Prediction Markets and the Australian election

Andrew Leigh has done a post on the bookmaker’s odds (Portlandbet) of all lower house seats at the upcoming Federal Election. 

Analysis of the Portlandbet odds shows that if the current betting market holds, then the coalition would hold a 4 seat majority.  9 seats are very close (within 3% either way) but 6 of these are current Labor seats so there is not much room there for Labor to gain.  This is at odds with the recent telephone polls that all have Labor well ahead of the coalition. 

I’ve had a passing interest in prediction markets for some time, particularly based on the views of The Wisdom of Crowds.  Issues around access to information, manipulation and general problems that markets tend towards over-reaction and speculation all question the legitimacy of this approach.  Yet there are obvious merits if these pitfalls can be overcome.

For the Australian election example above, it raises the question of the discrepancy between the opinion polls and the prediction market.  There could be a number of reasons.  It could be that the specifics of individual seats may count against the national trend towards a Rudd victory.  Also, it could be that people may not personally want to vote for the Howard Government but perceive that the proverbial rabbit will be pulled out of the hat (again) and that he is more likely to win in the end. 

At this stage, there appears to be a clear difference between who people wish to vote for and who they think will win the election. It will be interesting to see how the betting markets change over time and if the current perception of a close election is more accurate than the landslide intimated by recent opinion polls.

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