on the Republican primary. He says he made almost $1,000 in the 2008 and 2012 elections, and his reasons for doing it were simple: "I was able to predict things pretty well politically, I love gambling, and, you know, I had some extra money."


The role of political prediction markets is "becoming bigger with every election cycle, there's no question about that," Servan-Schreiber remarked. "Prediction markets are very much a mainstream thing now. A while ago it wasn't the case at all."

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Bettors can even employ tactics such as arbitrage, shorting, or hedging. That's exactly what Long did after the second Republican debate, when Fiorina's performance was widely praised. He bet that she wouldn't be able to maintain the momentum, so he "shorted" Fiorina's stock, which he said had tripled over the course of the debate" but quickly came tumbling back down, just as he had anticipated.

Eli Dourado, an expert on technology and internet governance at George Mason University's Mercatus Center, said that prediction markets present a "decentralized intuition" from all the participants, which provides "a better outlet to get unbiased information, without the spin from the campaigns." But while prediction markets might be better than polls and pundits when it comes to getting things right, they're not a perfectly unbiased tool.

Traders can theoretically manipulate the numbers by buying up massive amounts of a candidate's stock to bolster their standing. But the market was able to self-adjust in previous cases of possible price manipulation — as happened in the 2012 election, when a few mystery traders bought a massive chunk of Mitt Romney's stock, causing it to surge for all of six minutes before it came back down to its original price. Something similar also occurred in 2008, when John McCain's stock price briefly spiked due to suspicious trading activity after a debate with Obama, but then resettled a couple of days later.


According to Servan-Schreiber, the invisible hand of the market can be trusted to counter manipulations. If anything, he said, "it just makes it more efficient to have fools with lots of money inside the market."

Economists Paul W. Rhode and Koleman S. Strumpf studied manipulations in political futures markets and arrived at the same conclusion. While prediction markets are sensitive to minor fluctuations from rogue traders pumping in cash, they said, there was little evidence that such exchanges can be "systematically manipulated beyond short time periods."

Then there's the influence of money in campaigns through donations and super PACs, which some proponents of betting markets say is more of an issue.

Considering the hundreds of millions of dollars already pouring into this race, Long said, "it's very hard for me to think how prediction markets could possibly create a conflict of interest."

Follow Olivia Becker on Twitter: @obecker928 Photo via Flickr