Oz Politics Blog

Today I was asked for my views on the relative merits of opinion polls versus betting markets as a predictive tool on election outcomes. I answered along the following lines.

If the polls and the betting market are giving different messages, I would tend to favour the betting market over the polls when it comes to making a prediction about the next election. It is not an iron-clad rule, just a strong preference.

Voter intention polls do not seek to predict the next election outcome. They seek to predict how the nation would have voted were an election held on the day of the opinion poll. In effect, they report the current state of play between the rival parties.

When polling is used to predict an election outcome, we make the assumption that nothing significant will change between now and the election (or that the current trend line will continue unabated). It is an heroic assumption. We all know the aphorism, “a week is a long time in politics”. Things can and do change.

In addition, some have suggested that a sizable proportion of the population is politically disengaged between elections, and they respond to polls in terms of their evolving preferences and reactions to news and events, rather than with a considered voting intention.

In practice, voter intention polls used predictively are less reliable the further out from an election they are. Even six months out, they are not particularly reliable.

Their reliability, even at close quarters, is further compromised by the high volatility in the predictions from polling organisations. The polls typically jump around from one report to the next. It is very easy to read too much into a particular poll, or how one poll differs from the previous poll. They have a high noise to signal ratio.

When individuals bet on the next election outcome, they are putting their money on a particular outcome. The bookmaker is constantly adjusting the odds so that no matter who wins the election, the contingent payout to the punters is less than the total amount bet. This way, the bookmaker should always make a profit (of course they can be caught by a large very late bet). Because the bookmaker is constantly the adjusting the odds, the odds reflect the weight of moneyed opinion for each of the outcomes. It is quite a simple arithmetic procedure to convert these odds to probabilities.

Over recent years, betting markets have typically predicted election outcomes earlier and more consistently than voter intention polls, with much less volatility.

But betting markets are not perfect. For example, the punter’s favourite did not win the 2005 New Zealand election. Although to be fair, immediately prior to the election the betting market predicted that NZ Labour had 9 chances in 20 of winning the election and the Nationals 11 chances in 20. In probability terms, that is pretty close to neck and neck. The final result — NZ Labour — was not that unlikely an outcome from the betting market’s perspective, as it had given them 9 chances in 20 of winning.

If the Coalition wins in NSW this Saturday, it would count as an election the betting market did not predict. It would also be an election the polls did not predict. Somehow, I think it unlikely.