Stumbling and Mumbling: In defence of political betting

January 16, 2006

In defence of political betting

Jackie Ashley lays into political betting:

Where do the punters get their information from and how many of them, really, are there? Either they are watching the news and reading the papers, and picking up the instant "calls" of the same political journalists and replaying back, via the bookies, those judgments. Or, a high proportion of the punters are insiders and somehow involved themselves. If they are outsiders, then the circularity is comic - reporter X says something; the punter bets; the bookie reports the betting; and reporter X is able to reveal apparently independent evidence that his hunch was right. If the punters are insiders, the situation is arguably even worse. My advice to a Lib Dem leadership contender would be to pay lots of friends to go down to William Hill or Ladbrokes, with bundles of fivers. It might well be the cheapest way of shifting opinion and getting elected.

This misses the point. The prices quoted by any bookie are just like any other price - their function is to convey information. The fact that Simon Hughes is 11/10 favourite to win the Lib Dem Leadership race, with Menzies Campbell 5/4 tells us that average opinion - the opinion strong enough to put money down - reckons Hughes is marginally more likely to win. Countless sources of information are boiled down into two prices.
It's easy to see why political journalists don't like this. If the markets are efficient, it puts them out of work; why listen to self-important waffle when you can just look at the prices? If you wouldn't believe a financial journalist's opinion of a stock more than the market's opinion, why should you trust a political reporter's opinion over the betting market's?
The key question, then, is: how good are betting markets at aggregating information? There's a huge and growing literature here, and there was a nice debate last year between Chris Masse and Barry Ritholtz.
Ms Ashley's own criticisms - apparently formed without knowledge of this research - seem weak. It's unlikely that any outsider would bet good money on a single report, so her criticism of outsider betting seems wrong. More likely, the outsiders weigh several reports. Prices then act as a precis. Sure, they might be a biased or inaccurate precis - but so might be the reports of a political journalist.
In the case of insider betting, Ms Ashley's complaint seems not to be about the accuracy of the prices, but their effects. Which raises two questions.
First, are betting markets self-fulfilling? In some cases - such as Tradesports price that there's a roughly 30% chance of a US or Israeli airstrike on Iran - no.
Second, why does it matter if betting affects the outcome? Lib Dem MPs might have good reasons to want to vote for the bookies' favourite - because, say, a big mandate for the winner conveys the impression of a united party.
If these reasons are inadequate, the problem lies not with bookies, but with voters themselves.

January 16, 2006 in Markets, Politics | Permalink

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