Taking PredictIt odds at face value is the wrong way to use PredictIt. As a prediction market, its prices have highs and lows that can be taken advantage of. Those highs and lows come from other users’ expectations. Since anyone can use PredictIt, there’s no reason to think one user is better than another. That leaves the markets vulnerable to small shocks that can result in small profits. It’s a way to monetize things like 2022 midterm predictions.
Per PredictIt’s no-action letter, PredictIt users cannot make more than $850 in any position. Capping users’ profits allows PredictIt to maintain its status as an academic project. But within those limits, users can take advantage of the small market irrationalities that occur within PredictIt.
What Events Change 2022 Midterm Predictions
One of the most interesting markets to watch now is the balance of power market for the 2022 midterms. It measures the odds of the combinations of Republican and Democratic House and Senate. Currently, a Republican House and Senate is heavily favored. However, one event shocked the market and made room for savvy users.
The day before the Roe v. Wade leak, the balance of power market’s price for a Republican House and Senate was 76 cents. On the day of the leak, that price dropped to 69 cents. It rose back to 74 cents a few days later. That price has hovered between 73 and 75 cents ever since.
That was a golden opportunity for impartial traders. Traders who bought contracts on a Republican sweep of Congress would’ve made a 7.25% return by May 9 when the contract price hit 74 cents. PredictIt’s markets are markets and should be treated like markets.
Another strategy could’ve been holding onto contracts favoring Democratic gains in one or both chambers of congress. On the day of the Roe leak, contracts on both a Democratic Senate and on Democratic congressional control rose five cents. Buying $100 of both contracts with this strategy would’ve resulted in a 5% gain in one day. Users would’ve had to act quickly though. Prices for the most popular Democratic gain scenarios dropped three to five cents over the next few days.
What Doesn’t Change PredictIt Markets
Major events for the country aren’t always major events for PredictIt’s prediction markets. The Roe v. Wade leak included several firsts. It was the first Supreme Court draft opinion leaked and threatened to overturn an almost 50-year precedent.
In contrast, the Uvalde shooting didn’t move PredictIt’s balance of power markets. Prices on all electoral outcomes remained about the same. Trading volumes increased a little, but nothing outside the market’s normal fluctuations. It didn’t change PredictIt users’ opinions about the midterm outcomes. The non-reaction to gun violence lamented in the media manifested in PredictIt’s balance of power markets.
A major national event won’t necessarily change expectations about an election’s outcome. Events that feel new or different have better chances of creating market shocks than familiar ones. The Roe leak was full of novelty. The Uvalde shooting was all too familiar.
Look At PredictIt Markets With Caution
PredictIt’s markets don’t have prices set by bookies or statisticians. They’re set by whoever trades on PredictIt. Since anyone can and since PredictIt doesn’t have publicly available data about their users, using PredictIt as a poll is unreliable. It’s an accurate reflection of what PredictIt’s bettors think will happen, not necessarily what will happen.
Additionally, PredictIt’s attempt to reduce uncertainty in predicting can’t account for unpredictable events. A non-economic issue could dominate voters’ reasons for voting the way they do in 2022 as healthcare did in the 2018 midterms. A non-public threat brewing beneath the surface could radically alter the world and the American political environment as 9/11 did. These are risks that are unpredictable, have transformative political effects, and therefore cannot be accounted for in a public poll, prediction market, or another prediction mechanism.
So, treat PredictIt’s markets like one data point among many rather than an accurate representation of the country at large.
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