Back in 2012 there was a lot of discussion about how forecasters who relied on polls, such as Nate Silver, made much more accurate election predictions that many GOP pundits, who seemed engaged in little more than wishful thinking. I think that's right, but it's also important to emphasize that polls are not the best forecasters, markets are:
Here's a lesson from the U.K. election, follow the money, not the polls:
David Cameron confounded polls showing his Conservatives were neck and neck with Ed Miliband's Labour Party and won a second term as prime minister, winning a majority in the House of Commons. As far back as February, betting firms made Cameron favorite to win.
"Punters were piling into a Tory majority at 10/1 on the day, when we thought it had no chance and some political scientists put it at exactly a zero percent possibility," said Matthew Shaddick, head of political odds at Ladbrokes Plc. . . .
One possible explanation is that pollsters are finding it harder to get the right survey sample, said Nate Silver, who founded the stats-oriented news website FiveThirtyEight.com. . . .
Gamblers did better. Last month, most betting websites narrowly made Cameron favorite over Miliband.
While the favorite tag moved back and forth between Cameron and Miliband in the home stretch, many bookmakers cut the odds on the Conservative leader as money flooded in.
Betfair, for example, cut Cameron's odds to 5/6 from even in London. That means a successful 6 pound bet won 5 pounds; previously the same bet would have won 6 pounds. Paddy Power Plc, Ireland's largest bookmaker, also cut Cameron's odds after taking a 30,000-pound bet on the Conservative leader.
"The vast majority of money we took was on Cameron to win, even if we took a slightly opposite view," said Shaddick at Ladbrokes. "Punters were much more confident and right on the number of seats and Cameron winning than the pollsters were. That may be because they are more in touch with sentiment on the ground, it may be gut feeling. It may just be pure luck."
Perhaps gamblers viewed it in the same way as Tony Blair, who noted that this was an election of an incumbent government headed by a traditional right-wing party running against a traditional left-wing opposition, with a traditional result. Last time this type of contest occurred was in 1992, when the Conservatives also did far better than the polls predicted.
PS. And of course I can't help but point out that this provides one more reason why we need highly liquid macroeconomic prediction markets. I don't even understand why this would be controversial.