There is a movement afoot to allow Las Vegas casinos to take bets on Presidential elections. Betting on who will be the next President has the potential to increase the interest level in the election and perhaps voter turnout as a consequence. Of course, it will also bring more revenue to Nevada casinos. Detractors of the idea cite the typical arguments against gambling of any kind. I suppose campaign insiders could engineer a campaign emergency to sabotage their candidate and collect winning bets they have made on the other side.
One aspect that hasn’t been discussed is whether betting on elections would make for better predictions than current polling methods.
Election polling is simple at its core. Pollsters find a representative sample of likely voters and ask a basic question: if the election were held today, whom would you vote for? While the question itself is basic, polls often disagree on the answers. Differences in the polls tend to stem from how the sample was drawn, how “likely voters” are classified, and context (issue questions that may have preceding the voting question). On the whole, the major polling organizations do a good job with election polls, and, especially if you group all the polls together, they make excellent predictions. But, the pollsters are not always right. If we had left it up to the major polling organizations to select our Presidents, our children would be learning about the policies of President Alf Landon and President Thomas Dewey. (Of course if we trusted the polls and not the actual election, we also would be teaching about President Al Gore, but that is another story.)
A few election cycles back a few firms tried a new approach. Rather than ask “whom would you vote for?” the new approach asked “regardless of whom you may favor or vote for, who do you think will win the election?” This was seen as an attempt to get over the difficulty of predicting turnout. It was sort of a way to crowd source an election poll. The approach worked well, but has been tried too infrequently to make a definitive judgment. While election polls are great experiments in that we can judge their success or failure by a real-world result, they aren’t so good in that the sample size of national elections is small.
An interesting approach to the last few election cycles was taken by Intrade. Intrade was a “prediction market” — an exchange that traded shares for future events that had a “yes/no” type outcome, for instance, “will Barack Obama win the election?” The share price for this would be between $0 and $1. Once the election is over, a share of Obama would close at $1 if he won, and $0 if he lost. Since there was an active market in this trading, you could make real bets with real money on the election depending on where you stood. For instance, if an Obama share was trading at 72 cents, this could be interpreted as saying the market feels he has a 72% chance of winning. If you felt Obama had a greater than 72% chance of winning you’d buy his “stock.” When the election was over, you’d either lose 72 cents if he lost the election or make 28 cents if he won. What was interesting about the approach was watching how the stock price would move as the campaign season progressed.
After the conventions or debates, Obama’s share price would change. At any moment, the share price reflected the probability of victory. A good speech would move his price (and probability of winning) up a few points. Intrade was an excellent predictor and took into account the uncertainty inherent in predictions in an understandable way. The share prices of the candidates clearly showed their probability of winning in real time.
Allowing Vegas style betting on Presidential elections would be similarly interesting. But would it be accurate?
Vegas bookmakers establish initial odds on an event, and these odds (or a point spread in the case of football) evolve depending on how the betting comes in. Many people don’t realize that the oddsmakers are not actually concerned about the probability of who might win the football game. Instead, they set and adjust odds/point spreads to attract an even amount of money bet on both sides of the game, as that is how the casino maximizes its profits. So, the spread might not reflect the probability of winning, especially for teams with large, rabid fan bases, who may irrationally wager on their team (providing a buying opportunity on the other side for the rest of us). How do they do? In a perfect world (from the casino’s point-of-view), 50% of the underdogs would win and 50% of the favorites would win. In 2013, 512 regular season NFL games were played. The favorites won 248 times (48.9%). This is not significantly different than 50% in a statistical sense, so it appears that the sports books do a pretty good job.
It would not surprise me if allowing Vegas casinos to take election bets would result in a better prediction than the polls. Money tends to flow rationally and in response to new information, and it likely behaves more rationally than individual respondents in a poll. The polls won’t go out of business, as the polls have an excellent ability of understanding who voter for whom and why, and these results drive campaign decisions and cable TV news content. Of course the best approach to predicting who the next President will be is probably to just ask Nate Silver. 🙂