Are Political Futures Markets Actually Predictive?

Today I volition accept a brief pause from quantitative trading inward the fiscal markets. Instead, I volition accept a critical await at political futures markets. There has been a lot of enthusiasm lately for such markets (e.g. www.tradesports.com, based inward Ireland, is the most pop one.) Media pundits together with scholars alike produce got oft said that these markets offering a ameliorate prediction of election outcomes than thought polls, sometimes claiming that they trounce polls three-quarters of the time. I produce got been an avid player inward these markets, simply I would similar to offering a contrarian view: I believe that these markets oft follow, rather than predict, events. The so-called “predictability” of these markets is oft ill-defined. The prediction changes constantly over time, together with and so depending on when you lot accept a snapshot of the markets, you lot tin e'er detect an 2nd when, retrospectively, the prediction matches the actual election outcomes really closely.

As an example, I watched alongside entertainment the tradesports.com futures marketplace prediction of the Virginia Senate race betwixt Democrat Jim Webb together with Republican George Allen. This is ane of the 2 unopen races that volition decide the command of the Senate. For months, the marketplace predicts that the Democrat volition lose (the probability of winning, which is the same equally the cost divided yesteryear 100, is e'er below 50% until the laid about of November). Then inward November, the marketplace began to run into the light, together with started to predict a Democratic win. See the nautical chart below.

But await what happened on the black of the election:

As the vote counts started to live on released, the marketplace initiative of all idea the Republican was going to win, driving the prices downwards to the teens. That was due to the votes from the conservative southern Virginia, which were the initiative of all to come upwards in. Then, equally the vote counts from the to a greater extent than liberal northern Virginia were published at to a greater extent than or less 11:30 pm, the prices shot upwards to higher upwards $60, together with continued on to over $80. Clearly, the marketplace does non know to a greater extent than well-nigh the futurity than your average word anchor.

As soul interested inward the predictability of election outcomes based on futures markets, this raises a serious question. What is the proper fourth dimension to accept a snapshot of the market? Should it live on 1 calendar month earlier the election (in which instance this marketplace prediction failed, presuming a Democratic win later the recount)? Or should it live on 1 calendar week earlier the election, inward which instance this marketplace prediction succeeded? And without an respond to this question, how tin ane claim whether the prediction is accurate or inaccurate?