A political horse race where you can actually bet on the future president

Editor’s Note: During the last presidential election in 2012, economics correspondent Paul Solman reported on the world of political prediction markets. So what is a political prediction market? It’s an online stock market for political races, where people can wager on political outcomes. Think Clinton is going to win? In a prediction market, you can put your money on it. Think the underdog Kasich is going to make a comeback? You can put your money on that too.

For tonight’s Making Sen$e segment, Paul revisited the prediction market scene and met some new players in the field. Intrade, which became popular during the 2012 presidential race, was shut down, and PredictIt, which limits the amount of money you can wager to $850 per market, arrived on the scene with the Commodities Futures Trading Commission’s blessing.

Whether you call it betting or investing, one thing is clear: political prediction markets are surprisingly accurate predictors of presidential races.

Paul sat down with economist David Rothschild, who Making Sen$e first spoke with back in 2012, about PredictIt and the accuracy of political stock markets. For more on the topic, tune in to tonight’s Making Sen$e report, which airs every Thursday on the PBS NewsHour. The following text has been edited and condensed for clarity and length.

— Kristen Doerer, Making Sen$e Editor

Paul Solman: So since the last time we talked, have political markets grown or shrunk?

David Rothschild: Well, since the last time we talked, there’s been quite a change in the political prediction market scene. Intrade, which was the most widely recognized market in the U.S., was shut down shortly after the 2012 election, but PredictIt has come on the scene in its place. PredictIt is directly sanctioned by the Commodities Futures Trading Commission, and what that means is that Americans can legally go on to PredictIt and they can wager on political outcomes — up to $850 per market. That has gotten a lot of Americans in the system, and Betfair and some of these overseas markets that also wager on American political outcomes have picked up a little more slack too. There’s a lot more interest and a lot of liquidity in those markets as well.

Paul Solman: So how much money are in these markets?

David Rothschild: We’re talking millions of dollars that are being wagered overall in the American political scene.

Paul Solman: Even now?

David Rothschild: Even now. More than enough money to ensure that these are accurate representations of the probability of outcomes that we care about.

Paul Solman: But how do you know the market isn’t biased? Suppose it’s mainly Republicans playing the market, wouldn’t that bias the result?

David Rothschild: The great part about markets is that we don’t need to worry about whether or not the average person in the market is smart or whether the average person in the market is biased. What we need to worry about is whether or not there is enough smart money, just on the edge, to take advantage of all those people that are making biased or unintelligent bets. And that’s what makes financial markets tick — it’s really just a small selection of very, very sharp people who are taking advantage of all the other money in the market.

What we see is that people are going into this market, and they want to make the right decisions and get the best return they can get. And even if some people are on one side, or some people are on the other side, we see enough balance in the way that people approach it, and we see enough smart money to ensure that these markets accurately reflect what we believe to be meaningfully happening outside.

Paul Solman: If I were going to bet, what data is there to reassure me that it’s not a biased market?

David Rothschild: Well, the best thing that we could point to in order to show that these prediction markets aren’t biased is how well they have done year after year and election after election in predicting outcomes. We looked at the 2012 elections — the primaries, the senatorial, gubernatorial, presidential elections — and you see something that is as accurate or more accurate than any collection of pundits or statistical polling averages. It’s extremely well calibrated.

Paul Solman: Do the data support the assertion that prediction markets are more accurate than polls?

David Rothschild: If you want to compare prediction markets and polls, prediction markets have a few advantages. Number one is that prediction markets know all that polling data. Number two: prediction markets add in other, idiosyncratic data, such as contributions or endorsements, which haven’t yet affected the polls, but which we know will affect the polls. And number three, a prediction market is like a collection of really smart people who have aggregated all this information together, and they have a lot of incentive — money on the line — in order to make the decision, right? Very early in the cycle, when there’s more idiosyncratic information, when there’s more new information that’s hard for polls to interpret — when news breaks, when there’s a debate, when there’s a scandal — prediction markets really get out in front of the polling. Towards the end of the general election, they’re going to converge, because there’s not much other information out there, but in the beginning and when news is breaking, there is a huge difference.

Paul Solman: And right now?

David Rothschild: Primaries are actually the time where prediction markets really shine. Markets do a great job because primaries are idiosyncratic; they are hard to make a model for. And so that’s where markets have done a great job in aggregating the information out there and giving us a reasonable assessment of what’s going to happen.

Paul Solman: Prediction markets obviously incorporate information that polls don’t yet have. But other than that, what’s their advantage?

David Rothschild: When you have primaries, you really need people’s subjective opinion to get aggregated in an effective way. And that’s what markets do, that is where markets really shine. They understand the oddities of the trajectory of a primary. They understand how endorsements and how strategic voting, eventually, will affect primary systems. This is where markets have a huge advantage over the smartest people just working with polling or historical data.

Paul Solman: Well, the first primary was in Iowa. How did prediction markets do versus polls?

David Rothschild: If you just looked at the polls or even at very intelligent readings of the polls before Iowa, you were sure that Donald Trump was going to win. Prediction markets said that he was a little more likely to win, but they were very, very skeptical. They showed this as a razor-thin margin. If you looked at polls of Hillary Clinton versus Bernie, you’d think that it was just a toss-up. Prediction markets showed Hillary Clinton had this tiny, tiny, tight lead, and markets were quite confident that she would prevail in the end. It’s able to read the idiosyncratic nature of this and plug that into the ultimate outcome that is projecting.