Scott Sumner  

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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.


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COMMENTS (5 to date)
Sam writes:

Scott, I'm very intrigued by the idea of using prediction markets to steer the economy, but how do you answer critics who claim that those markets would be highly susceptible to manipulation given that the direction of those markets would have an inordinate (and mostly mechanical) economic effect?

Seems like someone could steer the market in some predictable direction with a relatively small amount of money and then reap enormous profits.

TMC writes:

Sam - It may not even be manipulation, but fervency. I may bet $1 that candidate A wins, but my neighbor bet $10 on candidate B because she KNOWS he's the best candidate. We should not magnify the results based on passion.

Scott Sumner writes:

Sam, Research on prediction markets suggests that this is not likely to be a problem. But I'd make two comments:

1. Even if it is true, it has no bearing on anything in my post. I mentioned creating the markets, not using them to steer policy.

2. The efficient markets hypothesis suggests any distortions would be tiny.

Lorenzo from Oz writes:

There might have been a late swing. Which certainly does not contradict your point.

Also, as a friend pointed out on Facebook, some voters might have thought "a Labour-SNP government means 4 years to being held hostage to the Scots: no thanks ..." and voted Tory as the best way to stop that.

Rob in Aus writes:

It's also an example of the "Shy Tory" vote. It's difficult to come out in public as a Tory if you are under the age of 30 in a social setting.

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