Real-time information aggregation in prediction markets
The Presidential Market before and after Trump’s verdict
An often-overlooked aspect of event contract markets is their ability to aggregate and incorporate information in real-time, as events transpire. A recent example of this feature was on display in the PredictIt markets for the 2024 U.S. presidential election.
The figure below shows a 30-day price history which includes May 30, 2024, the day on which Donald Trump was found guilty on 34 felony counts. Whereas daily volume in this particular market is mostly steady, the market data shows a noticeable spike on the day of the verdict, which carried over to the following day. The price history also shows a temporary blip in the prices of contracts on Trump and Biden: the prices converged briefly upon announcement of the verdict, but separated again and have mostly remained near their pre-verdict values in the weeks since.
So, in addition to showing how markets react to news in real time, this particular market gives a clear and objective assessment of the verdict’s impact on Trump’s chance of winning the election: the market’s quick return to pre-verdict prices suggests that the verdict had a negligible impact on the electoral outcome. This could be because the guilty verdict was already priced in or because, as many suspect, the verdict did not impact Trump’s chances in any material way.
Conditional Markets for Democratic Nominee
Yet another recent illustration of the importance of election prediction markets occurred after the Presidential debate held on June 27, 2024 between Donald Trump and Joe Biden. Joe Biden’s poor performance caused many pundits and political operatives to suggest that Biden might be replaced as the Democratic nominee. During the debate, the few active prediction markets offering contracts on the election, such as PredictIt and Betfair, showed dramatic price changes in favor of Donald Trump. The markets for Democratic party nominee even showed dramatic real-time moves against Joe Biden. Greater public awareness of these markets would lead to higher civic engagement by the general public and less confusion and chaos surrounding the state of our politics.
Given the importance of the presidential election, and the unprecedented possibility of replacing a major party candidate less than six months before the election, the general public would greatly benefit from well-functioning prediction markets offering (i) simple contracts on the major party nominees and (ii) conditional contracts on the general election winner given the different possibilities.
Given the serious discussions that Joe Biden may be replaced by Gavin Newsom or another candidate, and the lack of polling available to assess the popularity of those candidates, a conditional market would be an efficient way to inform the public discourse concerning this possibility. For example, a market with conditional event ‘Newsom is the Democratic nominee’ and ‘Democrat party to win presidential election’ would generate a price signal which would inform the general public about the likelihood of various contingent possibilities beyond its control.
Such markets are relevant to all Americans, whether they support the Democratic party candidate or not. Those who support the Democratic party benefit from knowing which candidate gives them the best chance of winning. Such information, on its own, is especially relevant when faced with the decision to potentially replace the candidate. For those who do not support the Democratic party, knowledge of which potential opponent is most formidable is also relevant to choice of their own candidate as well as to better understand the political landscape that is likely to impact the country for many years to come.
Beyond the obvious informational value of such markets, which cannot be replicated by any other means, conditional markets offer a useful way to hedge many risks that may arise under specific contingencies. The risk of war, recession, or certain regulatory policies may be higher if one candidate wins than another. Conditional markets allow individuals and businesses to hedge against those risks contingent on specific future events.