I understand the theory behind the claim that election markets might be more useful tools for predicting election outcomes than opinion polls:
- Pollsters ask about current opinion ('If an election were held today, ...'), and election markets focus attention on what really matters: what actually happens on election day.
- Poll respondents have essentially no incentive to tell the truth, while election market participants have a direct financial interest in revealing their subjective beliefs about election outcomes.
These are not-insubstantial arguments. So when the people behind the UBC election stock market started their 1997 federal election market, I joined in.
I was soon disabused of my preconceived notions. For one thing, the people participating didn't seem to understand how the market worked. Payoffs were allocated for the share of seats won in the House of Commons, but prices tracked national poll numbers almost exactly. Now, anyone who knows anything about Canadian politics knows that vote shares do not correspond to seat shares. But the election market didn't.
Then there was the day when I was trying to translate prices into seat forecasts, and couldn't understand the numbers I was getting. It eventually dawned on me that the reason the math didn't work out was that the bid and ask prices didn't satisfy the no-pure-arbitrage condition. Worse, this happened pretty much every day.
I ended up doing very well cashing in on those arbitrage opportunities (hey, somebody had to do it) and by betting on the Bloc Québécois (their national vote share underestimated their share of seats). But the experience left me somewhat jaded about the merits of election markets - in Canada, anyway.
There are at least two reasons for thinking that election markets should not be taken seriously as indicators for outcomes:
- Participants regard the market as a casino, and treat it as such. Betting $20 on your party's victory is essentially the same thing as betting $20 on your football team's victory next weekend. When that money is put in the market, the
investorbettor doesn't really expect to see it again.
- The markets are way too thin - at least in Canada. It's so easy to generate headline-inducing movements that it's hard to believe that no-one wouldn't try.
So it was with some dismay when I saw yesterday that Andrew Coyne saw fit to bring attention to this election market as evidence that the federal Conservatives might be likely to win the election that may or may not be held this fall. The trouble was - as I noted at the time - it would have cost about $30 to send the implied probability of a Conservative victory to 100%. Since then, no trades have occurred, but blocs of bids and offers (in nice, round quantities - no hint of co-ordinated activity here!) have been placed as tripwires around the last closing price.
It would appear that both sides have deployed the resources necessary ($164 between them) to make sure that we don't see any more media stories with the theme 'The Election Market Speaks'.
I'm hoping that they succeed. But I'm not betting on it.