Thursday, September 3, 2020

Arbitrage opportunity in betting markets?

 The Iowa Electronics Markets sell contracts that payoff $1 if a particular candidate is selected.  The prices can be interpreted as probabilities if Price=Expected Payoff=Prob[win]*$1.  Below, the implied probabilities seem to track the polls, which suggests that Biden has a big lead.  

However, this educational betting market is thin (mostly students, only $40,000 or so).  The much bigger betting markets in London has the election as much closer: Trump is trading at -120 (Prob[win]=54%) and Biden is trading at 110 (Prob[win]=47%).  Here is a calculator for converting "American odds" to probabilities.  

Here are three reasons why the polling may be different from the betting markets.  The one that seems most plausible to me is, "Theory #3: People don’t trust polling after 2016."  In 2016, Trump surprised the pollsters, and the betting markets, by pulling out a win.  


1 comment:

  1. Difference in contracts may explain the difference in spread. I think the IOWA market pays if the candidate "wins" the popular vote and that the London market pays if the candidate becomes President.