PredictIt: Presidential Market is Increasingly Wrong

Previously about PredictIt this election cycle: Free Money at PredictIt: 2020 General Election

Free Money at PredictIt?

It is important, on occasion, to state the obvious, on the record, at the proper time.

The prediction (alternatively, read: gambling) markets on the 2020 Presidential Election increasingly do not make sense. 

In particular, their movements over time do not make any sense.

Nate Silver’s model at 538, which puts Trump at 12.5% or so, does not take into account the possibility of anyone taking extraordinary measures to distort who is physically able to vote or to have their vote counted, or attempts to set aside the vote and appoint alternate electors or remain in office anyway, or anything like that. It is very reasonable to thus assign some probability to ‘Trump would lose an election with only a historically typical amount of shenanigans, but wins because of an ahistorically highly impactful level of shenanigans.’ You could also use different assumptions than Nate, and think the baseline situation is closer to even.

I even can imagine a world in which, right now, Donald Trump is currently 37% or so to win the Presidency – and I observe all the same things I’ve observed this year. In isolation, it’s possible. 

What I cannot explain, at all, is how this can be true if on June 20, three months ago, the market was 63-39, and now it’s 65-40, all but unchanged. Trump improved a bit, then got worse again, with Biden’s low being at 55. 

Note that on June 20, the 538 model had Trump at 22% to win (it began at 30% on June 1). The progression he offers makes sense and is consistent. The market’s doesn’t, and isn’t.

You cannot tell me that Trump’s situation is about as good as his situation at that time, at the start PredictIt’s longest quick lookback option.

Seriously, what the hell, market?

If you want to be super generous to Trump and assume that the market was correct because he has a fixed chance of winning ‘despite everything’ then we can put him at 38% on June 20, then put him at 29% to win now. That’s the hard upper bound, and I don’t think that’s reasonable – winning ‘despite everything’ gets harder as winning the regular way gets harder, so I think the ‘be afraid of shenanigans’ case caps out around 25%.

This is why I seriously considered betting on Trump months ago. The theory was, if things went well for him, I’d have a good bet. If things went poorly for him, I could cover my bets at little cost. One of my weaknesses as a gambler was always a reluctance to pull that trigger.

Many secondary markets are even more absurd than the primary one.

Biden is still 8-9% to drop out by 11/1 on 10/18. They thought he was 12% to drop out by 11/1 three months ago. If you can explain how those two agree with each other, please do so in the comments. You may wish to note “Challenge Accepted.” 

Time and again, I take what in retrospect was a very good bet when compared to doing nothing, but a very bad bet compared to waiting for an even better one. And it’s predictable.

It’s tough advice to follow, even when you know it is right, not to fire until you see the whites of their eyes.

In this case, if you really want to maximize your true expected value, my guess is that you should wait at least another week, and my gut tells me wait until two days before the election – you might get the best price of all on election day itself, but that’s definitely risky. 

Note that if you have the patience for it, some of the multi-way markets offer better prices than the main one by buying up all the “No” sides, and also allow you to get down additional funds. You can only bet $850/market, but there are at least five more or less clean variations of markets for who wins (including the female VP option, electoral college margin, popular vote margin, and party win), and if you’re willing to settle for close approximations like betting on Pennsylvania you can get a bunch more. Usually your prices on secondaries are a little worse then the primary price on Biden if they’re two-way, better if they’re multi-way. Thus, you can get down something like $10,000 at PredictIt if you want to and can take the odds hit, and you can use friends to further multiply that, but if you do that then you’ll be stuck with far too much funding there and nothing to do with it for a while, and facing expensive withdrawal fees. If you have a legal other way to bet, and can handle betting on that side the election, do take advantage of it.

If you want to stay side neutral, all the arbitrage opportunities not involving third party candidates that were there last time are still there. If anything, they’re bigger and over a smaller period of time.

I also think it is wise, as others have suggested, to top off your supplies in case the supply chain suffers a disruption after the election. The chances of this seem much smaller than they did in June (again, market is nuts) but the cost/benefit analysis on such actions is overwhelmingly positive. Make sure that if you can’t resupply for a few weeks, nothing terrible happens, have a rough idea what you’ll do if things start to get scary (in terms of a disputed election, not in terms of the wrong person wins), and expect to disregard all that most of the time.

This is not the first election with rather dumb prices that refused to update on time passing and the situation becoming lopsided. In 2008, McCain stayed close to 50% most of the way, despite an obviously degenerating position. Thank you, InTrade. In 2012, Romney was clearly priced too high given the stable nature of the polls and the way the electoral college stood. 

There are times when the market is nuts. This is one of those times. There are various forces contributing to that, but it is not purely a matter of people being size limited, as there are places for non-Americans to get down large amounts. 

