There are lots of arguments about “prediction markets.” Some of the most important are about the opportunities they create for corruption and the general social ills tied to what is essentially gambling. But the one that perpetually puts a bee in my bonnet is the frequently-advanced idea that prediction markets are superior to polls as predictors of election outcomes. I was reminded of this by the upset Lula win in yesterday’s Brazilian presidential election. Kalshi had candidate Flávio Bolsonaro with 76% odds of winning until the first returns came in and he lost. Obviously, polls and every other kind of prognostication have misses too. Those don’t discredit the whole enterprise. The problem with the argument about prediction markets and polls is both empirical and logical. Empirically they do not appear to be better. But the comparison is difficult if not impossible since polls don’t generate odds or probabilities. They approximate current levels of support. It’s easy to look fast and think those two things are the same. But they’re not. Logically, prediction markets cannot be “better” than polls since they are mostly derivative of polls; they are overwhelmingly reliant on polls.
In theory, the probabilities generated by prediction markets might represent polls leavened with other data points which allow bettors to refine the polling results. But that’s still the same reliance. Still vulnerable to the same problems of garbage in, garbage out.
In the electoral realm, prediction markets are simply mostly accurate measures of conventional wisdom. That can be helpful or interesting. But it’s never more than that. In equities markets, at least in theory, big money can claw its way toward greater insights into a company’s future profitability — from smart research, from things that hover on the edge of insider trading. This simply isn’t possible with elections. There’s no theoretical reason why this couldn’t be the case. In practice, it isn’t. This isn’t surprising to me because over the years I’ve spoken to people at the highest levels of finance who should have access to the best political intelligence money can buy. And it’s no better than what you and I have access to.
