Why the Online Prediction Markets Blew New Hampshire

Hillary Clinton’s shocking victory in New Hampshire spattered egg all over the faces of Beltway wonks and pollsters. And they aren’t the only ones. The prediction markets got it wrong too. 

Intrade, perhaps the most well-known of the political bourses, put Obama’s chance of victory at about 70% before the results started coming in. At 8:30 pm, as the Concord Monitor released early returns indicating a better than expected Clinton turnout, Obama’s chances dropped to 56%. At no point did Intrade seem to be leading publicly available information. The price simply reflected an amalgam of polling data and the collective group think of overrated “experts.”

And guess what? In this respect, Intrade and its competitors differ little from financial markets.

Predicting how people will vote is even trickier than predicting what and how much they’ll buy or what they’ll be willing to pay for stocks. There are comfortable quantitative fundamentals in the world of finance; there’s guidance, there’s supply and demand and rational expectations. Although stock market predictions are far from scientific, people buy more rationally and predictably than they vote, where the picture can be clouded by the most subtle and unpredictable of psychological nuances. 

In denouncing prediction markets as “wrong,” however, many pundits miss the point. Prediction markets do not provide accurate predictions of the future. (How could they? They simply represent the consensus guess of a group of people who aren’t prophets). They merely provide the most-informed guess as to what that future is likely to be.

As numerous “collective wisdom” studies have shown, the consensus guess is always better than the majority of the individual guesses that are factored into it (not sometimes–always). The collective wisdom, moreover, is often more accurate than that of ANY individual. Why? Because the market collectively incorporates far more information than is available to any one individual.

Like the stock market, prediction markets don’t get it right every time. They do, however, provide a useful window into the collective expectations of others–one that is often the best available estimate of the future. And they do sometimes get it right. Just as they did with Mr. McCain.

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