Watching the election odds on November 3-4 will be interesting. Often when things transition from pre-game wagers to live betting during the game, the frame for deciding odds shifts, or you find out that the real odds you were starting from were somewhat different from what was offered for wagering. Other times, things are more consistent. Either way, the deltas for events when they happen are always interesting, and the stock market’s movements also will tell the story (the market itself will be closed, so you want to watch the ESZ0 Index contract and others like it). 

Or, of course, if you’d be sitting there terrified, do your best not to do that, and counterprogram something else and hope it’s over when you wake up. If you need someone’s permission to do that, I’m giving it to you, along with permission to not watch the second debate if it happens. You’re welcome.

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31 Responses to PredictIt: Presidential Market is Increasingly Wrong

  1. Mkov B. says:

    Thought-provoking and interesting post.

    I am still a bit confused if your are claiming that the market is off on fundamentals, i.e not incorporating fundamentally new information of things going the wrong-way for Trump, or if instead you think Trump had missed the window to make up ground and thus the option value on the contract should have decayed much more than it has.

    Even if Trump has a low win probability if the election were to be held tomorrow, these are still binary options and perhaps it is a rich implied vol component that explains their high price rather than outright moneyness.

    Also a minor typo, but i think you meant to put ESZ0 :)

    • TheZvi says:

      So weird how the 8 got there – I’ve been out of the game too long, clearly. Spent 30 seconds remembering it was Z and then typed 8 somehow.

      I am saying that the market is definitely not incorporating the new information that Trump has missed his window and things have actively gotten worse. Whether or not it was previously wrong is trickier – I think it was, but if you anticipate what happens later, it *should* be off…

  2. sandorzoo says:

    Any attempts at voter suppression, from the limited data we have so far, don’t seem to be working. Here are the early vote totals:

    https://electproject.github.io/Early-Vote-2020G/index.html

    Out of all 50 states, the state with the most early votes so far (relative to total votes cast in 2016) is *Texas*. It has 43% of 2016’s vote totals already cast, with 16 days to go, and much of that has been in Democratic areas like Houston and Austin.

    • TheZvi says:

      It certainly does look that way, but we don’t know the counterfactual. In a pandemic things are very different from normal, it’s possible that if they hadn’t limited drop boxes it would be 53% instead by now, and it’s possible it would be 44% and make almost no long term difference.

      Generic standard voter suppression has been going on forever and is priced into everyone’s model, either way.

  3. Liam R says:

    In the last post, you indicated (I think?) that it takes so much time to register and learn PredictIt that betting doesn’t really make sense from an ROI perspective. Is that still the case?

    >> In 2012, Romney was clearly priced too high given the stable nature of the polls and the way the electoral college stood.

    Romney was being propped up by one big spender in 2012. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2322420

    It’s possible this is happening again. There’s always incentive for the trailing candidate to make the race appear closer.

    • PDV says:

      > It’s possible [one big spender] is happening again. There’s always incentive for the trailing candidate to make the race appear closer.

      This doesn’t explain the data this time around. Sure, that could prop up the top-level market, the party win, and maybe also the margin of victory bets. But the female VP and various Pennsylvania-like bets? Separately, on PredictIt that would require many, many people, since everyone including the big spenders are limited to $850 per question. This also means that a smart big spender can’t extract all the free money from the market, which I believe is a necessary condition for the markets being quite this insane.

    • TheZvi says:

      McCain had one big spender too. Wouldn’t be a great leap of Trump did too. Wouldn’t even be that big a leap of that person was Trump or Adelson or what not.

      ROI on arbitrage alone is not worth it. Of you think Trump is 15% to win that’s different, as ROI is higher and you don’t need expertise.

  4. Brian Lui says:

    Which wager looks more attractive to you, assuming that there’s no tax implications for either one:

    -152 on Biden to win election
    -455 on Biden to win popular vote

    Both look significantly mispriced to me.

    • tildeon says:

      All vs 538 odds:

      From an absolute edge point of view EC is better:

      -152 is 60.3% (vs 88%) (28% edge)
      -455 is 82.0% (vs 96%) (14% edge)

      From a Kelly point of view and see what the optimal portfolio is based on 538 odds.

      4 outcomes (Biden PV, Biden EC), (Biden PV, Trump EC), (Trump PV, Trump EC), (Trump PV, Biden EC) with probabilities (88%, 8%, 4%, ~0%).

      Using those odds, Kelly wants to bet 12% of Wealth on Biden in the PV and 66% on Biden in the EC.

