Prediction Markets
One could argue that prediction markets are better than opinion polls because prediction markets respond to all factors relevant to an election. While opinion polls try to anticipate the behavior of likely voters on election day, prediction markets consider voting practices and contingencies as well as voter intentions. Prediction markets can also reflect voter demographics and economic conditions.
Well-designed prediction markets provide relevant, up-to-date information, responding to all events in the public sphere. If a candidate gives an especially good speech or convention events play well in the media, prediction market prices respond. If a candidate misspeaks or says something that reflects poorly on his or her character, that, too, can move prediction market prices.
Anything known to the public can affect prediction market prices. That includes what traders learn from the media, what they hear from pollsters, analysts, and pundits.
A believer in efficient markets might say that political prediction markets reflect collective information across all people willing to place bets on the outcomes of political contests. Prediction markets reflect the wisdom of the crowd.
On Friday, October 9, 2020, about a month before the presidential election, Tom Miller was interviewed for Digital Planet, BBC World Service. Tom described election forecasts based on prediction markets. Portions of that interview were broadcasted on Tuesday, October 13, 2020. Here is the recording of that broadcast:
The Iowa Electronic Markets, a collection of nonprofit prediction markets at the University of Iowa, began as an experiment in 1988 with permission from the Commodity Futures Trading Commission (CFTC). During its first year of operation as a real-money prediction market, it was open only to University of Iowa students, faculty, and staff. Subsequently it was opened to adult traders worldwide. Iowa Electronic Markets include aggregate markets for congressional and presidential elections. The presidential election has winner-take-all and vote-share contracts. Each trader has a total trading limit of $500 across all contracts/markets. This limits the influence of any individual trader.
PredictIt was licensed and available for the entire 2020 election cycle. But on August 2, 2022, the Commodities Futures Trading Commission (CFTC) ordered the PredictIt market to close by February. 15, 2023. That order is under appeal.
While under appeal, a small number of PredictIt markets have be made available during the 2024 election cycle. Each trader has a total trading limit of $850 in each market/contract. As with the Iowa Electronic Markets, this limits the influence of any individual trader.
Polymarket is a decentralized, prediction market build on the Ethereum blockchain network. Polymarket allows worldwide investors to buy and sell future-event contracts using USD Coin (USDC stablecoin) cryptocurrency. Polymarket does not have a CFTC license to operate in the United States, and in January 2022, Polymarket was issued a cease and desist order by the CFTC. But this has not stopped US-based investors from using Polymarket. .
A major limitation of Polymarket is technology. Prior to placing their bets, investors must set up a cryptocurrency wallet for exchanging US dollars for cryptocurrency and for making deposits and withdrawals. Polymarket Learn provides user training for Polymarket.
With Polymarket, there is no limit to the amount that can be invested in any prediction market/contract. As displayed on the Polymarket leaderboard, there are individual Polymarket investors holding positions in the millions of dollars.
When selecting a prediction market data source for predicting the 2024 presidential election, we considered these key factors:
- Licensed by the CFTC for operation in the United States
- Participation by US-based investors (primarily)
- Ease of trading in US dollars
- Liquidity, ease of deposits and withdrawals 24/7
- Trading volume (large numbers of shares traded daily)
- Limits on individual market/contract investments
An additional consideration in the race for the US presidency was availability across the entire election cycle, across changes in the candidates running for office.
Polymarket is not a trustworthy data source for election forecasting because there is no dollar-limit on market/contract transactions. The prediction markets of PredictIt have much higher trading volumes than the prediction markets of the Iowa Electronic Markets. Accordingly, The Virtual Tout® selected PredictIt as the data source for the 2024 presidential election. In particular, we selected the PredictIt market/contract for the party that will win the 2024 presidential election.
Prediction surveys from The Virtual Tout® are a substitute for prediction markets. Like political polls, prediction surveys are not subject to CFTC regulation. But prediction surveys are expensive because they reward survey participants for correct predictions.
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