      I see the EC bet as being more appealing, although perhaps you might think of the PV bet as “safer”. (I’m not even sure I trust 538’s 4% for Trump, I think his chances in the PV are closer to 1%)

      • Brian Lui says:

        Thanks tildeon, great of you to math out the situation. As you say, I’ll put on a mixed bet, tilted slightly towards PV because it’s less subject to variance

    • TheZvi says:

      If those are the sizes take popular vote. If you have listed funds to risk then go with the outright, or of you are going to pay withdraw fees.

  5. Sniffnoy says:

    Hm, when I try to buy anything on the “who’s going to win the presidential election” contract, I get a message saying I can’t because they’ve already reached the maximum number of traders on that one. Dunno how long that’s been the case but it could be a factor, maybe?

  6. Joshua Fox says:

    The possibility of Biden getting Covid19 is the big election risk. I am surprised that fewer are taking about that risk.

    • TheZvi says:

      The weirdest part is that this risk clearly declines linearly with time!

    • Eric Fletcher says:

      Really? Isn’t all-cause ex-covid mortality a bigger risk for someone of his age, health, and level of risky activity?

      • joshuatfox says:

        Eric, that could be. So we can add up all the causes, and ask why that is not reflected.

      • TheZvi says:

        Biden’s health failing, or there being evidence that makes it look like his health has failed, mental and/or physical, was a substantial risk and is now way down, from all causes. This should move the market slowly over time, and it doesn’t…

  7. Evan says:

    I suspect part of it comes down to emotional hedging / Cassandra bias – progressives betting on Trump so they “win” either way (https://grandunifiedempty.com/2017/05/24/pessimism-and-emotional-hedging/).

  8. Sebastian H says:

    A similar thing is going on in the main financial markets. I’m not sure what the proper level should be, but whatever it is, it can’t possibly look as good as it did (or better than) a year ago. So something is wrong in how we understand those markets.

  9. Brett Bellmore says:

    538’s odds of Trump winning have been declining primarily because his model had underlying indications of a very low probability of a Trump win, (Which isn’t really changing much.) modified by a large error bar, which represented the chance of dramatic events.. If the error bar is much, much larger than the difference between the candidates, then the odds start to approach 50-50.

    If you look at his predicted median EC vote, it has barely moved at all. From Trump 215 to Trump 193. The projected popular vote has moved less than 1%. What has reduced the odds of a Trump win is the assumed reduction in uncertainty! The 80% range has collapsed from +/- 115 EC votes, to +/- 87 EC votes. (Eyeballing his graph.) THAT is why Trump now has very little chance of winning the EC in 538’s model: The assumed distribution of outcomes has narrowed at least as much as the median projected outcome, due to less time for dramatic events to take place in.

    Presumably the betting markets reflect an underlying model of the election which is unmodified by a large but declining range of error, so they’re not changing much. Probably looking at fundamentals, (Some of which are quite good for Trump.) not so much at polls.

  10. John says:

    This is appealing, but I like to be able to explain why the counterparty is wrong, and I can’t easily do that because of hidden variables:

    -How large is the shy tory effect this time?
    -Will there be a successful effort to disrupt vote-by-mail?
    -We appear to have a president who is very motivated to win the election. Given this, is there the possibility that the people betting against this position know something we don’t?
    -Are we actually confident that Covid isn’t skewing our interpretation of who, in total, is going to turn out to vote and when? In theory I would expect more Ds to vote early or by mail than on election day because they take Covid more seriously. That may reduce total D turnout.

    Still, this may be good EV. Tough call, maybe I’m too risk averse, but here are my napkin estimates:
    Actual joe biden probability of winning 85%
    Prediction market probability: 60%
    Total predictit rake: approx. 12% (10% check fee, about 2% due to the 5% rake on your gains)
    Margin of Safety w/ major unquantifiable unknowns (essentially, the premium I demand for “maybe being the sucker”): 15%
    Risk-free rate: 4.5%

    It’s good EV if, like me, you already have money in the ecosystem, but I am alarmed by that unquantifiable possibility that I may be walking into a poker game where I’m the mark. You can make 10% off bets like “Kim Jung Un Won’t be Declared Dead by the UN In 2 Months” or “Hillary Clinton WIll Not Run For President”, and while these have lower returns, there’s a lot of appeal in fully understanding that your counterparty is just a flaming idiot.

  11. deluks917 says:

    If you live in an advantageous society you can but both ‘Biden’ and ‘Dems win pop vote’. The later is very close to a sure thing and lets you ‘hedge’ the former. Of course its possible both bets go under but it is very unlikely.

    If you want to get in big money (ie sizable fractions of your net worth) this might be the way to go.

  12. deluks917 says:

    Some people on lesswrong who seem keyed in enough to bet Biden think Biden is favored in texas. Is there any truth to this?

  13. Pingback: 2020 Election: Prediction Markets versus Polling/Modeling Assessment and Postmortem | Don't Worry About the Vase

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